Salmon/Fung cage match -- Did Salmon use a representative example?

Felix Salmon is one of the sharpest business and finance bloggers out there but I've never quite shared his enthusiasm for the Groupon business model. Disagreeing with Salmon on business matters makes me a little nervous, so I feel a bit better to have Kaiser Fung on my side.

Fung (who shares my high opinion of Salmon's acumen) has a good take-down of Salmon's analysis. You should probably read the whole thing but there's one particular aspect that strikes me as requiring additional attention.

Here's Fung:

Let's start with [Salmon's] neighborhood restaurant example:

At Giorgio's, for instance, diners paid $15 for their Groupon -- which gave them $30 of food. But dinner for two at Giorgio's, with some kind of alcohol, can easily run to $100 or more. So even after knocking $22.50 off the bill (remember that Giorgio's kept $7.50 of the proceeds of Groupon), the restaurant would often still make money.

This is a bit complicated. We can trace how the cash flows. For Groupon, diners pay them $15, and they keep half of that, $7.50. For the diners, they paid Groupon $15 (now worth $30 spending), and so they pay Giorgio's $70; in other words, they paid $85 out of pocket for a meal worth $100 without Groupon. Giorgio's take in $70 from the diners plus $7.50 coming from Groupon for a meal worth $100.

...

So, I don't think the Groupon model is the kind of slam dunk Felix seems to think it is. Only if certain conditions are met will the merchants gain anything from Groupon:

• the value of the coupon has to be a fraction of the total spending at the merchant; in this example, the diners spent more than 3 times the face value of the coupon. What if the diners spend exactly $30? Then Giorgio’s loses $22.50 on each regular customer and earns $7.50 on each new customer, meaning that every 3 new customers pay for each regular’s discount. Not very attractive numbers at all.

Of course, that $7.50 doesn't take into account the cost to the restaurant of preparing and serving the meal (which would further help Fung's case), but putting that aside, how likely are customers to overshoot by a factor of three?

Looking at the offers currently on Groupon, I see three restaurants, Beto's Grill ($20 for $10), Stefano's Pizzeria ($20 for $10) and Henry's Hat ($35 for $15). Of the three, I'm only familiar with Henry's Hat (a game themed bar that, last time I was there, had Kruzno in its library), but, based on the information online, it would be fairly easy for two people to keep the tab down to close to the amount of the Groupon offer in all three.

Obviously, there are plenty of places in LA where you should plan on paying big money for your dinner, but I haven't noticed those places on Groupon. Instead I've seen a lot of moderately priced spots, and I doubt you've got a lot of couples running up a $60 dollar tab on three buck a slice pizza.

Apparently, journalists who work for Yahoo don't have access to the internet

Otherwise, they could easily have learned that that, rather than being in Little Rock, Russellville is about eighty miles to the west.

In Little Rock, Arkansas, for instance, the 2010-2011 yearbook at Russellville Middle School lists the "5 worst people of all time." Students listed former President George W. Bush and Bush's vice president, Dick Cheney, right after Adolph Hitler, Osama Bin Laden and Charles Manson.

Superintendent Randall Williams asked the yearbook printing company to cover the list with pieces of tape, but many parents aren't mollified.

"I think it's just hard to explain, and I've talked to the sponsor and she is very very very upset about it. That she didn't pay any attention to that particular part of that particular page," he told the local Fox affiliate. "I think she maybe just scanned the whole page and went on."

Friday afternoon data dump

Here are some more posts I should probably get around to one of these days:

There is nothing so distinctly middle-brow as the fear of being middle-brow -- yet another TNR edition.

In this excellent NPR piece, advocates claim this test can identify psychopaths but the researcher who developed the test isn't comfortable with the way it has been used. Lots of interesting stat questions here.

I always feel nervous when I disagree with Felix Salmon's analysis of a business model but Kaiser Fung made me feel a little better about this one.

Also from Gelman: If I can find the time, I'd like like to delve into this story about perennial nut-case Satoshi Kanazawa; I'd also like to join in the discussion of this Tyler Cowen post.

I wonder if this TNR writer knows that this practice goes back at least to Hearst (and was the basis for the Hitler allusion in Citizen Kane).

