Sometimes You're lucky to have Your Business Idea Shot Down

Four or five years ago, I thought I had an interesting business idea: private unemployment insurance. Fortunately, before I spent any time or money pursuing this idea, I was promptly talked out of it in a conversation over dinner with reader S.L., who was kind enough to act as a sounding board. As a seasoned businessman and investor, he spotted the flaw instantly: adverse selection. The people most likely to get laid off would be the ones most likely to apply for private unemployment insurance, which would wreak havoc with your loss ratios.

Yesterday's New York Times featured an article by Ron Lieber ("Good Luck Getting Private Insurance for Unemployment") about an entrepreneur who wasn't lucky enough to run his idea by S.L. before starting his own private unemployment insurance business. The article mentions that this entrepreneur, an insurance industry veteran named John Hartline, started his business in the Spring of 2008, only to have his reinsurers cut him off a year later:

Mr. Hartline said his reinsurance provider, Munich American Reassurance, forced him to stop writing new policies in April of this year.

Why? It turns out that the biggest problem with private unemployment insurance is something that industry insiders refer to as adverse selection. That is a fancy way of saying that the people who take out this sort of policy are the ones most likely to need it.

S.L. could have told him that, and saved him a lot of money and time. Sometimes the best thing a trusted mentor can do is tell us when we have a bad idea.

Update:: Cheryl was nice enough to mention a previous post, "Hedging against Job Loss", in the comment thread of the NY Times article mentioned above.

Another Update: S.L. adds this comment via e-mail:

Munich Re-Insurance Co. is one of the oldest, largest Re-insurance operations in the world.

Amazed that Munich had to wait a year before they took action. Probably after experiencing large losses.

Today's NJ Corruption Arrests

From the AP, "3 NJ mayors, lawmakers arrested in corruption case":

By DAVID PORTER, Associated Press Writer David Porter, Associated Press Writer – 2 mins ago

NEWARK, N.J. – An investigation into the sale of black-market kidneys and fake Gucci handbags evolved into a sweeping probe of political corruption in New Jersey, ensnaring more than 40 people Thursday, including three mayors, two state lawmakers and several rabbis.

Even for a state with a rich history of graft, the scale of wrongdoing alleged was breathtaking. An FBI official called corruption "a cancer that is destroying the core values of this state."

Federal prosecutors said the investigation initially focused on a money laundering network that operated between Brooklyn, N.Y.; Deal, N.J.; and Israel. The network is alleged to have laundered tens of millions of dollars through Jewish charities controlled by rabbis in New York and New Jersey.

Prosecutors then used an informant in that investigation to help them go after corrupt politicians. The informant — a real estate developer charged with bank fraud three years ago — posed as a crooked businessman and paid a string of public officials tens of thousands of dollars in bribes to get approvals for buildings and other projects in New Jersey, authorities said.

Among the 44 people arrested were the mayors of Hoboken, Ridgefield and Secaucus, Jersey City's deputy mayor, and two state assemblymen. A member of the governor's cabinet resigned after agents searched his home, though he was not arrested. All but one of the officeholders are Democrats.

Also, five rabbis from New York and New Jersey — two of whom lead congregations in Deal — were accused of laundering millions of dollars, some of it from the sale of counterfeit goods and bankruptcy fraud, authorities said.

In rounding up the defendants, FBI and IRS agents raided a synagogue Thursday morning in Deal, a wealthy oceanfront city of Mediterranean-style mansions, with a large population of Syrian Jews.

A couple of thoughts on this:

Aside from these arrests being good news in the civic hygiene sense, this is obviously good news for Chris Christie's campaign to unseat Governor Jon Corzine, given that four of the five public officials arrested were Democrats, that one of Corzine's staff members is a suspect and was forced to resign, and that these arrests will remind voters of Christie's successful track record of prosecuting corruption as a U.S. Attorney in NJ. It will be interesting to see how many tens of millions of dollars the former Goldman Sachs chief Corzine will pour into his reelection campaign now.

The Syrian Jewish community mentioned in the AP article above was profiled a couple of years ago by Zev Chafets in a New York Times Magazine article, "The Sy Empire". That article focused mainly on this community's strict ban on intermarriage. It mentioned that fraudster Eddie Antar ("Crazy Eddie") was a member of the community, and that the community was affluent from its business dealings, but it didn't mention anything about the kidney business. Those of you of a certain age from the New York area will remember the original Crazy Eddie's commercials, but here's a clip of one of them from YouTube for the rest of you. The fellow who posted this video on YouTube noted that the man in the commercial isn't Crazy Eddie himself, but an actor named Jerry Carroll.

What is Walter Kirn Whining About?

Cue the world's smallest violin for Walter Kirn while you read these excerpts from his column in today's New York Times Magazine ("Life, Liberty and the Pursuit of Aptitude"):

When Sonia Sotomayor sits down next week before the Senate Judiciary Committee to answer questions about her qualifications to serve on the U.S. Supreme Court, thoughtful observers may do well to reflect that, by certain measures, she shouldn’t be there. That’s because decades ago, in her late teens, Sotomayor faced another important test — the SAT, the traditional route to top-tier placement in our national meritocracy — on which, by her own admission, she didn’t do well. What exactly her test scores were she hasn’t said, but she has revealed that they “were not comparable to that of my colleagues” at Princeton University, where she was admitted as a self-styled “affirmative-action baby.” The fact that¹ she later graduated from Princeton with highest academic honors and went on to reach the upper echelons of her chosen career, the law, speaks well of her intellect, her drive and the discernment of Princeton’s admissions office, but it doesn’t speak well, necessarily, of the conventional, test-based notions of merit that might well have stopped her, had they been strictly applied, before she even got started.

