Peter Krupa

Investigative journalism has never been a money-maker for newspapers. It’s good for democracy, it makes newspapers into power brokers, and it occasionally sets the national conversation, but let’s be honest, front-page stories about Tiger Woods’ hook-ups sell way more papers than 6,000-word droners about health-care lobbyists.

Newspapers were able to produce expensive, time-consuming investigative journalism because they had display and classified advertising monopolies in their markets. Now that they no longer have those monopolies and the extra cash that comes with them, subsidies for non-productive content (investigative journalism included) have been cut. As a consequence, journalists are out of work, Democracy is weaker, blah, blah blah, etc.

Or is it?

The uncommented truth of this situation is that having a lock on an advertising market gives one a huge chunk of extra change to play with. Where is that chunk now?

With Google, of course. Google controls something like three-quarters of the U.S. online advertising market. That’s about as good as any single big-city newspaper ever got. Better, because it’s for the whole country.

Of course, Google isn’t spending its extra folding money on investigative journalism, like newspapers did. Instead, it’s spending it on tech innovation, generally by ordering its employees to spend 20% of their work hours tinkering, more specifically by providing the public with awesome free products like Google Docs, YouTube, Gmail, Google Analytics, Blogger, Google Books, Google Translator, you get the idea.

You could argue, therefore, that the economic rent that comes from dominating an ad market is still being used to promote democracy, by making it extremely cheap for millions of individuals to get online and share information themselves.

This is great. Yay democracy. But it’s also putting a lot of people out of work. And I’m too old to go back and learn Python.

UPDATE: “Traditionally, three sectors have led the way out of recession: automobiles, home building and banking.”

Goldman Sachs 2009 earnings: $13.4 billion.

Government funds received by Goldman Sachs via the AIG bailout: $13 billion.

Think about that.

It is said that Joseph Kennedy got out of the stock market in 1929 – right before the crash – after getting a stock tip from a shoe-shine boy. The theory was that once a bull market sucks in people who have no business being there, some sort of collapse is imminent.

On the heels of the recent financial debacle, I’m sure we all have our hindsight glasses on. I remember a pair of encounters in 2004 with very wealthy, very unpleasant, very stupid dudes (yes, that’s the word) my own age who were making a killing brokering mortgages. In retrospect, a system that rewarded piggishness so lavishly should have been instantly suspect.

Likewise, I remember getting offers from a relation, out of the blue, to take out some sort of really great mortgage on a house with no money down. A good investment, this person urged. Also, the thousands of pink-scrubbed, grinning, crazy-eyed real estate Stepford folk waddling into Costa Rica from California and Florida between 2005 and 2008 should have sounded a fucking klaxon.

Post-bubble, it’s easy to spot the warning signs. The eternal question is if next time, we will spot them before the bubble pops.

I was musing on this very question when CNN broadcast a gee-whiz, woman-on-the-street bit on China, how it’s unstoppable, how they’ve got it all figured out, how look at all these freaking shiny-ass skyscrapers. And I thought to myself two things:

1. What kind of an idiot gets market analysis from CNN?
2. ZOMG, SELL!

This guy is apparently thinking the same thing.

“… and by recovered I mean, apparently re-dipping their balls in gold.”

The longer I’m alive, the more I think economists are the academic version of Gypsy palm readers: They charge you a lot of money to make stuff up about the future, then when it doesn’t work out, you go back to them for more advice. Watch Eugene Fama, founding father of the efficient-market hypothesis, scuttle sideways like a crab:

So what is your explanation of what happened?

What happened is we went through a big recession, people couldn’t make their mortgage payments, and, of course, the ones with the riskiest mortgages were the most likely not to be able to do it. As a consequence, we had a so-called credit crisis. It wasn’t really a credit crisis. It was an economic crisis.

But surely the start of the credit crisis predated the recession?

I don’t think so. How could it? People don’t walk away from their homes unless they can’t make the payments. That’s an indication that we are in a recession.

So you are saying the recession predated August 2007, when the subprime bond market froze up?

Yeah. It had to, to be showing up among people who had mortgages. Nobody who’s doing mortgage research—we have lots of them here—disagrees with that.

