Loan Sharks, Facebook and the Growth Fetish

Think about the following game. I'm going to let you pick seven or twelve then I'm going to role a pair of dice. If you pick seven you win seven hundred dollars if seven turns up and you lose one hundred if it doesn't. If you pick twelve you win two thousand dollars if twelve turns up and lose one hundred if it doesn't.

I assume everyone who reads this blog would pick seven at this point but what if I added the following detail, there's a loan shark waiting outside with a large gun and he is going to shoot you dead if you don't hand him two thousand dollars.

Suddenly, that twelve is starting to look pretty good.

This example is extreme, of course, but it's not all that unrealistic. There are lots of situations where the value of money follows a nonlinear or even stair-step curve. (ever been a nickel short at the coke machine?). Unfortunately we often make all sorts of assumptions about smoothness and well-behaved functions when talking about finance and economics.

Think about stock options. Let's say you bought a share for one hundred dollars. Furthermore, lets say that the CEO (whose options are also pegged at one hundred) has a choice between two strategies: one has a fifty/fifty chance of a share price off 100 or 105; the other has basically a fifty/fifty chance of lowering the price to 50 or raising it to 110.

Which is the better strategy? That depends on whether we're talking about the point of view of you, the stockholder, or of the CEO.

This is, of course, another toy example, albeit a more realistic toy than the first. For a real and timely example consider this from Marketplace:

Facebook's ad revenue is growing steadily, but not fast enough to justify its stock price.

Williamson: Everybody is going to be looking for is some traction in mobile revenue.

If Facebook's ad sales aren't gaining momentum, the social network could face another problem: share overhang -- meaning, jittery employees could dump shares and the stock plummets. Since the IPO, employees haven't been allowed to sell shares. But starting in August, they will be.

Brian Wieser: If the revenue turns out to be way above expectations, it is possible to alleviate some of the share overhang.

Brian Wieser is an analyst at Pivotal Research Group. But he says if earnings disappoint, employees could stage an ugly sell off.

Other than the marketing analytics aspect (where Facebook is very sharp) I don't have any special expertise here, but to a casual observer, the company appears to be facing a seven/twelve choice.

The seven is to shore up the mobile side of the business, get costs under control,and focus on deepening the relationship with existing customers.This strategy has an excellent chance of paying off handsomely for many years.

The twelve is to try to try to grow fast enough to justify the stock price which is a hell of a long shot (When you're closing in on a billion members, a business plan that assumes further explosive growth may not be realistic). Unfortunately, even having a chance at that goal requires pouring money on the problem and squeezing more cash out of members in ever more annoying ways. This strategy runs the risk of leaving the company cash poor with a tarnished brand and unhappy members.

All of this takes us back to the growth fetish, the tendency to overvalue short term growth even when it may end up reducing the long term returns of a company.

Remember that ongoing conversation about the decline of journalism?

From Marketplace:

Vigeland: OK, excellent. Give us a rundown of some of the subjects that you have been quoted as an expert on. 

Holiday: Turntables, insomnia, barefoot running and -- my favorite, of course, is boat winterization. 

Vigeland: And do you own a boat? 

Holiday: I don't own a boat. I don't own a turntable either. And I don't suffer from insomnia. 

Vigeland: All right. So what was your ultimate goal here? Why bother with this kind of thing? Were you bored, you needed something to do? 

Holiday: No, absolutely not. So I discovered about a year ago, there's this service that's called HelpAReporterOut.com. Basically, the reporter needs a subject for a trend piece; I'm promoting something, I say, 'I'll be your trend subject,' and we trade. The reporter doesn't really have to do their job, and the source gets free publicity. So what I wanted to prove was that this backroom arrangement left the front door wide open to all sorts of media manipulation. And so, in about six months, I was able to deceive almost every major media outlet -- not a single one fact-checked, not a single one asked, 'Hey, why are you giving us this information? What's in it for you?' Look, sources have always been self-interested -- we've known this -- but we've almost embraced that self-interest and not asked: 'What are the consequences of doing so?'

