Simon Johnson's Blog, page 33

Capital Gains Tax Rates and Savings

By James Kwak

Earlier this week, I  wrote my own “job creator’s” manifesto for The Atlantic, in response to Steven Pearlstein’s great parody. You can read it if you are interested in knowing what one “job creator” thinks our country needs.

There’s something I forgot to add, however. (Literally: while I was away from my computer I decided to add it, but then I forgot to do so before sending it to my editor.) As I’ve said before, the capital gains tax rate had no impact on my decision to start a company. It couldn’t have had any impact, because I didn’t know what it was.

In addition, the capital gains tax rate has no impact on the question of what I do with my money. My wife and I both have jobs, and we live in an area with a moderate cost of living, so we can basically fund our lifestyle out of current wage income. Everything else gets invested according to a few simple, fundamental principles—basically an approximative version of mean-variance optimization.

I don’t think, “The capital gains tax rate is going up next year, so I should sell a bunch of assets and increase consumption today.” I don’t need another car (I just replaced my thirteen-year-old Prizm with a Subaru Impreza), and there aren’t many expensive restaurants where we live, and with two small children we’re not about to go on an eco-safari in Africa. Barack Obama and Mitt Romney could jointly announce that they are eliminating all tax preferences for investment income, and it wouldn’t change my savings and investment decisions a bit.

Now, changes in investment income tax rates can affect the relative valuations of different types of investments, such as high-dividend vs. low-dividend stocks. But the point here is that if your consumption decisions don’t change, then the amount of capital you are making available for investment in the current period remains the same. There may be more sophisticated people out there who may buy more LVMH products when capital gains tax rates go up. I’m just not one of them.

Fiscal Confrontation And The Declining Influence Of The United States

By Simon Johnson

It is axiomatic among most of our Washington elite that the United States cannot lose its preeminent global role, at least not in the foreseeable future. This assumption is implicit in all our economic policy discussions, including how politicians on both sides regard the leading international role of the United States dollar. In this view, the United States is likely to remain the world’s financial safe haven for international investors, irrespective of what we say and do.

Expressing concerns about the trajectory of our federal government debt has of course become fashionable during this election cycle; this is a signature item for both the Tea Party movement in general and vice presidential candidate Paul D. Ryan in particular.

But the tactics of fiscal confrontation – primarily from the right of the political spectrum – only makes sense if the relevant politicians, advisers and donors firmly believe that the American financial position in the world is unassailable.

Threatening to shut down the government or refusing to budge on taxes is seen by many Republicans as a legitimate maneuver in their campaign to shrink the state, rather than as something that could undermine the United States’ economic recovery and destabilize the world. This approach is more than unfortunate, because the perception of our indefinite preeminence – irrespective of how we act – is at completely odds with the historical record. In his widely acclaimed book, “Eclipse: Living in the Shadow of China’s Economic Dominance,” Arvind Subramanian places the rise of the dollar in its historical context and documents how economic policy mistakes, World War II and the collapse of empire undermined the British pound and created space for the United States dollar to take over as the world’s leading currency. (Dr. Subramanian and I are senior fellows at the Peterson Institute for International Economics; we have worked together, but not on this book.)

Very few people in Washington are aware – and even fewer care – that persuading people around the world to hold both their official government reserves and their private wealth in dollars was the result of a hundred-year process and a great deal of hard work. Responsible economic policy and being careful about its fiscal deficit were absolutely part of why the United States persuaded others that holding its dollars was appealing.

But Dr. Subramanian also asserts that two other factors were important: the sheer size of the American economy, which overtook Britain’s, probably at some point in the late 19th century, and the United States current account surplus. In particular, American exports were far larger than imports during World War I and by the end of World War II the United States had amassed almost half the gold in the world (gold at that time was used to settle payments between countries.)

In effect, the United States dollar pushed aside the British pound in part because the United States became the world’s largest creditor.

Dr. Subramanian’s point is not just that the United States will lose its predominance but rather that it has already lost key advantages. The United States has run current account deficits consistently since the 1980s; we are now the world’s largest debtor, not a creditor. About half of all federal debt is held by foreign individuals and governments. Emerging markets have amassed very large foreign-currency reserves (much of which is this Treasury debt in dollars).