As a product of the same education system that molded Sotomayor (and as a fellow Princeton graduate who took his degree seven years after she did), I would like to think that I know a tiny something about what she and others experienced while trying to scale, percentile by percentile, the ladder of academic and social distinction. I call this group of contemporary strivers — a group that has largely supplanted the moneyed gentry as our country’s governing class — the “Aptocrats,” after the primary trait that we were tested for and which we sought to develop in ourselves as a means of passing those tests. As defined by the institutions responsible for spotting and training America’s brightest youth, this “aptitude” is a curious quality. It doesn’t reflect the knowledge in your head, let alone the wisdom in your soul, but some quotient of promise and raw mental agility thought to be crucial to academic success and, by extension, success in general. All of this makes for a self-fulfilling prophecy. The more aptitude that a young person displays, the more likely it is that she or he will have a chance to win the golden tickets — fine diplomas, elite appointments and so on — that permit you to lead the aptocratic establishment and set the terms by which it operates.

[...]

Only when I entered Princeton did I start to have doubts about the system that got me there. Some took the form of doubts about myself. My impressive performance on the SATs (whose supposed biases I was blind to, perhaps because I was a middle-class Caucasian and they operated in my favor) didn’t seem to count for much now that I found myself having to absorb volumes upon volumes of information rather than get the right answers on multiple-choice tests. Yes, I had a large vocabulary, and yes, I knew how to deploy it to good effect in classroom discussions and during professors’ office hours, but suddenly my prowess felt slightly fraudulent.

While I dished out the high-level baloney that my aptocratic mind excelled at, I looked around at the students who didn’t resemble me in terms of skin color and background and wondered how they were staying afloat at all. As a child of the rural Midwest, I felt decidedly out of place at Princeton among the debonair Eastern prep-school graduates who still, in the early 1980s (just a decade or so after the campus went co-ed) seemed to embody its privileged heritage, so I could scarcely imagine the alienation of these other yet more marginalized students.

[...]

What’s more, the poorer and browner of my classmates — particularly the women — seemed to study twice as hard as I did, clocking endless hours in the library and forgoing weekend parties for late-night cram sessions. Maybe their SAT scores were lower than mine, but they ranked higher than I did on the effort scale. And on the bravery scale too.

[...]

The orthodox combination of high-school transcripts and SAT scores that allowed me into Princeton wasn’t, I found out after I was admitted, a guarantee of my ability to make the most of its academic offerings. Put simply, I wasted a lot of time there, I engaged in a lot of shoddy, pretentious dodges, and maybe I shouldn’t have been there in the first place. Perhaps someone else deserved my spot — someone whose talents weren’t so easily indexed but might have been another Sotomayor.

That's a nice trick Kirn attempts there, whining about the alleged unfairness of an education system that he benefited from while continuing to cash in on it. Of course, no one put a gun to Kirn's head and forced him to do well on the SAT, or to attend Princeton. He could have easily gone to a state school in the Midwest and left a spot open for another candidate. That's water over the dam now, but if Kirn really wants to eat his own dog food today, I'd be happy to suggest some ways for him to assuage his guilt (assuming he really feels any) for his success.

For starters, he could donate all the proceeds from his new book about this subject, “Lost in the Meritocracy: The Undereducation of an Overachiever.”, to a scholarship fund at Princeton for prospective Latina students whose talents might not be "so easily indexed". Kirn could also give up his slot as a frequent contributor to the New York Times, and recommend it be given to a harder-working, braver, minority journalist. With Vibe Magazine shutting down, there are surely a number African American journalists now out of work. If these journalists are anything like the "poorer and browner" classmates Kirn remembers from Princeton, they are braver and twice as hard-working as Kirn. It's too late for Kirn to give up his Princeton spot to one of them, but it's not too late for him to give up his New York Times gig to one of them. What do you say, Walter?

¹Does anyone read Strunk & White anymore? The egregious phrase "the fact that" could easily have been replaced with a simple "That" in that sentence.

Seven NYC Valedictorians

The Metro section of Sunday's New York Times featured brief profiles and a group interview with the seven NYC valedictorians pictured above ("In Uncertain Times, Valedictorians Look Ahead"). The print edition of the paper had the above photo on the front page of the section, and another group photo on p.6, where the article continued. The second group photo listed SAT scores and other info for each of the valedictorians. I showed Cheryl the first photo and asked her to guess which kids had the highest and lowest SAT scores, respectively. She guessed them both, based on the names and photos.

From the article,

These seven valedictorians — the five from public schools ranked highest in their class; Mr. Monsalve and Adrienne Edwards of the elite Spence School were selected to give the valedictory — are a tableau of American ideals¹. Four are from immigrant families — Uzbekistan by way of Armenia, Colombia, the Dominican Republican and Lebanon. Their parents include an elevator mechanic, two hotel banquet servers and a limousine driver, along with the chairman of the neurology department at Mount Sinai Medical Center. They speak Spanish, French, Russian, Arabic, a little Hebrew.