More on microfoundations

Speaking of the stuff of the queue, Joseph and I have been talking about questionable defenses of economic rationality. Now Paul Krugman (who pumps this stuff out at an astounding rate) has another example of theory not matching reality:

So: I’m old enough (you kids get off my lawn) to remember the rise of self-service gas stations, which coincided with the oil shocks of the 1970s. Suddenly gas was much more expensive — and drivers, eager to limit the blow, were willing to pump their own to save a few pennies. 

At the time, being either in or fresh out of grad school, I thought, wait, this makes no sense: the decision to pump your own gas is about making a tradeoff between money and your own effort, and should have nothing special to do with the price of gasoline per se. Yet people acted as if they had a limited budget for fuel, as opposed to an overall budget constraint, and responded to a rise in gas prices with a seemingly irrational effort to hold down the size of that sub-budget. 

What the new paper by Hastings and Shapiro does is to show that the same kind of behavior continues to apply, with consumers shifting to lower-grade gasoline when gas prices rise, to higher-grade when they fall; the upshift happens even if incomes are falling. 

What does this have to do with the macro wars? Well, if the assumption of perfect rationality breaks down even in the most standard of micro settings — if consumers behave in a way inconsistent with full maximization even when doing something as mundane as choosing which type of gas to put in their tank — how absurd is it to insist that, say, Keynesian stories about the economy can’t be right because we can’t fully derive them from intertemporal maximization?

Two anecdotes on how (and how not) to run a business

I'm going to be discussing both of these businesses in future posts but since my queue is pretty full at the moment I thought I'd get these two examples out while they were still current.

The first involves Weigel Broadcasting, probably the best run business you've never heard of. As with sports and politics, there's an aesthetic pleasure to watching business done well and under that criteria, Weigel is in Joe Montana territory.

Take the response to the death of Andy Griffith on their MeTV network. The network ran a slate of shows featuring Griffith including the Make Room for Daddy back door pilot. Nothing particularly surprising there. I'm sure they plan these in advance and have already laid out the shows they'll air when other notables like Dick Van Dyke or Mary Tyler Moore pass away.

What was notable was the timing. The tribute aired on the Fourth of July. It was an inspired choice -- no living performer was more associated with Americana than Griffith -- but what makes it notable was the fact that Andy Griffith died on July the third.

Let's run through the timeline:

1. Decide on the Fourth

2. Reschedule the day's shows

3. Record the promos

4. Put the promos into heavy rotation

5. Issue press releases.

I've seen simpler corporate processes stretch on for months. At Weigel, this took six hours on the outside. If we had better business journalists, you'd be hearing more about Weigel.

Now for something completely different...

I was checking Hulu last night when I noticed an item about the Dark Knight. I immediately assumed it was something about the shootings (keep in mind, the time you see at the bottom of the screen is West Coast time) but instead it was a jokey piece on fake spoilers. It was still there when I went to bed.








When you get a big, tragic story like this, smart nimble businesses immediately ask themselves if there's a negative PR aspect that they need look out for and if possible, avoid. This is particularly true for websites because

1. it's easy to make changes

2. screen captures are forever.

I suspect that someone at Hulu saw this and thought "we really ought to pull that" but the company wasn't set up for that kind of rapid response. This is also consistent with other things we've seen from Hulu, but that's a topic for other posts.

(also posted at MippyvilleTV)

Krugman on Climate Change

Paul Krugman makes a couple of essential points about climate change. The first points to a new paper by James Hansen. As Krugman puts it:

The first is the relationship between extreme weather events and climate change. The normal, cautious thing is to say that there’s no way to attribute any particular event, like a heat wave in the Ukraine, to global warming — and news media have basically been bullied by this argument into rarely mentioning climate change even when reporting on extreme weather. But Hansen et al make an important point: this argument is much weaker when we’re talking about really extreme events, like temperatures more than 3 standard deviations above historical norms. Such events would almost never happen if there weren’t a rising trend in global temperatures; so when they become quite common, as they have, it’s fair to call them evidence of warming.