The Chinese are embarked on a long-term strategy to make their currency, the renminbi, into an appealing reserve currency. Their economy is currently between one-quarter and one-third the size of the American economy, but it is catching up fast. You may not agree with Dr. Subramanian on the extent of Chinese dominance today, but there is no question that this is a real possibility within 20 years.

The “fiscal cliff” coming at the end of this year could be resolved in a reasonable manner (if you need a primer on what is coming, I recommend these graphics from NPR’s “Planet Money.”) For example, let the Bush-era tax cuts expire and replace them with other temporary tax cuts (e.g., to payroll taxes), to provide short-term support to the economy. And American politicians could find other ways to restore federal government revenue to where it was in the late 1990s while also bringing health-care spending under control.

The point is not to make precipitate adjustments but rather to increase revenue and limit spending in a reasonable manner over the next two decades.

But this is not going to happen. Congressional Republicans will refuse to consider anything they regard as a tax increase, and the fiscal cliff is likely to become a repeat of the debt-ceiling fight last summer, which ended up making everyone in Washington look bad. What would be the consequences?

First, this will definitely be destabilizing to world financial markets – making people more concerned about risk both in the United States and around the world. Anyone who pays a “risk premium” when they borrow – including American home buyers and euro-zone governments – is likely to be affected negatively. Uncertainty and fear will increase, slowing the economy in the United States and perhaps contributing to yet another round of crisis in Europe. The stock market will presumably fall.

Second, yields (market-determined interest rates) on United States Treasury debt are likely to fall. In most other countries, when politicians act irresponsibly, bond yields go up. But we are still the world’s No. 1 safe haven – so capital will come into the United States. Some politicians will see this as justification for their tactics.

Third, Dr. Subramanian will be proved right, faster than would otherwise be the case. The world will more eagerly seek an alternative to the fickle American dollar. It will become increasingly hard for the United States to borrow at reasonable interest rates.

The dollar became strong because American politicians were responsible, careful and willing to compromise. Fiscal extremism, confrontation and a refusal to consider tax increases over any time horizon will undermine the international role of the dollar, destabilize the world and make it much harder for all of us to achieve any kind of widely shared prosperity.

An edited version of this post appeared recently on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire column, please contact the New York Times.

One-Hit Wonders

By James Kwak

Meg Whitman is what is known as a superstar CEO. She became CEO of eBay in 1998 and took it public; during her reign, eBay became one of the most successful, most valuable Internet companies in existence (and Whitman became a billionaire). She used her celebrity to mount a high-profile, expensive, and ultimately unsuccessful campaign to become governor of California (losing to career politician Jerry Brown) before being named CEO of HP, the iconic Silicon Valley company.

Why did HP, one of the largest information technology companies in existence, hire Whitman, who preceded her stint at eBay (auction house for random stuff from people’s attics) with jobs at Disney, a shoe company, a flower delivery service, and a toy company? Because of the idea of the superstar CEO, with transferable general management skills, who can transform any organization.

Charles Elson and Craig Ferrere have written a new paper about that idea (Harvard Law School Forum blog post; paper at SSRN). The concept of transferable executive skills is the most common justification for outrageous CEO compensation packages: if there really is a single global market for CEO talent, then companies have to pay the going rate for that talent, which is whatever the market will bear. The problem is that the whole theory rests on a myth.

On pages 28–30, Elson and Ferrere cite multiple empirical studies finding no relationship between a CEO’s performance at one company and his performance at the next company that massively overpaid to hire him. They conclude: “the empirical evidence suggests a negative expected benefit from going outside rather than pursuing an internal succession strategy, despite the ability to access an enhanced talent pool. In the aggregate, CEOs appear to be at their most effective only when they have made significant investments in firm-specific human capital.” Nor does the world of CEO hiring actually behave like a market in which stars move progressively from smaller to bigger firms where their marginal product will be higher (since their skills are applied to more people and assets)

Elson and Ferrere’s main argument is that excessive CEO compensation is caused by the ubiquitous practice of benchmarking new CEO packages against those given by “peer group” companies. This practice would only make sense if there really is a liquid market for CEO talent and your CEO could jump ship for a peer at any time. Otherwise, what you really have is a monopoly-monopsony situation where what matters is the CEO’s value to his current firm, not the value of other firms’ CEOs. Peer group benchmarking (and then setting your CEO’s compensation at the 50th, 75th, or 90th percentile of the peer group) is just a mechanism for perpetually ratcheting CEO compensation upward, without any relationship to the value provided to actual firms.

