Take me out to the (expensive) ball game
Should Congress amend tax laws to lower the price of entertainment?
The New York Times had an op-ed yesterday by two professors who argue that an old tax law allowing businesses to avoid paying taxes on entertainment expenses with a “business purpose” is largely responsible for the high price of tickets for Major League Baseball games. Their suggestion? Altogether eliminate the business entertainment tax deduction or at least limit the amount that businesses are allowed to write-off.
Unfortunately, the authors provide no framework within which to make a considered judgment of their arguments. They make a compelling case for how the tax exemption led to higher ticket prices, but offer no discussion of why the law exists in the first place or what the consequences might be of its repeal.
Obviously there is a market distortion created by the tax exemption on business entertainment expenses: the after-tax cost for entertainment is higher for individuals than for a business. The question is whether the benefits of this loophole outweigh the costs. Read more
The financial man
Yves Smith tries to locate the historical basis for the entitlement of the financial industry:
In the early 1990s, Sallie Krawchek, then an equity analyst covering publicly owned investment banks for Sanford Bernstein, remarked, “It’s better to be an employee of a Wall Street firm than a shareholder.” Being public changed all the incentives. Management had less reason to be cautious. Indeed, that also showed up in her analysis. The most profitable business was fixed income, meaning the debt-trading business, and even then the firms were on a trajectory of taking on more risk.
And more risk changes the meaning of trader profits. The private partnerships had managed against the fact that the non-partner market-makers didn’t share in the downside, and a key device was making sure that joining the partnership was the richest reward. That alone encouraged underlings to be more judicious.
Smith identifies an old guard that attempted to hold the line on compensation, but failed as the logic for irresponsible risk-taking became clear.
-John
What are the alternatives?
Richard Posner does an excellent job in this piece tying together a discussion on growing debt and the emerging fiscal crisis with the growing consensus that America is “ungovernable.”
But again, no solutions are offered. It may really be an urgent crisis if not even our public intellectuals have proposals to right the ship.
-John
What if equality and growth were compatible?
How one economist could change egalitarian distributive justice forever
An interesting article in the Santa Fe Reporter last week on an economist whose work has major implications for theories of economic distributive justice. Samuel Bowles of the Santa Fe Institute, a research institution dedicated to the study of complexity, is one of the leading economists in a movement challenging the assumptions of the Milton Friedman/Chicago School of free-market economics.
According to the Chicago School, distributive inequality is an inevitable consequence of economic growth. Bowles challenges this notion, claiming that while the theories of the Chicago School may work in ideal models, in the real world the story is much different. The Chicago School assumes an economy that is efficiently organized. But in reality, economies are actually quite inefficient, those with greater inequality, Bowles contends, particularly so. Instead of the distribution of wealth being dependent on economic growth, economic growth is dependent on the distribution of wealth.
Everybody knows somebody . . .
. . . who crashed a Toyota.
Toyota has recalled 9 million cars worldwide due to a faulty breaks, bad accelerator pedals, and defective floormats (yes, floormats). The move has come as a shock to many observers, both due to its scope and because Toyota has set the paradigm for high-quality production. Businesses around the world look to Toyota’s unique production philosophy, which emphasizes continuous improvement (kaizen) and features the andon cord–a mechanism which allows any factory floor worker to stop the production line of he or she detects a problem.
Now it appears that Toyota’s entire organization has ignored this philosophy. The automaker was slow to take decisive action, even as reported problems with numerous Toyota models were mounting.
Today, the company’s President apologized in stark terms: “I deeply regret that I caused concern among so many people . . . I believe what is happening now is a very big problem. We are in a crisis.”
From a PR perspective, this is probably too little, too late. But who does bear responsibility when something goes horribly wrong in a large corporation? Read more
In my day…
One doesn’t necessarily expect the deepest analysis from Tom Freidman; his gift is for explaining sprawling issues to large audiences via anecdote, and he does so quite well. Even so, readers must expect more than yesterday’s op-ed:
Sometimes you wonder: Are we home alone? Obviously, the political and financial elites to whom we give authority often act on the basis of personal interests. But we still have a long way to go to get out of the mess we are in, and if our elites do not behave with a greater sense of the common good we could find our economy doing a double dip with a back flip.
