Tag Archives: economics

Surprise, surprise.

The Supercommittee’s failure is the least surprising news in a long time. Don’t believe me? Check the Treasury bond yields. Interest rates on government debt actually went down a little, which means nobody buying bonds thought this was a big surprise. And said yields are at historical lows, which means that investors around the world still thing U.S. government bonds are the safest investment around.

And yes, I prefer to think of Supercommittee as one word. I like the irony of structuring the word Supercommittee like Superman.

It’s time to bring back http://slowclapforcongress.com/


Leave a comment

Filed under Uncategorized

Rocco, we love you, but you’re bringing us down.

Originally posted at Createquity.com.

If you’ve followed theater blogs even casually over the past several weeks, you will have heard about NEA Chair Rocco Landesman’s comments on oversupply of performing arts in his address to the #newplay convening at Arena Stage in Washington DC. Trisha Mead is a Portland arts marketer who broke the story, got quoted (sloppily, without context) in the New York Times, and has been the only blogger, to my knowledge, to get a direct response from Landesman so far. But if you want a more complete view of Landesman’s thoughts, it may be more useful to start with the NEA blog. In fact, if this concerns you, please do read Landesman’s post on the official blog. It may help you avoid hyperbolic hyperventilation. You can also follow #supplydemand on Twitter and participate in the conversation as it unfolds.

The gauntlet thrown down

Landesman cites the NEA’s 2008 Survey of Public Participation in the Arts in saying that performing arts event attendance has dropped 5 percentage points. More specifically, in 2002, 39.4% of U.S. adults (or 81 million) attended either a jazz event, classical music event, opera, musical play, non-musical play, ballet, or art museum or art gallery. In 2008 that number dropped to 34.6% (or 78 million).1

This 5% of decrease in attendance share, interpreted as demand, is juxtaposed against a 23% increase in the absolute number of nonprofit performing arts organizations during the same time period, interpreted as supply. The 5% is a decrease in percentage of attendees among the adult population, and the 23% is an increase in number of organizations, without reference to size or whether the additional 23% produce events at the same rate as previously existing organizations.2

It’s not a perfect comparison to put the 5% drop in percent of attendance against a 23% increase in number of organizations, but the opposite direction and the size of both changes is still disconcerting. If fewer people are attending arts events, but more organizations are creating them, then this could be a problem, right? Landesman said that we can’t realistically increase demand, so we ought considerer reducing supply. I.e., we need fewer performing arts organizations, or those organizations need to produce fewer events. This idea, that there is an oversupply of performing arts, has been met with negative reactions among many arts workers, to say the least. That the NEA also wants to fund fewer organizations has ratcheted up the anxiety level.

My problem is not that Landesman wants to further ration the already-rationed cookie jar. And I do not believe he thinks he can or should use the NEA to prune the gnarly tree of performing arts in the USA. My issue is that Rocco (can I call him Rocco?) presented a simplistic view of the economics of performing arts, one that hasn’t been much expanded in the discussion since, by focusing only on event attendance and NEA subsidies. Landesman, along with a passel of concerned bloggers, is ignoring what makes nonprofit economics sustainable, strong performance in multiple markets.

The demand function in nonprofit performing arts

Performing arts nonprofit organizations operate in at least three markets: markets for what people will pay to see them perform, the financial markets for debt, investments and endowments (do not apply to all organizations, and are not further discussed here), and the markets for private philanthropy and status. Markets for philanthropy and status are almost entirely missing from the demand side of Rocco’s equation (and the demand side of this traditional economic analysis by Devon Smith).

Rocco speaks of contributed revenue as if it is just a policy-driven subsidy, like a subsidy to the agribusiness industry. Or, as Trisha Mead later put it on 2amtheatre.com, a subsidy for scientific research and development, which is not a bad analogy when describing NEA funding. Frequently, a subsidy is the result of political influence, but when it is a well-intentioned policy instrument, a subsidy makes it possible to get things that we or the government think we need, but just aren’t willing or are unable to pay for on our own. It’s inherently paternalistic–making us eat our spinach (or at least pay for the spinach with a wee miniscule share of our taxes).