Elson and Ferrere distinguish their position from what they describe as the two main schools of thought on CEO compensation: (a) those who see it as a product of CEO capture of weak boards and (b) those who see it as the natural result of a competitive market for “talent.” I would say their analysis is much more consistent with the former. In a world of weak, captured boards, peer group benchmarking is a convenient fig leaf for outrageous pay packages. They are right, however, that simply having an independent compensation committee will not be enough if that committee is hiring the same old compensation consultant churning out the same old market-based justifications for lavish packages.

So why pick on Meg Whitman? Well, she’s in the news these days, getting the superstar treatment. (“In all likelihood, this is Ms. Whitman’s last great public performance.”) But you can’t blame her for capitalizing on her fame. The people to blame are the board of HP, which somehow thought that a one-hit wonder was the answer to their problems. This after hiring Léo Apotheker, a man who was hugely successful at SAP, where he worked for two decades, yet bombed at HP. And before Apotheker there was Mark Hurd, who spent more than two decades at NCR before doing a middling job at HP (once praised for cutting costs, now criticized for letting the technology world—Google, Apple, Amazon, Facebook—pass HP by).

The lesson is that successful CEOs are often successful because of the people around them, and to the extent that their individual contributions matter, they are often specific to their companies. Meg Whitman may have been a great CEO of eBay (although, remember, eBay also watched the technology world pass it by, with the arguable exception of PayPal). But that doesn’t make her a great CEO of anything else.

Scott Brown: ATM For The Big Banks

By Simon Johnson

During the Dodd-Frank financial reform debate in early 2010, newly elected Senator Scott Brown of Massachusetts was referred to as an ATM for the bankers – meaning that whenever they needed some more cash, they would stop by his office.  It was not paper money he was handing out, of course, it was something much more valuable – rule changes that conferred a greater ability to take on reckless risk, damage consumers, and impose higher future costs on the taxpayer.

Mr. Brown had this ability because he represented the final vote needed to pass Dodd-Frank through the Senate.  He could have asked for many things – including greater consumer protection, a more thorough investigation into mortgage practices, and reforms that would have cleaned up unscrupulous lenders.  He asked for none of those changes – or anything else that would have made the financial system safer and fairer.

Instead, Senator Brown’s requests were designed to undermine the Volcker Rule – i.e., he was opposing sensible attempts to limit the ability of big banks to place highly dangerous bets (and to blow themselves up at great cost to the rest of us).  Mr. Brown seems to have been particularly keen to allow big banks to invest in hedge funds of various kinds – and the Boston Globe reported recently that he has continued to push in this direction behind the scenes. 

Such risky investments earn high returns when times are good (and big bonuses for senior executives), but they also imply large losses when something goes wrong.  The special interests involved naturally like, “heads I win, tails you lose”, but this is absolutely not in the broader social interest.  Banks with FDIC-insured deposits absolutely should not be allowed to engage in such speculative activities.  This was the original insight of former Fed Chairman Paul Volcker – and it remains the right view today.

The economy absolutely does not need banks that can go crazy on various kinds of “proprietary” trading.  In fact, it is exactly this kind of mismanagement of risk that brought the financial system to its knees and inflicted great damage on the economy in 2008-09.

Very large financial institutions get implicit government support and effective taxpayer subsidies – this is what it means to be “too big to fail”.  This point is widely agreed on the right and the left of the political spectrum.  One sensible idea is to offset these subsidies with a levy on large financial institutions, for example based on how much leverage they have – as large amounts of debt relative to equity is precisely what makes these firms so prone to failure.  And there was a “bank levy” of exactly this kind in the Dodd-Frank legislation until the very end.  Then Senator Scott Brown killed it – again, a form of cash withdrawal for the banks (and big future liability for everyone else).

Senator Brown knows the financial sector well – in fact, he recently acknowledged working specifically on real estate transactions during the boom years.  His lobbying of the US Treasury and other government agencies has been sophisticated and exactly in line with the positions of the most dangerous big banks.  He has drawn a great deal of support from financial sector donors, both to his campaign and running ads in parallel with his efforts (including through Karl Rove’s Crossroads groups.)

In his bid for re-election, Mr. Brown presents himself as some sort of Massachusetts moderate, looking out for our common interest.  But his record is unambiguously someone who sticks up for the special interests of big banks – and creates great risk to the rest of us.

