McDonalds

It has been a long time since I’ve looked closely at the McDonald’s menu. When I was a boy, the the menu was pretty simple. They had hamburgers, cheeseburgers and the fish sandwich. On the rare occasion when I eat there, I still get a cheeseburger and a fish sandwich. Maybe I’ll do the one dollar chicken sandwich. Otherwise, I could not name five things on their menu. I suppose they still sell the Big Mac and fries, but the rest is a mystery I’m happy to ignore.

This story on Yahoo tells me they have 121 items on their menu. I’m not sure how that’s possible, but maybe they are counting things like ketchup packs. Still, how in the world did they let that happen? The whole point of fast food is it is simple, cheap, fast and consistent. The fish sandwich in Boston as in Minneapolis. It generally costs the same and is delivered the same. Given the general stupidity of the American people, 121 offerings just means it will undermine the whole effort.

In California, there is a chain called In ‘N Out Burger. They offer a cheeseburger, a hamburger, a double burger and fries. The food is good, the service is quick and the experience is consistent from restaurant to restaurant. It is what McDonald’s used to be fifty years ago. Chick-fil-A is the same concept, except they do not permit homosexuals in their stores.  Anytime I see one of these restaurants, they are packed. It turns out that McDonald’s was right the first time. People don’t like diversity.

It is the great lie of modern times that people like options. That’s nonsense. People are social animals. We like belonging to a group. That’s our nature. It’s why there are Pepsi drinkers and Coke drinkers. We have two types of cola. Then we have the oddball stuff for the weirdos, but it is a tiny market. When was the last time you heard someone order an RC Cola or a Moxie? No, people like a few choices so we can divide ourselves up into simple groups. Otherwise, diversity is always a bad thing.

The Ad Scam

Many moons ago, I sat through a presentation by the director of marketing for a company where I was working. He put up charts and graphs showing the effectiveness of the various market programs. It was very well done, but complete bullshit. Talking with the guy after his presentation, he admitted as much.

There was no way to measure the effectiveness of his programs. I had been tasked with trying to come up with a way to do it, which was why I was in his presentation. To the guy’s credit, he knew there was no point in trying to fool me so he came clean. He was just making assumptions from anecdotes and wishful thinking.

The guy was not an asshole or a crook. He was doing his job like every other marketing guy. His bosses and coevals made all the same assumptions he made and relied on the same pseudo-logic to justify the marketing budget. Everyone just assumed smart people had worked it all out a long time ago.

That’s why every great company spent money on ads, campaigns, promotions, etc. The one very memorable thing he said was that he made sure to spend a little more than his budget every year. That way, he would get  a bigger budget the next year.

I’ve always wondered if there would come a time when companies figured out that much of their advertizing was a waste of money. Dr. Pepper spends millions on college football, but their product still tastes awful. The percentage of people who will like odd flavored soda is fixed. No amount of advertizing with change it. Beyond product awareness and sales, advertizing strikes me as rather pointless. As I type this, I’m watching an ad for something that may be for clothes or possibly wheat. I have no idea and doubt anyone else does either. Millions were spent for something and I doubt the company will see a nickel in return.

On TV, most of these ads are filtered out by our brains as background noise. On-line, they are blocked by the browser and browser add-ons. I suspect most of us have become so good at blocking out web ads that we don’t even notice them. When I bother to look, I wonder why anyone would be spending money on them. Sites that lard up on ads, like Brietbart and the Daily Caller, I tend to avoid. If I have to close eight windows and then find and mute some stupid video in order to get to your site, your site sucks.

Of course, it has long been suspected that skimmers like Facebook use click farms to scam companies into advertizing with them. This video from earlier in the year is pretty good. No one has ever bothered to refute it. It has been known for a while that there are “like farms” for hire that will boost a Facebook page for a fee. Twitter has been plagued by zombie accounts to boost the follower counts of celebrities. The fact that Facebook, and presumably others, is using robots and click farms to scam advertisers should not shock anyone. The degree is the question. How much of scam is on-line advertising?

It appears half of these ads are never actually seen by humans.

Online advertising is a fickle thing. It accounts for 20% of the ad industry’s total spending, and over 90% of revenue for the internet giants Google and Facebook. That said, no one seems to have any idea whether it actually works.

