This is a bit of a follow-up to my thought process in the last post. I think there are two reasons people are mad at Wall Street. First, they're mad that financial professionals are paid so much. And second, they're mad that financial professionals can have such a strong destabilizing influence on the economy.
Both of these propositions are fundamentally true. Bankers, hedge fund managers, private equity executives, and others in finance get paid more generously, across the board, than similarly qualified people in other industries. And bad investment directed by the financial sector can, as we've seen over the last 3 years, do a huge amount of economic harm. But I think there's a much more benign explanation for these truths than a lot of people are willing to acknowledge.
So start with the first one-- that financial professionals are paid a lot. That's pretty self-evident. Open the Forbes 400, and it's clear that two groups are over-represented: descendants of Sam Walton and financial workers. I hate looking at lists like the Forbes 400, but at a glance, I'd guess that about a quarter are hedge fund managers. That's a HUGE presence for a single occupation. On top of that, the sums become even more absurd when you break them down. Hedge fund manager John Paulson made $4 billion PERSONALLY in a year. By comparison, Howard Schultz's entire net worth is listed at between $1 and $2 billion (which I'm pretty sure is wrong, but let's assume it's right for a second). One guy became a billionaire by building a small, Seattle-based coffee shop into one of the most recognizable brands on the planet. The other made triple his net worth... by correctly betting that housing prices were headed for a slide in 2008. Worse, Paulson's fund is down over 40% in 2011 so far. If Starbucks lost 40% of its capital over 5 years, Howard Schultz would be out of a job. If Starbucks lost 40% of its capital in a year, Howard Schultz would be facing criminal charges.
But the key question here is why someone like John Paulson, who is obviously so much less innovative and valuable than someone like Howard Schultz, getting paid so much more? And the answer is pretty technical and not all that interesting: margin. While people like Howard Schultz, Bill Gates and Sam Walton are remarkable managers, their businesses have huge overhead. It's the CEO's ideas that drove those companies' growth, but it takes thousands of workers to execute those ideas, and millions of dollars in capital investment to get those companies running. To go back to the Starbucks example, the company is generating billions in annual revenue... but it's also got tons of costs. They have costs to pay for retail space, costs in hiring employees, and costs in buying inventory. All of those costs eat into what they can pay their executive.
In finance, on the other hand, the only input of note is capital. Yeah, you need to pay for a computer network, a couple of floors of office space by Columbus Circle in Manhattan or in Greenwich, and a secretary. But, realistically, you can run a multibilliondollar hedge fund with 10 guys on a couple of floors in Manhattan. And it doesn't take any more effort to run $25 billion than it does to run $2 billion. Sure, at $25 billion, your trades can get more crowded and you need to mix up your strategy, but one person could easily make $10 billion on $25 billion in capital in a good year. In a retail business of any kind, that kind of performance is impossible. Now it's another question whether having our brightest college graduates going off to exploit price inefficiencies is the best way to build a functional society. But unless you want to ban speculation (which seems unreasonably restrictive) or you want to restrict pay for money managers (which seems unworkable), there's not really much you can do about it. So while it's a somewhat unique business in its potential for big returns with little investment of labor, I would call that circumstance a curiosity rather than an evil.
As for the second part of the argument about endangering the system, I think that's something that's also somewhat inherent to the business of finance. Finance (at least in its purest form) is a utility that provides capital where it's needed and moves savings into profitable investment opportunities. By providing capital to productive companies that need it, finance allows business to grow and function. The problem is that finance is prone to overinvestment in particular sectors, and tends to feed boom-bust cycles. And because modern financial institutions are huge, highly leveraged (making them more fragile than other companies), and hugely interconnected, their failure can have significant consequences throughout the economy that cause real harm to businesses and the jobs of people around the world. So it's really the nature of finance as a business that makes it as risky as it is, not the way it's necessarily practiced.
So, while I think tighter regulation of finance and the banking sector is certainly necessary to prevent the kinds of crises that frequently come out of the financial sector, I don't think that there's anything especially morally blameworthy about financial workers that justifies the hatred they get from ordinary people.
Tuesday, September 27, 2011
Monday, September 26, 2011
The Tale of the Insensitive BBC Trader
The latest thing that's got everyone up in arms is a day trader named Alessio Rastani, who got on the BBC and told a story where he seemed to say that he's really eager for the economy to crash so he can profit. Here's the video:
What he's saying is essentially that traders aren't concerned about the fate of the global economy-- they're looking for opportunities to profit based on market trends.
Now, I kinda get where all the outrage is coming from, but it's misguided. The reality is that no trader at a hedge fund or at Goldman Sachs or at Credit Suisse is trying to crash the global economy-- they're looking at the economy, finding opportunities, and trying to deploy their capital in a way that benefits their bottom line. Does that serve a particularly useful social function? Eh, sort of. But it's hardly something to gasp about. It's like starting a funeral service in the middle of a plague-- it's pretty unseemly, but it doesn't do anything actively malicious or harmful.