Like all good New Yorkers, they bemoan the subway system, the hordes and the city’s willful indifference to personal boundaries.

Although these young men and women all bemoan the subway system, none of them plans to do anything about it when they grow up: none plans to be a civil engineer, urban planner, politician, or work in another field where one might try to improve it. I find it interesting, too, that the writer notes the valedictorians all bemoan "the hordes and the city's willful indifference to personal boundaries". Something tells me that if a non-New Yorker expressed similar sentiments, a New York Times reporter would take offense.

Look at the profile of the young woman second from right:

ADRIENNE EDWARDS

LIVES IN St. Albans, Queens

COMING FROM Spence School, 49 seniors

GOING TO University of Pennsylvania

HOPES TO be a litigator

SAT SCORE 2160²

Outspoken and assertive, Adrienne commuted 90 minutes by bus and train to Spence, where she enrolled in 7th grade and was head of the hip-hop dance group and the multicultural awareness club. “I don’t think I’ll be able to function at my highest anywhere else but New York because I’ve met all my challenges and had all of my progressions here.”

Might Ms. Edwards be a nominee for the Supreme Court in 2040?

The photo above, of, from left, Jenae Williams, Jordano Sanchez, Adam Sealfon, Kristina Arakelyan, Christian Monsalve, Adrienne Edwards and Muhammad Safa, accompanies the article and is credited to Béatrice de Géa.

¹At the risk of seeming picayune, am I the only one who finds this sentence poorly written? I think what the writer is trying to say is that two of the seven valedictorians (Monsalve and Edwards) tied for that top honor at the same school. She could have explained that clearly and simply in a brief parenthetical comment.

²These scores include the new SAT essay section. Unlike the SAT, the GMAT, which also has an essay section, lists the essay score separately: test-takers can earn a maximum score of 800 points on the objective, standardized test portion of the GMAT (the part schools care the most about) and on the essay section, get a separate score of 0-to-6, which is the average of the subjective assessment of two readers. The GMAT's approach makes more sense, in my opinion. Adding the score of a subjectively-graded section to the scores of two objectively-graded sections, as the SAT now does, seems to muddy the waters a bit.

Alan Blinder on the Inflation Debate

In recent posts (e.g., this one) we noted the views of Paul Krugman, John Taylor, and others on whether the Fed's responses to the financial crisis might lead to high inflation in future. Yesterday, Alan Blinder, the Princeton economist, former Fed governor, and long-time Democratic policy adviser weighed in on the debate in his Sunday New York Times Business Section column, Economic View: "Why Inflation isn't a Danger"). Blinder's argument essentially boils down to this: The Fed is aware that if it doesn't rein in the money supply in a timely manner as the crisis abates, this will lead to inflation. The Fed has planned for this, and has the competence to pull this off. Further, bond market participants appear to support this view. Blinder wrote,

[The Fed] has committed itself to an inflation target of just under 2 percent. Of course, none of that assures us that the Fed will hit the bull’s-eye. It might miss and produce, say, inflation of 3 percent or 4 percent at the end of the crisis — but not 8 or 10 percent.

[...]

SKEPTICAL? Then let’s see what the bond market vigilantes really think.

The market’s implied forecast of future inflation is indicated by the difference between the nominal interest rates on regular Treasury debt and the corresponding real interest rates on Treasury Inflation Protected Securities, or TIPS. These estimates change daily. But on Friday, the five-year expected inflation rate was about 1.6 percent and the 10-year expected rate was about 1.9 percent. Notice that the latter matches the Fed’s inflation target. I don’t think that’s a coincidence.

But if the inflation outlook is so benign, why have Treasury borrowing rates skyrocketed in the last few months? Is it because markets fear that the Fed will lose control of inflation? I think not. Rising Treasury rates are mainly a return to normalcy.

In January, the markets were expecting about zero inflation over the coming five years, and only about 0.6 percent average inflation over the next decade. The difference between then and now is that markets were in a panicky state in January, braced for financial Armageddon; they have since calmed down.

How to Borrow Money and Network at the Same Time

The Styles section of Sunday's New York Times featured an article about Unithrive, an organization founded by the three Harvard alumni pictured above to connect students seeking small loans with alumni lenders, "I’m Going to Harvard. Will You Sponsor Me?". The maximum dollar amount of the loans is fairly small: $2,000 -- an amount a college student could accumulate with a part-time job, or put on his credit card, if need be. Money isn't the main issue here; bonding with alumni is. As the article notes,

The appeal of direct donor-to-student loans, Unithrive’s founders say, is that alumni will have a personal connection to current students: those requesting loans list hometowns, majors and classes they have taken. Alumni can lend to students with whom they feel a bond. They are promised updates three times a year from students they support — not unlike the letters that sponsors of poor children in Africa receive through the Christian Children’s Fund.

