James Surowiecki

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The spirit of any age must be addressed, even when inconvenient. I doubt Bill Clinton entered politics to be the tough-on-crime President whose policies helped turn the nation into a penal colony within a colony, but there he was in the 1990s, not realizing that crime was about to mysteriously and precipitously decline, waving a badge and a billy club. Clinton likely never dreamed of a scenario in which he would be chastening “welfare queens,” yet there he was doing a better job of it than Ronald Reagan, who coined that odious term. It was no different than when Richard Nixon, having at long last having won the White House, argued in favor of universal healthcare and a basic-guaranteed-income tax plan, something he certainly wasn’t considering before the Sixties happened.

Chief among the prevailing winds of our time is wealth inequality, the enduring gift of an Occupy movement that framed a single election and otherwise sputtered out, at least for now. So GOP candidates must, at minimum, pay lip service to the concern. Donald Trump is suddenly a reformer taking aim at hedge-fund managers. Jeb Bush has spoken about how income disparity has threatened the American Dream (without mentioning, of course, that his proposed tax cuts would only exacerbate the situation). Rick Santorum and the sweater-vest wing of the party want to raise the minimum wage. 

What’s true of politicians is also so of economists, and academics have descended on the problem, which makes this moment ideal for Joseph Stiglitz, who’s spent much of his career, from thesis forward, on the topic. In a NYRB piece, James Surowiecki analyzes the economist’s most recent slate of books, finding fault with Stiglitz’s identification of the twin devils of the contemporary financial arrangement: rent-seeking and a lack of corporate oversight. Surowiecki doesn’t believe these issues explain our 99-and-1 predicament. He doesn’t dismiss Stiglitz’s suggestions and likewise sees no reason why CEOs should be earning so much, but he believes a remedy is more complicated.

An excerpt: 

It’s possible, of course, that further reform of corporate governance (like giving shareholders the ability to cast a binding vote on CEO pay packages) will change this dynamic, but it seems unlikely. After all, companies with private owners—who have total control over how much to pay their executives—pay their CEOs absurd salaries, too. And CEOs who come into a company from outside—meaning that they have no sway at all over the board—actually get paid more than inside candidates, not less. Since 2010, shareholders have been able to show their approval or disapproval of CEO pay packages by casting nonbinding “say on pay” votes. Almost all of those packages have been approved by large margins. (This year, for instance, these packages were supported, on average, by 95 percent of the votes cast.)

Similarly, while money managers do reap the benefits of opaque and overpriced fees for their advice and management of portfolios, particularly when dealing with ordinary investors (who sometimes don’t understand what they’re paying for), it’s hard to make the case that this is why they’re so much richer than they used to be. In the first place, opaque as they are, fees are actually easier to understand than they once were, and money managers face considerably more competition than before, particularly from low-cost index funds. And when it comes to hedge fund managers, their fee structure hasn’t changed much over the years, and their clients are typically reasonably sophisticated investors. It seems improbable that hedge fund managers have somehow gotten better at fooling their clients with “uncompetitive and often undisclosed fees.”

So what’s really going on? Something much simpler: asset managers are just managing much more money than they used to, because there’s much more capital in the markets than there once was.•

 

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The opening of a New Yorker blog post by James Surowiecki, author of The Wisdom of Crowds, about the epic fail of the Redditor throng during the Boston Massacre bombing manhunt:

After Reddit’s attempt to find the Boston Marathon bombers turned into a major failure (for which Reddit’s general manager Erik Martin publicly apologized Monday), the over-all conclusion seems to be that the whole experiment was misguided from the start, and that the Redditors’ inability to identify the Tsarnaev brothers demonstrates the futility of using an online crowd of amateur sleuths to help with a criminal investigation. Or, as the Timess Nick Bilton put it, ‘It looks as if the theory of the ‘wisdom of crowds’ doesn’t apply to terrorist manhunts.’

That proposition may be true. But Reddit’s failure isn’t evidence for it. To begin with, it’s a bit facile to frame this story as a competition between ‘the crowd’ and ‘the experts,’ since the official investigation wasn’t relying on a couple of experts, but rather had its own crowd at work, one made up, in Bilton’s words, of ‘thousands of local and federal officials.’ More important is that the Redditors faced a simple, but insuperable, obstacle when it came to identifying the Tsarnaevs, namely that the two brothers were not, as far as I can tell, in any of the photographs that were widely available before Thursday morning. The footage that convinced investigators that the Tsarnaevs were prime suspects was the footage from the Lord & Taylor surveillance cameras, which hadn’t (and still hasn’t) been released to the public. This is an obvious point, but one that’s been overlooked: Reddit had no real chance of identifying the right suspects because it didn’t have access to the information that mattered. (Had the clip of the Tsarnaevs walking down Boylston Street been publicly available last Tuesday, I don’t think there’s any doubt Redditors would have flagged them as suspicious.) Whatever the value of the wisdom of crowds, it isn’t magic:you can’t ask the crowd to find someone that, in a sense, it’s never seen.”