Of course this is all true, but it’s also banal. It only gets worse, as Friedman bemoans the behavior of investment banks as “utterly selfish.” How else would Friedman expect banks to behave? Private institutions exist to make money while playing, generally, within certain agreed-upon boundaries; it’s the role of the government to set those boundaries.
Of course, it’s the inability of government to deal with large, long-term problems that is the difficulty. Friedman seems to believe, however, that the real problem is that the politicians we have are somehow “not adult,” that if we elected good salt-of-the-earth Senators none of these problems would have arisen.
I suppose there’s no way to disprove that counter-factual. However, it’s bizarre that Friedman completely discounts the role of institutions in shaping our political culture. One doesn’t have to look far for theories, some of the best being the role of the filibuster, 24 hour news cycle, etc etc etc. While nominally the “character” of our elected official is in our hands, it seems more relevant to focus on reforming institutions rather than making “in my day Senators and bankers knew how to sacrifice” kind of arguments.
-John
What is the value of professional credentialism?
Ben Casnocha has a worthwhile reflection on credentialism. Referencing an older Jim Fallows article, the puzzle is this:
Would the very best people working in the profession today obtain the highest possible scores on the license test? In the case of air traffic controllers and therapists, the answer is no. I bet the answer is no for lawyers, businesspeople, and real estate agents, too.
I think truest argument for lengthy credentialing processes (in an age where the actual information is freely available) is that the process artificially limits entrants into certain professions. I feel like the common wisdom is that this guild-like process is bad, but I’m not so sure. If standards were decreased, fields like law, academia, and others might well collapse under a flood of entrants. Credentialism may not be perfect or justifiable from a skills-building perspective, but the relevant question may be whether we’re better off if a given profession is arbitrarily gated or if it ceased to exist at all.
-John
The importance of tipping
What do we owe whistleblowers?
The Washington Post ran a lengthy story today about trouble inside the Securities and Exchange Commission with regard to whistleblowers. It’s not that the SEC, which regulates our stock and equities markets, has too few whistleblowers–it has too many.
Rather than rehashing the many instances related in the article of worthwhile tipsters being overlooked because the SEC has no better than an ad hoc approach to private tips, I’ll just pass along this one:
In the case of Bernard L. Madoff, whistleblowers had provided credible information to various SEC units for years. The most prominent of these informants, a Boston financial analyst named Harry Markopolos, contacted the enforcement division on numerous occasions, according to the SEC’s inspector general. In one instance, Markopolos provided a detailed explanation of why Madoff’s business was probably a fraud. Enforcement officials listened, but they dismissed him in their internal discussions. Two former enforcement officials told the inspector general that they discounted Markopolos’s information because he was not an insider in Madoff’s company.
Oops.
So what’s the problem? Here’s what he SEC’s Tip Czar (I made that title up) has to say:
“There was no uniformity to it. Every division and office had its own system of recording, tracking or handling tips and complaints. That system was pretty rudimentary,” said Steve Cohen, the official tasked by Schapiro to overhaul the agency’s tips, complaints and whistleblower program. “We’re already working to acquire and deploy technology that centralizes all of the agency’s tips and complaints so they can be sorted, reviewed, analyzed and tracked.”
The ethics of whistleblowing tend to focus on whether the tipster herself has an obligation to come forward. Sometimes, the whistleblower knowingly participates in illegal activity before coming clean, but other cases can be more complicated. Instances of illegal pollution, for example, often involve a chain of individuals each dutifully doing their jobs, unaware that the end result of their respective decisions will be gallons of toxic waste headed for the river. The person who does discover the malfeasance may be far removed from the person who puts the whole chain into motion, and she may have little internal authority to put a stop to the illegal practice.
In those cases, some of those who study institutional responsibility suggest that the seemingly powerless — but aware — employee must give “voice” to the problem in one of a few ways: she could raise the issue internally; she could exit the organization; or, she could blow the whistle.
Once the whistleblower goes to the feds or the public, the movie versions of these stories take care of themselves. Public pressure may force a change or the law simply intervenes.
But the SEC’s myriad problems absorbing credible tips suggests there’s a big gap between bringing illegal conduct out into the open and smooth intervention by the law. That gap is filled with an enforcement body–the police, the FBI, the IRS, etc.
In this case, the problem seems relatively straightforward. Enforcement bodies have an absolute obligation to provide support to whistleblowers and tipsters. There should be easy to access the enforcement agency, to facilitate tipsters who may be under duress or restricted in communications. And there should be systems that can effectively distinguish between good and bad tips.