That uncertainty reached a new high this week, as Google announced that 56.1% of ads served on the internet are never even “in view”—defined as being on screen for one second or more. That’s a huge number of “impressions” that cost money for advertisers, but are as pointless as a television playing to an empty room.

This is not a big revelation. The web metrics company ComScore reported last year that 46% of online ads are never seen. Spider.io, an ad fraud company acquired by Google in February, has pointed out that a large portion of ads are “viewed” only by robots, revealing that one botnet of 120,000 virus-infected computers viewed ads billions of times, running up the tab for advertisers without offering them the human eyeballs they sought.

Still, the acknowledgement by a heavyweight such as Google that ad viewability is a problem could shake up the industry by delaying possible IPOs of ad companies and requiring new ways for advertisers to gauge the effectiveness of their ads.
The nineteenth-century retailer John Wanamaker famously said, “Half the money I spend on advertising is wasted. The trouble is I don’t know which half.” In this case, it’s the obviously the half that pays for ads which are never seen, and now advertisers are looking for new tools to figure out which those are.

It’s worth noting that Google made this acknowledgement of the deficiency of the model it has profited richly from while also offering a new model to advertisers: In July it introduced its Active View product, which measures only viewed ads.

This goes back to the puzzle of Facebook and Twitter. How can they be worth billions? Yeah, they have lots of users, but so what? Those users pay them nothing. The ads on Twitter are minimal and you can’t even see them on your phone. I don’t do Facebook anymore, but the ads I used to see were mostly scumbags like dating services and fake medicines. At some point, the guys writing the checks will figure out they are wasting 100% of their money these sites.

Stupid People With Money

The IQ guys swear that high IQ strongly correlates to success. That’s tempting to believe until you start thinking about the fabulously successful people who were also incredibly stupid. Caligula is the guy who comes to mind whenever someone mentions intelligence and our political leaders. Caligula was clever at times, but no one would call him intelligent. He managed to screw up so much he was murdered after just four years as emperor. Granted, he was probably mad, but that just underscores the fact you can get pretty far without being terribly bright.

One of the most oddly successful salesman I ever met was very dumb. He sold auto accessories to retail stores and job shops. He worked hard, had a great personality and was willing to spend all day selling gaudy crap to people who had customers looking for gaudy crap. He was also a white guy willing to go into the ghetto. He made a lot of money because he had the right products and the right attitude. He had a big house and a Cadillac, along with an 95 IQ.

When I was a teenager, I talked my way into a graduate seminar on proto-Marxism taught by a guy who was jarringly brilliant. He spoke five languages, could write in seven. He had a masters in math as well as a PhD in history. I don’t think he had two nickels to rub together and I doubt he cared. He drove a car that looked like it would collapse in a heap at any minute. I’m not sure if he was the smartest person I’ve met, but he is a good example of how a high IQ does not necessarily mean a high status, big money or even success in a narrow field.

There’s that and then there is the fact that serendipity plays a determinative role at the extremes. Germanicus, the father of Caligula, was a smart and accomplished guy, but he was unlucky and just a click less smart than Tiberius, who had him killed. Caligula was outlandishly lucky to find himself in the role of emperor. Of course, his successor was probably the luckiest man who ever lived. Claudius was an able emperor, but his rise to power still fascinates classicists because of its improbability. His relatively long reign is just as improbable.

In modern times, we have seen some people hit the lottery and become billionaires, despite not being terribly bright. Mark Cuban is a good example. He is a hustler and a risk taker. He does not mind making a spectacle of himself in public. He also got outlandishly lucky when fools totting dot-com money bought his worthless company for billions. The Facebook boys were similarly lucky. The proof of that is MySpace is the same product, but never caught on like Facebook. Mark Zuckerburglar is not stupid, but he is not a billion time smarter than you.

That’s what we’re seeing here with the death of the New Republic. The venerable progressive journal founded by the Mussolini loving Herbert Croly was recently purchased by Facebook lotto winner Chris Hughes. That was two years ago and now he has decided to turn it in Gawker, because he likes saying the phrase “digital media property.” The staff resigned en masse this week, making a big show of it for each other.