This is a clever idea, based on an old, counter-intuitive principal of human nature: the quickest way to make someone your friend is not to do him a favor, but to ask him to do a favor for you. That this was the brainchild of Harvard alumni isn't surprising considering that Harvard seems to have the most effective alumni network of any elite school. Perhaps that's because it attracts students who are savvier and more aggressive about networking than those who attend other schools. Other elite schools may have similar academic prestige (e.g., MIT) or a similar Ivy League pedigree (e.g., Penn), but their alumni don't seem to have a network in the same league. If they did, then, presumably, an MIT alumnus wouldn't have had to resort to wearing a sandwich board in Midtown Manhattan to get a new job, and Atlantic blogger and Penn (and University of Chicago GSB) alumna Megan McCardle wouldn't have recently posted her latest lamentation about how she couldn't afford to go out with her friends while she was unemployed after earning her MBA.

As smart as this idea is, Unithrive co-founder Joshua Kushner, whom the article describes as "a scion of a wealthy real estate family", may get some heat from some New York Times letter writers for his apparent disdain for the sort of jobs many college students work part time for extra cash:

Mr. Kushner noted that the college still asks scholarship students to contribute a few thousand dollars a year from summer and school-term jobs.

“I have friends who would spend 10 hours a week when they are not in class working at a coffee shop or in the dorms,” said Mr. Kushner, 24, referring to time that he considered wasteful. “I think the most special thing about college is not just what you do in class, but what you do out of class.”

I doubt Mr. Kushner will be troubled by any opprobrium from lumpen letter-writers though, and he may be right not to be troubled by it: working a mundane part-time job might teach a college student humility, but what Harvard student needs humility when he can get the money interest free for 5 years and build a bond with potential alumni mentors at the same time?

The image above, of Unithrive founders Nimay Mehta, left, Joshua Kushner and Tanuj Parikh, accompanied the article and was credited to Michael Falco.

Puerto Rican Day Parade

The National Puerto Rican Day Parade is taking place today in New York City. A few years ago, we headed into Manhattan on a Sunday without realizing it was Puerto Rican Day. We figured it out as soon as we were jammed in traffic on the 79th Street transverse, as Puerto Ricans waving their flags filtered by us. I had forgotten about this until I hit Google while writing this post, but there was a Seinfeld episode that featured the main characters stuck in traffic due to the Puerto Rican Day Parade. From The New York Times:

Faced with criticism from the leader of a Puerto Rican organization who found the ''Seinfeld'' episode on Thursday insulting, NBC apologized yesterday, saying it had not intended to offend anyone.

The second-to-last ''Seinfeld'' featured Jerry, Elaine, George and Kramer driving back from a Mets game and getting stuck in a traffic jam created by the Puerto Rican Day parade. At one point, Kramer tossed a sparkler and accidentally lighted a Puerto Rican flag on fire. He tried putting out the burning flag by stomping on it.

Angry paradegoers then began chasing Kramer. When they lost him, the mob began shaking Jerry's empty car and threw it down a stairwell. Kramer remarked that ''it's like this every day in Puerto Rico.''

The scene was an ''unconscionable insult'' to Puerto Ricans, said the president of the National Puerto Rican Coalition, Manuel Mirabal.

''It is unacceptable that the Puerto Rican flag be used by 'Seinfeld' as a stage prop under any circumstances,'' Mr. Mirabal said.

The Bronx Borough President, Fernando Ferrer, who is Puerto Rican, said the ''Seinfeld'' episode ''crossed the line between humor and bigotry.'' Mr. Ferrer said it was a slur to depict men rioting and vandalizing a car and suggesting that it happens every day in Puerto Rico.

As long as they keep holding the parade on the second Sunday each June, we won't make that mistake again. That's not a certainty, because the date of the National Puerto Rican Day Parade was chosen somewhat arbitrarily, as it's not based on any particular historical date. It isn't held on the anniversary of Puerto Rico's independence, because Puerto Rico isn't independent. That point was made, pithily and humorously, by The Onion a few years ago.

A.O. Scott on Sam Mendes

Sam Mendes (of "American Beauty" fame) apparently has a new movie out (one I have no intention of seeing), based on a story by Dave Eggers, about an expectant hipster couple's search for a place to raise their child: "Away We Go". In his review of "Away We Go" in Friday's New York Times, A.O. Scott calls Mendes out ("Practicing Virtue, and Proud of It").

Of Sam Mendes's protagonists, the hipster expectant parents Burt and Verona (played by Jon Krasinski and Maya Rudolph, pictured above) Scott writes,

Their conversation is carefully poised on the boundary between facetiousness and sincerity, and they do things like turn unlikely words into adjectives by adding the letter Y (Burt wants a “Huck Finn-y” life for their baby) and pretend to argue about the difference between cobbling and whittling.

To observe that they inhabit no recognizable American social reality is only to say that this is a film by Sam Mendes, a literary tourist from Britain who has missed the point every time he has crossed the ocean. The vague, secondhand ideas about the blight of the suburbs that sloshed around “American Beauty” and “Revolutionary Road” are now complemented by an equally incoherent set of notions about the open road, the pioneer spirit, the idealism of youth.

Or something. Really, “Away We Go” is about the flight from adulthood, from engagement, from responsibility, even as it cleverly disguises itself as a search for all those things. But the dream of being left alone in a world of your own making, far from anything sad or icky or difficult, is a child’s fantasy. Not an unattractive or uncommon one, it must be said, and for that reason it is tempting to follow Burt and Verona into the precious, hermetic paradise that awaits them at the end of the road. You know they will be happy there. But you should also understand that you are not welcome. Does it sound as if I hate this movie? Don’t be silly. But don’t be fooled. This movie does not like you.