Whistleblowing is a moral imperative in instances of institutional wrongdoing precisely because good laws are meant to be enforced. If there were no faith in the rightness of the law, whistleblowers would have few incentives to risk their careers, their livelihoods and, occasionally, their physical lives. Similarly, without good ways to receive tipsters, the law abandons a critical weapon – the cooperation of good citizens – in an effort to maintain the peace.
Anything less than the best effort to attract, listen to, and act upon tips is a gross dereliction of duty.
-Sam
What is the educational value of intercollegiate sports?
University of Texas faculty were understandably outraged when the news broke that football coach Mack Brown’s annual salary would be $5 million, making him the highest-paid college coach in the nation. This is a familiar dispute. Academics bemoan the university’s support of unpaid professional athletics, which of course has no connection to the business of teaching and research. (I suppose to get my commitments on the table I’ll stipulate upfront that teaching and research, broadly speaking, are the business of the university.) The retort is that unpaid professional sports at major-conference powers like Texas regularly earn millions of dollars in profit. That money is generally used to fund other non-revenue generating sports (everything except football, men’s basketball, and I understand occasionally baseball).
Although I’m loath to support college athletics philosophically, I’ll concede that it would be difficult for a university to simply give up this revenue. The relevant question to me is why the money is being funneled back into varsity sports. Why shouldn’t this revenue be remitted back to the university for fulfillment of the core mission? The answer is that doing so would make non-revenue varsity sports impossible. But so what? What is it about getting on a bus and competing against another university that’s so positive an experience for student-athletes? Athletics are important and can surely be part of a rounded education, but I tend to believe that intramural competition provides all of the physical and spiritual fulfillment of intercollegiate sports.
I fear that intercollegiate sports continue out of inertia. At the high school level, it would make sense that the benefits of athletic competition might only be available by competing against other schools; for example, a school of 400 students would not be able to form several soccer teams. Additionally, the price of high school competition is generally quite low as significant costs are born by parents and competition is generally geographically closer than in intercollegiate matches. But at a major university, intercollegiate sports appear, at least to me, highly competitive and very satisfying.
It would be hard to make the case that for student-athletes, the amazing commitment of time and attention paid to sports does not trade off with study or academic activities. It would also be hard to make the case that minor sports provide value for the student body at large, which is likely to be entirely unaware of field hockey and diving.
is there a better defense for intercollegiate sports?
-John
GDP as welfare
The International Commission on the Measurement of Economic Performance and Social Progress, convened by French president Nicolas Sarkozy and chaired by economist Joseph Stiglitz, wrote a lengthy report recently opposing Gross Domestic Product (GDP) as a measure of social welfare. GDP is the market value of all goods and services produced by a nation in a year. In his blog, Chicago Law professor Richard Posner outlines some of the critiques, which involve philosophical debates about the definition of welfare and it’s validity as a metric for moral value. He writes:
[This] brings me to the third and broadest problem with GDP as a measure of welfare–that even if improved along the lines I have just suggested it would not really measure happiness or well being. Market value is a function mainly of cost. The value that people derive from goods and services is better measured by what they would pay for them if competition did not reduce their price to or near the cost of production; but that value (“consumer surplus”) is difficult to estimate. Or consider—coming closer to current events that have sharpened traditional concerns with GDP’s adequacy as a measure of welfare—the anxiety that people who are involuntarily unnemployed experience.
The second in command at the international commission was the economist Amartya Sen, a pioneer (along with the philosopher Martha Nussbaum) in attempting to develop measures of human “capabilities” and ranking countries according to their ability to equip their citizens with such capabilities (long life, adequate nutrition, education, etc.). The United Nation’s Human Development Index attempts such a ranking, and some might think it a candidate for replacing GDP.
Posner concludes, nevertheless, that we should not jettison GDP as an important value. First, he argues that government statistics need to be calculated in objective ways to have legitimacy and the other contenders all involve controversial, necessarily biased economics. Second, he argues that GDP is at least “rougly correlated with adjusted measures of welfare.” Third, he argues that GDP is important not as method of ranking nations, but as a means of measuring the business cycle in an individual nation. This addresses the criticism that if GDP accounted for leisure time, an important compenent of welfare, some counties–like France (which in French apparently means “nappy time”)–would be much higher ranked.
-Jake
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