More reasons from Ebert to hate 3D.*

When a rocket scientist I know (this is LA, they're all over the place) heard an interview with James Surowiecki about the Wisdom of Crowds, he commented "wow, they've just discovered standard error." Perhaps now people are starting to realize some of the limitations. There's just not a lot of there there.

*update: Ebert has another post up on the search for the next big thing. His thoughts on the changing economics of the industry are particularly relevant.

Time will tell. What depresses me is that mainstream Hollywood seems to be experiencing a crisis of confidence. For decades there was the faith that if you released a good movie, people might very well buy tickets to it. The traditional pattern was to open it slowly, hope for good reviews, and then "roll it out" more widely.

The economics of television advertising put an end to the theory that an audience might find a movie. Now the movies must find an audience. Big new releases open everywhere at once, and everybody knows they will be available before long on DVD or On Demand . Theaters offer 3D as something you can't get at home (apart from "3D television," about which I am unpersuaded). Now we get rocking and rolling D-Box seats.

RIP: Joel Rosenberg

Noted Canadian science fiction author Joel Rosenberg has died.

It is a poorer world without him.

One more thought

Mark, Andrew Gelman and I have all weighed on on the article written by David Rubinstein. So I think the high points have been hit.

One thing that I think was interesting, though, was his decision to be defiant about his career. Comments like:

Why do I put “worked” in quotation marks? Because my main task as a university professor was self-cultivation: reading and writing about topics that interested me. Maybe this counts as work. But here I am today—like many of my retired colleagues—doing pretty much what I have done since the day I began graduate school, albeit with less intensity.

Seemed to me to be extremely revealing. I think that one possibility is one of culture. I grew up in a social democracy and I would feel shame if I thought I was "milking the system". My father used to explain the low Swedish unemployment rate to me as being a cultural phenomeon (in Sweden the shame of not working is high).

On the other hand, I occasionally see people bragging about how they bilked the system as if this is a point of pride and not deep humiliation. I wonder if there is a cultural divide here as I would find behavior to be shameful. Consider this statement:

Committee meetings were tedious but, except for the few good departmental citizens, most of us were able to avoid undue burdens.

Why would he not be ashmaed not to have been a good departmental citizen? I am always worried that I am not carrying enough administrative burden in my department and concerned when another faculty member is overloaded.

Or this comment:

To be sure, some of my colleagues were prodigious researchers, devoted teachers, and outstanding departmental, university, and professional citizens. But sociologists like to talk about what they call the “structural” constraints on behavior. While character and professional ethics can withstand the incentives to coast, the privileged position of a tenured professor guarantees that there will be slackers.

So why are character and professional ethics not valued? Why does an confession as to a lack of professional ethics sound like an attack on the profession and not an admission of a personal failing. Mark pointed out the comments on his teaching ability and I have to admit it sounds like he wasn't the most focused professor ever.

Or perhaps I misunderstand some parts of this situation??

University Professor Compensation -- Andrew and Joseph hit the big points but leave out the punch line

Both Andrew Gelman and my co-blogger Joseph take down David Rubinstein and his bizarre Weekly Standard piece, "Thank you, Illinois taxpayers, for my cushy life." Both posts do a good job showing how unrepresentative Rubinstein's case is and how flawed the conclusions he draws from it are, but to get to the really amusing part of the story you have to go into the comment section of Gelman's blog (always a good idea, by the way) where you'll find a link to Rubinstein's RateMyProfessors page. Here are some representative quotes:

got a B in his class. tests are all fill in the blank/short answer but you can use the book and your lecture notes. so you really have to come to lecture and take good notes. he is really disorganized and got off topic easily. i wouldn't recommend him.

DO NOT TAKE THIS CLASS W/HIM. Terrible teacher!! He is very frustrating and unclear. Nobody understands what he is talking about. Everyday he comes in with an empty coffee cup and takes sips throughout the class even though there is nothing in his cup!!! CRAZY. DO NOT TAKE SOC 100 WITH HIM! HE IS SO UNORGANIZED!!!

This class can sometimes be interesting, but mostly he just rambles about useless stuff that barely makes sense. He doesn't even write a real syllabus he's so disorganized. If you take his class, definitely go to lecture. You'll fail completely if you don't.