The Communications Revolution, like the Industrial Revolution, has created a lot of very rich people. Some of those rich people are super-rich, like Chris Hughes. The cultural elite of every society lives off the generosity of the financial elite. They don’t always live well, but the arts can only exist with the ascent and support of the monied elites. One of the fun parts about Nero’s biography is what we learn about the status of entertainers. In Rome, they were the bottom of the social order, even though they were supported by the ruling elite.

The current cultural elites have always lived in a world where the rich are willing to write checks for the privilege of mingling with the intellectuals. Journals like The New Republic never made money, but they got rich patrons to bankroll them so the writers could have nice middle-class lives. National Review, for example, purged all of their conservative writers because their patrons demanded it. Guys like John Derbyshire and Bob Weissberg refuse to go along with the official dogma so they were sent to the fringe.

The new money appears to be different from the old financial backers. The robber barons from Silicon Valley are not interested in hanging out with smug progressive writers. They want to hang out with ball players and starlets. That means the New Republic has to become a gossip site based in New York or Los Angeles, not a journal of dogmatic political thought serving the homely people of Washington. Never mind that there are plenty of gossip sites and the value of the New Republic lies in its ties to the Washington power elite.

It will be interesting to see this unfolds. The Cult is not going to take kindly to having their friends unemployed because some rich Nazi wants a different toy. Robber barons like Chris Hughes have the money to put up a good fight, but the Cult has the power of the state. They also know how things work, which apparently Chris Hughes does not. If he was half as smart as he thinks, he would have used TNR as a way into DC’s power elite. Then again, the Golden Rule says the man with the gold makes the rules.

From WW1 through the 1970’s we did not see the creation of great fortunes. Great fortunes are made at the start of great economic revolutions. That left a long time for the relationships between the cultural, political and financial elites to settle in place. The Communications Revolution has created a whole new batch of great fortunes. The first batch, Larry Ellison, Bill Gates, Paul Allen, Steve Jobs, etc were happy to ape the style and manner of the established great fortunes. That meant buying their way into the cultural and political elites, without making any demands. The second batch of great fortunes is not looking to follow that path.

We now have a lot of stupid people with money buying up elite real estate, physical and mental. That will not be without consequence.

Unter

Way back when the phrase “new economy” caused economists to swoon, cynics made sport of them and the idiocy of the dot-net boom. I recall a conversation with a friend who was involved with a dot-com back in the 1990’s. I kept asking him how they made money and he kept talking about hits and stickiness and other nonsense. I kept trying to get an answer and he finally got frustrated with me and said I did not get the new economy. The company burned through all of its cash in about six months and went bust.

The tech boom was driven, in part, by free money from the credit boom. It is not an accident that the tech boom quickly followed the Louvre Accords, which codified the floating exchange rate currency system we enjoy so much today. All of a sudden there was cheap money for all sorts of crackpot ideas. Some turned out to be revolutionary, while others turned out to be insane. The information grid is an example of the former. The financial services industry is an example of the latter.

This post at Marginal Revolution and many others like it at various other places make me laugh. The new buzz phrase is “sharing economy” which is as devoid of meaning and value as the people who like to use it. The vapid hipsters love prattling on about Uber and how it is “disruptive” as if that is always a good thing. Earthquakes are disruptive. The Black Plague was disruptive. Like everything else today, Uber is about signaling. You are a beautiful person if you think Uber is the best. You are a loser if you think it sounds like a handful of sharpies convincing hipsters to be gypsy cab drivers at below market rates.

That is the thing about the “sharing economy.” It is not new. Ross Perot got rich doing much the same thing in the 70’s and 80’s. In the old days, computers were expensive. Companies would sell their idle time to guys like Perot who would find customers in need or processing power but lacking the money to buy their own mainframe. It was the technological equivalent of the oxpecker bird and rhino. The bird picks ticks and parasites from the hide of the rhino and functions as a warning system. The rhino can live without the bird but lives better with him.

Perot and others could make a business out of renting processing capacity because it was very expensive in the old days. When processing costs plummeted in the 80’s and 90’s that “sharing economy” went away. In other words, the “sharing economy” was just a transitional phase, not a desirable economic arrangement. The companies renting their mainframes rented them out to defray the cost of ownership. The renters wanted their own mainframe, but they could not afford it. The solution was a temporary one until the preferred solution was available.