For now, I will use the word subsidy for policy-driven funding that somebody, like the government or a foundation, thinks is good for us. A subsidy pays for the spinach. But the vast majority of contributed revenue to arts organization comes from individuals (as the NEA knows; see page 1 of this report), out of sheer appreciation for the work that is generated. When a small business owner contributes $1000 every year to the symphony in her town, she is clearly stating that they music she enjoyed that year was worth at least $1000 more to her, and her community, than what she paid in tickets.3 That is a reflection of demand. Not only that, but she’s signaling to this organization that she likes what they’re doing. If they’re paying attention, and subsequently doing more of what they think she will like, then they are responding to market forces, just in a subtler fashion, and in a market with fewer participants.

Consider how demand differs from person to person. Conceptually it’s not complex. For any given thing that people buy, some people like it more, and are willing to pay more, than others. That’s why the iPhone cost so much when first introduced. Apple knew that some people would want one so badly that they’d happily pay a premium price, and when all their fanboys had one, it would be time to cut prices to reach the next group. If you can get everybody to pay the maximum they’d be willing to pay, then you’ll bring in the most money. Economists and marketers call it price discrimination. When you’re selling tickets you can do this, to a limited extent, with differences in price for seats in the front verses seats in the back (not exactly price discrimination), or through dynamic pricing (Trisha Mead is a big advocate of dynamic pricing). But to really get the most money, you’d like a way for somebody who adores your product to pay you even more than the highest price you’re charging. That’s exactly what you can do as a nonprofit organization when you accept contributions. If you have a good development & fundraising staff, you will get as much revenue as possible given the demand that exists. It will not be reflected, however, in the event attendance figures extrapolated from NEA surveys.

Some contributors aren’t so purely motivated. Corporations may donate for the PR or advertising. Sometimes donors want to sit on committees with other donors to make business contacts or find golf partners. Sometimes, they just want to be associated with a highly respected arts organization, because it impresses their neighbors or clients. This is the market for association and status. Don’t tell the donors that you know this, because such status may be more valuable when not explicitly acknowledged. But truly, there is demand for this. Naturally, this status is more likely to be supplied by larger, longer-lived institutions than by smaller upstarts.

Further, if you want nonprofit arts organizations to conduct R&D for the art world, donors (including foundations) often want to fund exactly that. They demand artistic R&D by funding it.

The demand to supply, and the benefits of competition to suppliers

The market for association and status is not limited to donors, sponsors and underwriters. It extends to the labor market, as well. Rocco is admirably concerned that if performing arts organizations oversupply, against lower demand, then they will have to share what he sees as a shrinking revenue pie with more organizations, which will eventually force organizations to pay their artists less, or at least will make it harder to pay artists a living wage. I think he’s generally right, if the industry structure remains fixed. When, on Twitter, a theater artist suggests that the “model is broken” if he or she doesn’t receive a living wage, I often reply that if they want to be paid more, then less theater should be produced.

Of course, each individual can’t alter the fact that artists supply their own talents for less than what the market will monetarily compensate. And, they really shouldn’t try. First, artists do get some intangible compensation. Anybody working for free, or almost free, creating art gets the intangible benefit of doing something that he or she loves or is driven to do. The artist may also receive respect and admiration from friends. Moreover, many artists are working to build recognition and reputation (or status), so that they have better opportunities to secure paid work in the future. There is a value to intangible compensation. And while we can’t perfectly measure that value, we know it’s there. If it weren’t there, people would stop creating art for free.

Further, the assumption that oversupply will lead to lower revenue per artist is one of those ceteris paribus arguments common in economic theory. If all else is held constant, then more theater and fewer theater-goers leads to less and less money for each theater. In real life, however, ceteris never stays paribus. If you want your city to gain a critical mass of creative, talented theater artists, it helps to have more production. Higher competition within a market will naturally give more options to your theater-goers, making it more likely that they’ll be able to find something they like. This might even increase demand, though there’s no guarantee this will happen, or happen quickly.

However, this is not a recommendation to form more theater companies or chamber orchestra groups. According to the National Arts Index, the vitality of the arts tracks fairly closely with the economy. Recessions impact all areas of demand discussed here. Since 2008, we’ve seen several orchestras fold or come close. Worse, the NAI research indicates that even during prosperous years this last decade, approximately 1/3 of nonprofit arts organizations ran at a deficit. This is a more serious concern, worthy of further analysis, but we still can’t leap to the judgment that this is driven by oversupply.


