Friday, August 31, 2007


I'm always ranting about vacation time. Well, here's where the theory gets put into practice: I'm away for 12 days starting tomorrow (ok, it's not three weeks, but it's a start!), and no, I'm not taking a laptop...

Market failure: the airport edition

A post from Maria at Crooked Timber makes me wonder whether there isn't perhaps some sort of massive market failure going on at airports. Here's Maria:

Here are the things most people would happily pay for at an international transit airport: – a shower – clean underwear (for those of us who habitually forget to pack it) – daylight – an exercise facility to help with the jetlag and minimise DVT – nutritious but not too heavy food – a nap, lying flat, somewhere quiet.

And here’s what is generally available: – Gucci – Chanel – l’Occitane – Bodyshop – Lacoste – Nike – a few plastic seats – McDonalds, dougnuts, and the local variety of fried, sugary dross to add a sugar hangover to your jetlag.

I suppose the obvious point is that as a consumer of travel, your decision about where to travel is not about the airport but the place. If you want to go to London, you have to put up with Heathrow. So the airport company have a captive customer base, attracted by, and in a sense paid for, by the business environment and tourist attractions of the city. It's hard to see a market solution to the problem, except perhaps in very large cities, where you could conceivably have multiple airports in genuine competition.

So is there a solution? Are there any good publicly funded airports? Or are they just as bad? Is this dream airport something we're just never going to get?

Tuesday, August 28, 2007

Bail us out!

Watch this remarkable rant from "Mad Money" host Jim Cramer on CNBC. Isn't it funny how quickly free-market types turn to the government when things go wrong?

Slate's Daniel Gross puts it best when he writes about these characters having a special bye-law which says "The government should never intervene in the economy, unless it is to bail out hedge funds and investment banks". (For the record, I certainly don't hold the position that government intervention should be ruled out because it might help reckless financiers.)

Thursday, August 16, 2007

Only economists...

Here's the start of a piece in the Economist about working hours:

Most people greet the weekend with gratitude. But some economists view it with puzzlement. Why, they wonder, does the bulk of the population rest on the same two days each week? Why does everyone's week end at “the” weekend? From an economic point of view, it would surely be more efficient to stagger days of rest throughout the week. That way, expensive pieces of equipment would not lie idle for two days in seven, and infrastructure would be less congested the other five.

Surely only economists could possibly be puzzled by why people like to have the same days off! More seriously, isn't it a somewhat sobering thought that something as important as the fact that people like to enjoy leisure time with other people might be missing from models used to make decisions about our lives?

Five weeks off

US blogger Ezra Klein writes about vacation time, and says he'd love to be able to take more time off. Here's a fairly typical response from an irate reader:
So here's my problem with Ezra's post:

...I'm not willing to give up a lot for five weeks of vacation a year, right now. I like the Bay Area, and the cost of living is high, here. I'd like to get a house. I'd like to be able to live here AND still have enough money to go on vacation to Japan this year or next. And some of that's going to have to go by the wayside if I lose 8% of my paycheck.
Now, maybe in a few years, that personal equation will change for me, and I'll start thinking of ways that I could shift my work-life balance more towards "life." But I like to think that, if those few years later Ezra's got a kid and a mortgage and needs to hold onto every penny that's coming his way...“

Does anyone spot the flaw in this argument? The problem is a classic Prisoner's Dilemma: if the respondent alone works less, he's in trouble, because houses will still cost the same, but he alone will have less money. If, on the other hand, everyone works a bit less, house prices will have to fall, and so long as his rank position in the earnings table remains unchanged, he's going to be able to buy the same house as before, except that now he'll also have been able to spend three weeks on a canoeing trip. Thus, with respect to "competitive" goods like housing, it is possible to enjoy more leisure without any real sacrifice: but only if it's a collective decision. On the other hand, a Japan vacation or flat-screen TV will not get much cheaper even if everyone in the Bay Area does work less, so those kinds of things are examples of genuine leisure-consumption trade-offs.