The comment thread on the version of this article on the New York Times website even includes some comments backing up Scott on his review. Below are two of them.

Eggers doesn't work on the screen

The story is the same kind of innocents-in-the-storm tale that a much-younger Eggers became famous on back those many years ago. But this is a variation on a now-tired Eggers theme and Scott gets that completely - to use the language of the film, a hipstery, politically correcty, don't-want-to-grow-uppy couple who can too easily see the faults in everyone else and prescribes a cure that has an icy condescension within its professed simplicity. The story, like Eggers, is getting too old.

— Ed, Rhode Island

Watch an Apple-vs.-PC ad instead

You'll be watching the same plot: Young, hip, cool-o and pretentious triumphs over old, dysfunctional and clownish. And it won't cost you anything in cash or nearly as much in time.

A.O. Scott's review totally nailed it. In addition to the smugness and condescension I'd add affectation and treacle. Another example of filmmakers who seem to assume that all they have to do is anoint certain characters as "hip" or "offbeat," and use "edgy" colors and graphics in the posters, and the Angelika Film Center crowd will start lining up with open wallets.

But if you ask me, Eggers never worked on the page, either. Always makes me think of Tevye belting out a Mad magazine version of his Fiddler showstopper: "Pre-ten-tion!!"

— TMJ, Kent, CT

If only Peggy Noonan read this blog. She could take Scott's rejection of the Mendes/Eggers weltenschauung, combine it with some personal observations about Americans wading through the Great Recession, and throw in an anecdote from her Reagan years for contrast. Then she could let it all marinate for a few days, and microwave it just before the deadline for her weekly Wall Street Journal column.

The publicity photo of Jon Krasinski and Maya Rudolph accompanied Scott's review and is credited to François Duhamel/Focus Features.

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".

Picking on the Wrong Real Estate Guru

Sometimes I get the sense that the editors of the New York Times don't read much of other sections of their own paper. If they did, why would the editors of the NY Times business section have focused on Carleton Sheets (pictured above) as they did in an article earlier this month ("When the Real Estate Game Cost $9.95"), when the Times real estate section published a much more damning article about a different real estate guru (Russ Whitney) two years ago, one that was more relevant to the recent credit and real estate busts? That article, from March 2007, was "Russ Whitney Wants You to be Rich", and I've actually been meaning to mention it for a while, because it's so good. Below are a few of my favorite excerpts from it.

On the cost of the program, and an accidental admission from Whitney:

Those who do call and who attend the first Whitney workshop find that it is mainly a sales event for another workshop. The fraction that agree to pay a few hundred dollars proceed to the second hotel workshop, where they discover yet another sales event, or what sounds from the description of participants like a Holy Ghost revival. A powerful speaker stokes passions until, one by one, about 20 percent of the audience rise from their seats — the number is reliable, according to the company — and consent to pay thousands of dollars each to learn how to get rich through real estate.

In staging some 4,700 free events a year, Whitney Information Network attracts some 280,000 people, of whom 22,000 go on to enroll as students in advanced courses. Last November at the Clarion Hotel in Louisville, Pat Yarbrough, a 56-year-old custodian at the University of Louisville, became one of them. “Fast money,” she explained later, “that’s all I’m interested in.” At the front of the conference room, a nice man had taught her how to raise her credit-card debt limit, she said, and when she made her way with a cane to the back, a nice clerk showed her what she could buy: three-day courses with names like Rehabbing for Profit and Keys to Creative Real Estate Financing. The courses cost $4,995 each, but less if you bought more. Yarbrough chose four, including the Millionaire U Real Estate Training. She had $130,000 in debt, some of it on her seven credit cards, and the clerk helped her to add $18,000 to it.

[...]

Whitney Information Network is now a public company [Pink Sheets: RUSS.PK]¹ that employs roughly 475 people and that took in about $160 million in revenue in 2005, according to its annual report, all on the promise that anyone might become rich like Whitney, if he will only do as Whitney has done. The difference, though, between Whitney and those who come to WIN is that he bought his first real estate book for just $10, and they pay up to $54,000 a head for the full course package. When I asked if he would have enrolled in his school when he was starting out, Whitney said no. Then he added, “I shouldn’t say that,” and began trying to take it back.

Tips from the Advanced Class ("Millionaire U."):

Pacing before them was Tracie Taylor, a sleek African-American woman in red lipstick and dark business suit [one of Whitney's instructors].

[...]

She advised the students to cease identifying with the poor. There are more people making a little than there are making a lot, and those people, she said, need places to live. Expect to become landlords, she told the class. The neighborhoods they should expect to work in — “good cash-flow areas” — are indicated by the presence of laundromats, pawn shops and any boulevard bearing the name Martin Luther King, she told them on a tour of one such neighborhood.

[...]

Yarbrough the custodian, meanwhile, sat fanning herself with her notebook, asking for words to be defined, concepts repeated. She said she wasn’t getting much out of the presentations. She was mainly waiting, she admitted, for that lesson on how to buy houses without money.

