Lessons Unlearned - Facebook & Goldman Sachs

Back in the spring of 2010 there was a brief uproar about the obtuse nature of privacy settings on Facebook. In the face of the uproar, Facebook made some changes and Mark Zuckerberg had an op-ed in The Washington Post. Mr. Zuckerberg said this:

"If we give people control over what they share, they will want to share more. If people share more, the world will become more open and connected. And a world that's more open and connected is a better world. These are still our core principles today."

Apparently when Mr. Zuckerberg advocated for openness and sharing, he didn't count Facebook in that number. Recent reports from The New York Times outline how Facebook has partnered with Goldman Sachs to market a financial product intending to raise capital for Facebook. Here's the rub, since Goldman is marketing the product it is made to look like Goldman is a single investor, instead of counting all those individuals that got this exclusive offer. Why do that? Because if you have more then 499 investors you have to disclose your financial results. I guess sharing isn't so grand but control is.

So let's consider some obvious parts to this story. First, Mr. Zuckerberg is a hypocrite. He wants to catalog your information and make money off of it, but he really likes to have control and isn't big into sharing how is company is really doing. Second, while this may not be strictly illegal, it would certainly appear to violate the spirit, if not the letter of the law. Did Goldman Sachs really learn so little during the financial crisis?

The SEC is investigating this activity, so we will see what happens with that. I find it incredulous that a finance firm would think this is good business so soon after the crisis. Maybe the problem was so many people got bailed out that lessons went unlearned. Maybe, as Paul Krugman often say, when it comes to high finance, heads they win, tails we lose.

I take some solace in the idea that Facebook probably won't be here in 2036, though I fear populist narcissism and corporate obliqueness will.

Income Inequality and Political Economy

Robert Lieberman has an interesting book review on disparate wealth distribution in the United States and associated political economy in the January/February 2011 issue of Foreign Affairs:

It is generally presumed that economic forces alone are responsible for this astonishing concentration of wealth. Technological changes, particularly the information revolution, have transformed the economy, making workers more productive and placing a premium on intellectual, rather than manual, labor. Simultaneously, the rise of global markets -- itself accelerated by information technology -- has hollowed out the once dominant U.S. manufacturing sector and reoriented the U.S. economy toward the service sector. The service economy also rewards the educated, with high-paying professional jobs in finance, health care, and information technology. At the low end, however, jobs in the service economy are concentrated in retail sales and entertainment, where salaries are low, unions are weak, and workers are expendable.

Champions of globalization portray these developments as the natural consequences of market forces, which they believe are not only benevolent (because they increase aggregate wealth through trade and make all kinds of goods cheaper to consume) but also unstoppable. Skeptics of globalization, on the other hand, emphasize the distributional consequences of these trends, which tend to confer tremendous benefits on a highly educated and highly skilled elite while leaving other workers behind. But neither side in this debate has bothered to question Washington's primary role in creating the growing inequality in the United States.

Boehner's Tears and His Actions

Timothy Egan, over at The New York Times has a great post up talking about John Boehner's teary-eyed profile on 60 minutes. Beyond the double-standard that would have disallowed Nancy Pelosi to withstand a sob-fest when she became Speaker of the House, there is also the question of why John Boehner cries so much:

"'Making sure these kids have a shot at the American dream like I did is very important,' [Boehner] said, choking up."

Egan then does a great job of listing all the things that are designed to help people have a shot at the American dream, but that John Boehner has voted against. Time and again Boehner's actions, his votes, have been obstacles to people achieving something greater.

To me, this is the great challenge to America in the 21st century. The slow erosion of social safety nets and the lock-step aversion of the Republican party to consider new social safety nets will allow the rate of disparity to continue apace.

I doubt John Boehner will cry when presented with the statistics that show a consolidation of wealth at the highest tiers of earners. It's easier to get teary-eyed at the abstraction of the American dream, then to dry your eyes and help make it a reality for people.

UPDATED: h/t to Matt Yglesias for pointing out this peice in The New York Times by David Leonhardt. Mr. Leonhardt makes a point I couldn't quite put to words and does so eloquently:

It's easy to look at the current debate and see an unavoidable trade-off between this country's two economic traditions - risk-taking and security. but I don't think that's quite right. I think it is ultimately as misplaced as those worries about Social Security and Medicare equaling Bolshevism.

Guaranteeing people a decent retirement and decent health care does more then smooth out the rough edges of capitalism. Those guarantees give people the freedom to take risks. If you know that professional failure won't leave you penniless and won't prevent your child form receiving needed medical care, you can leave the comfort of a large corporation and take a chance on your own idea. You can take a shot at becoming the next great American entrepreneur.

To me, this is precisely why we need social safety nets. In most policy debates we are given this false choice between individual ingenuity and government coddling. Leonhardt hits on the point quite nicely that some sort of economic backstop can free people to take the big swings and aim for the fences.

AfPak after Holbrooke

Richard Holbrooke's passing on Monday was truly a loss for the foreign policy establishment. If there are rock stars of foreign policy, surely he would be Mick Jagger. He was the elder statesmen of Democratic foreign policy. He was brash, forceful, and relentless. When he was tapped to be Special Envoy for Afghanistan and Pakistan in January 2009, there was a real sense that he could pull the situation together and bring it to some sort of resolution. Sadly, he was unable to finish his work, but work remains to be done, and the fates of nations rarely rest on the fate of a man.

What happens now in AfPak? Our current political approach hasn't produced much. It was widely reported that Holbrooke and Karzai didn't get along. Since recently Karzai hasn't gotten along with anyone within the U.S. government, that is unsurprising. Perhaps there is an opportunity to bring in a new special envoy, a new voice, with a new plan for the political strategy necessary to reach a conclusion to large scale U.S. involvement in AfPak.