Another useful way for those who are outraged by it (who are primarily liberals) to see it is by looking at an incident that happened 20 years ago involving liberal icon George Soros. In 1992, the British government was committed to tie the value of the pound to the German mark in a step designed to allow for a smooth transition to a single currency (what would become the Euro). The British exchequer (their Treasury) committed to keep the pound valued within a certain range of the mark. But in 1992, as Germany's economy started to overheat in the aftermath of reunification, the mark strengthened in value. Meanwhile, the British were stuck in a nasty recession. Realizing that the British wouldn't be able to maintain their peg, Soros (and others) took out a massive short position in the pound-- they bought up pounds and exchanged them for marks until the British Treasury ran out of foreign exchange reserves and had to leave the ERM. The resulting devaluation allowed Britain to ultimately escape the nasty recession it was in. In the process, Soros made over $1 billion in pure profit on the trade (at the expense of, essentially, British taxpayers). Was there anything "evil" about this? I don't think so... Soros profited from a market inefficiency that the British hadn't resolved, and the end result was productive for all involved.
Broadly speaking, traders are in the same boat. They watch macro trends and profit from them (if they bet right). They're not evil agents out to undermine the economy-- they're just profiting from governments that can't fix their own economies. So instead of vilifying this clown, it's probably a better idea to vilify the German government, whose policy chokehold over Europe is set to drive the global economy off a cliff.
What he's saying is essentially that traders aren't concerned about the fate of the global economy-- they're looking for opportunities to profit based on market trends.
Now, I kinda get where all the outrage is coming from, but it's misguided. The reality is that no trader at a hedge fund or at Goldman Sachs or at Credit Suisse is trying to crash the global economy-- they're looking at the economy, finding opportunities, and trying to deploy their capital in a way that benefits their bottom line. Does that serve a particularly useful social function? Eh, sort of. But it's hardly something to gasp about. It's like starting a funeral service in the middle of a plague-- it's pretty unseemly, but it doesn't do anything actively malicious or harmful.
Another useful way for those who are outraged by it (who are primarily liberals) to see it is by looking at an incident that happened 20 years ago involving liberal icon George Soros. In 1992, the British government was committed to tie the value of the pound to the German mark in a step designed to allow for a smooth transition to a single currency (what would become the Euro). The British exchequer (their Treasury) committed to keep the pound valued within a certain range of the mark. But in 1992, as Germany's economy started to overheat in the aftermath of reunification, the mark strengthened in value. Meanwhile, the British were stuck in a nasty recession. Realizing that the British wouldn't be able to maintain their peg, Soros (and others) took out a massive short position in the pound-- they bought up pounds and exchanged them for marks until the British Treasury ran out of foreign exchange reserves and had to leave the ERM. The resulting devaluation allowed Britain to ultimately escape the nasty recession it was in. In the process, Soros made over $1 billion in pure profit on the trade (at the expense of, essentially, British taxpayers). Was there anything "evil" about this? I don't think so... Soros profited from a market inefficiency that the British hadn't resolved, and the end result was productive for all involved.
Broadly speaking, traders are in the same boat. They watch macro trends and profit from them (if they bet right). They're not evil agents out to undermine the economy-- they're just profiting from governments that can't fix their own economies. So instead of vilifying this clown, it's probably a better idea to vilify the German government, whose policy chokehold over Europe is set to drive the global economy off a cliff.
The Next Big Crisis
Even though the market meltdown in the aftermath of Lehman's collapse came after about a year of slow boiling in financial markets (beginning with BNP Paribas suspending redemptions on its subprime-invested hedge funds in 2007 and continuing with Bear Stearns's acquisition by JPMorgan and the government's placement of Fannie Mae and Freddie Mac into conservatorship), relatively few people expected the housing crisis to have as profound an effect on the global economy as it did. But now, barely 4 years after Lehman, we're seeing the same kind of build-up coming in slow motion. Except this time, the problem isn't just housing in the US and parts of Europe-- it's European sovereigns.