When the students are ready, the master appears:

On the last day of the course Taylor rather grandly introduced “my mentor, my friend, Mr. Russ Whitney!” Whitney came bounding in carrying a water bottle, as though fresh from his workout.

[...]

He was soon strutting before them, saying again that real estate is “the simplest way to make a lot of money” but warning them to be careful out there, because “people don’t always have your best interests in mind.” In fact, he said “in 9 out of 10 cases they don’t.” And that’s why they needed more education — to learn what they could expect.

“We’ve got a lot of classes,” he went on. “You probably think they’re expensive.”

“They are expensive!” Yarbrough called out from the front of the class.

Whitney turned to regard her. Yarbrough stared back at him. He began to insist that his profit margins were reasonable, that he wasn’t gouging anyone, but Yarbrough quickly stopped him. “Let me say,” she replied, “that if we didn’t want to be here, we wouldn’t be here. Nobody twisted our arms.”

Whitney couldn’t help but snort. He said he’d fire the salesman who didn’t twist arms, and everybody had a good laugh.

The image above of Carleton Sheets comes from the New York Times article on him mentioned above.

¹It's actually trading for less than its net cash, as of the end of December. I'll be interested to see what its Q1 numbers look like.

Mark Hulbert Whistles Past the Graveyard

In his column in yesterday's New York Times business section (Strategies: "The Road Back from the '29 Crash Wasn't So Long After All"), Hulbert writes that, although the Dow didn't match its 1929 peak until 1954, investors who bought and held the Dow at its 1929 peak would have been made whole in real terms four and a half years later, thanks to double digit deflation and double digit dividend yields. Of course, today we have a fiat currency and a Federal Reserve committed to fighting deflation, and dividend yields on Dow stocks average in the low single digits, so Hulbert's example doesn't seem terribly apposite.

"Mad Ireland"

That was the headline of Megan McCardle's post on her Atlantic blog in response to Paul Krugman's New York Times column today about Ireland, "Erin Go Broke". In his column, Dr. Krugman suggested that Ireland got into trouble (it's economy is projected to contract by as much as 10% this year) because it was too free market oriented, noting that Ireland was ranked #3, behind only Hong Kong and Singapore, on the Heritage Foundation's Index of Economic Freedom. What Krugman didn't mention is that Australia, which was ranked #4 on that Index last year (and is ranked #3, switching places with Ireland, on the 2009 Index of Economic Freedom) is weathering the economic storm much better than Ireland or the United States. Australia is in a recession now, but its economy is projected to contract by less than 1% this year. So perhaps having a free market economy wasn't the proximate cause of Ireland's economic troubles.

Megan's post in response to Krugman's column isn't worth quoting here -- the best part of it was the headline, in response to which I wrote,

Hey, is that an allusion to Auden in the headline (from his poem "In Memory of W.B. Yeats"*)? If so, nice: the sign of a tasteful and expensive education (to borrow Neal Stephenson's phrase).

[...]

*I'm thinking of the great line "Mad Ireland hurt you into poetry", which I think of whenever I flip the channels and see Celtic Woman on a local PBS station. I wonder if "Mad Ireland" hurt them into doing their 50-piece Enya covers.

The photo above, of what apparently are the stars of Celtic Woman, is from the Celtic Woman website. Note that the neither the photo nor the name "Celtic Woman" gives a sense of the scope of the enterprise that is Celtic Woman. It appears to be comprised of dozens of Celtic women, along with dozens of Celtic men.

"No Easy Workout"

That headline appeared above a photo of gym-goers working out on treadmills and stair masters at the soon-to-be foreclosed on Fayetteville Athletic Club, in a front page article about distressed debt in the business section of yesterday's New York Times. Apparently the business section's online editors don't have the same sense of humor, since the online version of the article eschews the clever pun of that headline and photo. Instead, the online version leads with this headline, "After the Bank Failure Comes the Debt Collector", and the photo above, of Fayetteville Athletic Club owners Robert and Katherine Shoulders.

The article notes that the Shoulderses borrowed $10 million from a local bank to renovate and expand their health club, and when that bank failed, they stopped paying their interest payments. Then Rick Williamson, "a Chicago banker turned junk-loan buyer", swooped in and bought the Shoulderses' loan at an FDIC auction for 34 cents on the dollar, and sued to foreclose on their property. One question raised, but not answered, by the article is why the Shoulderses didn't bid on their own loan at the FDIC auction (or have a friend do so). According to the article, the Shoulderses were willing to pay the FDIC $6 million upfront to forgive their loan -- so why not bid $4 or $5 million at the auction for their own loan (which Williamson bought for $3.4 million)? Williamson might have backed out then, and the Shoulderses wouldn't today be in danger of losing their business.

Also mentioned in the article was Andy Beal, the self-made billionaire and buyer of distressed debt who was the subject of a previous post here ("A Different Kind of Banker"):

The single biggest buyer at these [FDIC] auctions has been Andrew Beal, a banking billionaire from Texas who made his fortune buying distressed debt during the savings and loan crisis.

By the end of February, Mr. Beal had paid more than $200 million to buy $438 million worth of loans, according to agency records. Some of the loans came from the failed Arkansas bank.

