Wall Street Needs Return to Partnership Culture

(p. A17) Ever since the crisis of 2008, banks have been subject to ferocious attack and more regulation. In “Why Wall Street Matters,” William Cohan, the author of earlier books on Goldman Sachs and Lazard Frères, mounts a defense of Wall Street banking institutions and argues that much of the regulation after 2008 has been counterproductive. In his view, the main culprit in the financial meltdown was Wall Street’s compensation culture, and he presents some controversial proposals to reform it.
. . .
So what went wrong? Where did useful innovation morph into lunacy that almost brought down the whole system? The sea change began in 1969, Mr. Cohan says, when the first investment bank (Donaldson, Lufkin & Jenrette) sold equity to the public. Previously investment banks were partnerships whose capital came from the net worth of the individual partners, who would assume only the most modest risk since investment failure might endanger their life savings. But once a firm’s capital could be increased by debt and equity financing–in essence, by other people’s money–the calculus shifted.
. . .
Mr. Cohan’s solution is to replace Wall Street’s broken compensation system: the bonus culture that creates incentives to take big bets with other people’s money while avoiding accountability when the bets go bad. He says that we need to “return to a compensation system that more closely resembles that of the partnership culture” of earlier times. Going well beyond calls for a claw-back of bonuses when trouble hits, Mr. Cohan proposes that the leaders of Wall Street firms be required to put their entire net worth on the line. Their co-op apartments, houses in the Hamptons, art collections and bank accounts would all be “fodder for the bank’s creditors” if something goes wrong.

For the full review, see:
Burton G. Malkiel . “BOOKSHELF; Big Bonus, Big Problem; Dodd-Frank and the Volcker Rule address the wrong problems and did nothing to fix Wall Street’s broken compensation culture.” The Wall Street Journal (Weds., March 1, 2017): A17.
(Note: ellipses added.)
(Note: the online version of the review has the date Feb, 28, 2017.)

The book under review, is:
Cohan, William D. Why Wall Street Matters. New York: Random House, 2017.

Increasing Number of Free Agent Entrepreneurs

(p. A3) A tiny segment of U.S. manufacturing appears to be thriving–the one with no employees.
A mix of technology, economic necessity and adventure is leading more Americans to found companies that plan to stay very small. That entrepreneurial spark also highlights challenges facing the economy, from difficulty re-entering the job market to the diminishing role of fast-growing young firms.
Nicholas Hollows wants to be his own boss, and not anyone else’s.
“I definitely don’t intend to switch my role from a person who makes things to a person who manages people,” said the 32-year-old sole proprietor of Hollows Leather in Eugene, Ore. “Being hands-on is the whole reason I do this.”
The number of businesses classified as manufacturers with no employees has been rising steadily since the depths of the recession. The tiny operations often make food, craft beer, toiletries or other niche products. Their growth stands out in a sector that has been shedding workers for decades.
U.S. food manufacturers with no employee but the owner nearly doubled from 2004 to 2014. One-worker beverage and tobacco makers expanded 150%. Such chemical manufacturers–a category that includes makers of soap and perfume–grew almost 70%.
In all, there were more than 350,000 manufacturing establishments with no employee other than the owner in 2014, up almost 17% from 2004, according to the most recent Commerce Department data. By comparison, there were 292,543 establishments with other employees, down 12%. The shift creates a challenge for building back the number of jobs in the U.S. manufacturing sector.

For the full story, see:
Sparshott, Jeffrey. “Tiny Firms Stay That Way.” The Wall Street Journal (Thurs., Dec. 29, 2016): A3.
(Note: the online version of the story has the date Dec. 28, 2016, and has the title “Big Growth in Tiny Businesses.”)

Kenneth Arrow Had Broad Knowledge Beyond Economics

(p. A21) Professor Arrow was widely hailed as a polymath, possessing prodigious knowledge of subjects far removed from economics. Eric Maskin, a Harvard economist and fellow Nobel winner, told of a good-natured conspiracy waged by junior faculty to get the better of Professor Arrow, even if artificially. They all agreed to study the breeding habits of gray whales — a suitably abstruse topic — and gathered at an appointed date at a place where Professor Arrow would be sure to visit.
When, as expected, he showed up, they were talking out loud about the theory by a marine biologist — last name, Turner — which purported to explain how gray whales found the same breeding spot year after year. As Professor Maskin recounted the story, “Ken was silent,” and his junior colleagues amused themselves that they had for once bested their formidable professor.
Well, not so fast.
Before leaving, Professor Arrow muttered, “But I thought that Turner’s theory was entirely discredited by Spencer, who showed that the hypothesized homing mechanism couldn’t possibly work.”