Mr. Brown had a chance to make a difference and he did, ensuring more cash now for big banks and more danger and destruction for the economy later.

Mr. Brown knows the banking sector well and his staff includes sophisticated financial services professionals.  They understand exactly what they want and why they want it.

Fortunately, Massachusetts has a choice.  The voters can either choose Scott Brown and his allies, the big banks.  Or they can choose Elizabeth Warren who has worked hard to make the financial system safer, fairer, and less prone to collapse.

Mr. Brown fooled Massachusetts voters once, in his original election.  Who thought they were electing someone to stick up for the global megabanks?

Will he fool them a second time – when his achievements in diluting sensible financial reform are apparent for all to see?

Vote for Scott Brown if you want to hand the megabanks a mandate to ruin the economy, again.

Thomas Hoenig Read All of Basel III . . .

By James Kwak

. . . and doesn’t like what he sees. In a post for the Harvard Law School Forum on Corporate Governance and Financial Regulation, the former president of the Kansas City Federal Reserve Bank echoes some of the issues raised by Andrew Haldane, which I discussed earlier. The core problem, for Hoenig, is that Basel III “promises precision far beyond what can be achieved for a system as complex and varied as that of U.S. banking.” Banks were able to arbitrage the risk-weighted capital requirements of Basel II? Well, we’ll close all of those loopholes, one by one. But this cannot be done, given the incentives and power imbalances at work: “Directors and managers . . . will delegate the task of compliance to technical experts, and the most brazen and connected banks with the smartest experts will game the system.”

How do we know this will happen? Just look at history:

“Between 1999 and 2007, for example, the industry’s tangible equity to tangible asset ratio declined from 5.2 percent to 3.8 percent, and for the 10 largest banking firms it was only 2.8 percent in 2007. More incredible still is the fact that these 10 largest firms’ total risk-based capital ratio remained relatively high at around 11 percent, achieved by shrinking assets using ever more favorable risk weights to adjust the regulatory balance sheet.”

In other words, large banks increased their leverage (measured simply) while keeping their risk-weighted capital ratios constant. Conceptually speaking, this can only happen if their asset portfolios were becoming less risky over the period (1999–2007). Does anyone think this was actually happening?

In the long term, Hoenig ascribes the decline of capital levels in U.S. banks to the replacement of market forces by deposit insurance and regulators as guarantors of banks. Even if we shouldn’t go back to the unregulated days of the nineteenth century, he argues that we should go back to the capital levels that applied then. Otherwise, lower capital levels reflect a subsidy from the federal government to bank shareholders, who can take on greater risk because of the government safety net. (Those lower capital levels could also reflect the extent to which government regulation actually makes banks safer, which is something that can be debated.)

That implies a ratio of tangible equity to tangible assets on the order of 10 percent or higher—several times higher than required by Basel III. Some argue this will be bad for banks (an argument that Anat Admati has shredded previously). But another way to put it is that the capital levels prescribed by Basel III are very, very good for banks. Is that what we want?

Restoring The Legitimacy Of The Federal Reserve

By Simon Johnson

The Federal Reserve has a legitimacy problem. Fortunately, a potential policy shift is available that offers both the right thing for the Fed to do and a way to please sensible people on both sides of the political spectrum: raise capital requirements for megabanks.

As the election season progresses, Republican politicians are increasingly criticizing the monetary policy of Ben Bernanke and his colleagues on the grounds that they are exceeding their authority, particularly by buying assets and trying to lower interest rates in what is known as “quantitative easing.”

There is growing concern in Republican circles that the Fed is tipping the election toward President Obama, and Mitt Romney repeated unambiguously in August that he would not reappoint Mr. Bernanke (a Republican originally appointed by President George W. Bush).

At the same time, a significant number of people on the left of American politics are concerned about how the Fed acted in the period leading up to the crisis of 2008 – blaming it for a significant failure of regulation and supervision – and about how much support it currently provides to big banks.

If the right and the left were ever to come together on this issue, they might enact legal changes that would reduce the independence of the Federal Reserve, making it more subject to Congressional pressures. At the very least, the implicit buffers that protect the Fed from political interference could easily weaken, depending on the outcome of the November election. The Fed has no special constitutional protection, from either the original Constitution or any subsequent amendment. The Federal Reserve System was created in 1913 by an act of Congress and its mandate, functions and authority have been amended by Congress over the years. Most recently, some small but potentially significant changes were enacted as part of the Dodd-Frank financial legislation in 2010.