You'll have to go to the second page to find a 'good' rating (the rest were 'poor'):

i love this class. If you're right wing lol, i think you are going to like professor rubinstein

If you read between the lines, that review doesn't really contradict the others. Numerous students complained about the professor going off topic. Since it's hard to imagine a straightforward 'intro to sociology' lecture having a deeply right wing bent, it seems more likely that the good review was also a reaction to these tangents.

When Rubinstein talks about how overpaid he is, he's almost certainly right, not because the system is flawed (that point is certainly up for discussion) but because David Rubinstein appears to be an exceptionally bad teacher.

We may be seeing the beginning of a new journalistic genre: writers proudly basing arguments (implicitly or explicitly) on their own incompetence. First we got the "I'm too financially inept to support a family on $350,000 a year" stories (and the closely related "I'm too financially inept to support a family on just over a quarter of a million and too financially illiterate to grasp the concept of marginal tax rates"). Now we get Rubinstein. Can we expect some columnist to follow with a piece entitled "You shouldn't trust journalists because I'm a moron"?

(actually, I'd like to see that last one.)

University Professor Compensation

Andrew Gelman links to college professor David Rubinstein who makes a number of inflammatory comments under a headline that includes "Thank you, Illinois taxpayers, for my cushy life":

After 34 years of teaching sociology at the University of Illinois at Chicago, I [Rubinstein] recently retired at age 64 at 80 percent of my pay for life. . . . But that's not all: There's a generous health insurance plan, a guaranteed 3 percent annual cost of living increase, and a few other perquisites.

In my 34 years, just one professor in the sociology department resigned to take a nonacademic job. For open positions, there were always over 100 applicants, several of them outstanding. The rarity of quits and the abundance of applications is good evidence that the life of the college professor is indeed enviable.

Protests against efforts to reform pay scales, teaching loads, and retirement benefits employ a “solidarity forever, the union makes us strong” rhetoric. What these professors and other government workers do not understand is that they are not demanding a share of the profits from the fat-cat bourgeoisie. They are squeezing taxpayers—for whom the professors purport to advocate—whose lives are in most cases far harsher than their own.

I have a few comments to make about this particular issue. First of all, I notice that the professor in question is happy to brag about his success but is not proposing, for example, to stop accepting his pension. I am not sure why it makes sense to mock the people who support one's financial position. Is it considered good sense to mock customers in business?

Second, there are a lot of people in all fields of endeavor who do not earn their salary. What is it about academics that makes people think it might make sense to brag about being a poor performer?

Third, why is the focus on the cost to the taxpayer for academic pensions a focus? We subsidize a lot of activity -- for example, we tax hedge fund managers at captial gains tax rates. This is a very important subsidy on that activity but we do not hear comments about how hard it is for people in the working class to subsidize multi-billion dollar incomes.

I think Andrew Gelman makes the winning point here:

David Rubinstein appears to be somewhat of an extreme case of the underworked and overpaid professor: he taught at a low-ranked but high-paying institution, he got his Ph.D. at a time where they were giving out tenure-track slots like candy canes at Christmas, he (by his own admission) spends a total of less than one hour per week on class preparation, grading, and advising combined, and he got a contract in an era with generous retirement benefits.

It is unclear to me what action makes sense here, given these issues. Clearly, attacking current new professors does not seem to address the core issues (that David Rubinstein was hired in an exceptional era). It can only hurt people who have had to struggle up under much more difficult circumstances than he has. Which seems to be identical to his critique of academics in general (that they are priviledged and don't care about people who have had to deal with more difficult life circumstances).

I do know that my own experience of university life is completely different. I am in a resaerch position and I still spend a lot more time on teaching then he does, not to mention leading student research groups. My pension is defined contribution and my pay has just been cut as part of a state-wide austerity movement (after 1 year, that time when compounding means cuts hurt the most). It's hard work but I like the job. I do know that when I worked in industry, pay was higher and life was a lot less stressful.

It is a very odd article.

Tyler Cowen argues against more regulation with an example that calls for more regulation

Tyler Cowen has a piece in the New York Times on how regulation inhibits innovation in transportation using the example of driverless cars. I'm not sure he's made his general case (that's the subject for an upcoming post), but his specific case is particularly problematic.