For the full obituary, see:
MICHAEL M. WEINSTEIN. “Kenneth Arrow, Influential Economist and Nobel Laureate, Is Dead at 95.” The New York Times (Weds., FEB. 22, 2017): A21.
(Note: the online version of the obituary has the date FEB. 21, 2017, and has the title “Kenneth Arrow, Nobel-Winning Economist Whose Influence Spanned Decades, Dies at 95.”)

“High Expectations, High Support” Charter Schools Work Well

(p. 2) The briefest summary is this: Many charter schools fail to live up to their promise, but one type has repeatedly shown impressive results.
Hannah Larkin, the principal at Match, refers to such schools as “high expectations, high support” schools. They devote more of their resources to classroom teaching and less to almost everything else. They keep students in class for more hours. They set high standards for students and try to instill confidence in them. They focus on giving teachers feedback about their craft and helping them get better.
. . .
The latest batch of evidence about this approach is among the most rigorous. Professors at M.I.T., Columbia, Michigan and Berkeley have tracked thousands of charter-school applicants, through high school and beyond, in Boston, where most charters fit the “high expectations, high support” model.
Crucially, the researchers took several steps to make sure the findings were real. They compared lottery winners with losers, controlling for the fact that families who applied for the lotteries were different from families who didn’t. They also counted as charter students all those who enrolled, including any who later left.
When you talk to the professors about their findings, you hear a degree of excitement that’s uncommon for academic researchers. “Relative to other things that social scientists and education policy people have tried to boost performance — class sizes, tracking, new buildings — these schools are producing spectacular gains,” said Joshua Angrist, an M.I.T. professor.

For the full commentary, see:
Leonhardt, David. “Schools That Work.” The New York Times, SundayReview Section (Sun., NOV. 6, 2016): 2.
(Note: ellipsis added.)
(Note: the online version of the commentary has the date NOV. 4, 2016.)

The “latest batch of evidence” mentioned above, includes:
Angrist, Joshua D., Sarah R. Cohodes, Susan M. Dynarski, Parag A. Pathak, and Christopher R. Walters. “Stand and Deliver: Effects of Boston’s Charter High Schools on College Preparation, Entry, and Choice.” Journal of Labor Economics 34, no. 2 (April 2016): 275-318.

Entrepreneur Marconi Was Driven by Wireless Communication Project

(p. C5) Marconi is another example of the Victorian “self-made man,” in this case a precocious youth fascinated by electricity and electrical wave pulses.
. . .
Sending the letter “S” in Morse code to his assistant, Mignani, on the far side of the meadow several hundred yards away was great, but not enough. What if, instead, Mignani took the receiver to the other side of the hill, out of sight of the house, and then fired a gunshot if the pulses got through? “I called my mother into the room to watch the momentous experiment. . . . I waited to give Mignani time to get to his place. Then breathlessly I tapped the key three times. . . . Then from the other side of the hill came the sound of a shot. . . . That was the moment when wireless was born.”
. . .
A combination of technological insight, organizational skill and business acumen gave him, like Steve Jobs in the next century, his place in history. To the end of his life Marconi was driven by a vision of the whole world communicating through wireless waves in the air.
. . .
. . ., Mr. Raboy exhaustively if deftly tells the tale of the next few critical years: Marconi’s long stay in England, the search for funding (without losing control), the critical establishment of patents, the embrace by officials in the British Post Office and Royal Navy, the ship-to-shore and ship-to-ship wireless transmissions. There’s a fine chapter on the critical long-range, trans-Atlantic experiments in 1901. These were conducted in wintry, gusty Newfoundland, whose supportive provincial government grasped almost immediately what Marconi offered: instant and vastly less expensive communication to Canada, Boston and New York and, above all, to Britain and its empire. Little wonder that such powerful entities as the (state-subsidized) Anglo-American Telegraph Co. were alarmed at this interloper. . . .
In 1909, at the age of 35, the Italian entrepreneur would stand up proudly to receive the Nobel Prize in physics.

For the full review, see:
PAUL KENNEDY. “When the World Took to the Air; Like Steve Jobs, Marconi combined technological insight, organizational skill and business acumen.” The Wall Street Journal (Sat., Sept. 10, 2016): C5-C6.
(Note: ellipses internal to second quoted paragraph, in original; other ellipses, added.)
(Note: the online version of the review has the date Sept. 9, 2016, an has the title “The World’s First Communications Giant; Like Steve Jobs, Marconi combined technological insight, organizational skill and business acumen.”)

The book under review, is:
Raboy, Marc. Marconi: The Man Who Networked the World. New York: Oxford University Press, 2016.