The Fed has been unpopular before, most notably when under Paul A. Volcker, its chairman, it tightened monetary policy to bring down inflation in the early 1980s. And some tension is built into the very objectives of the organization. Section 2A of the Federal Reserve Act, as amended, now reads:

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

(This so-called dual mandate came from the Full Employment and Balanced Growth Act of 1978, sometimes known as the Humphrey-Hawkins legislation. This language was not in the Federal Reserve Act of 1913 or the 1946 Employment Act).

Most of the previous political concerns were from the left of the political spectrum and concerned with whether the Fed placed too much weight on low inflation and not enough weight on achieving a high level of employment. Strong voices from the left currently assert that Mr. Bernanke’s team should have done more, earlier and faster, to speed the economic recovery.

But now the brunt of the attack comes from the right, where trouble for the Fed has been brewing for some time.

Open season on the Fed was declared last year by Rick Perry, governor of Texas and then a Republican presidential candidate. On the campaign trail in summer 2011, he remarked memorably:

“If this guy prints more money between now and the election, I don’t know what you all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous – treasonous, in my opinion.”

Mr. Perry was picking up on longstanding themes from that part of the Republican right that feels the very existence of the Federal Reserve undermines the Republic. Ron Paul’s book on the subject is titled “End the Fed.” Mr. Paul is sometimes regarded as a fringe figure, but anti-Fed sentiment is no longer a marginal view within the Republican Party – see, for example, the range of voices quoted by Politico this week.

(Mr. Paul’s and, to some extent, Governor Perry’s intellectual predecessor was Wright Patman, a populist Democrat from Texan who served in the House for almost 50 years and was a regular bête noire of Fed chairmen from William Martin to Arthur Burns. In one hearing on the Fed’s monetary policy, for example, Mr. Patman opened the session by caustically asking Mr. Burns, “Can you give me any reason why you should not be in the penitentiary?” Mr. Patman, it should be noted, was described by the historian Robert Caro as to the left of Lyndon B. Johnson.)

Fortunately there is a way for the Fed to reaffirm its legitimacy: the Board of Governors should strengthen capital requirements for the largest United States banks and other systemically important financial institutions. Ideally it should move policy in a direction that is responsible and that would be welcomed on both sides of the political spectrum.

The best way to do this would be to increase capital requirements for very large banks and other financial institutions that the Fed deems to be systemically important. Both sides of the aisle increasingly show some understanding that higher capital requirements for megabanks would make them generally safer and more resilient in the face of really big unusual shocks – and therefore reduce the degree of public subsidy they receive, implicitly, because they are too big to fail (and therefore able to get support, when needed, from the Fed).

(The Dodd-Frank Act constrained the ability of the Fed to help individual financial institutions. but in my assessment left the door open to various kinds of broader assistance to classes of assets or groups of companies – either through the Fed discount window for lending to banks or through some mechanism to be specified later.)

The recent letter to Mr. Bernanke by Senators Sherrod Brown, Democrat of Ohio, and David Vitter, Republican of Louisiana – which I wrote about recently – is a perfect example of the emerging cross-partisan consensus. In private, I hear strong voices from right and left echoing the sentiments of this letter.

The megabanks, naturally, are opposed. They contend that higher capital requirements would be bad for the economy. That is a myth, fully exploded by the Stanford professor Anat Admati and her colleagues (if you have not already seen their Web site, you should look at it now.)

The Fed has the ability and the opportunity to make a move on capital requirements for systemically important financial institutions – we are currently in a comment period that runs until Oct. 22 on exactly this issue. Higher requirements would make the financial system safer. They would also represent an important step toward rebuilding the political legitimacy of the Federal Reserve System.

An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire column, please contact the New York Times.

Masters or Trend-Followers of the Universe?

By James Kwak

There is an image that underlies the theory of efficient markets. The image is of a pack of hyper-intelligent, hyper-competitive, voracious traders (working at hedge funds, at bank prop trading desks, in their basements, whatever), relentless scouring the markets for pricing inefficiencies and pouncing on them, trading them out of existence before moving on to the next one. The archetype is the quantitative trading desk at Salomon Brothers in the late 1980s, led by John Meriweather, exploiting arbitrage opportunities between on-the-run and off-the-run Treasury bonds. In finance theory, these sharks are contrasted with the “noise traders” who don’t know what they’re doing, and the question is whether the noise traders are enough to upset market efficiency.