Now, there's a conventional story people (read: American conservatives, and, on some issues, the Germans) like to tell about why Europe's in trouble, and it's important to know that, for the most part, that story is BS. It's not "massive welfare states" and "irresponsible government spending" that have Europe on the edge of collapse-- that's a major part of the story for Greece, but if that were the story, Spain and Ireland would be fine (they had little debt and budget surpluses in 2007), and Italy would be humming along (it's got a heavy debt burden, but the budget is more or less balanced). The problem, really, is that the Eurozone is fundamentally a problem-- there's a massive mismatch between what the Germans want (low inflation) and what the peripheral countries need (monetary easing combined with fiscal stimulus). To be able to pay off their debt loads, what the peripheral countries need is devaluation-- they need their wages and prices to fall relative to Germany and France's. That would allow them to export more goods to the Germans, boost their employment, and begin to pay off their debts. But the Germans won't play along. While the press focuses on the subsidy the Euro provided to countries like Greece and Ireland (which borrowed at German rates until they didn't), there's a subsidy that Germany gets that is overlooked by the financial press. A huge chunk of Germany's economic success has come from the strength of its export sector. And that export sector has been fueled in large part by the fact that the Euro is (and has long been) valued lower than the Deutschemark would be were it still in existence. That is, while German workers are substantially more productive than Greek or Italian workers on balance, their labor is valued in the same currency units, which allows Germany to export a ton of goods and keeps its economy buzzing along. And the Germans won't readily accept higher inflation that would allow the peripheral countries to revalue because it would mean giving up some of their export advantages in the process. And internal deflation by the peripheral economies without German inflation won't work either because that would boost the real value of those countries' debts and make repayment even harder than it already is.
So Europe is stuck between a rock and a hard place-- its solution so far has been to kick the can down the road, providing loan subsidies tied to austerity demands in hopes that somehow the Greek, Spanish, Irish, Italian and Portuguese economies will magically start growing and will allow them to start making progress on repaying their debts. But that's a fool's hope. It might happen someday, but for now, there's no light at the end of the tunnel-- it looks like Europe is looking at the comatose patient and hoping the feeding tube will be enough to pull him out of his coma.
What Europe actually needs is systemic rebalancing-- it needs substantiallly higher (maybe 4%) inflation in the core countries that will make it relatively less painful for the peripheral countries to devalue compared to the core. It needs significant fiscal transfers from the core to the periphery to jump-start demand, and a Eurobond program that makes individual countries' obligations collective "European" obligations. It also needs looser monetary policy from the ECB-- hyperinflation is bad and all, but worrying about it in the current climate is absurd-- it's like agonizing over heatstroke on the North Pole. Collectively, those steps might make Europe less likely to blow up fast. But even then, it would take quite a bit of luck to diffuse the ticking time bomb on the continent.
While Europe might spend the next few months kicking the can down the road, the reality is that the continent is under speculative attack. And the attackers know that, economically, the rebalancing they're betting on needs to happen, so they'll press their advantage. That means half-measures won't go far: there are two ways to halt a speculative attack-- by definitively resolving the problem, or by caving in. In 1992, when the British pound's peg to the deutschemark was under speculative attack from George Soros and a bunch of other hedge fund giants, the attack ended when Britain had to abandon the peg and leave the exchange-rate mechanism (almost certainly for its own good). In 2008, when the stocks of the stand-alone investment banks came under speculative attack after Lehman collapsed and Merrill Lynch was acquired by Bank of America, Morgan Stanley and Goldman halted the attack by becoming bank holding companies and getting permanent access to the Fed's discount window, instantly allaying concerns about their liquidity. To resolve the issue in Europe, half-measures won't do: to avoid defaults and a rapid, disorderly blowup of the Eurozone, similarly decisive steps are essential. But right now, it doesn't look like we'll get them.
Sunday, September 25, 2011
Why Occupy Wall Street?
Social media's been riled up for the last few days over the way the police have treated the protesters who are "occupying" Wall Street this month. And at first glance, there does seem to be quite a bit wrong with the police's actions. If they did pepper spray peaceful protesters, that's inexcusable and should probably lead those policemen to face serious consequences (though it's far from conclusive from the video that they were indeed maced). But the point of this post isn't to consider whether the police's actions were appropriate or not-- if they were as unseemly as they appear, they were obviously unacceptable. The more interesting issue is whether the protesters have any basis for their actions.
Now, in scouring the internet, I really couldn't find a coherent vision behind the protests. To me, in all honesty, it seems like a case of protest more or less for the sake of protest. That's not to say that Wall Street hasn't played a role in the country's struggles right now-- it certainly was massively irresponsible for the better part of the last decade (if not the last 3), and played a role in the massive misallocation of resources that's plagued the economy. But the question that they don't seem to have any answer for is what Wall Street is supposed to change to make the country a better place. Have Wall Street professionals been overpaid for the last thirty years? Without a doubt. Is finance too big a part of the US economy? Probably. But none of that explains what Wall Street's supposed to do to fix the problems we are facing as a country. In short, if Wall Street pay was cut in half, across the board, tomorrow, there wouldn't be too many negative consequences (setting aside investments they've already made that count on them earning a steady salary), but there also wouldn't be many positive consequences.
