Luigi Zingales Occupies Wall Street

May 6, 2015
Posted by Jay Livingston

Just one of those coincidences. Yesterday, the Times had a story about the enormous sums that hedge funders took home last year.

Last year, the hedge fund industry had returns of only 3 percent on average. . . But the top 25 managers still managed to earn $11.62 billion in compensation in 2014

Kenneth C. Griffin of Citadel. . . $1.3 billion. . .. James H. Simons of Renaissance Technologies was second with $1.2 billion, and Raymond Dalio of Bridgewater Associates was third with $1.1 billion. William A. Ackman of Pershing Square Capital was a close fourth, earning $950 million in 2014.

I know it sounds like a lot, but 2014 was an off year. That $11.62 billion was barely half what the top 25 hauled in the year before. I guess there’ll be some belt tightening.

The point though is that in an efficient market system like ours, people get what they are worth to the economy, don’t they?

“Does Finance Benefit Society?” That is the title of a paper or talk by Luigi Zingales, an economist who has had posts at Harvard and Chicago’s Booth School of Business. The paper is from January, but by coincidence it was discovered to me (hat tip: Dan Hirschman) the same day as the hedge fund story.

Here is the short version of Zingales’s answer to the question:

At the current state of knowledge there is no theoretical reason or empirical evidence to support the notion that all the growth of the financial sector in the last forty years has been beneficial to society.

Zingales is no flaming radical. The right-wing website The Daily Caller says he is “an advocate of free market economics and limited government.” The trouble is that the hedge funders and bankers keep messing up those free market models with their rent-seeking and fraud.  (A table at the end of the paper summarizes cases of fines paid to the US Government 2012-2014. And those are just the ones where someone got caught.)

A couple of other quotes on the same theme:

If political power is disproportionately in the hands of large donors – as it is increasingly the case in the United States – why is the negative public perception of finance a problem? Rich financiers can easily buy their political protection. In fact, this is precisely the problem.

Many financial activities tend to have a private return that is much higher than the (perceived) social return.

Furthermore, I am not aware of any evidence that the creation and growth of the junk bond market, the option and futures market, or the development of over-the-counter derivatives are positively correlated with economic growth.

A pdf of the paper is here.

Baltimore Ballet

May 5, 2015
Posted by Jay Livingston

Someone should tell David Brooks that policing is not ballet.

When I first read Brooks’s column about Baltimore,“The Nature of Povery” (here), I thought he was just singing the same personal-responsibility-and-family anthem so beloved of conservatives everywhere.  Brooks writes of
“the quality of relationships in a home and a neighborhood that either encourage or discourage responsibility, future-oriented thinking, and practical ambition.” 
Objective conditions, especially the job market, are not even a grace note.*

But I didn’t realize how deliberately Brooks was ignoring important facts until I checked one of the works he cites.  Here is Brooks writing about the nature of city life.

Jane Jacobs once wrote that a healthy neighborhood is like a ballet, a series of intricate interactions in which people are regulating each other and encouraging certain behaviors.

As Philip Cohen points out (here), ballet is about the most inept a metaphor anyone might come up with. ry imagining“The Wire” in tutu and on point.

For Brooks, Baltimore’s problems have arisen because, alas, the delicate pas-de-deux between cop and kid has broken down.

In a fantastic interview that David Simon of “The Wire” gave to Bill Keller for The Marshall Project, he describes that, even in poorest Baltimore, there once were informal rules of behavior governing how cops interacted with citizens — when they’d drag them in and when they wouldn’t, what curse words you could say to a cop and what you couldn’t. But then the code dissolved.

“The code dissolved.”  All by itself.

If you read the Simon interview (here), you get a much better picture of the code. You won’t mistake it for “Swan Lake.” The typical arabesque consists of cops arbitrarily arresting and jailing people for a couple of days for reasons that have little to do with the law and much to do with the cop’s personal whim. As Simon says, it’s called a “humble.” The goal is humiliation.

This was simply about keeping the poor down, and that war footing has been an excuse for everybody to operate outside the realm of procedure and law. And the city willingly and legally gave itself over to that, beginning with the drug-free zones and with the misuse of what are known on the street in the previous generation as ‘humbles.’

A humble is a cheap, inconsequential arrest that nonetheless gives the guy a night or two in jail before he sees a court commissioner.  You can arrest people on “failure to obey,” it’s a humble. Loitering is a humble. These things were used by police officers going back to the ‘60s in Baltimore. It’s the ultimate recourse for a cop who doesn't like somebody who's looking at him the wrong way. And yet, back in the day, there was, I think, more of a code to it.

