Thursday, September 30, 2010

Quotes of the day

The conspicuous paradox that “The Social Network” plays with is that the world’s most popular social networking Web site was created by a man with excruciatingly, almost pathologically poor, people skills. The benign view of Facebook is that it creates “a community,” a sense of intimacy, which is of course one reason it also creeps out some of its critics.--Manohla Dargis

With apologies to [Jeremy] Bentham, income inequality data is nonsense, and wealth inequality data is nonsense on stilts. It’s all about consumption.--Scott Sumner

Income inequality data is often collected at the household level, implying that a doctor making $250,000 with a stay at home spouse is no better off that a Boston cop making $150,000 (including lots of overtime) married to a nurse making $100,000 (including lots of overtime.) But the two income couple might have to spend money on child care, and have very stressful lives doing household chores on top of their paid jobs. This isn’t a major bias, but many people who naively think of the top quintile as being “rich” would be shocked at how many working class couples in their 40s or 50s who are dual income and live in high cost areas like NYC and Boston actually fall into that category. I’d guess two married people each making $55,000 would make it the top quintile, and I’d guess a couple who each make $75,000 would make the top decile. Those aren’t gaudy incomes around here.--Scott Sumner

Suppose you are the richest guy in the world, owning $100 billion in Microsoft stock. You cash out and decide to live off the interest. To avoid inflation risk, you put it all in 10-year indexed TIPS. You would earn $650,000,000 per year in interest. Unfortunately your tax liability would be more than $650,000,000. The government would report your income as about $2 billion. So the person who might well have the highest reported income in the entire country according to official data, might not have any real income at all. Now obviously most rich people don’t put all their money in TIPS. They take bigger risks and get positive rates of return. But risk implies the possibility of loss. Some do much worse than the hypothetical I gave you. Of course even with no income a person this rich has a fabulous lifestyle, which is what I would argue is exactly the point. Look at consumption inequality, not income inequality.--Scott Sumner

It would seem that, on paper, the MBA remains a solid investment even despite its prohibitive cost. The problem is that jobs currently are in short supply, even while more and more MBA graduates flood the market. If students aren’t working then they aren’t paying down the cost of their investments. And only 40% of full-time two-year MBA Class of 2010 graduates received an offer of employment by graduation. That was down from 50% for the Class of 2009 and 62% for the Class of 2008. Students seeking jobs in manufacturing, health care or energy all had more success than those seeking jobs in finance or consulting -but almost half of the 2010 graduating class hoped to go into finance or consulting, two industries have been hit particularly hard by the downturn in the economy during the last two years. The Bottom Line: The MBA Is A Risky Investment.--Dave Behr

[D.E. Shaw], the second-largest hedge fund by employees, had about $39 billion to look after just two years ago. Today it has about $21 billion, a result of declining markets and the firm’s decision during the crisis to restrict withdrawals by customers. Investors, it seems, do not forget so easily. While not all the money was wedged into hedge funds, assume investors paid an average management fee of 1.5 percent. The firm’s income, before its slice of any profit, would have fallen 46 percent, to some $315 million. That might not be such a problem if investments were thriving and it was pocketing the traditional 20 percent of the upside. But the math illustrates a basic point. Hedge funds are not so different from their Wall Street brethren. Like banks, their cost structures grew, in some cases well beyond their ability to sustain them. The good news for hedge funds, at least for now, is that the cuts amount to only a fraction of the declines in performance. That may not last.--Jeffrey Goldfarb and Rob Cox

I am often asked, especially by my Peking University students, to list what I think is the sequence of steps China will take to address its economic imbalances. Remember that rebalancing, in the Chinese context, has a very specific definition. It means raising the consumption share of GDP. This is just a way of saying that consumption growth must outpace GDP growth, and over the next few years it inevitably will, if the rest of the world is unable to absorb a rising Chinese trade surplus. But there are many ways this can happen. The good way is by a surge in consumption growth that allows GDP growth to remain strong. The bad way is for consumption growth to slow, and for GDP growth to slow much more rapidly. ... Unfortunately the pace of China’s adjustment will in large part depend on the pace of the external adjustment – China needs trade surpluses to absorb excess capacity, but its trade surplus depends on the ability and willingness mainly of the US and trade-deficit Europe to absorb those surpluses. Because China has resisted adjusting for so long, I worry that the rest of the world is neither able (especially in the case of trade-deficit Europe) nor willing to wait long enough to allow China a relatively easy adjustment.--Michael Pettis

When Rome magistrates opened an investigation last week into the Vatican bank over transparency issues, it was not only a bold assertion of state over church, it also pointed to one of the Vatican’s greatest continuing challenges: facing modernity. As in the sexual abuse scandal, in which for years the Vatican appeared to declare itself outside — or above — civil law, this time the issue is the Vatican’s famously opaque finances, which for the first time are being held to tightened European Union anti-money-laundering statutes.--Rachel Donadio

Pittsburgh's Woodland Hills High School tops USA Football's list of high schools with the most NFL players with six, while three schools have five players in the league this year. USA Football based the list on the 1,696 players on opening-week rosters. The New York Jets' Jason Taylor, Arizona's Steve Breaston, New England's Rob Gronkowski, Pittsburgh's Ryan Mundy, Miami's Lousaka Polite and San Francisco's Shawntae Spencer played at Woodland Hills.--Mark Divver

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