Put simply, while cutting Wall Street pay might make a lot of people feel good about themselves, it won't improve the stagnation in the American worker's wages (which has been going on for a good three decades now, with a short pause during Clinton's second term). Nor will it fix the country's fraying infrastructure, or convince people to come together for a common cause. Wall Street is a natural target, for sure-- while the country as a whole has struggled for three decades, it's done exceptionally well, minting money and growing rapidly as a portion of the economy. But that doesn't mean that there's anything Wall Street can do to reverse that trend, or any particular reason to demonize finance as the source of the country's problems. To put it in broader terms, if the "problem" is the death penalty, then picketing the needle industry isn't a solution.
So who should bear the blame? To me, it's politicians. For decades, our country thrived on strong infrastructure, community spirit, and rising wages and standards of living across the income spectrum. It's clear that we've lost our way as a whole. However, protesting Wall Street because it has escaped that stagnation is the wrong place to go-- instead, focus on politicians who have stopped protecting the interests of the working classes and instead have focused on shrinking government for its own sake, consequences be damned.
Tuesday, September 20, 2011
Chelsea-Man United Post Mortem
On Saturday, Chelsea had a huge away match against our biggest rival, Man United. And on the scoresheet, it was ugly. We went down 3-0 at half, and never really looked like we'd win the game. But I went back and watched the game again and, in retrospect, it was as encouraging a performance as a 3-1 loss can possibly be. So here are my key thoughts from the match:
1. Chelsea were the better team-- Everyone makes this claim about their team pretty regularly, but in this case, the stats back it up. Chelsea had 22 shots to United's 14, 8 on target to United's 6, and 10 corners to United's 4. The difference in the game was one thing: United took its chances and Chelsea didn't. That's a problem on its own, but this was not a game where Chelsea got bossed or looked out of its element-- the team outperformed United, and were unlucky not to at least draw the game.
2. Andre Villas-Boas got his tactics right-- This is huge. The 33 year old manager put the squad in a position to win the game. And that's all a manager can do-- he can't make his defenders mark, he can't put the ball in the net for his forwards, and he can't make passes for his midfielders. But AVB put the squad in a position to win, and, when some things weren't working out, he made changes.
3. Fernando Torres is improving-- All anyone will talk about after this game is Torres's horrible miss. Everyone's seen it by now: he took a through ball, took a quick touch past the keeper... and shanked the ball wide with the net open. What everyone is ignoring is that he scored a brilliant goal to open the second half, and put himself in a position to score. This is three strong performances in a row now for Torres, and he got on the scoresheet against the defending champs this time. There have been two big problems for Torres: he lost his confidence after failing to score for awhile, and he's never really gotten the explosive speed he had before the World Cup back since he hurt his knee last summer. The speed is coming back now, and I think the confidence is at least moving in the right direction. If he comes back, this is a different Chelsea team.
4. Frank Lampard isn't good enough to start for this team-- It's always hard to push out a club legend, but this game really underscored the truth: Lampard, at 33 years old, just isn't a starter for a title-winning team anymore. At his best, he was a box-to-box player who ran all day, scored 20 goals a season, and provided thrust in the middle of the field. Now, he's lost the ability to outlast his opponents, and it's made him a pretty middling player for this team. He can't keep up with quicker midfielders, and his passing isn't good enough that he can operate as a playmaker. The United game made this painfully obvious: he didn't have the movement to close down space in the middle of the field, he wasn't quick with the ball, and the team improved when Nicolas Anelka replaced him at half. I don't think Lampard should be forcibly sold-- you can't get rid of a guy like him against his will-- but I think he's a squad player at this point.
5. What this team needs is... Frank Lampard-- Not today's Frank Lampard, but 2006 Frank Lampard: the Frank Lampard who brought energy to the middle of the park and chipped in regular goals. A month ago, if you'd asked me what this team needed, I would have said Luka Modric. Modric still wouldn't hurt. But Juan Mata is a guy who's very capable of playing as a creative central player (even if he plays in a more advanced role than Modric). What the team needs is a box-to-box guy. Strangely, it's not Modric the team needs, but Scott Parker, who's only a couple of years younger than Lampard, but is visibly more energetic and better able to provide the energy in midfield that this team needs. I think Moussa Sissoko from Toulouse would be the ideal signing, but he may be a year or two away.
6. This is not a 4-3-3 squad anymore-- The United game made it clear that a 4-3-3 doesn't really suit this team's strengths. Especially with Michael Essien out, three central midfielders are not optimal for this squad. Instead, at this point, I think a 4-2-3-1 is ideal. At the moment, that would mean Meireles and Ramires in front of the back four, with Sturridge, Mata and one of Anelka or Malouda behind Torres. Once Drogba comes back, he'd rotate with Torres, while Essien would work into the Meireles/Ramires rotation in central midfield. That formation would be the ideal combination of central thrust and attacking link-up play for the personnel on this team. The squad's improved performance when Lampard came off and the team went 4-2-3-1 just underscores the need to move to this formation on a permanent basis.