Demand is a function of more than just ticket sales and attendance. You have to include demand to provide funding, demand to contribute, demand for status, association, and even demand for truth and beauty. Further, the root of oversupply, if it exists, is in artists insisting on supplying more of their generative work to their communities. Rocco can’t stop this even if he wants to, and I doubt he really wants to. If it were to stop, our arts ecosystem would be less vibrant, would hold less potential, and would be less motivating.


  1. If you analyze the attendance decrease in absolute number terms rather than change in percent, the decrease is 3.7%. But the decrease in percentage of U.S. adults attending is 4.8%, which Landesman has rounded to 5%. The attendance number includes attendance at for-profit events (it’s based on a survey of attendees, many of whom will not know or care if they are at a for-profit or nonprofit event), and the organizations number includes fairs, festivals, and media.
  2. The 23% increase in number of nonprofit organizations is taken from the Americans for the Arts National Arts Index. It is the increase from 2002 to 2008 in number of 501(c)(3) arts organizations in the above categories, plus nonprofit media organizations and fairs & festivals. It does not include for-profit arts organizations such as for-profit art galleries. If you convert this to the number of organizations per one million people, for more apt comparison to the change in attendees as percent of the population, then the number of organizations increased from 294 per million to 341 per million, a 16% increase. This isn’t a breakdown by organization size. We can’t assume that the total output of events increased 23% just because the number of organizations did. The additional organizations could be tiny, with low production capacity. If we look at both changes in terms of absolute numbers, you can see that attendance dropped 3.7% and number of organizations (not necessarily number of events) increased 23%. If we look at both changes in terms of percentage of the population, then attendance dropped 4.8 percentage points, and number of organizations per million increased 16.3%.
  3. On the value of the $1000 from the small business owner: sure, there is a tax deduction, too. But even if she’s a rich business owner, in which case she might give a lot more than $1000, the tax deduction will only be worth $350 at most (less if a large share of her income is from dividends or capital gains), which means she still wants to give away at least $650 to the symphony.

Leave a comment

Filed under Uncategorized

Robert M. Solow’s review of How Markets Fail, by John Cassidy

Robert M. Solow famously worked out model of how labor and capital are combined with technological advances and other factors for productive output, which demonstrates that a huge part of economic growth comes from those technological advances or other factors exogenous to an individual or firm’s control. The model is a staple of macroeconomics and international comparative economics. He won the Nobel Prize in Economics in 1987. The guy about as famous as economists get without publishing pop-econ books.

Solow has now reviewed a new pop-econ book by New Yorker staff writer John Cassidy, entitled How Markets Fail: The Logic of Economic Calamities. I don’t know if How Markets Fail is going to make my reading list very soon; Cassidy is a smart journalist, and I’ve recommended his work before, but I’m pretty time-constrained. However, Solow is a legend, and his review is extremely cogent, balanced, and educating. You should read it.

Most writing on economics found in the mainstream and business press is ideologically motivated and intentionally pugilistic…

IN THIS CORNER, weighing in at a lean 1 trillion dollars market capitalization*, counting on a knock-out from the Invisible Hand, the defending champion, lately spending a lot of time on the ropes: Neo-Classical Free Market Economics!

IN THE OPPOSITE CORNER, riding on a wave of populist outrage and checking their hair in the reflection of Paul Krugman’s shiny new Nobel medalKeynesian/Interventionist Economics!

Unfortunately and predictably, nothing gets solved this way. Journalists and pundits and bloggers and think tanks just provide fuel to their respective power brokers, whether politicians or business leaders. While there are plenty of highly respected economists, testing theory against empirical observation, writing excellent academic papers and blog entries, and teaching insightful courses, they are rarely found making comprehensible observations in an arena of high visibility to the general public.

This makes me very gratified to read Solow’s review of Cassidy’s book, in the New Republic. Forget about the book for a second; Solow provides a very sensible set of observations on the limitations of free market economics, but doesn’t throw the baby out with the bathwater. This levelheadedness won’t be found in the bitter mudslinging between Paul Krugman and John Cochrane (NOTE: don’t read those links unless you have a lot of time on your hands and find it entertaining to see respected professors take pot shots at eachother).