Ride sharing “works” now in the same way. In most cities, taxi service is regulated by the municipality. That means lots of costs on the taxi company. They are real companies so that means they have to abide by labor laws, zoning laws, OSHA regs, insurance regs, etc. Of course, it is not cheap to maintain a cab. The cabs take a lot of abuse and they need a lot of service. The end result is a price for cab service the hipsters in these cities think is too high, so they are searching out alternatives. In steps Uber.

Unlike the old sharing economy, the new sharing economy borrows from the new new economy or economy 2.0 or whatever. That is, the money is made in shifting the cost onto unsuspecting third parties and/or by not complying with the laws that govern everyone else. Amazon avoided sales tax. Google and Netflix shifted costs to non-customers. Media companies taxed people through their cable bill. In the case of Uber, they are not abiding by the municipal laws that govern the livery business. Instead of having cabs, licenses, insurance, and employees driving the vehicles, they shift those costs onto their customers.

If you look at the Uber website, they make the claim that you can drive for them without incurring the wrath of your local government or your insurance company. Neither is true. My insurance specifically says it does not cover me as a hired driver. They will not cover my car if it is used for hire. Similarly, my state does not permit me to rent my car without a permit and a special license plate. But that’s not Uber’s concern. They will not be paying the fines or the insurance premiums.

That is what gets missed in the gushing over companies like Uber. If your wife gets raped by the Yellow Cab driver, the company pays the price. Not only does their reputation suffer, but they also get investigated by the authorities and they get sued by the victim. Therefore, they have a strong incentive to keep their cabbies from raping their fares. If the Uber guy rapes your wife, that is your problem. Uber is not accountable. That is an extreme example, but that is the point. We have these laws because of extreme examples in the past. No law sprung from nothing. Every one of them is there for a reason.

To wrap this up, let us circle back to the old days of renting our mainframe time. Back then, the companies renting the time had an expensive asset they want to maximize. The renter was looking for a lower cost alternative to the million dollar mainframe. Cabs are cheap. No one gets rich driving a cab. How desperate do you have to be to be an Uber driver? How hard up are you if you want to take a ride from some hard up weirdo you met on-line?

Forty years ago, a symbiotic relationship between mainframe users was a temporary solution to bridge the gap between the now and better future. Uber represents a desperate attempt to squeeze the remaining juice from the lemon of the modern economy. It is the equivalent of a widow taking in laundry and borders in order to pay rent. It is not something signaling a better future. It is a desperate attempt to delay the inevitable decline. Maybe they should have named the company “Unter.”

Free Riders

An age old problem in human society is the free loader problem. Economists prefer to phrase it as the “Free Rider Problem” so as not to drag in those icky moral and cultural issues. I prefer to use the more appropriate phrase, “free loader” as that’s the real problem. People unable to provide for themselves are not a problem, even for poor human societies. Every society, not matter how rich, is plagued by a slice of humanity that chooses to live off the labor of others, even when alternatives are available to them.

The better term may be the “entitlement problem” but that one has been claimed for other purposes. An example I like to use is the pizza problem. In my youth a friend had a roommate, who was from a very wealthy family. Having grown up unaware of the restraints the rest of us faced, he had a sense of entitlement. He just expected people to wait on him. Whenever we ordered a pizza, this guy would eat more than his share and never chip in for the bill, unless asked. He seemed oblivious to the fact that food cost money and the rest of us had to concern ourselves with the fact we lacked an abundant supply of money.

That’s one side of the entitlement coin. Spend any time around the very rich and you bump into this. When I worked for a Congressman in my youth, he and his family were often stymied by mundane things like buying gas. They never carried cash and did not have credit cards. Someone else was always there to pay the bill so when caught needing to actually pay for something, they would be stumped. The thing about it is there was always someone there to solve the problem for them. A sense of entitlement can carry you a long way in society.

The other side of the coin is the underclass.It is generally assumed by the ruling class that the lower class is just too dumb to do anything other than be poor. That’s often the case. There are a lot of very stupid people in the ghetto. But, they are not so stupid that they cannot provide for themselves. Instead of investing their time into middle-class pursuits, they work the welfare system, learning all the ways to maximize their return, while minimizing their investment. After all, they are entitled.