1. Chelsea were the better team-- Everyone makes this claim about their team pretty regularly, but in this case, the stats back it up. Chelsea had 22 shots to United's 14, 8 on target to United's 6, and 10 corners to United's 4. The difference in the game was one thing: United took its chances and Chelsea didn't. That's a problem on its own, but this was not a game where Chelsea got bossed or looked out of its element-- the team outperformed United, and were unlucky not to at least draw the game.
2. Andre Villas-Boas got his tactics right-- This is huge. The 33 year old manager put the squad in a position to win the game. And that's all a manager can do-- he can't make his defenders mark, he can't put the ball in the net for his forwards, and he can't make passes for his midfielders. But AVB put the squad in a position to win, and, when some things weren't working out, he made changes.
3. Fernando Torres is improving-- All anyone will talk about after this game is Torres's horrible miss. Everyone's seen it by now: he took a through ball, took a quick touch past the keeper... and shanked the ball wide with the net open. What everyone is ignoring is that he scored a brilliant goal to open the second half, and put himself in a position to score. This is three strong performances in a row now for Torres, and he got on the scoresheet against the defending champs this time. There have been two big problems for Torres: he lost his confidence after failing to score for awhile, and he's never really gotten the explosive speed he had before the World Cup back since he hurt his knee last summer. The speed is coming back now, and I think the confidence is at least moving in the right direction. If he comes back, this is a different Chelsea team.
4. Frank Lampard isn't good enough to start for this team-- It's always hard to push out a club legend, but this game really underscored the truth: Lampard, at 33 years old, just isn't a starter for a title-winning team anymore. At his best, he was a box-to-box player who ran all day, scored 20 goals a season, and provided thrust in the middle of the field. Now, he's lost the ability to outlast his opponents, and it's made him a pretty middling player for this team. He can't keep up with quicker midfielders, and his passing isn't good enough that he can operate as a playmaker. The United game made this painfully obvious: he didn't have the movement to close down space in the middle of the field, he wasn't quick with the ball, and the team improved when Nicolas Anelka replaced him at half. I don't think Lampard should be forcibly sold-- you can't get rid of a guy like him against his will-- but I think he's a squad player at this point.
5. What this team needs is... Frank Lampard-- Not today's Frank Lampard, but 2006 Frank Lampard: the Frank Lampard who brought energy to the middle of the park and chipped in regular goals. A month ago, if you'd asked me what this team needed, I would have said Luka Modric. Modric still wouldn't hurt. But Juan Mata is a guy who's very capable of playing as a creative central player (even if he plays in a more advanced role than Modric). What the team needs is a box-to-box guy. Strangely, it's not Modric the team needs, but Scott Parker, who's only a couple of years younger than Lampard, but is visibly more energetic and better able to provide the energy in midfield that this team needs. I think Moussa Sissoko from Toulouse would be the ideal signing, but he may be a year or two away.
6. This is not a 4-3-3 squad anymore-- The United game made it clear that a 4-3-3 doesn't really suit this team's strengths. Especially with Michael Essien out, three central midfielders are not optimal for this squad. Instead, at this point, I think a 4-2-3-1 is ideal. At the moment, that would mean Meireles and Ramires in front of the back four, with Sturridge, Mata and one of Anelka or Malouda behind Torres. Once Drogba comes back, he'd rotate with Torres, while Essien would work into the Meireles/Ramires rotation in central midfield. That formation would be the ideal combination of central thrust and attacking link-up play for the personnel on this team. The squad's improved performance when Lampard came off and the team went 4-2-3-1 just underscores the need to move to this formation on a permanent basis.
Social Security is NOT a Ponzi Scheme
One thing that's been driving me crazy over the last few weeks has been the characterization of Social Security as a Ponzi scheme. It's a popular meme among politicians on the right, and to some people it even sounds serious. People pay into the system as they work, the payouts go to those who are already retired, and so the system relies on current workers to pay the benefits of the elderly. In that narrow sense, it's like a Ponzi scheme-- those who benefit now are not those who pay now. But the resemblance ends there.