Mr. Beal is hardly averse to risk. He is famous for trying (and failing) to build his own space satellite launch company, and for luring some of the world’s best poker players to a series of games, with him as a participant, and betting pots worth $2 million. Mr. Beal, in a telephone interview, said he went to great lengths not to push people out of their businesses, but at times he had no choice.

“Borrowers force us into litigation,” he said. “They don’t want to perform on their loan, they won’t talk to our workout people. What are we supposed to do, send them a vase of roses?”

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.

Freeman Dyson in Tomorrow's NY Times Magazine

Tomorrow's New York Times Magazine features a cover article on the physicist Freeman Dyson, by Nicholas Dawidoff, "The Civil Heretic". The eighty five year old Dyson has led an eventful life so far, and the article covers a lot of its interesting parts. Below are a few brief excerpts of Dyson on Al Gore, James Hansen, and coal, followed by a brief note about Dyson's artistic sensibilities.

Among those he considers true believers, Dyson has been particularly dismissive of Al Gore, whom Dyson calls climate change’s “chief propagandist,” and James Hansen, the head of the NASA Goddard Institute for Space Studies in New York and an adviser to Gore’s film, “An Inconvenient Truth.” Dyson accuses them of relying too heavily on computer-generated climate models that foresee a Grand Guignol of imminent world devastation as icecaps melt, oceans rise and storms and plagues sweep the earth, and he blames the pair’s “lousy science” for “distracting public attention” from “more serious and more immediate dangers to the planet.”

[...]

For Hansen, the dark agent of the looming environmental apocalypse is carbon dioxide contained in coal smoke. Coal, he has written, “is the single greatest threat to civilization and all life on our planet.” Hansen has referred to railroad cars transporting coal as “death trains.” Dyson, on the other hand, told me in conversations and e-mail messages that “Jim Hansen’s crusade against coal overstates the harm carbon dioxide can do.” Dyson well remembers the lethal black London coal fog of his youth when, after a day of visiting the city, he would return to his hometown of Winchester with his white shirt collar turned black. Coal, Dyson says, contains “real pollutants” like soot, sulphur and nitrogen oxides, “really nasty stuff that makes people sick and looks ugly.” These are “rightly considered a moral evil,” he says, but they “can be reduced to low levels by scrubbers at an affordable cost.” He says Hansen “exploits” the toxic elements of burning coal as a way of condemning the carbon dioxide it releases, “which cannot be reduced at an affordable cost, but does not do any substantial harm.”

[...]

Dyson has great affection for coal and for one big reason: It is so inexpensive that most of the world can afford it. “There’s a lot of truth to the statement Greens are people who never had to worry about their grocery bills,” he says. (“Many of these people are my friends,” he will also tell you.) To Dyson, “the move of the populations of China and India from poverty to middle-class prosperity should be the great historic achievement of the century. Without coal it cannot happen.” That said, Dyson sees coal as the interim kindling of progress. In “roughly 50 years,” he predicts, solar energy will become cheap and abundant, and “there are many good reasons for preferring it to coal.”

The article notes in passing that Freeman Dyson disliked John Adams's opera "Dr. Atomic". That puts me in good company, I guess: I turned the PBS simulcast of this opera off after a half hour. Below is the trailer for the Metropolitan Opera's production of Dr. Atomic.

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.

Where Left-Leaning Pundits and Bloggers Compare Notes

Interesting piece by Michael Calderone on The Politico yesterday, on how liberal commentators compare notes and hone their message, "JournoList: Inside the Echo Chamber". A few brief excerpts follow.

For the past two years, several hundred left-leaning bloggers, political reporters, magazine writers, policy wonks and academics have talked stories and compared notes in an off-the-record online meeting space called JournoList.

Proof of a vast liberal media conspiracy?

Not at all, says Ezra Klein, the 24-year-old American Prospect blogging wunderkind who formed JournoList in February 2007. “Basically,” he says, “it’s just a list where journalists and policy wonks can discuss issues freely.”

[...]

Last April, criticism of ABC’s handling of a Democratic presidential debate took shape on JList before morphing into an open letter to the network, signed by more than 40 journalists and academics — many of whom are JList members.

POLITICO contacted nearly three dozen current JList members for this story. The majority either declined to comment or didn’t respond to interview requests — and then returned to JList to post items on why they wouldn’t be talking to POLITICO about what goes on there.

In an e-mail, Klein said he understands that the JList’s off-the-record rule “makes it seems secretive.” But he insisted that JList discussions have to be off the record in order to “ensure that folks feel safe giving off-the-cuff analysis and instant reactions.”

One byproduct of that secrecy: For all its high-profile membership — which includes Nobel Prize-winning columnist Paul Krugman; staffers from Newsweek, POLITICO, Huffington Post, The New Republic, The Nation and The New Yorker; policy wonks, academics and bloggers such as Klein and Matthew Yglesias — JList itself has received almost no attention from the media.

A LexisNexis search for JournoList reveals exactly nothing. Slate’s Mickey Kaus, a nonmember, may be the only professional writer to have referred to it “in print” more than once — albeit dismissively, as the “Klein Klub.”

[...]

“You don’t want to create a whole separate, like, private blog that only the elite bloggers can go into, and then what you present to the public is sort of the propaganda you’ve decided to go public with,” Kaus argued.