Unemployment Was Lower When Fed Stuck to Taylor Rule

(p. A17) . . . in a recent empirical study, Alex Nikolsko-Rzhevskyy of Lehigh University and David Papell and Ruxandra Prodan of the University of Houston divided U.S. history into periods, like the 1980s and ’90s, where Fed policy basically adhered to the Taylor rule and periods, like the past dozen years, where it did not. Unemployment was 1.4 percentage points lower on average in the Taylor rule periods, and it reached devastating highs of 10% or more in the non-Taylor rule periods.
. . .
Moreover, Fed calculations that only look at macroeconomic effects of low rates overlook their negative microeconomic effects on bank lending found by economists Charles Calomiris of Columbia University and David Malpass of Encima Global.

For the full commentary, see:
JOHN B. TAYLOR. “The Case for a Rules-Based Fed; Neel Kashkari is wrong. My proposed rules-based reform of the Fed would not be run by a computer.” The Wall Street Journal (Weds., Dec. 21, 2016): A17.
(Note: ellipses added.)
(Note: the online version of the commentary has the date Dec. 20, 2016.)

The paper mentioned above, that shows the good results when the Fed followed policies close to the Taylor rule, is:
Nikolsko-Rzhevskyy, Alex, David H. Papell, and Ruxandra Prodan. “Deviations from Rules-Based Policy and Their Effects.” Journal of Economic Dynamics and Control 49 (Dec. 2014): 4-17.

“Thank You, Industrialization” (Thank YOU, Hans Rosling)

The TED talk embedded above, is one of my favorites. I sometimes show an abbreviated version to my Economics of Technology seminar.

(p. B8) Hans Rosling, a Swedish doctor who transformed himself into a pop-star statistician by converting dry numbers into dynamic graphics that challenged preconceptions about global health and gloomy prospects for population growth, died on Tuesday in Uppsala, Sweden. He was 68.

The cause was pancreatic cancer, according to Gapminder, a foundation he established to generate and disseminate demystified data using images.
. . .
Brandishing his bubble chart graphics during TED (Technology, Entertainment and Design) Talks, Dr. Rosling often capsulized the macroeconomics of energy and the environment in a favorite anecdote about the day a washing machine was delivered to his family’s cold-water flat.
“My mother explained the magic with this machine the very, very first day,” he recalled. “She said: ‘Now Hans, we have loaded the laundry. The machine will make the work. And now we can go to the library.’ Because this is the magic: You load the laundry, and what do you get out of the machine? You get books out of the machines, children’s books. And Mother got time to read to me.”
“Thank you, industrialization,” Dr. Rosling said. “Thank you, steel mill. And thank you, chemical processing industry that gave us time to read books.”

For the full obituary, see:
SAM ROBERTS. “Hans Rosling, Swedish Doctor, Teacher and Pop-Star Statistician, Dies at 68.” The New York Times (Fri., FEB. 10, 2017): B8.
(Note: ellipses added.)
(Note: the online version of the obituary has the date FEB. 9, 2017, and has the title “Hans Rosling, Swedish Doctor and Pop-Star Statistician, Dies at 68.”)

Privatized Airports Are Better Managed

(p. A15) The highest-ranked American airport on the list of the world’s top 100, as determined by the Passengers Choice Awards, is Denver–at 28. Atlanta comes in at 43, Dallas at 58, Los Angeles at 91.
Why do American passengers pay so much to get so little? Because their airports, by global standards, are terribly managed.
Cities from London to Buenos Aires have sold or leased their airports to private companies. To make a profit, these firms must hold down costs while enticing customers with lots of flights, competitive fares and appealing terminals. The firm that manages London’s Heathrow, currently eighth in the international ranking, was so intent on attracting passengers that it built a nonstop express train to the city’s center. It’s also seeking to add another runway, as is the rival firm running Gatwick Airport.
American airports are typically run by politicians in conjunction with the dominant airlines, which help finance the terminals in return for long-term leases on gates and facilities. The airlines use their control to keep out competitors; the politicians use their share of the revenue to reward unionized airport workers. No one puts the passenger first.

For the full commentary, see:
JOHN TIERNEY. “‘Third World’ U.S. Airports? That Insults the Third World; Private managers make terminals sparkle and hum the world over. Here we’re stuck with LaGuardia.” The Wall Street Journal (Sat., Jan. 21, 2017): A15.
(Note: the online version of the commentary has the date Jan. 23 [sic], 2017.)