In case you haven't been following this story, Google has been getting a lot of press for its experiments with self-driving cars, especially after statements like this from Stanford professor Sebastian Thrun:

"Think about the car as a medium of mass transit: So, what if our highway-train of the future meant you go on the highway, and there's a train of very close-driving cars with very low wind drag, fantastic capacity, is twice as efficient as possible as today, and so there is no congestion anymore?"

Cowen is clearly thinking along the same lines:

Furthermore, computer-driven cars could allow for tighter packing of vehicles on the road, which would speed traffic times and allow a given road or city to handle more cars. Trips to transport goods might dispense with drivers altogether, and rental cars could routinely pick up customers. And if you worry about the environmental consequences of packing our roads with cars, since we can’t do without them entirely, we still can make those we use as efficient — and as green — as possible.

Putting aside the question of the magnitude of these savings in time, road capacity and fuel effeiciency (which, given the level of technology we're talking about here, aren't that great), where exactly are these savings coming from?

Some can certainly be attributed to more optimal decision-making and near instantaneous reaction time, but that's not where the real pay-off is. To get the big savings, you need communication and cooperation. Your ideal driving strategy needs to take into account the destination, capabilities and strategies of all the vehicles around you. Every car on the road has got be talking with every other car on the road, all using the same language and rules of the road, to get anything near optimal results.

Throw just one vehicle that's not communicating (either because it has a human driver or because its communication system is down or is incompatible) into the mix and suddenly every other vehicle nearby will have to allow for unexpected acceleration and lane changes. Will driverless cars be able to deal with the challenge? Sure, but they will not be able to able to do it while achieving the results Thrun describes.

A large number of driverless cars might improve speed and congestion slightly, but getting to the packed, efficient roads that Cowen mentions would mean draconian regulations requiring highly specific attributes for all vehicles driving on a major freeway. The manufacture and modification of vehicles would have to be tightly controlled. Motorcycles would almost certainly have to be banned from major roads. Severe limits would have to be put on when a car or truck could be driven manually.

This would seem to be another case of a libertarian endorsing a technology with less than libertarian implications.

A couple of interesting stories on the business of gambling

American Public Media's Marketplace has a report on one of those you've-got-to-be-kidding business models. Not sleazy (the people behind it actually go out of their way not to take advantage of customers who might develop a serious problem), but this online casino is another example of people willingly paying money for something they can get for free.

By comparison, the AP has this account of a casino model that players have remarkably little interest in. Given the emergence of casinos in nearby states and the stagnant economy, the decline in Atlantic City isn't exactly unexpected, but this piece is still worth checking out and the title "Monopoly lost: Atlantic City's rise and fall" is definitely good for some bonus points.

A "how to lie with statistics" instant classic from the Wall Street Journal op-ed page

CJR's Ryan Chittum catches Stephen Moore doing his damnedest to mislead:

The question-as-headline is your second red flag that this just might be a deeply disingenuous op-ed (the first is that it’s on The Wall Street Journal op-ed page):

A 62% Top Tax Rate?

The top marginal tax rate is just 35 percent now, of course. So how does Moore come up with the idea that Obama and the Democrats are pitching a 62 percent tax rate for the rich? Disingenuously.

First, here’s a classic example of misleading readers with an apples and oranges comparison:

If the Democrats’ millionaire surtax were to happen—and were added to other tax increases already enacted last year and other leading tax hike ideas on the table this year—this could leave the U.S. with a combined federal and state top tax rate on earnings of 62%. That’s more than double the highest federal marginal rate of 28% when President Reagan left office in 1989. Welcome back to the 1970s.

For Moore’s headline purposes he includes state taxes to get to 62 percent, but when he compare it to rates under Reagan, he doesn’t include state taxes.

The comparison is much more misleading than that, really. Moore is also including things like payroll taxes to come up with his fake 62 percent number, while not including them in that 28 percent Reagan figure. You can’t do that, boss.

Moreover, to come up with that doozy of a number, Moore is adding in not only state and payroll taxes, but just about every possible tax hike being bandied about by Democrats. But Moore knows full well that even if they wanted to, which they don’t, the Dems wouldn’t be able to enact every one of these. But he acts like they’re all coming.