The second addresses something that has bothered me for a long time, the "won't there be winners with global warming?" argument. My rebuttal has always been that we have optimized agricultural land use based on our current climate. Krugman makes that point but takes it further:

The second point is how we know that climate change is a bad thing — a question I sometimes get asked. The questioners wonder why the fact that, say, more of Canada becomes agriculturally viable doesn’t offset the damage in places that get too hot. 

My first-pass answer is that we have a global economy that is adapted to historically normal climate — not just in terms of what is grown where, but in terms of where we locate our cities. In the long run, after a couple of centuries’ worth of urban development and infrastructure has been drowned by rising sea levels and/or made useless because previously habitable regions need to be abandoned, we might be able to reconstruct an equally productive economy; but in the long run …

On a related note, we are now having to worry about invasive species in in Antarctica.

Saturday Afternoon in LA

I'm typing this sitting under the umbrellas at Irv's Burgers, a Fifties era hamburger stand in West Hollywood. It's a notoriously friendly neighborhood place and it reminds me of something that first struck me when I moved to LA from Atlanta: for all its trendiness, LA has a distinctly old fashioned attitude toward dining. In most of the country, if you drive down the street looking for a quick bite to eat, you will see the same places serving the same food.

It's true that national chains are eating away at local dining, but the independents and local chains like Tommy's and Zankou's still dominate much of the town. Part of the reason is certainly the loyalty these spots inspire. Pulitzer Prize winning food writer Jonathan Gold once refused to say whether he preferred Apple Pan or Pie N' Burger because he didn't want to deal with the letters from the patrons of the spot he didn't pick.

I was having a cheeseburger at Apple Pan last week and I got into a conversation with the man sitting next to me. He had been coming there weekly for over fifty years, only slightly longer than the counterman had been there.

There are plenty of regulars here at Irv's, walking in and picking up old conversations through the pick-up window with the family that owns the place. There's a comfortable, small town vibe here that you can find in most of LA.  That's not something most of the world associates with LA, but the locals know. 

Marissa Mayer: Outlier

There has been a lot of talk about Marissa Mayer, the new CEO of Yahoo!  A lot of the interest seemed to be in the fact that she was six months pregnant when appointed and not just that she is the youngest CEO of a Fortune 500 company right now.  In particular, so close to the Anne-Marie Slaughter discussion about "women having it all", people wondered if she was a good example of women having it all or not.

But Ms. Mayer, you I admire greatly, has nothing to contribute to the debate except (perhaps) to act as an existence proof.  She is a 37 year old worth 300 million dollars.  I think it is fair to say that she is not going to  be unable to provide extensive child care services as well as working.  Might a bracing schedule interfere with breast feeding?  Yes, but many children are bottle fed (I am one) and did fine.  Might it interfere with seeing everything about your children?  Yes, but only in the same way that rules out a serious quest for enlightenment in a Buddhist monastery as well.  In life there are always some degree of trade-offs between activities -- none of us can do everything.

But most importantly, her career track and resources add nothing to the debate about work life balance for young women in the United States.  The normal barriers to career success are things like access to childcare and needing to balance housework.  Or with being a single mother and needing to do it all on your own.  The wealth to hire a team of housekeepers and childcare providers makes most of this far less concerning.

It is like worrying if Warren Buffet has health insurance or not.  It is pretty clear that not being insured would not be a serious barrier to Warren Buffet getting and and all treatment that he desires.  After all, he has the resources to overcome these issues.

So I think the real narrative is "lack of resources".  That being said, it turns out I am a fairly big Marissa Meyer fan and I hope that she is an amazing success in her new role.  I do think she is a good example as a businesswomen and engineer about how to climb the corporate ladder and become highly successful.

"The corporate equivalent of ketosis"

An excellent post by Felix Salmon on the mishandling of the USPS:

To put it another way: the Post Office is broken, in large part thanks to unhelpful meddling by Congress. And it won’t get fixed unless and until Congress gets out of the way and stops forcing it into the corporate equivalent of ketosis, essentially consuming its own flesh in order to survive.