So what caused the recession if it wasn’t the financial crisis?

(Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.)

Haha! But the really funny thing about the efficient-market hypothesis is that we know market prices are correct because they are set by markets. Got that? It’s the same reason the Bible is God’s word – because He said it is. In the Bible. Hilarious!

I looked into going back to school recently. I might still do it some day. In some ways it’s hard to see a financial benefit. Cost = ($30,000 annual tuition x 2) + ($40,000 in annual salary foregone x 2) = way more than the benefit I’d gain from Master’s-level government employment (Oh, didn’t you hear? Private sector job growth during the last decade was negative).

Still, I wonder if the current wailing and gnashing of teeth over the expense of undergraduate and graduate education fails to account for details. Take college. The average debt from a four-year degree is now $23,200. That’s either a little or a lot. It’s a little if you studied engineering at MIT. It’s a lot if you majored in Christian Studies at Hillsdale College.

Same with, for example, law school. People gasp about $140,000 debt incurred in the hallowed halls of the Ivy League. However, that cost is neither surprising nor excessive considering it gives one access to six-figure Biglaw salaries. If one doesn’t mind settling for a normal (probably government?) salary, it’s not too difficult for a reasonably intelligent person to get good LSAT scores, get scholarships to a decent law school, graduate with debt that’s not overwhelming, and go on to have a nice local career.

The problem is that Americans are making the same mistake with education as they recently made with real estate. We justify massive borrowing by blindly assuming that the investment will always maintain its value and pay a return. While this was perhaps true for education during the last several decades, it no longer is. Students must now make good choices to get good value.

From the most excellent Baseline Scenario:

… yes, bankers are like athletes. Their individual contributions are overrated relative to their supporting environments; they are overpaid; they are paid based on where they randomly fall in the probability distribution in a given year; and paying a lot for bankers is no guarantee that your bank will be successful in the future. Team sports, like banking, are an industry where the employees capture a large proportion of the revenues. And one with negative externalities, like upsurges in domestic violence around major sporting events. Neither one should be a model for our economy.

In The Crash of 2008 and What it Means, George Soros makes the most eloquent critique of globalization that I’ve ever read.

In a nutshell, he argues that starting in the 70s, rich countries forced Washington consensus austerity measures on poor (“periphery”) countries, while at the same time reserving for themselves the right to enact countercyclical measures to keep their own markets stable and attractive for investment.

The status of the U.S. dollar as a reserve currency coupled with this globalization of financial markets allowed the more attractive markets of rich countries (in particular the United States) to suck in the savings of the less-stable “periphery” markets, generating large current account deficits – that is, we borrowed heavily to spend beyond our means and fuel our prosperity.

This finally catches up to the rich countries. A series of government bail-outs starting in the 1980s coincided with the rise of “market fundamentalism,” the result being broad deregulation of financial markets coupled with a massive, throbbing moral hazard.

Now, the super-bubble has popped, and your average American is screwed. In addition, Soros predicts a prolonged move away from the dollar as a global reserve currency, ending the unlimited line of global credit that the United States has enjoyed over the last 30 years.

The “market fundamentalism” that Soros refers to is the orthodoxy that unregulated financial markets tend toward equilibrium. He places it alongside several other fundamentalist philosophies that ultimately ended badly: communism, national socialism, and  fascism.

He might have a point. We’ll see.

During the last 50 years, the ratio of the highest-paid employee’s compensation to that of the lowest paid rose from 24:1 to 275:1. From the New York Times Magazine:

Indeed, what has happened with executive compensation … is that a culture of entitlement has apparently become the norm. It’s not a matter of how much anyone in particular makes, and certainly not a question of an innovator like a Steve Jobs hitting the jackpot. The problem is that so many now seem automatically to receive so much (the chief executives in the Fortune 500 averaged $11 million in 2008) despite average or poor performance — or, in the case of the TARP companies, performance that was so colossally bad that it almost brought down the financial system.

I’ve often wondered if that CEO who makes $11 million a year really adds $30,000 per day of value to the company, or if it’s just some kind of office politics jackpot. Leaning towards jackpot.