The illustration above, by Matt Wuerker, accompanied Calderone's piece on The Politico.

More on Moyo

In a post last month ("An African Economist on Western Aid to Africa"), we mentioned the Zambian-born economist and author Dambisa Moyo, and posted an excerpt from the interview with her in the Financial Times. Today's New York Times Magazine features an interview with Moyo as well ("Questions for Dambisa Moyo -- The Anti-Bono"). From the interview:

Q: As a native of Zambia with advanced degrees in public policy and economics from Harvard and Oxford, you are about to publish an attack on Western aid to Africa and its recent glamorization by celebrities. ‘‘Dead Aid,’’ as your book is called, is particularly hard on rock stars. Have you met Bono?
I have, yes, at the World Economic Forum in Davos, Switzerland, last year. It was at a party to raise money for Africans, and there were no Africans in the room, except for me.

[...]

You argue in your book that Western aid to Africa has not only perpetuated poverty but also worsened it, and you are perhaps the first African to request in book form that all development aid be halted within five years.
Think about it this way — China has 1.3 billion people, only 300 million of whom live like us, if you will, with Western living standards. There are a billion Chinese who are living in substandard conditions. Do you know anybody who feels sorry for China? Nobody.

Maybe that’s because they have so much money that we here in the U.S. are begging the Chinese for loans.
Forty years ago, China was poorer than many African countries. Yes, they have money today, but where did that money come from? They built that, they worked very hard to create a situation where they are not dependent on aid.

The photo above, of Ms. Mayo, accompanied Deborah Solomon's interview.

The "Sidney Awards"

New York Times columnist David Brooks announced his "Sydney Awards" in a recent column ("The Sidney Awards") for the best long-form journalistic essays of the year. Two of the four winning essays were mentioned previously on this blog. The Atlantic essay by "Professor X", "In the Basement of the Ivory Tower", was mentioned in this post, "The Next Bubble to Burst in the Deleveraging Process: Higher Education?", and the Portfolio essay by Michael Lewis, "The End of Wall Street's Boom", was mentioned in this eponymous post.

Former Mexican Foreign Minister's Call for Amnesty Gets Cool Response from NY Times Readers

In an op/ed piece in the New York Times earlier this week, former Foreign Minister of Mexico (and current NYU professor) Jorge Castañeda called on Barack Obama to suspend efforts to enforce laws against illegal immigration ("Call Off The Immigrant Hunt"). Yesterday the Times published four letters in response to Castañeda's op/ed (and to a related editorial), and three of those four letters opposed Castañeda's view (the fourth letter, from a Hudson Institute fellow, objected to the Times editors' characterization of the Bush administration as hostile to open borders, noting that President Bush had tried to get an amnesty policy passed). Below are excerpts from the first three letters ("Ways to Discourage Illegal Immigration").

From Alma Suzin Flesch, of New York, NY:

Without disagreeing with Professor Castañeda’s plea for more humane treatment of illegal immigrants, I would like to ask what he did while he was a member of the Mexican cabinet to improve the economic lot of his people and so stem the tide of illegal immigration into the United States.

From Christopher Brigham, of Somerville, MA:

We must support our government’s efforts to finally enforce our immigration laws. At a time of rising unemployment and financial uncertainty, we must protect United States workers from the wage competition brought on by mass immigration.

With state and local budgets stretched beyond repair, we cannot continue to provide benefits for anyone who wants to sneak into the country. If we want to create a sustainable society, we must recognize that there are limits to the number of people we can employ, house, feed and provide health care for.

From David C. Holzman, of Lexington, MA:

Jorge G. Castañeda, the former foreign minister of Mexico, should worry more about the mess in his own country than about United States policy toward illegal immigrants.

Mexico is actually relatively wealthy by world standards and used to have a substantial middle class, but corruption has changed that. In fact, our crackdown on illegal immigrants, which Mr. Castañeda opposes, might help Mexico deal with these problems.

Why? Because those who are willing to risk so much to sneak across the border are the same people who would be most likely to push for change in their own country should we continue to eliminate the incentives for them to come here.

By functioning as a safety valve, we are enabling our southern neighbor’s bad policies.

These three New York Times readers -- blue state residents all -- probably represent numerous other letter writers with similar opinions whose letters weren't published by the Times. This is worth remembering next time one reads an op/ed column advising the GOP that the way back from the political wilderness is to embrace an open borders policy welcoming unlimited unskilled immigration from south of the border (as if the GOP candidate in November's election weren't the most zealous advocate of such a policy). In fact, there are three reasons why this is a perfect time to advocate a more rational immigration policy, one similar to the policies of Canada or Australia, that seeks to attract immigrants with high levels of human capital.

First, with the bursting of the housing bubble, there is little demand for unskilled labor in the construction industry. Second, with the incoming Obama administration planning a massive stimulus which will include infrastructure spending, it would be better for that infrastructure work to go to Americans, who will spend most of their salaries at home (hopefully, creating a multiplier effect) than to illegal immigrants who will send much of their salaries to their countries of origin. Third, since the Obama administration plans to expand entitlement programs, including those that provide access to free or subsidized health care, it makes sense to limit immigration primarily to those immigrants with high levels of human capital who will tend to pay more in taxes than they will consume in government benefits.