AHRQ Questions

The Incidental Economist is writing about a House Bill to remove AHRQ as an agency and to remove economic research from the National Institutes of Health. 
I am of decidedly mixed feelings. I can definitely see how the focus in the NIH should be on the science. Single, focused mandates can improve the ability of an agency to perform a critical task.

But that, if anything, is why AHRQ is critical. If we want to remove economic research from the NIH (to improve focus and metrics) then it would make a second agency, with the appropriate mandate, even more important. This is very similar to the FDA, which focuses on safety, needing a partner organization that is considering cost.

So that rather inclines me towards the view that I like the improved NIH focus but see pairing it with the elimination of AHRQ as being a very questionable decision.

NOTE: the preceding was entirely personal opinion. It does not represent any institution that I have been affiliated with or will be affiliated with. I have received funding from AHRQ.

Quote of the Day

Via Twitter

davidfrum @davidfrum 15 Jul One of the many evils of the employer-based healthcare system is that it makes unemployment an almost total personal catastrophe ...

It is true that if we wanted labor market mobility then we would face this issue head on. Lot's of other financial services (bank account, auto insurance) don't depend on employers.  The one bright side of plans like the 401(k) is that they also decouple the dependence of former employees on the health of the employer's pension plan.  Why can't we do the sdame thing for health insurance? 

I dream of distant verdant fields

And as I walk toward those fields, I realize that I'm looking at millions of terracotta figurines of small animals, cartoon characters and busts of the President, all with grass growing out of their heads.

Spies like us

I've been seeing how many calories I can log on the exercise machines at the gym (I realize those numbers may not accurately measure what I'm burning but they make a good motivational metric). To keep myself distracted I've been digging up all the files I can for my cheap media player, including a number from the wonderful Internet Archive.

One of the shows on the playlist was Ziv Television's I Led Three Lives. I had never actually seen the show but I had heard about it and knew the basic premise -- a fictionalized account of a man who infiltrated the communist party for the FBI. It was a well done show (Ziv always knew how to get the most out of a limited budget and often hired some interesting talent like Harlan Ellison and Gene Roddenberry), but what stood out was just how much a product of its time the show was and how difficult it would be to imagine the '53-'56 show ten years later.

We often talk about the Sixties as being the height of the Cold War but that certainly isn't the picture you get from pop culture. Light entertainment like Man from UNCLE and Hogan's Heroes as well as message films like the Russians are Coming featured sympathetic Russian communists. More serious fiction like the Harry Palmer and Matt Helm books (no, really) and most of all the novels of John LeCarre depicted counter-intelligence agents as morally compromised as their counterparts. Even the Bond films never used the Russians as primary villains.

The difference in attitudes is particularly sharp when the Bond movies are compared to the corresponding novels of a decade earlier. Other than the Blofeld arc at the end of the series (which also happened to be the Sixties books), the villains in Fleming's books were Russians and they were every bit as despicable (and somewhat more cartoonish) than the fifth columnists in I Led  Three Lives.

Of course it was possible to find evil Russian communists and (thanks to Stan Lee*) even rhe occasional fifth columnist, but the public mood had clearly changed. I would guess this was primarily a reaction to the Cuban Missile Crisis but I'm open to other suggestions.



*On a related note, Lee's famous break with the comics code was prompted by a request from the Nixon administration'

(From Wiki)

An early 1970s Spider-Man story led to the revision of the Comics Code. Previously, the Code forbade the depiction of the use of illegal drugs, even negatively. However, in 1970, the Nixon administration's Department of Health, Education, and Welfare asked Stan Lee to publish an anti-drug message in one of Marvel's top-selling titles.^[1]:239 Lee chose the top-selling The Amazing Spider-Man; issues #96–98 (May–July 1971) feature a story arcdepicting the negative effects of drug use. In the story, Peter Parker's friend Harry Osborn becomes addicted to pills. When Spider-Man fights the Green Goblin (Norman Osborn, Harry's father), Spider-Man defeats the Green Goblin, by revealing Harry's drug addiction. While the story had a clear anti-drug message, the Comics Code Authority refused to issue its seal of approval. Marvel nevertheless published the three issues without the Comics Code Authority's approval or seal. The issues sold so well that the industry's self-censorship was undercut and the Code was subsequently revised.^[1]:239 