As rotten as the code was, it did break down. But Simon leaves no doubt as to who broke it.

For example, you look at the people that Baltimore was beating down in that list in that story the Sun published last year about municipal payouts for police brutality, and it shows no discernible or coherent pattern. There's no code at all, it’s just, what side of the bed did I get up on this morning and who looked at me first? And that is a function of people failing to learn how to police. When you are beating on 15-year-old kids and elderly retirees – and you aren’t even managing to put even plausible misdemeanor charges on some arrestees, you’ve lost all professional ethos.

Cops “beating on 15-year-old kids and elderly retirees” don’t find their way into Le Ballet Brooks. But Simon extends the context further, to the brass and the politicians, who, in his view, are ultimately responsible for the breakdown of decent police work . (If you’ve seen “The Wire,” you’ll know that in Simon’s view both the drug dealers the street cops have a certain integrity. The true bad guys are the more powerful and ambitious figures far removed from life on the streets.)

The drug war began it, certainly, but the stake through the heart of police procedure in Baltimore was Martin O’Malley. He destroyed police work in some real respects. . . . . But to be honest, what happened under his watch as Baltimore’s mayor was that he wanted to be governor. And at a certain point, with the crime rate high and with his promises of a reduced crime rate on the line, he put no faith in real policing.

Martin O’Malley did become governor, and as we speak he seems to be running for the Democratic nomination for president. He surely knows that, as Mr. Dooley said, politics ain’t beanbag. And Baltimore policing ain’t ballet.

* Brooks gets much wrong factually about poverty and anti-poverty programs. For details, see this corrective by Matt Breunig.

Edmund Burke on Rioting

May 2, 2015
Posted by Jay Livingston

We adjust our thoughts about rioting and looting to make those thoughts and perceptions at home with our overall ideology. That was the point of yesterday’s quote from Donald Rumsfeld, Secretary of Defense under George W. Bush. The looting in Baghdad was clearly a result of the US invasion of Iraq, an invasion Rumsfeld promoted and planned. To see the looting as the indefensible work of immoral criminals would be to admit that his policies and thrown Baghdad into the Hobbesian chaos that David Brooks sees in Baltimore.

Instead, Rumsfeld characterized the large-scale theft of historical artifacts as a sign of “freedom” and liberation from oppression. This attention to historical and political context is rare in conservative analyses of looting, rioting, and other forms of what Rumseld called “untidiness” when these happen in the US.

Not all conservatives. Here is Edmund Burke,* much beloved of intellectual conservative, often quoted by the likes of George Will, William F. Buckley, Jr., et al. 

    If you do not carefully distinguish the feelings of the multitude from their judgments; if you do not distinguish their interests from their opinions; attending religiously to the one and utterly despising the other; if you lay down a Rule that because the people are absurd, their grievances are not to be redressed, then in plain Terms it is impossible that popular grievances should receive any redress at all, because the people when they are injured will be violent; when they are violent, they will be absurd—and their absurdity will in general be proportioned to the greatness of their Grievances.

[If one pursues the rule that grievances opposed through mob-like protest should be ignored,] the worse their [the people’s] suffering the further they will be from their remedy.

HT: I took this quote from Andrew Sabl at The Reality-Based Community. He got it from David Bromwich’s intellectual biography of Burke.

Ideology Happens

May 1, 2015
Posted by Jay Livingston

Looting and violence are indefensible. The people who commit such acts are nothing more than criminals who lack basic morality.  Lacking any restraint, unable to restrain their impulses and for civilized ties, they create a Hobbesian nightmare for everyone in the area.  Or as David Brooks wrote today (here), “Until the invisible bonds of relationships are repaired, life for too many will be nasty, brutish, solitary and short.”

That’s the view from the right today just as it was fifty years ago. Conservative writers scoff at more liberal views of rioting that try to understand it in its social and political context.

But not always.

Rumsfeld on looting: ‘Stuff happens’

By Sean Loughlin
CNN Washington Bureau

WASHINGTON (CNN) -- Declaring that freedom is “untidy,” Defense Secretary Donald Rumsfeld said Friday the looting... was a result of “pent-up feelings” of oppression and that it would subside...

He also asserted the looting was not as bad as some television and newspaper reports have indicated and said there was no major crisis ... The looting, he suggested, was “part of the price” for ... liberation.

“Freedom's untidy, and free people are free to make mistakes and commit crimes and do bad things,” Rumsfeld said. “They're also free to live their lives and do wonderful things. And that's what's going to happen here.”

Looting, he added, was not uncommon for [cities] that experience significant social upheaval. “Stuff happens,” Rumsfeld said.

The full story is here.