That’s the thing you see with the under-class. They view themselves as dependent and they can’t imagine things arranged any other way. Government and the rich people who run it owe them free housing, free food, free booze and so forth. In a weird way the under-class is like modern hunter-gatherers. They forage around their environment, in this case the ghetto and the custodial state that supports it, for the necessities to live. Every once in a while, the males engage in violent conflict with males from other tribes. Afterwards, they get high, eat and screw.

The point of all this is humans have been trying to figure out how best to handle the free rider problem since forever and we still struggle with it. The best way we have discovered is to have everyone pay their own way. A radical idea that has been tried in a few places with surprising success. Colonial New England is probably our best example locally. People were expected to pay their own way, take care of their families and not be a burden on their neighbors. Charity existed, but it existed with lots of strings. Those strings were intended to discourage you from needing charity. I used to live near an old almshouse from the 18th century, for example.

All that was considered crazy so we have struggled to come up with better answers. A good example how the struggle is going is Net neutrality. For reasons he most certainly does not understand, President Obama is pushing for the FCC to arbitrarily force ISP’s to treat all traffic the same.

President Obama urged the US government to adopt tighter regulations on broadband service in an effort to preserve “a free and open Internet.”

In a statement released Monday, Obama called on the Federal Communications Commission to enforce the principle of treating all Internet traffic the same way, known in shorthand as Net neutrality. That means treating broadband services like utilities, the president said, so that Internet service providers would be unable “to restrict the best access or to pick winners and losers in the online marketplace for services and ideas.”

Obama wades into a contentious debate that has raged over how to treat Internet traffic, which has only heated up as the FCC works to prepare an official guideline. Those rules were expected to be made available later this year, though reports now claim they may be delayed until early 2015. The debate has centered on whether broadband should be placed under Title II regulation under the Telecommunications Act, which already tightly controls phone services.

Proponents argue that Title II regulation would ensure the free and fair flow of traffic across the Internet. Opponents, however, believe the reorientation would mean onerous rules that would limit investment in the infrastructure and in new services, and that toll roads of sorts would provide better service to companies that can support their higher traffic volumes. But that in turn has created widespread concern that ISPs could throttle service in some instances, intentionally slowing some content streams and speeding others.

The problem is the Internet is not a utility. A utility is a special sort of monopoly that provides a specific product that is the same for all customers. Rich people get the same electricity as poor people. The utility charges by the unit at the same rate for all users. The Internet is a wildly varied service that is valuable only because of a millions of other businesses that sells products and services over the Internet. But, there are loads of companies transferring their costs to people who do not use their service, via the miracle of the cable bill. Facebook is the most obvious example.

The problem we have is a variation on the classic Tragedy of the Commons. The public, through their governments, allowed private industry to use public resources to construct the Internet, including the massive cable TV network. In many cases, these companies were paid to build out infrastructure. All of them rely on free access to public roads and sidewalks to maintain their networks, like any other utility. Unlike the electric grid, the Internet is a virtual market place, The ISP charges rent to anyone who sets up shop and charges access to anyone who wants to buy products offered on-line.

Well, sort of.

I pay much more for Internet service that I probably should, given my usage. I don’t watch movies on-line or listen to music on-line very often. The guy down the road has a bunch of kids who each use ten times the bandwidth I use. Their Internet bill is the same as mine. The costs are socialized so he can get cheap movies and I can get expensive e-mails. Much like the cable bill, we have a inverse of the utility model. Instead of metered billing, everyone pays the same, regardless of usage. The ISP’s want to implement what amounts to metered billing, like a utility, except the government is trying to stop them, because they say they are a utility.

Stop Trying To Sell Me Stuff

Over Labor Day I was at the Boston College – UMass football game. The crowd was small, maybe 30K, but it could have been less. It was a “home game” for UMass so the Boston College fans were maybe half the crowd. Labor Day in Boston is not a great time to hold a sporting event, but for some reason they did it anyway.