But how good are the sharks anyway? That’s the question that came to my mind on reading the Economist‘s summary of a paper by Lauren Cohen, Christopher Malloy, and Karl Diether on stock market responses to legislation affecting specific industries. They found that you could make money by buying stocks of companies likely to be helped by new bills, and you could identify those companies from the voting records of senators and the incidence of keywords in the bill text.

“The mystery,” according to the Economist, ”is why the broader market is so slow to recognise the effect of legislation.” That’s the classic way of thinking about the problem. Shouldn’t the hedges have figured this out already? But this isn’t the only case. A recent column by Lucian Bebchuk reminded me of another example: Up until the 1990s, you could have made money by buying stocks of companies with good corporate governance practices and shorting those of companies with poor practices.

These are patterns that were discovered by academics, who have limited research budgets and little financial incentive involved. (Academic prestige counts for something, but, according to theory at least, not as much as the billions of dollars in fees brought in by top hedge funds.) How come they were discovered by Bridgewater and Renaissance and all of those guys who have huge piles of money to invest in research?

One possibility is that Renaissance has discovered this and other trading strategies and has figured out a way to milk them without making the arbitrage opportunity go away entirely. The other possibility is that the sharks really aren’t so terrifying and ruthless as popularly believed, and instead they just stumble around copying each other to try to reduce their variance from the competition.

Or more likely it’s some combination of the two. A handful of firms come up with their own superior trading strategies, but most simply copy whatever they hear other people are doing. That’s why the corporate governance anomaly seems to have been traded away, and why everyone is doing high-frequency trading these days. The problem is that most investors’ money is going to the followers, which is why they are getting low returns and high costs. But it’s good for the entire industry that laypeople are in such undeserved awe of hedge fund managers as a class.

Voters: Not So Stupid?

By James Kwak

In July, a New York Times article on Priorities USA Action mentioned a focus group in which participants refused to believe that any presidential candidate could be in favor of “ending Medicare as we know it” (replacing guaranteed coverage with vouchers that will pay for an unknown percentage of guaranteed coverage) and tax cuts for the rich. At the time, I called this no less than “the problem with American politics.” 

But perhaps the problem isn’t so bad. Here are some results from recent Times/Quinnipiac polls of swing states (click on the image for a bigger version):

 

So, I must admit, a majority of voters realize that Mitt Romney’s policies will favor the rich. They know what’s going on. However you define them, the rich are a small minority of the population. Yet he remains within striking distance of Barack Obama in those states.

Logically speaking, there are a few main possibilities:

Many Americans think they will be rich someday, or their children well. I recall being insulted by a listener to a radio call-in show saying that she was unemployed but we shouldn’t raise taxes on the rich because she wanted her daughter to have a jet someday. (Empirically speaking, however, we now have lower social mobility than the typical Western European “social democracy.”)
Many Americans think that, as a matter of principle, we should have policies that favor the rich, even though they are not themselves rich. Call it “rewarding success.”
Many Americans are voting for Romney in full knowledge that his economic policies will not help them, either because of so-called “social issues” or because they just hate Barack Obama that much.

I’m not sure which of the possibilities is most discouraging.

The Gift That Keeps on Giving

By James Kwak

By now most of you probably know about the video of Mitt Romney at a fund-raiser for rich people dissing 47 percent of Americans, including seniors, one of his core constituencies. (Many seniors don’t pay income tax because they don’t have enough income, since Social Security is not taxed except for high-income households. For more on the “47 percent,” see here.)

Still, this is standard Tea Party fodder that Romney et al. have been dishing out for months now. But what about this?

Describing his family background, he quipped about his father, “Had he been born of Mexican parents, I’d have a better shot of winning this.” Contending that he is a self-made millionaire who earned his own fortune, Romney insisted, “I have inherited nothing.” He remarked, “There is a perception, ‘Oh, we were born with a silver spoon, he never had to earn anything and so forth.’ Frankly, I was born with a silver spoon, which is the greatest gift you can have: which is to get born in America.”