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During the Great Recession, it’s become common knowledge that a leaner operation with fewer employees is more profitable. But what if that isn’t true, especially for large retailers? From Surowiecki:

“The big challenge for any retailer is to make sure that the people coming into the store actually buy stuff, and research suggests that not scrimping on payroll is crucial. In a study published at the Wharton School, Marshall Fisher, Jayanth Krishnan, and Serguei Netessine looked at detailed sales data from a retailer with more than five hundred stores, and found that every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales. Stores that were understaffed to begin with benefitted more, stores that were close to fully staffed benefitted less, but, in all cases, spending more on workers led to higher sales. A study last year of a big apparel chain found that increasing the number of people working in stores led to a significant increase in sales at those stores.

The reasons for this aren’t hard to divine. As Fisher, Krishnan, and Netessine show, customers’ needs are pretty simple: they want to be able to find products, and helpful salespeople, easily; and they want to avoid long checkout lines. For a well-staffed store, that’s no problem, but if you don’t have enough people on the floor, or if they aren’t well trained, customers can easily lose patience. One of the biggest problems retailers have is what is called a ‘phantom stock-out.’ That’s when a product is in the store but can’t be found. Worker-friendly retailers with more employees have fewer phantom stock-outs, which leads to more sales. And happy workers tend to stick around, which saves the costs associated with employee turnover, like hiring and training.”

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The Solyndra boondoggle is already a politicized hand grenade, but as anyone in venture capital will tell you, investing in the future doesn’t ensure return. Malfeasance should always be remedied, but fear of failure will guarantee no success. From “A Waste of Energy?‘ by the New Yorker‘s reliably lucid James Surowiecki:

‘Of course, some think the Solyndra failure shows that the government isn’t investing smartly. But, while government subsidies have built-in problems—most obviously, some money will go to projects that would have happened anyway—there’s little sign that the Department of Energy has handed out money recklessly: the vetting process, which relied on three thousand outside experts, was unusually rigorous. Solyndra was a wager that went wrong, but failure is integral to the business of investing in new companies; many venture capitalists will tell you that, of the companies they fund, they expect a third, if not more, to fail. By those standards, the government is actually doing pretty well so far: under the stimulus program, the D.O.E. has handed out nearly twenty billion dollars in loan guarantees to renewable-energy companies, and only Solyndra has defaulted, accounting for a small fraction of the money guaranteed. Solyndra’s failure isn’t a reason for the government to give up on alternative energy, any more than the failure of Pets.com during the Internet bubble means that venture capital should steer clear of tech projects.”

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It’s always curious to me that negotiators, whether politicians or the opposing sides of sports leagues, so often delay working on an agreement in earnest until they place themselves under severe time constraints, which would seem to be the worst time for those in disagreement to reach a compromise. The reliably lucid James Surowiecki explains why negotiations go bonkers under time pressure, in his article on the debt-ceiling debacle in the New Yorker. 

“You might think that there are benefits to putting negotiators under the gun. But, as the Dutch psychologist Carsten de Dreu has shown, time pressure tends to close minds, not open them. Under time pressure, negotiators tend to rely more on stereotypes and cognitive shortcuts. They don’t consider as wide a range of alternatives, and are more likely to jump to conclusions based on scanty evidence. Time pressure also reduces the chances that an agreement will be what psychologists call ‘integrative’—taking everyone’s interests and values into account.

In fact, by turning dealmaking into a game of chicken, the debt ceiling favors fanaticism. As the economist Thomas Schelling showed many years ago, ‘It does not always help to be, or to be believed to be, fully rational, coolheaded, and in control of oneself’ when it comes to brinksmanship.”

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A dramatic interpretation of the American economy, with Slim Pickens in the role of John Boehner:

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Small selection, late fees, lousy staff, etc. (Image by Stu pendousmat.)

Netflix is great and Blockbuster sucked is the simple reason why the latter had to file for Chapter 11. But why didn’t Blockbuster change its ways and use its capital to become a leaner and smoother operation? According to the New Yorker‘s James Surowiecki, it’s because large, successful companies tend to double down on their core strategies during times of stress, even when those strategies obviously no longer work. An excerpt:

“Why didn’t Blockbuster evolve more quickly? In part, it was because of what you could call the ‘internal constituency’ problem: the company was full of people who had been there when bricks-and-mortar stores were hugely profitable, and who couldn’t believe that those days were gone for good. Blockbuster treated its thousands of stores as if they were a protective moat, when in fact they were the business equivalent of the Maginot Line. The familiar sunk-cost fallacy made things worse. Myriad studies have shown that, once decision-makers invest in a project, they’re likely to keep doing so, because of the money already at stake. Rather than dramatically shrinking both the size and the number of its stores, Blockbuster just kept throwing good money after bad.”

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