While Solow is condensing an awful lot of information into a few pages, requiring a slow and careful read, it is all apprehensible. And, best of all, his focus is not on proving a theory wrong or right. He doesn’t talk at all about the Solow growth model, labor vs. capital, or total factor productivity. He just wants to discuss how markets fail, without taking an ideological stand on it. He does, however, bring up questions that he thinks Cassidy missed, for example:

Why, in the marketplace (sic!) of ideas, have the evangelists for the unrestricted market attracted so much attention and the “realists” so little? [Cassidy] argues, fairly convincingly, that the truth does not lie predominantly on that side of the issue. So is it that believers always make more effective advocates than skeptics do? Are we for some reason more receptive to simple answers than to complex ones?

That’s a really, really good question. Let’s ask ourselves why we believe what we believe, even in the face of contrary evidence. We all do this, but we can still try to intentionally question our assumptions.

Then he mildly echoes Paul Volcker, who recently told finance execs that the only valuable financial innovation of the last 25 years has been the ATM. Solow’s approach to this issue is less entertaining, and more Socratic:

It is nice that Cassidy is able to use the story of the financial crisis to exemplify some of the systematic sources of egregious market failure. But there is a deeper, or at least prior, question that he does not take up. Is all this financial activity socially useful, even in the absence of breakdown? It is worth a moment’s thought.

So, here in one book review, you get more balanced economic wisdom than you are likely to find in any other mainstream media source. Read it.


*It’s a joke. Don’t take it too seriously.

1 Comment

Filed under Uncategorized

Analysis of the 47 percenters

This is a very useful analytical article, unpacking the statistic that says 47% of Americans pay no federal income tax.


Filed under Uncategorized

One of many battles to come over minutae of the new healthcare law

This entry was originally posted on Monday, March 29, at 11:30pm.  I’ve UPDATED it at the end with a glance at the financial impact of this news on AT&T, Caterpillar, 3M, and Deere & Company.

So, I read this article and fully understand why people prefer phrasemongering. This shit is dull. But really, if you want to figure out whether healthcare is good or bad for people and employers, you’ve got to pay attention to this stuff. And, unfortunately, you sometimes might still need an interpreter. I’ll do my best to drop some MBA larnin on ya. Please feel free to comment if I get something wrong, or it isn’t clear.

As part of Medicare Part D, which provides supplemental drug insurance to seniors, companies that provide their retirees with their own prescription drug benefits get both a subsidy and a tax credit for providing the coverage. They get a tax credit, even though they aren’t paying the full cost of the benefit, because the government wanted to give them an incentive to keep seniors on private plans, off of Medicare Part D.

Starting in 2013, the subsidy to help companies pay for retiree prescription drug benefits will continue. But the tax credit will go away. So, yes, it will cost companies something in the form of higher taxes. It won’t cost them anything in cash until then.

But, accounting rules require that when there is a regulatory change like this, you have to estimate the total future cost and post it to your financial statements. Now. (Not the full dollar amount forever into the future; it gets discounted because it is cheaper to pay somebody a dollar in a year from now than it is to pay a dollar now–paying that dollar another year later makes it worth less, etc…) So what will be a cash cost in 2013 and later needs to be recorded as an expense today, but discounted because dollars in the future are worth less than dollars today. Got it?

So the companies need to reduce their paper profits today. That is what they are complaining about. Yes, even though we are only talking about paper profits, this is still cause for complaint, because it will eventually cost them some cash money in higher taxes.

But. How much it will cost them is very difficult for anybody to calculate. Actuaries calculate this, and it is important to understand that actuaries have to make assumptions about the future in their calculations. For one thing, they have to make an estimate, a highly educated guess, about when retirees will die.

A retiree’s lifespan will obviously have an impact on how long a company is paying the benefit, so a guess about when they will die is relevant. And there are other assumptions to make, too. The actuary’s job is to make assumptions with the best statistics and as little bias as possible, but in real life it doesn’t work that way. A chief financial officer might look at the actuary’s estimate, decide it is too low or too high, and ask the actuary to change the assumptions in order to tweak the outcome. And, since the CFO pays the actuary, how much do you think the actuary will fight the CFO? A little, for the sake of professionalism, but not enough to risk losing the CFO as a paying client.