The small crowd meant I could get the full marketing blast from the people who run the sports facility. That means the blasting of music, video ads everywhere and constant haranguing by the public address man to pay attention to a sponsor. I think even toilet breaks were brought to us by some corporate sponsor.

This is why live sporting events struggle to maintain attendance. Across all sports attendance is flagging. Sports marketing people always think more is better, so we get more and more marketing. More video boards. More screaming PA guys. More rock music. More side crap to draw our attention away from the game to pay attention to something or other brought to us by MegaCorp. The argument in favor of this is that sitting at home has become so good, they have to make going to the game like home, but with more ads. Always more ads.

I had club seats for the game so we went inside to avoid being screamed at by the PA guy and the deafening rock music. I asked someone about this nonsense and they told me that young people like it. That’s the catch all of all marketing campaigns. Young people like it. There’s never any evidence of this, but marketing people always say it.

The fact that young people have no money is never mentioned. No one ever points out that the blaring music is thirty years old and the young people make sport of it when outside of earshot. But, it’s hardly the point. The point is no area of daily life can be free of marketing.

No matter what it is, if people like it, the dreary dickheads from the business schools will demand they ruin it with ads no one watches. This letter to the editor in the Roanoke Times gets to the heart of the matter. Being told by some dimwit when to cheer and where to look is insulting. Adults can tolerate a little of it, but there are limits.

The same is true of the barrage of ads. Everyone gets that marketing dollars are a part of the business. The teams cannot live on the billions in ticket and merchandise sales, so they have to “leverage” their fan base in order to “monetize” the popularity of their sport and maximize their market position.

It used to be that commercial TV had ads because the service was free. You got the free service because they got to sell airtime to people trying to sell you stuff. Pay cable was supposed to be commercial free. Now it is not only packed with ads, they sell your personal data to marketing firms who use it to sell you crap on your phone or your browser. The whole racket now is to get you to pay them to send you ads. Sports fans are rationally forgoing the attendance costs because they can at least change the channel when the ads are jammed in their face during the game if they on their couch.

This is how it goes when everything is based on the madness of growth. It’s not enough to be a stable, profitable business. You can’t because the people in charge are systematically eroding those profits with currency manipulation. Your costs keep going up because your money keeps losing value. In 1984, I could get into the Red Sox game and have a beer for $10.00. The ticket was $6 for a bleacher seat and a beer was $3.50. If I did not want a beer, I could get a couple of dogs and maybe a coke, if I had some change. Adjust for inflation and that ten bucks gets half a beer today, as long as it is domestic. At the football game over Labor Day, I paid ten bucks for a slice of pizza.

That means everyone all the time has to be raising prices, lowering value and finding new customers. Big operations like football teams have to charge for everything. Breathing will soon be taxed. We’re not far from the day when the toilets will have credit card readers. The other option will be standing their watching ads while you wait for the hopper. Before you can sit, you’ll have to fill out a marketing survey.

This has to end. By that I mean, it cannot go on like this forever. I’m saturated. I can take no more. Even those with a higher threshold for this stuff have a finite amount of time and money. The stone will run out of blood eventually. Then what?

 

Protection Rackets

Much of what is called the “new economy” is just an updated version of the old economy. Netflix, for example, transfers their infrastructure costs onto you, even if you don’t use their service. Their streaming service relies on the Internet and the cost of growing bandwidth is in your cable bill. Facebook exists because they don’t have to pay to put their site on your PC. You pay for it. Cost shifting is a big part of the new economy and in some cases it is outright extortion.

First the chefs of a small Italian restaurant got mad at online review site Yelp. Instead of trying to get better reviews, they decided to take a different approach: get terrible ones.

The campaign helped Botte Bistro get a rating of one out of five stars, as more than 1,000 reviewers left hundreds of tongue-in-cheek reviews panning the Richmond, California, eatery, said chef Michele Massimo, adding that it boosted business.

It was the latest protest among businesses who for years have complained that Yelp was extorting them by raising or dropping ratings depending on whether they advertised with the Internet’s most popular review site.

Yelp has persistently denied those claims on its website, in court and at every opportunity when the question is put publicly to the company.

“It wouldn’t pass the straight face test,” Yelp spokesman Vince Sullitto said of the extortion claims.