I am just beginning to consider what that strategy could be, and I have no idea who would serve in the role of Special Envoy. I hope to have a post up on that a little later this week. One thing is clear, if there is a new Special Envoy for AfPak they won't have the star power, the presence, indeed the sheer force that Richard Holbrooke brought to the position.

Nasser al-Aulaqi's Suit Dismissed

Judge Bates today dismissed Nasser al-Aulaqi's suit on behalf of his son, American-Yemeni cleric Anwar al-Aulaqi, for want of standing. Nasser, Anwar's father, had asserted "next friend" standing, which affords family members the ability to bring suit on behalf of an individual unable to access the courts--next friend standing is particularly relevant in habeas corpus petitions. Al-Aulaqi asserted that he satisfied next friend standing because his son is in hiding under threat of death and could therefore not access US courts. The government, on the other hand, argued that Anwar al-Aulaqi could in fact access US courts by presenting and surrendering himself to a US embassy in Yemen. Judge Bates wrote

Plaintiff has failed to provide an adequate explanation for his son's inability to appear on his own behalf, which is fatal to plaintiff's attempt to establish "next friend" standing.3 In his complaint, plaintiff maintains that his son cannot bring suit on his own behalf because he is "in hiding under threat of death" and any attempt to access counsel or the courts would "expos[e] him[] to possible attack by Defendants." Compl. ¶ 9; see also id. ¶ 26; Al-Aulaqi Decl. ¶ 10. But while Anwar Al-Aulaqi may have chosen to "hide" from U.S. law enforcement authorities, there is nothing preventing him from peacefully presenting himself at the U.S. Embassy in Yemen and expressing a desire to vindicate his constitutional rights in U.S. courts. Defendants have made clear -- and indeed, both international and domestic law would require -- that if Anwar Al-Aulaqi were to present himself in that manner, the United States would be "prohibit[ed] [from] using lethal force or other violence against him in such circumstances."

Taxing the Rich? You betcha!

Our colleague over at To Get Rich is Glorious, tries to scare us into believing an increase in the income tax for those in the top bracket will hinder economic development. He points to the bag tax in DC and the cigarette tax in Maryland as examples of what could happen if the Bush tax cuts are not extended.

This is a common argument against the administration proposal to let the tax cuts expire for those making over $250,00 per year, but does it hold water?

Here's a graph:

It's a little tough to read, but looking from 1988 to 2008 I pulled data on GDP (trillions chained to 2005 dollars), GDP percentage change (based on chained 2005 dollars), and overlay-ed the individual income tax rate for the top income tax bracket. I got the GDP numbers from the Bureau of Economic Analysis and the tax rate numbers from the National Taxpayers Union.

So what does the graph tell us? Honestly, not much. Seems like the 1990s were good times for US economic growth, despite and increase in taxes in 1991 and 1993. It also seems like the 2000s weren't some boon time spurred on the Bush tax cuts. These are incredibly strained causal arguments and I'm perfectly comfortable admitting that. At the same time, one can't make us fearful of a return to a tax rate we lived quite comfortably with during the 1990s.

You see, our colleague, to my mind, conflates several different economic topics in his examples. When looking at the bag tax, you're looking at substitution effect and some aspects of price-elasticity of demand. Turns out, people don't want to pay 5 cents for a plastic bag. In the example of Maryland and the cigarette tax, clearly the government overplayed its hand and came in excess of the elasticity of demand for cigarettes. They effectively priced the cigarettes beyond what people were willing to pay.

What does that tell us about letting the Bush tax rates expire for the top income bracket? Not much. The marginal utility of the first dollar earned beyond $250,000 (to use the administration's line) would be different from dollar $249,999, but the marginal utility of dollar $250,000 to $2 million is the same. If the marginal utility of each dollar earned is constant (at least as it relates to the tax paid on each dollar), then there is no evidence an individual would work less.

But wait, you say, look what happened to Maryland. They priced people out of buying cigarettes. You know, it sure looks like they did, but we aren't discussing a tax rate never considered before. We are talking about a tax rate that we lived just fine with for nearly a decade.

So beyond the sniff test, which makes it highly specious people would work less hard because the tax rate changes, this argument doesn't pass the economics test either. As an aside, not bad externalities to have people using fewer plastic bags and smoking less.

Palin, JFK, and Religion

Kathleen Kennedy Townsend spends some time defending her uncle's masterful speech to Houston Ministerial Association, where he sought to undo the perception that his Catholicism outweighed is American-ism, from Sarah Palin.

Palin questions the speech in her recent book, America by Heart, and thinks Kennedy divorced his religion from his governance, and that this was wrong. Kathleen Kennedy Townsend, meanwhile, spends the majority of her essay defending separation of church and state, but also indicts those that would impose a religious litmus test on political candidates.

"Not only does she [Palin] want people to reveal their beliefs, but she wants to sit in judgement of them if their views don't match her own. For instance, she criticizes Rep. Nancy Pelosi, a Democrat and a faithful Catholic, for talking the (God) talk but not walking the walk. Who is Palin to say what God's 'walk' is?" (my emphasis)

Quite right. There is a disturbing trend in American politics that candidates face litmus tests on all sides and instead of being rewarding for being genuine, they must walk this tight rope between what they truly believe and what a base of supporters will let them believe. Palin, it would seem, believes there is a religious litmus test a candidate must past.

This could help explain why Palin is the current presidential front runner for the Republican party. She's the one tying up the rope.