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Slate Star Codex reviews Red Plenty. Got a chuckle out of the ‘what-if’ idea that had things played out differently – like, had well-meaning Smart People been heeded and empowered more, and killed less – the Soviets with their advanced invention of ‘linear programming’ might have solved the allocation problem and passed the West after all. I mean yeah, linear programming works ok in highly controlled, circumscribed situations. You know what’s even better at solving this type of problem when it gets bigger and messier (and less linear) though? The mathematical technique which, when implemented among humans, involves those things we refer to as ‘free markets’ and ‘prices’! Oh but sure, with linear programming you can figure out how many widgets vs. doohickeys your two-item factory should make each reporting period. (IF YOU KNOW THEIR PRICES.)
This pedestrian article asking why Wall Streeters get paid so much (in which we learn, for example, that ‘rents’ means ‘basically profits above and beyond what you’d expect’) got some discussion somewhere, I forget where. Not that I dispute the overall point, but the methodology seems suspect: they followed people (‘longitudinal data’) who worked at the ‘same job’ in finance and in not-finance, ‘controlling for job title, age, gender, and region’. Hmm. 1. A person’s career arc matters (independently of age). Working in finance is – probably – correlated with being in peak career mode, whatever the age. If one does job X in finance and then later does the ‘same job’ in not-finance it’s likely their career is on a downward arc or they chose to, say, prioritize family (otherwise they wouldn’t have left finance!), so they’d make less money for ‘natural’ reasons. If one does job X in not-finance and the does the ‘same job’ in finance, it’s likely that he is moving up in his career (hence getting paid more money for ‘natural’ reasons). You can’t notice either dynamic controlling only for ‘job title’ and ‘age’ is at best a proxy for it. 2. I question this notion of ‘same job’ in the first place. Is a Whatever Job in finance the ‘same job’ as Whatever Job in not-finance? Says who? Because it has the same job title? Nah. Again, these are nit-picks. I gather from this methodology that he would’ve had to exclude, say, job titles like ‘Trader’ and ‘Portfolio Manager’, so, yeah. Wall Streeters do get paid a lot, don’t get me wrong.
I got in a heated twitter battle with one of the myriad Internet Self-Anointed Econo Dudes who assume they are experts on climate modeling for some reason.
This piece (HT Kling) by two authors, one of whom (Jason Richwine) I knew I recognized, explains the insanity of FCRA accounting when it comes to how the federal government values the student loans that it, in its infinite wisdom, decided to start making a few years ago. This is a very important point few seem to talk about, which is why we get the Elizabeth Warrens of the world (dumbly) claiming the government makes ‘obscene profits’ on it.
I admire Nate Silver’s 538 for trying to figure out whether QE3 was a success, but it seems kind of hopeless. What does ‘success’ even mean? Compared to what? They observe that it didn’t seem to bring long-term rates down. But what about ‘term premiums’? Maybe rates would’ve been higher otherwise? (Lisa Simpson’s rock did keep tigers away, after all.) Also, maybe it wasn’t supposed to bring rates down then, just later. Or earlier. Or ‘expectations’ of rates. Or something. See, the Fed can move the goalposts all they want, they’re the ones who made them up in the first place.
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Much better than Linsk.
Planned or market economy: shouldn’t we expect some variation in whatever target you’re measuring? And then, did Krushchev really have anything to do with the numbers moving in the right direction? This is another example, to me anyway, of Survivorship Bias: people think they are really smart and effective at business/government (George W. and Rick Perry as Texas governor) when they just happen to be in the right place at the right time. Some of us ascribe superpowers to those that were there at the opportune time and place… At some point in the future I’ll quit bringing this up.
Finance: while true, I still don’t have to like what you are saying about the arc of my career.
QE3 was successful for all the Smart People that matter. I don’t even need to read the linked article to know that, and I’m not even a Smart People.
Comment by Mike September 30, 2014 @ 12:37 amIf it’s any help, it’s a thing I’m saying about my career arc as well :)
Comment by Sonic Harm September 30, 2014 @ 7:11 amThe employees get paid a lot but the shareholders don’t. So any theory would have to explain both ends of the bargain. If you look at where broker dealers make money (ignoring M&A and asset management),it’s in managing IPOs. If a bank is lucky, ordinary commission generating activities won’t lose money. My guess is that WS is a cartel that punishes price cutters by locking them out of syndicates. However, competition within the cartel is fierce, hence the rents go to the employees who win the beauty contests, not to the firms.
Comment by bjdubbs September 30, 2014 @ 1:29 amI think what people like Matt Levine are saying in response to this meme is that people are thinking of it all wrong, because (in effect) the employees are a type of shareholder.
Comment by Sonic Harm September 30, 2014 @ 7:13 amA short answer to the people who think WS traders get paid too much is that they ought to jump on that bandwagon and find out what it takes to do that job. Then they can give all the money to charity so they won’t feel bad about having been overpaid. They shouldn’t have to do it very long to make their point; then they can go back to doing something virtuous like journalism or working for a non-profit.
Comment by texan999 September 30, 2014 @ 8:56 amMost of the broker dealers make single digit ROEs, and yet pay the traders big salaries. My hunch is that trading is an excuse to inflate revenues, which in turn is the justification for large executive compensation. It’s not clear what the traders do, unless it’s to use the balance sheet to generate more commissions. It certainly isn’t to generate big trading profits, because there are no big trading profits on WS. And very few traders ever manage to succeed once they leave the bank, suggesting that little skill is involved.
Comment by bjdubbs September 30, 2014 @ 9:37 amExcellent. If their jobs are that easy, it should child’s play to go get one and make a ton of money. It’s a win-win: prove a valuable point, and generate a lot of money for charity. The person trying this experiment would never want to keep the money, knowing that it’s unfair.
Comment by texan999 September 30, 2014 @ 9:46 amYou’re looking at it from the wrong end. If a trader is talented, why work at a bank?
Comment by bjdubbs September 30, 2014 @ 10:12 amWhy, to establish social injustice, of course. Otherwise it will just be a bunch of people claiming that traders are overpaid and any idiot could do that job for less, and who would listen to that kind of unsubstantiated drivel?
Comment by texan999 September 30, 2014 @ 11:04 amThe value is in the franchise, not the traders. You’re projecting your concern with social justice onto me.
Comment by bjdubbs September 30, 2014 @ 11:28 amI could hardly begin to express how minute a concern I have for social justice.
Comment by texan999 September 30, 2014 @ 11:34 amNo? Not for the justice due WS traders? You seem pretty exercised about it.
Comment by bjdubbs September 30, 2014 @ 12:20 pmTheir pay has nothing to do with social justice. Social justice never operates to ensure that high earners get to keep their salaries, only to take it away and give it to more deserving people.
Comment by texan999 September 30, 2014 @ 1:20 pm