So yes, these numbers that AT&T and Caterpillar are complaining about can be manipulated… or tweaked, to use a nicer word. Not only that, good financial analysts and smart investors (admittedly a small group, and I don’t include myself in it) automatically assume these calculations were manipulated. The manipulation can make the numbers look better or worse, depending on what the company needs to report that quarter.

And the fact that they have the numbers ready to go so fast means they were prepared ahead of time to drop this news at a calculated moment. If they really want this section of the healthcare law repealed, it is obvious that they will want to make this impact look really bad.

So will it really cost them what they say it will cost them? We don’t know, but I have my doubts. At the very least, these numbers reflect worst case assumptions. The timing of these announcements outs them as politically motivated. This isn’t automatically a bad thing. If I weren’t politically motivated, I wouldn’t be writing this blog! But just remember that you have to take these estimates on the future cost of healthcare policy change with several grains of salt. If we keep in mind their incentives to make it look worse than it is, and if we recognize that they have the ability to make it look worse than it is, we can be much better critical thinkers.

–UPDATE follows–

The point of my post above is that managers are not going to give us an objective read on the effect of politically charged policy changes. So, what about investors? Investors lack the depth of information that managers have, but they are motivated to make money. Their political views are usually not reflected in the bid-ask spread for a security. I’m certainly not saying that investors are unbiased. But their biases are going to be different.

AT&T (ATT): Stock price closed 0.11% higher on Friday, Mar 26, than it opened on Monday, Mar 22. That’s basically flat. AT&T’s market capitalization is $1.21B. I couldn’t make out the timing of AT&T’s announcement on Google Finance.

Caterpillar (CAT): It was a big week for CAT; the stock price climbed 5.17% (mostly on Monday and Tuesday, along with many other industrials on the basis of economic recovery optimism).  They made their healthcare tax cost announcement on Wednesday, March 24, and the market, apparently, said “meh.” No significant losses.

3M (MMM): 3M posted non-trivial losses  of 1.17% last week. Most of those losses were incurred on Thursday. The biggest Thursday news from 3M was that their CEO’s pay increased 21% in 2009 (all in bonus and options), and they spent $440,000 in lobbying in the Q4. Their announcement about healthcare charges was widely reported at the end of the day on Friday. The company said the tax change cost them 12 cents/share, which is a lot. The market didn’t seem to agree.

Deere & Company (DE): Deere gained 2.66% over the week. They made their healthcare charge announcement on Thursday, at the beginning of the day. They lost some ground at the end of the day. If those losses were related to healthcare charges, this was an uncharacteristically slow reaction in the market.

What to make of the effects of the tax change on these companies? Here’s a general recap from Market Watch. It makes sense.


Filed under Uncategorized

“Chicago School” economists on the crash

If you have some time, here is something worthy of it. http://freakonomics.blogs.nytimes.com/2010/01/20/chicago-economists-on-the-crisis/

I did my MBA at the University of Chicago, and I concentrated in economics and finance. But the econ you get in the MBA curriculum is really Chicago School Lite. So, I am no expert.  But I did take classes from three of the guys interviewed for this series, one neo-classicist (Murphy), one cautious pragmatist (Rajan), and one behaviorist (Thaler). They were all brilliant, but I think for advice in a financial crisis, I’d go with Rajan.

Whatever you might think about the Chicago School, know this. The current economics and finance faculty at the U of C is a very diverse group. You can see that in these interviews.

1 Comment

Filed under Uncategorized


–UPDATED on Feb 15, see end of post–

You’ve probably heard of Freakonomics, a great popular economics book (and there are an awful lot of those out nowadays, aren’t there?) and you’ve likely heard of the follow-up, Superfreakonomics.  Steven Levitt and Stephen Dubner wrote these books.  Steven Levitt teaches at my school, but I’ve never taken his class.  Either he or the school administration is not interested in offering his class to evening students.  Thanks.  Jerks.