[Also posted at Mippyville TV]

Schadenfreude alert

Marketplace approaches this as a story about the importance of timing the sale of a company. I think there may be a bigger point here about the actual value of some of these companies:

When Digg launched in 2004, it was a startup darling. It let users post links to their favorite news and websites. Then their friends could vote the link up-or-down. In its heyday, the site had 14 million visitors -- and a line of offers. Google reportedly put $200 million on the table in 2008. But no deal was ever done. So that $500,000 selling price has got to hurt. But could Digg have known?

Ezra Klein makes a point that should be obvious but apparently isn't

Yesterday's Washington Post had an excellent piece by Klein yesterday, Here's the money shot:

Actually, I got something wrong there. I said “almost nothing.” But that 1.459 percent doesn’t account for inflation. And so when you do account for inflation, it’s not “almost nothing.” It’s “less than nothing.” Here are the latest “real yield curves” for Treasurys, which is to say, the yields after adjusting for inflation:


They’re negative. Negative! The market will literally pay us a small premium to take their money and keep it safe for them for five, seven or 10 years. We could use that money to rebuild our roads and water filtration systems. We could use that money to cut taxes for any business that adds to its payrolls. We could use that to hire back the 600,000 state and local workers we’ve laid off in the last few years. 

Or, as Larry Summers has written, we could simply accelerate payments we know we’ll need to make anyway. We could move up maintenance projects, replace our military equipment or buy space we’re currently leasing. All of that would leave the government in a better fiscal position going forward, not to mention help the economy. 

The fact that we’re not doing any of this isn’t just a lost opportunity. It’s financial mismanagement on an epic scale.

As noted before, Paul Krugman and company spend a great deal of time arguing that financially  governments are not like households or businesses. It's a valid point, but the economists making it often lose sight of the fact that, in this context, it's also a moot one. In this situation, a government, a family or a business, if responsibly managed, would take advantage of these better-than-free funds for investment and maintenance.

There is no context in which our current course makes sense.

An immunity to cognitive dissonance now seems to be the sole requirement for a journalism position

First consider this from Politico (via Chait)

"The Obama complaint claims we erred in saying Mitt Romney gave up active management of Bain Capital in early 1999 to run the 2002 Winter Olympics, insisting we were then wrong in saying Romney was not responsible for shipping U.S. jobs overseas," FactCheck's Brooks Jackson and Robert Farley wrote in a response to the Obama campaign, which had complained about an earlier article by the authors.

"In fact, if the Obama campaign were correct, Romney would be guilty of a federal felony by certifying on federal financial disclosure forms that he left active management of Bain Capital in February 1999."

This would seem to be a convincing argument. Romney is too smart and too much of a professional to casually misrepresent himself on a federal filing. The only trouble is that, according to recent reports, at least some of those forms seem to tell a different story.

Romney said he left any managerial role at Bain Capital behind in February 1999, delegating all voting shares of stock to 26 managing directors and leaving day-to-day operations to focus on running the Olympics. But subsequent SEC filings list him as “sole stockholder, chairman of the board, chief executive officer, and president.” A 2001 SEC filing first reported by TPM lists his “principal occupation” as “Managing Director of Bain Capital, Inc.” and theBoston Globe reviewed additional filings containing similar claims.

I don't know enough about the law to say where the line is here but I'm pretty sure that there are legal connotations to these terms and that listing yourself as chairman, CEO, president and managing director of a firm you have no managerial role in has got to put you in a legally gray area. I doubt that's a risk Romney would take. 


Which takes us back to Factcheck which reacted as follows:

"We see little new in the Globe piece. So far, nobody has shown that Romney was actually managing Bain — even part-time — during his time at the Olympics, or that he was anything but a passive, absentee owner during that time, as both Romney and Bain have long said," Brooks Jackson, a co-author of the FactCheck piece, told POLITICO today.