Mitt Romney saying that he inherited nothing? The son of the CEO of AMC and governor of Michigan? (And Mark Thoma remembered how Mitt and Ann didn’t have to work because of stock from Mitt’s father.)

Then there’s the campaign’s response:

Gail Gitcho, the communications director for Mr. Romney, said in a statement that Mr. Romney is “concerned about the growing number of people who are dependent on the federal government, including the record number of people who are on food stamps, nearly one in six Americans in poverty, and the 23 million Americans who are struggling to find work.”

Um, Gail, the people on food stamps, in poverty, and struggling to find work are precisely the people who don’t pay income taxes—about whom your candidate said, “my job is is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.”

Some people are thinking (hoping) that this means the end of the Romney candidacy. I’m not so sure. Remember George W. Bush addressing a group of the “haves and have-mores” and saying, “you are my base”? Didn’t seem to hurt him. Still, there is—or should be—a difference between making a joke about your rich friends and insulting half of the electorate.

Musical Pseudo-Science

By James Kwak

A friend sent me to an article in The Economist titled “The Science of Conducting” summarizing a study by a number of researchers (including apparently at least one real musician). The Economist’s conclusion:

“The findings are in harmony with what conductors knew all along: that baton-toting despots, like the late Herbert von Karajan, do add value—but only if they rein in the uppity musicians in front of them.”

This is more or less what the paper itself claims:

“We propose that the conductor will significantly change the perceived quality of a piece when s/he both increases his/her influence on musicians and, at the same time, expresses a personality able to overshadow the inter-musician communication. In simpler terms, this might be the essence of leadership.”

The method involved attaching infrared sensors to the players’ bows (there were eight violinists) and the conductors’ batons (two conductors) and then tracking the relationships between the movements of the baton and the violinists’ bows and among the violinists’ bows and each other. (How asking a conductor to lead eight skilled violinists is a test of anything is beyond me, but whatever.) The idea was to measure the degree to which the violinists are influenced by the conductor and the degree to which the violinists are influenced by each other (since eight decent violinists can play just about anything—such as Mozart Symphony #40—without a conductor).

The conclusion, quoted above, is based on the following facts:

Of the five pieces played, listeners were indifferent between the performances of the two conductors for three pieces.
For piece #3, conductor 1 was significantly more assertive than conductor 2, and the violinists were significantly less dependent on each under conductor 1 than under conductor 2. Listeners preferred the performance under conductor 1.
For piece #5, conductor 1 was also significantly more assertive than conductor 2, but this time the violinists were not significantly less dependent on each other under conductor 1 than under conductor 2. This time listeners preferred the performance under conductor 2.

Huh? If you want to see that in pictures, here you go:

 

If you think there isn’t enough data here to draw any conclusions, you’re not alone. Alternatively, the conclusion might have been that the conductor should be laid-back rather than assertive, as that was clearly the right strategy for piece #5 (where C2 was preferred).  At the end of the day, there were two pieces where the listeners were not indifferent. In piece 3, the winning strategy was high assertiveness by the conductor and modest interaction among the violinists. In piece 5, the winning strategy was low assertiveness by the conductor and modest interaction among the violinists.

But research costs money, and you have to publish something to show you didn’t waste the money, so this is what we got, and then The Economist picked it up with the subtitle, “Von Karajan Was Right: Orchestras Really Can Use the Smack of Firm Leadership,” and then Tyler Cowen picked it up, and . . .

Of course, any real musician knows that this kind of study is hopeless and misguided from the start. Any good orchestra can play any piece from the standard classical repertoire without a conductor. In an actual performance, the conductor provides a modest coordinating role (which could really be played by anyone good enough to play in said good orchestra). This role, however, is superfluous when you only have eight musicians—the Schubert and Mendelssohn Octets are regularly played without conductor, for example.

The conductor’s more important work occurs before the performance and has nothing to do with baton-waving. And in my experience,* the most important factor is less what the conductor does in rehearsal than whether the orchestra respects the conductor as a musician and as a person (since there are plenty of charlatans out there, at least at the lower levels). And you don’t need a baton for that. (Kurt Masur, for one, doesn’t use one.)

* In high school, I went to the Juilliard Pre-College Division, and in college and the first half of graduate school I spent most of my time playing music. Many of the people I played chamber music with are now professional musicians, most Alan Gilbert. I also conducted an orchestra for one year in college.