So, yes, working less mean earning less, but the substantive effect of the reduction is not as bad as it sounds, so long as everyone else is working less too.

Wednesday, August 08, 2007

Masters of the Universe II

Three further thoughts on the Barksy interview below:

1. When you have “the most profitable industry in the history of mankind” enjoying a “quirk” in regulation, you simply have to ask questions about influences on the political process.

2. Market wages do not necessarily reflect the true, long-term "usefulness" of work (except under very strong assumptions). Many professions pay more than others because they deviate from a perfect market, not the reverse: medicine is a good example. Taxes which are used to pay for workers (firemen, nurses, scientists) who are under-valued by the market can then be seen as rightly rewarding productive work by using the excess rewards which accrue to those in over-valued sectors. (The fact that estimates of the extent to which different kinds of work are over- and under-valued are both very rough and highly politicized does not invalidate this general defence of taxation.)

3. The labour market distortions induced by extremely high wages in the finance sector are worrying. Put simply: is it really efficient to have legions of bright young physicists and engineers (usually trained at great public expense) slugging it out in the City in the hope of a becoming lucky young millionaires instead of doing research on, say, sustainable energy, or designing genuinely innovative new products?

Masters of the Universe

Are people in finance overpaid? Should hedge fund managers be able to pay a lower tax rate, as they do in many cases? I'm sure regular readers can guess my views on these and related questions, but it was interesting to read an interview in the New York Times with hedge fund manager Neil Barsky, which touched on some of these questions. Barsky is certainly a “finance type” and used to be a reporter at the Wall Street Journal, so he's certainly no leftie. Some excerpts:
[On tax rates]
First, let me state the obvious: there is no public policy reason for hedge fund and private equity managers to pay a lower tax rate than teachers, doctors, or lawyers... I suspect that this debate is the result of a quirk in the tax code... No legislator in his right mind ever said, “We have to tax hedge fund managers this way, otherwise they’ll have no incentive to work hard!” So let’s not kid ourselves — the tax code is a gift to the industry. Of course, accountants and some managers will find clever ways to circumvent the new laws, so perhaps the proposed bills won’t generate the revenue they are meant to...The notion that the most profitable industry in the history of mankind (I hyperbolize, but on a per-person basis, this might in fact be true) requires a lower tax rate to take risk and make investments, simply does not square with logic. I know of no manager who would stop working or stop investing as a result.

[Short-termism in business thinking driven by financial markets]
This is a great question: does the presence of short-term-oriented investors such as hedge funds alter the behavior of the companies they invest in? Let me throw a few more questions out there: To what extent does widespread options issuance create an incentive for a CEO to focus on his or her stock price to the exclusion of building long-term business value? Does the ubiquity of earnings estimates cause companies — unconsciously or, ahem, intentionally — to distort their business practices in order to please investors? Does all the money sloshing around hedge fund coffers allow them to throw their weight around and often force managements to make bad business decisions? My answers would be: Yes. A lot. Yes. Yes. Short-term thinking infected Wall Street some time ago, and I would suggest it was performance-obsessed mutual funds that got the ball rolling back in the 1980s bull market.

[Social and labour market effects of hedge funds]
I don’t believe hedge funds necessarily provide a social good, but I also do not believe they are a social evil (generalizations are always dangerous, but bear with me here). And it is unfortunate that the “best and the brightest” no longer seem to want to go into government or medicine or teaching (I did say I’d be generalizing here), and instead seem to gravitate to the best-paying professions... In general, the compensation differential between jobs in finance and jobs in virtually every other part of society is sad.