A Ponzi scheme is, to quote Wikipedia, "a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation." The first problem with the Social Security comparison is the term "fraudulent." Social security is a government insurance program, and it doesn't claim to be antyhing else-- there's nothing fraudulent about it. The second problem is characterizing it as an "investment scheme." Social security is NOT a savings vehicle-- it's social insurance. In essence, it works by paying out a fixed sum to those who reach a certain (retirement) age. That payout is funded by current taxes. If someone dies, they get nothing-- they don't have a "social security account" the way an investment fund does (and that's a crucial distinction; if George Soros has an investor who dies, Soros doesn't pocket the money invested with him and tell the guy "tough luck"; he has to return the principal to the dead person's beneficiary; the account itself is an asset, in a way that Social Security benefits aren't). A final distinction is that there's no risk of loss in Social Security: the only risk is that the program will be shut off or tweaked (which it can be at Congress's discretion).
All the talk about the disappearance of Social Security is, simply put, fearmongering. Social Security is like welfare, food stamps, or road maintenance-- Congress can choose, year over year, to fund it or not fund it. It can choose to expand benefits or cut benefits. It can raise the age at which people are eligible for it, or lower it. It's a "Ponzi scheme" in the same way that property taxes to pay for schools are a Ponzi scheme if the government decides to close pbulic schools before a family has raised school-age children: they've paid taxes, but haven't gotten benefits back.
So the right way to think about Social Security is as a combination of as a universal welfare program for the old, and a statutorily-mandated automatic social insurance policy. When state taxes fund food stamps for the extremely poor or disability benefits for the injured or unemployment insurance for the out of work, there's no assumption that someone has an "account" with the relevant organization. And there's no guarantee that someone who spends their whole life paying in will ever reap any benefits. And, like Social Security, those programs can be shut off if Congress makes the policy choice to do so.
So what's the upshot of this argument? Well, it's really simple. Social security is like any other program-- to keep it going, you need to raise enough revenue for it. If you think it's too generous, you can pare back its benefits. If you think it starts too early, you can push back the age at which it kicks in. If you think it distributes too much to some people who don't need it, you can create a means test for it. It's the same as any other program-- the rules are constantly in flux, and those rules can be changed to reflect policy preferences voiced by the general population. In short, if Social Security is a Ponzi scheme, then so is any other program paid for with taxes coming from those who don't necessarily enjoy the present benefits.
A Ponzi scheme is, to quote Wikipedia, "a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation." The first problem with the Social Security comparison is the term "fraudulent." Social security is a government insurance program, and it doesn't claim to be antyhing else-- there's nothing fraudulent about it. The second problem is characterizing it as an "investment scheme." Social security is NOT a savings vehicle-- it's social insurance. In essence, it works by paying out a fixed sum to those who reach a certain (retirement) age. That payout is funded by current taxes. If someone dies, they get nothing-- they don't have a "social security account" the way an investment fund does (and that's a crucial distinction; if George Soros has an investor who dies, Soros doesn't pocket the money invested with him and tell the guy "tough luck"; he has to return the principal to the dead person's beneficiary; the account itself is an asset, in a way that Social Security benefits aren't). A final distinction is that there's no risk of loss in Social Security: the only risk is that the program will be shut off or tweaked (which it can be at Congress's discretion).
All the talk about the disappearance of Social Security is, simply put, fearmongering. Social Security is like welfare, food stamps, or road maintenance-- Congress can choose, year over year, to fund it or not fund it. It can choose to expand benefits or cut benefits. It can raise the age at which people are eligible for it, or lower it. It's a "Ponzi scheme" in the same way that property taxes to pay for schools are a Ponzi scheme if the government decides to close pbulic schools before a family has raised school-age children: they've paid taxes, but haven't gotten benefits back.
So the right way to think about Social Security is as a combination of as a universal welfare program for the old, and a statutorily-mandated automatic social insurance policy. When state taxes fund food stamps for the extremely poor or disability benefits for the injured or unemployment insurance for the out of work, there's no assumption that someone has an "account" with the relevant organization. And there's no guarantee that someone who spends their whole life paying in will ever reap any benefits. And, like Social Security, those programs can be shut off if Congress makes the policy choice to do so.
So what's the upshot of this argument? Well, it's really simple. Social security is like any other program-- to keep it going, you need to raise enough revenue for it. If you think it's too generous, you can pare back its benefits. If you think it starts too early, you can push back the age at which it kicks in. If you think it distributes too much to some people who don't need it, you can create a means test for it. It's the same as any other program-- the rules are constantly in flux, and those rules can be changed to reflect policy preferences voiced by the general population. In short, if Social Security is a Ponzi scheme, then so is any other program paid for with taxes coming from those who don't necessarily enjoy the present benefits.
Wednesday, September 7, 2011
Klinsmann So Far: My Review
US Soccer is now a few games into the Jurgen Klinsmann era, and the results so far have been... less than inspiring. On the surface, two losses to Belgium and Costa Rica, and a draw against Mexico don't look so hot. The press and Twitter are starting to buzz about whether Klinsmann is the right guy to take the US forward after all. Even though I was initially very skeptical of the Klinsmann choice, I'm definitely open to the idea that I might have underestimated. So I'll run down my thoughts so far.