We Want Meaningful Work

(p. 1) HOW satisfied are we with our jobs?
Gallup regularly polls workers around the world to find out. Its survey last year found that almost 90 percent of workers were either “not engaged” with or “actively disengaged” from their jobs. Think about that: Nine out of 10 workers spend half their waking lives doing things they don’t really want to do in places they don’t particularly want to be.
Why? One possibility is that it’s just human nature to dislike work. This was the view of Adam Smith, the father of industrial capitalism, who felt that people were naturally lazy and would work only for pay. “It is the interest of every man,” he wrote in 1776 in “The Wealth of Nations,” “to live as much at his ease as he can.”
This idea has been enormously influential. About a century later, it helped shape the scientific management movement, which created systems of manufacture that minimized the need for skill and close attention — things that lazy, pay-driven workers could not be expected to have.
Today, in factories, offices and other workplaces, the details may be different but the overall situation is the same: Work is structured on the assumption that we do it only because we have to. The call center employee is monitored to ensure that he ends each call quickly. The office worker’s keystrokes are overseen to guarantee productivity.
. . .
(p. 4) To start with, I don’t think most people recognize themselves in Adam Smith’s description of wage-driven idlers. Of course, we care about our wages, and we wouldn’t work without them. But we care about more than money. We want work that is challenging and engaging, that enables us to exercise some discretion and control over what we do, and that provides us opportunities to learn and grow. We want to work with colleagues we respect and with supervisors who respect us. Most of all, we want work that is meaningful — that makes a difference to other people and thus ennobles us in at least some small way.
. . .
You enter an occupation with a variety of aspirations aside from receiving your pay. But then you discover that your work is structured so that most of those aspirations will be unmet. Maybe you’re a call center employee who wants to help customers solve their problems — but you find out that all that matters is how quickly you terminate each call. Or you’re a teacher who wants to educate kids — but you discover that only their test scores matter. Or you’re a corporate lawyer who wants to serve his client with care and professionalism — but you learn that racking up billable hours is all that really counts.
Pretty soon, you lose your lofty aspirations. And over time, later generations don’t even develop the lofty aspirations in the first place. Compensation becomes the measure of all that is possible from work. When employees negotiate, they negotiate for improved compensation, since nothing else is on the table. And when this goes on long enough, we become just the kind of creatures that Adam Smith thought we always were.

For the full commentary, see:

BARRY SCHWARTZ. “Rethinking Work.” The New York Times, SundayReview Section (Sun., AUG. 30, 2015): 1 & 4.
(Note: ellipses added.)
(Note: the online version of the commentary has the date AUG. 28, 2015,)

The commentary is related to Schwartz’s book:
Schwartz, Barry. Why We Work, Ted Books. New York: Simon & Schuster, 2015.

G.D.P. May Understate Growth by 2% or More

(p. B1) As the economy has shifted from one that primarily produced things — refrigerators and cars, guns and shoes — to one that now deals largely in services and information, economists have grown more and more skeptical that the traditional measure of gross domestic product — the nation’s total output — is accurately capturing much of the economy’s innovation and improvements.
“I think the official data on real growth substantially underestimates the rate of growth,” said Martin Feldstein, an economist at Harvard.
. . .
(p. B2) Mr. Feldstein likes to illustrate his argument about G.D.P. by referring to the widespread use of statins, the cholesterol drugs that have reduced deaths from heart attacks. Between 2000 and 2007, he noted, the death rate from heart disease among those over 65 fell by one-third.
“This was a remarkable contribution to the public’s well-being over a relatively short number of years, and yet this part of the contribution of the new product is not reflected in real output or real growth of G.D.P.,” he said. He estimates — without hard evidence, he is careful to point out — that growth is understated by 2 percent or more a year.
. . .
For Mr. Feldstein, it is misleading measurements that are contributing to a public perception that real incomes — particularly for the middle class — aren’t rising very much. That, he said, “reduces people’s faith in the political and economic system.”
“I think it creates pessimism and a distrust of government,” leading Americans to worry that “their children are going to be stuck and won’t be able to enjoy upward mobility,” he said. “I think it’s important to understand this.”

For the full story, see:
PATRICIA COHEN. “Is the Slogging Economy Blazing? Growth Our Old Gauge Can’t See.” The New York Times (Tues., FEB. 7, 2017): B1-B2.
(Note: ellipses added.)
(Note: the online version of the article has the date FEB. 6, 2017, and has the title “The Economic Growth That Experts Can’t Count.”)

Steady Increase in Federal Regulations

RegulationsRiseGraph2017-02-03.jpgSource of graph: online version of the WSJ article quoted and cited below.

(p. A2) In a high-profile attack on growth-killing red tape, President Donald Trump this week ordered that any agency issuing a new rule find two to repeal.

He will likely discover that the only thing harder than getting something done in Washington is getting it undone.
Vast swaths of rules are untouchable because Congress ordered them to be written or the president himself demanded them..

For the full story, see
Ip, Greg. “CAPITAL ACCOUNT; Trump May Find Leviathan Hard to Tame.” The Wall Street Journal (Thurs., Feb. 2, 2017): A2.
(Note: the online version of the story has the date Feb. 1, 2017, and has the title “CAPITAL ACCOUNT; Donald Trump May Find Leviathan Hard to Tame.”)