Monday, August 06, 2007


James Surowiecki writes on "rent-seeking" in the US student loan business in this week's New Yorker:
[Student loans] ...isn’t a free market in any meaningful sense of the term, because the government effectively determines prices, insures against losses, and subsidizes volume. In this environment, most of the competition among private companies is really just squabbling over how to split up the spoils. Economists call this behavior—when a company seeks to manipulate economic conditions rather than actually create value—“rent-seeking.” It’s common in areas where the fetish for privatization has taken hold, such as the outsourcing of homeland security to private contractors and the boom in private Medicare insurers. (The private insurers are less efficient than Medicare and receive billions in subsidies from the government.) Outsourcing tasks to private companies is supposed to let government reap the benefits of the free market. But sometimes it just ends up uniting the worst of government and the worst of the private sector into one expensive mess.

If you're in the UK, does any of this sound familiar? Isn't rent-seeking exactly what's been going on in many of the botched attempts at privatisation, from the railways to Heathrow?

First They Came

First they came for the Jews
and I did not speak out
because I was not a Jew.
Then they came for the Communists
and I did not speak out
because I was not a Communist.
Then they came for the trade unionists
and I did not speak out
because I was not a trade unionist.
Then they came for me
and there was no one left
to speak out for me.
Pastor Martin Niemöller

-- Attributed to Pastor Martin Niemöller (1892–1984)

Wednesday, August 01, 2007

Why does Bergman matter?

Ingmar Bergman's death has triggered off a mini-debate about the merits of art cinema. Here is one example, from today's Times; last night's Newsnight is another. The question being asked – and I welcome the fact that it is being asked – is why we should care about film-makers whose films are not popular, and which are in the opinion of many, unenjoyable.

This question goes to the heart of what art really is. If art is meant to be enjoyable (in some broadly defined sense) and if each person's view counts as much as any other, then surely, the argument goes, the Farrelly Brothers are greater artists than Bergman ever was.

Appealingly democratic though this argument is, I think it misses out on an essential aspect of enjoying art, which is adaptation. Our response to a given stimulus is not fixed from birth to death, but capable of undergoing change. In many cases, enjoying something involves learning: we have to undertake an initial investment to even be able to appreciate the thing. This initial effort may not be enjoyable at the time, but is undertaken in the hope that it will lead to greater joys in future.

Consider what happens with food. The first time we go from fish fingers and ketchup to good tomatoes and olive oil, it doesn't seem nice (or at least it didn't to me), but over time you learn to enjoy food in a way that makes the entire process of eating more fun, not less. A business invests money, foregoing profits in the present to add to profits in the future. In the same way, this sort of training is a hedonic investment: a decision to enjoy a little less in the present in order to enjoy more, or more sustainably (I'll write more on this aspect in a later post), in the future.

So what has all this got to do with art? You could argue that art is essentially a sort of product or service whose enjoyment requires specialized training. The idea is that learning to appreciate the artform opens up new possibilities for enjoyment, and it is in the hope of realizing these possibilities that anyone bothers. Of course, there is a strongly subjective component to all of this, so each individual has to make a guess as to exactly which hedonic investments are likely to pay off for her. (Typically this is done by looking at people who we assess to be in some way like ourselves, and who have clearly learned to enjoy something, and then following the route they've taken. In other words, we use role models.)

Coming back to the specific case of Bergman (or for that matter any relatively unpopular but feted artist) I think what tends to happen is that at a given point in time, only a small number of people make the effort, or even have the inclination, to seriously get into cinema. Over time, their tastes certainly evolve away from the mainstream, but there is a sense in which these film-buffs are getting more out of their trips to the cinema than the average person. They love Bergman, and we can appreciate their specialized ability to enjoy film, even if we do not share it, so we take note when he dies. This seems perfectly reasonable to me.

Furthermore, since most film-makers tend to themselves belong to this small set of serious cinema fans, over time these arthouse films influence more popular work, to eveyone's benefit. Indeed, many of today's popular films – Pulp Fiction or the Usual Suspects say - would have seemed far too complicated for popular consumption in the 1950s. But their makers are film-nerds. They themselves made hedonic investments, devouring films that others may have thought unenjoyable, and learning how to enjoy, and use, storytelling devices which were not common in the mainstream. Years later, they've been able to use that learning to craft widely enjoyed but relatively sophisticated entertainment. That sounds like progress to me.