First things first, three friendlies is NOT a sufficient sample size to decide much of anything. Friendlies are friendly for a reason-- the result is secondary to learning things about your team. And probably the biggest positive for me has been Klinsmann's willingness to bring a wide range of players into the mix. Against Mexico, Edgar Castillo and Michael Orozco Fiscal got into the mix at the back, and Jose Torres got another run out in midfield, along with Kyle Beckerman. Edson Buddle was included up top. Brek Shea got looks against Costa Rica and Belgium. Even Jeff Larentowicz was brought on in the last game. Now, the counter-argument is that the experimentation didn't necessarily do all that much good-- Shea was one of our better attacking players in both games he played, but Torres was OK against Costa Rica but pretty bad against both Mexico and Belgium. Orozco Fiscal was mediocre both times he ran out. Buddle was terrible against Mexico. Castillo was so bad in his two appearances, I found myself wishing for the Jon Bornstein days. But even though none of the new(er) faces, besides Shea, showed much, that doesn't mean that trotting them out wasn't valuable. The more guys get on the field, the more we know about them, and seeing a wide range of players was very useful, as much for figuring out who definitely can't make the cut (Castillo) as for figuring out who might. Klinsmann was also willing to experiment withe personnel-- he tried Timmy Chandler at left back to get him and Steve Cherundolo on the field at the same time. Cherundolo's probably still a better right back at this point, but Chandler mostly held his own on the left, which was doubly impressive given that Belgium deployed one of the world's best young wide players in Eden Hazard on his wing.
So we've definitely gotten a look at a pretty broad range of guys, which I think is indisputably a good thing. Now, on the downside, I think Klinsmann is trying to coach the squad he wishes he had rather than the one he has. Against Mexico, he trotted out an odd 4-1-4-1, with three central midfielders in the middle, and a fourth deployed out wide, with a fifth sitting in a holding role. The result was (predictably) Bradley and especially Jones struggling to create much on the attack, and Torres drifting out of the game. Against Costa Rica, we got a weird 4-3-3, with Donovan lined up as an attacking center mid next to Torres and Maurice Edu behind them. Against Belgium, it was back to the 4-1-4-1, with Dempsey and Torres in the advanced central midfield role, and Edu sitting behind them (at least this time there were two real wide players in Shea and Robbie Rogers on the field instead of 5 center mids; ignore for a second that Rogers stinks).
My problem with these formations is that they're essentially built for attacking teams with midfielders who can retain possession under duress and unlock defenses with their passes. Spain can pull it off because Xavi never gives the ball away, and Iniesta, Xabi Alonso and Busquets are all very, very comfortable on the ball. The US's strength is our center mids' discipline and energy. But they're unremarkable passers at best, and they will make mistakes if they're pressured. Our biggest weakness is a lack of a natural playmaker, and no natural goalscorers up top.
These limitations scream out for a 4-2-3-1. Which four are at the back is an open question-- Carlos Bocanegra's been playing well in the middle (though he's getting up there in years; hopefully one of Omar Gonzalez or Tim Ream will develop into a reliable option there by 2014), and Cherundolo still deserves his spot at right back (though by the time the next World Cup rolls around, it'll almost definitely be Chandler's spot, as Cherundolo will be a geriatric 35 by then). Otherwise, I think Clarence Goodson is probably the front-runner next to Boca, as he's good in the air and is usually in position. Left back is still a problem-- Bornstein still stinks, and Castillo may be worse. Eric Lichaj is injured now, but he's probably the most promising option there. In the two holding spots, I like the idea of an Edu-Bradley partnership. They've both played pretty well in their last few appearances (Edu especially), and their passing isn't bad for that spot. Then, I like the idea of putting Jozy Altidore up top with Clint Dempsey in the central attacking mid role behind him-- Clint Dempsey's our most creative player, our best dribbler, and also probably the best goalscorer. I think the hole is the best place for him. But we do have a problem out wide-- Shea is showing me some nice qualities, but the other spot is wide open. Landon Donovan is still the best option there, but he'll be 32 by 2014 (old for a wide player, especially one who relies as much on his speed as Donovan), so I'd prefer to see him phased out. Ideally, Freddy Adu will develop into a viable option in the hole, and then Dempsey can be shifted out wide (he's only a year younger than Donovan, but he's better technically, which I think will allow his game to age better). While there are still a few years before the next World Cup, I'd like to see Klinsmann tailor his system to the personnel he's got rather than vice versa. Spain's 4-3-3 is great when you've got Xavi, Busquets and Iniesta in midfield. It's less great when you've got Edu, Jones and Bradley. Klinsmann should recognize those limitations and build his system around the players he's got, not vice versa.