Those theoretical and far-from-likely tax hikes include a 3 percent surtax on incomes over a million bucks; Obama’s proposal to end the Bush tax cuts for the rich in 2013, which would return marginal rates to 39.5 percent at the top; 3.4 percent Medicare taxes (Moore includes the employer’s contribution here); and 10.1 percent in additional payroll taxes because “Several weeks ago, Mr. Obama raised the possibility of eliminating the income ceiling on the Social Security tax” (that includes the employers’ share, too, though Moore doesn’t say that).

There’s also this:

Today’s top federal income tax rate is 35%. Almost all Democrats in Washington want to repeal the Bush tax cuts on those who make more than $250,000 and phase out certain deductions, so the effective income tax rate would rise to about 41.5%.

It’s unclear how Moore gets to 41.5 percent here. Repealing the Bush tax cuts would return the top marginal rate to 39.5 percent. Deductions affect effective tax rates, which are far lower than marginal rates. Since he doesn’t explain it, and since the backdrop is the rest of this misleading piece, I’m going to assume that this 41.5 percent number is false (I believe Moore is talking about the PEP and Pease taxes, but those don’t apply to people making more than $525,000, so they can’t be included in a total tax rate that includes a millionaire’s surtax.)

To get to 62 percent, Moore also includes 4 percentage points for state taxes. It’s unclear why he didn’t include local taxes while he was at it. That would have got him another full point (it’s always worth noting that state and local taxes are extremely regressive, taking 11 percent of the income of the lowest quintile of earners, which is more than twice what the top 1 percent pays.)

All this allows Moore to plant the zombie lie that Democrats are “proposing rates like those under President Carter.” Even with all his hocus-pocus, that’s not true, either. The top marginal federal income tax rate under Carter was 70 percent, a full eight percentage points higher than Moore’s fake number. If you include all the state and payroll taxes he uses to get to Obama’s “62 percent” figure, which you have to to make the comparison, that Carter number would be closer to 80 percent.

And, as Andrew Sprung points out, that's still lower than the rate under Ike. It would be interesting to see how Moore reconciled the high taxes of the Postwar Era with its phenomenal growth.

Probably not informative, but interesting.

Metaphor of the day

From Merlin Mann via John D. Cook:

If a project doesn’t have an owner, it’s like a chainsaw on a rope swing. Why would anyone even go near that?

[Technically a simile, but do you really want to get technical here?]

More nails in the church door -- the case for the counter-reformation keeps getting stronger

The education reform movement is a strange beast. Its support is extensive and extraordinarily broad-based, bringing together players as diverse as Roger Ebert, the New Republic and Rick Scott (not that TNR is exactly proud of the commonalities -- check out how Kevin Carey manages to avoid Scott when discussing Republicans' reform positions, despite the Florida being the epicenter of the GOP's reform agenda).

Yet, despite this overwhelming consensus, it is a movement almost completely unsupported by solid, non-anecdotal evidence. I summarized some, but by no means all, of the cases where the data seemed to be running against the tenets of the movement in a post entitled: "Perhaps this is the time for a counter-reformation."

The following report (described here by the indispensable Dana Goldstein) undercuts the intellectual framework of the movement even further (though I would have liked to hear more about Canada which seems to be the more relevant example).

But what if the United States is doing teacher reform all wrong?

That’s the suggestion of a new report from the National Center on Education and the Economy, a think tank funded mostly by large corporations and their affiliated foundations. The report takes a close look at how the countries that are kicking our academic butts—Finland, China, and Canada—recruit, prepare, and evaluate teachers. What it finds are policy agendas vastly different from our own, in which prospective educators are expected to spend a long time preparing for the classroom and are then given significant autonomy in how to teach, with many fewer incentives and punishments tied to standardized tests.

Finland, for example, requires all teachers to hold a master’s degree in education and at least an undergraduate major in a subject such as math, science, or literature. Finnish teacher-education programs also include significant course work in pedagogy—exactly the sort of instruction former New York City schools chancellor Joel Klein recently called useless. All teacher candidates must write a research-based master’s dissertation on an issue in education policy or teaching practice, and will then spend a full-year as a student teacher reporting to an experienced mentor.