This is not a review of Superfreakonomics.  I loved the first book, but have yet to get my hands on the new one.  I’m mentioning it, because the last chapter on global warming has kicked off quite an energetic volley of phrasemongering.  Dubner & Levitt wrote a chapter that essentially offers some alternate opinions on what we should do about global warming, compared to the currently dominant Al Gore solution.  (For the record I’m all for CFL’s.  Just not in the bedroom–they’re not effectively dimmable.)

So, this has kicked up quite a storm of controversy.  A dusty, dusty storm that threatens to block out the sun.  That wouldn’t be so bad, if you believe in geoengineering as a way to initiate global cooling.  But a lot of the criticism, as you can probably guess, is shrill and nasty and condescending.  And, of course, it is the nastiest stuff that travels across the internet fastest.

Thankfully, there is some in-depth discussion available.  Arguing for the  freakonomists is Nathan Myhrvold.  Myhrvold is probably used to telling people to slow down and listen for a second, just because of how his name is spelled.  He was interviewed in the book, talking about the limitations of solar-cell infrastructure, among other things.  He has some confidence that there are some cheap geoengineering possibilities, that might become solutions.  I won’t go into his bio, because you can read it on the Freakonomics NYT blog, where he’s responded to some of the criticism.  I hope you do read his response to his critics, because contextualization is badly needed when people start slinging mud.

Arguing capably and reasonably against the global cooling chapter in the book (and particularly, against geoengineering) is Real Climate.  What I love about their argument is that they go right after the sound-bite logic that Levitt and Dubner have deployed to simplify their case.  It’s funny to me that many commentators start by praising the first book, then saying this one is garbage.  My guess is they weren’t subject matter experts on any of the chapters in the first book, so they couldn’t dismiss any of it as overly simplistic.

Of course, Levitt and Dubner wrote what was intended to be a popular book.  Of course they’re phrasemongers.  That’s what they set out to be.  But we don’t need to act like children about it, do we, Joe Romm?

P.S. The comments on The Economist website frequently contain excellent information and analysis.  Such is the case with The Economist’s review of SuperFreakonomics.

Feb 15 UPDATE:

On my recent vacation in Costa Rica, we did a little snorkeling and I finished reading Superfreakonomics.  We did the snorkeling because, due to ocean acidification (lots of carbon dioxide is absorbed into the oceans, reducing pH and making them more acidic) coral reefs are being eroded.  We don’t take lots of tropical vacations, so we might not have many more chances to see coral reefs.  Ocean acidification, as Superfreaks Leavitt and Dubner have noted on their NYT blog (but not in the book, which is unfortunate), cannot be helped by blocking sunlight through cheap geoengineering solutions suggested in the book.

A couple weeks in Costa Rica gives you a lot of appreciation for delicate ecosystems, especially if you hire guides for your hikes through cloud forest and reserves and your snorkeling excursions.  A rare species of tree frog that lives only in cloud forests above 2,000 ft. doesn’t really impact our lives, so far as we know.  But species extinction, as a possible unintended consequence of our own economic vigor, should at least lead us to pause and count the cost of cheap consumer goods and long commutes.

Unintended consequences, as it happens, are the Achilles heel of Superfreakonomics.  Leavitt and Dubner do discuss them.  They seem to take glee in the clearly observed fact that well-meaning government policy, for example, can lead to negative unintended consequences.  While they don’t come right out and say it, the implication is that we’d be better off letting the market handle it.  The market is, naturally, composed of individuals and groups selfishly acting in their individually perceived best interests.  But by definition, externalities are market failures, and often require collective action that is not in our individual selfish interests to mitigate.  If such collective actions are not the domain of policy, then what is?  Do we do this perfectly in the policy realm?  Clearly the answer is no.  Sometimes the market can find a solution where politicians dither.  Leavitt and Dubner’s NYC horse manure story is a very entertaining example where the market did, in fact solve an externality problem, but not on purpose.  And, naturally, the solution to urban horse manure build-up (the automobile), brought with it a whole host of its own externalities.

But around this point in the book, the Superfreaks completely drop any mention of unintended consequences when they start discussing global geoengineering.  They present a proposal to pipe sulphur dioxide into the stratosphere, in order to block some sunlight and cool the globe, and never express the slightest misgiving that this might have its own unintended consequences.  This is a major failure of the book.  They are impish contrarians, stirring the pot.  It’s hard to take their proposals seriously.


Filed under Uncategorized