First things first, three friendlies is NOT a sufficient sample size to decide much of anything. Friendlies are friendly for a reason-- the result is secondary to learning things about your team. And probably the biggest positive for me has been Klinsmann's willingness to bring a wide range of players into the mix. Against Mexico, Edgar Castillo and Michael Orozco Fiscal got into the mix at the back, and Jose Torres got another run out in midfield, along with Kyle Beckerman. Edson Buddle was included up top. Brek Shea got looks against Costa Rica and Belgium. Even Jeff Larentowicz was brought on in the last game. Now, the counter-argument is that the experimentation didn't necessarily do all that much good-- Shea was one of our better attacking players in both games he played, but Torres was OK against Costa Rica but pretty bad against both Mexico and Belgium. Orozco Fiscal was mediocre both times he ran out. Buddle was terrible against Mexico. Castillo was so bad in his two appearances, I found myself wishing for the Jon Bornstein days. But even though none of the new(er) faces, besides Shea, showed much, that doesn't mean that trotting them out wasn't valuable. The more guys get on the field, the more we know about them, and seeing a wide range of players was very useful, as much for figuring out who definitely can't make the cut (Castillo) as for figuring out who might. Klinsmann was also willing to experiment withe personnel-- he tried Timmy Chandler at left back to get him and Steve Cherundolo on the field at the same time. Cherundolo's probably still a better right back at this point, but Chandler mostly held his own on the left, which was doubly impressive given that Belgium deployed one of the world's best young wide players in Eden Hazard on his wing.
So we've definitely gotten a look at a pretty broad range of guys, which I think is indisputably a good thing. Now, on the downside, I think Klinsmann is trying to coach the squad he wishes he had rather than the one he has. Against Mexico, he trotted out an odd 4-1-4-1, with three central midfielders in the middle, and a fourth deployed out wide, with a fifth sitting in a holding role. The result was (predictably) Bradley and especially Jones struggling to create much on the attack, and Torres drifting out of the game. Against Costa Rica, we got a weird 4-3-3, with Donovan lined up as an attacking center mid next to Torres and Maurice Edu behind them. Against Belgium, it was back to the 4-1-4-1, with Dempsey and Torres in the advanced central midfield role, and Edu sitting behind them (at least this time there were two real wide players in Shea and Robbie Rogers on the field instead of 5 center mids; ignore for a second that Rogers stinks).
My problem with these formations is that they're essentially built for attacking teams with midfielders who can retain possession under duress and unlock defenses with their passes. Spain can pull it off because Xavi never gives the ball away, and Iniesta, Xabi Alonso and Busquets are all very, very comfortable on the ball. The US's strength is our center mids' discipline and energy. But they're unremarkable passers at best, and they will make mistakes if they're pressured. Our biggest weakness is a lack of a natural playmaker, and no natural goalscorers up top.
These limitations scream out for a 4-2-3-1. Which four are at the back is an open question-- Carlos Bocanegra's been playing well in the middle (though he's getting up there in years; hopefully one of Omar Gonzalez or Tim Ream will develop into a reliable option there by 2014), and Cherundolo still deserves his spot at right back (though by the time the next World Cup rolls around, it'll almost definitely be Chandler's spot, as Cherundolo will be a geriatric 35 by then). Otherwise, I think Clarence Goodson is probably the front-runner next to Boca, as he's good in the air and is usually in position. Left back is still a problem-- Bornstein still stinks, and Castillo may be worse. Eric Lichaj is injured now, but he's probably the most promising option there. In the two holding spots, I like the idea of an Edu-Bradley partnership. They've both played pretty well in their last few appearances (Edu especially), and their passing isn't bad for that spot. Then, I like the idea of putting Jozy Altidore up top with Clint Dempsey in the central attacking mid role behind him-- Clint Dempsey's our most creative player, our best dribbler, and also probably the best goalscorer. I think the hole is the best place for him. But we do have a problem out wide-- Shea is showing me some nice qualities, but the other spot is wide open. Landon Donovan is still the best option there, but he'll be 32 by 2014 (old for a wide player, especially one who relies as much on his speed as Donovan), so I'd prefer to see him phased out. Ideally, Freddy Adu will develop into a viable option in the hole, and then Dempsey can be shifted out wide (he's only a year younger than Donovan, but he's better technically, which I think will allow his game to age better). While there are still a few years before the next World Cup, I'd like to see Klinsmann tailor his system to the personnel he's got rather than vice versa. Spain's 4-3-3 is great when you've got Xavi, Busquets and Iniesta in midfield. It's less great when you've got Edu, Jones and Bradley. Klinsmann should recognize those limitations and build his system around the players he's got, not vice versa.
Subscribe to:
Posts (Atom)