Shanghai takes a somewhat different approach; its teacher candidates take 90 percent of their college courses in the subject they will teach, and are expected to complete the same undergraduate programs as students who will go on to receive Ph.Ds in math or the sciences. As in Finland, however, a new teacher in Shanghai will spend the first year of his employment under the supervision of a mentor teacher, who is relieved of some of her own classroom duties in order to spend more time training the newbie.

You can see how these international examples cut against the grain of American education reform. Our approach has largely borrowed the Teach for America model. First, we attempt to bring more elite college graduates into the teaching profession by decreasing the credentialing necessary to become a teacher: no student-teaching year or education degree required, just a few weeks of summertime training are supposed to suffice. Then we expect teachers to spend much of their time preparing children for standardized tests, whose results, in turn, will be used to judge teachers’ competency.

The NCEE report makes a persuasive case that the Obama administration and its allies in the standards-and-accountability school reform movement have teaching policy exactly backward. The way to increase the prestige of the teaching profession is not to make it easier for elite people to do the job for a few years and then burn out, but to make it more challenging to earn a teaching credential, so that smart young people are attracted to the rigor of education programs. Within such a system, alternative credentialing programs for career changers could still play an important role. But alternative pathways will never have the capacity to provide the entire teacher corps.

Following this approach, Finland has been able to abolish test-score based accountability, finding that the folks who come through their challenging teacher professional development pipeline are well prepared to create their own curriculums and assessments. “It is essential for high-performing countries to trust its teachers, but it had better have teachers it can trust,” writes Marc Tucker, author of the NCEE report.

For the record, I don't believe in slavishly following international examples (even when they support my position), but when movement advocates like Klein and Rhee use these countries to bolster their arguments, they need to explain why we should pursue the opposite of these countries' policies.

Thought of the day

I was reading this statement (via a link from Felix Salmon):

Emergers also have a better chance of being part of the coveted 1% who control 40% of wealth in America someday.

It got me thinking again about precisely why we have low marginal tax rates on those who make above (for example) 500 thousand per year. Now, by low I mean low in comparison with other rates in the post-WWII era.

There seem to be two explanations: 1) competition for key talent and 2) incentive for performance.

The first seems unlikely. All US executives pay taxes in the same country so it just resets the baseline. Americans seem to be the best compensated class of business executives and stock traders so international competition can only matter so much.

The second is much clearer if we (following Linda McQuaig and Neil Brooks) look at sports stars. Did Babe Ruth or Lou Gehrig under-perform relative to Micheal Jordan due to low compensation? Do we really think that the overall quality of play would decline in some massive sense?

Now we might get fewer people wasting their lives trying to become a sports superstar if they paid more in marginal taxes, but is that really a shame?

Meanwhile, infrastructure, education and the rule of law all make economic activity possible. Is it not possible that these areas are under-invested in and could use some transfer of cash?

I do not know for sure, but it is worth thinking about.

3-day Weekend Blogging -- Junk Food edition

We've been robbed!

L.A. is unquestionably one of the world's great burger towns (and I have the only Pulitzer Prize winning food critic to back me up on this), so it's bad enough when Travel and Leisure omits us from its top ten list, but this is just adding insult to injury:

No. 2 Salt Lake City

Locals have lined up in droves ever since the streamlined burgers of In-N-Out have come to town, but otherwise the area's burger personality is quite a bit more decadent—as in, pastrami burgers. To try a quarter-pound patty piled high with more beef, check out Crown Burger, where they also add Thousand Island dressing, lettuce, onions, and cheese.

In-N-Out? Really?

Correlation is not causation . . .

. . . but this association is both alarming and worth a lot more study;

Plus, overall, people with long commutes are fatter, and national increases in commuting time are posited as one contributor to the obesity epidemic. Researchers at the University of California–Los Angeles, and Cal State–Long Beach, for instance, looked at the relationship between obesity and a number of lifestyle factors, such as physical activity. Vehicle-miles traveled had a stronger correlation with obesity than any other factor.

Unlike things like genetic factors (which tend to be reasonably stable within decades at the population level), the shift towards longer commutes has moved in parallel with increases in obesity. If the association persists at the individual level then it is a possible candidate for obesity prevention.

The problem, of course, is we continue to build low density, car centered cities which do not improve matters. It makes it hard to change average commutes on any sort of easy time scale. But a discovery that this association was causal would suggest all sorts of public health interventions.