Sullitto said Yelp attracts millions of viewers and sells advertising to 80,000 businesses because of the site’s credibility with consumers. Sullitto said many of the company’s critics are businesses that have received bad reviews.

Last month, the 9th U.S. Circuit Court of Appeals tossed out a lawsuit filed by several businesses claiming Yelp extorted them by removing positive reviews after advertising sales pitches were turned down.

The court is one rung below the U.S. Supreme Court and the ruling could have been a definitive one for Yelp.

Instead, it served to fuel the company’s critics because the court said that, even if Yelp did manipulate reviews to penalize businesses, the practice would not constitute extortion.

The court said it found no evidence of manipulation and that it was ruling narrowly only on the question of extortion. Nonetheless, the company’s critics said the ruling supported their claims.

Even before the 9th Circuit ruling, Yelp was battling two lawsuits filed by company investors who make similar extortion claims.

The suits, filed in San Francisco federal court over the summer, allege that the company’s stock traded at artificially inflated prices because the “company tried to sell services designed to suppress negative reviews or make them go away” and then lied about it.

The company has yet to formally respond to the lawsuits in court, but says it will fight these legal actions as well.

Last year, a lawyer serving as a small-claims judge in San Diego likened Yelp to a “modern-day version of the Mafia going to stores and saying, ‘You want to not be bothered? You want to not have incidents in your store? Pay us protection money.'”

This is not a new thing. Trade magazines have played the same game for years. Good reviews could make or break a product and the way to ensure it was to buy ads in the trade magazines. At the same time, writers would know they better play ball and say nice things about the products from their advertisers. It was not a formal arrangement, just a natural one. Everyone had an interest in promoting the product.

Yelp and other review sites have simply expanded the model to the Internet and every consumer business. Proving they are manipulating their rankings is never going to be easy, but it is hard to imagine they are not doing it. The bias will always be in favor of their customers who are the people sending them money, not the dingbats writing reviews. That’s what “new economy” types often forget. The customer is the guy writing the checks and he always comes first. In this case, the review site will look out for those businesses that pay for ads.

Information Asymmetry

I’ve written in the past that public debt will one day be banned in the reforms that come after the great collapse. I’m half joking about the great collapse stuff, but history says we are due for a Bronze Age Collapse. The reason I think the banning of public debt will be on the list of reforms is we keep seeing these stories about American cities being swallowed up by debt payments.

Among the many ideas the Chicago Teachers Union have come up with over the years to save big money or generate gobs of new revenue for our cash-strapped city, a favorite involves what they like to call “toxic” interest-rate swaps deals.

Here’s the perennial claim, which is making a comeback as CTU President Karen Lewis contemplates a run for mayor:

The city and the school system have thrown away hundreds of millions of dollars after being duped by big banks into signing deals that locked in excessive interest payments. If only the city would take legal action, CTU again argued in a letter to the mayor last month, the money could be recouped and spent on city services and in classrooms.

Cities went out and made deals with Wall Street that looked good in the moment. They freed up cash to buy votes and pay off cronies. States did similar things with synthetic debt instruments like tobacco bonds. All across the country we see examples of states and municipalities struggling with bad debts. That’s not bad debt owed to them but bad debts incurred by previous administrations.

The libertarians simply shrug and say they should suffer. The neocons produce 5,000 page plans to restructure the debt using more synthetic securities cooked up by their brethren on Wall Street. Liberals want ta debt jubilee. That’s merely a short term fix that destroys the bond markets for a generation. If the court ever did such a thing, the world financial system would collapse in a hour because of the trillions of derivatives that would be effected.

In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure in the worst case.

The men on Wall Street who broker these deals are super smart and know their business better than anyone, other than maybe the guys at the other banks doing the same deals. The folks running pension funds are either men and women lacking the smarts to work at the big banks or they are not sociopaths. They are usually beholden to the local pols and therefore share their short term motives. They are easy pickings for the sharpies on Wall Street.

There’s no fixing this. In fact, we used to know this. Pension fund managers used to spend their days reading the newspaper and banging their secretaries because all they had to do was buy T-Bills and high end corporate bonds. Then the economics professions lowered interest rates to zero and suddenly the guys with bad comb overs had to start playing the market and doing interest swap deals .

The solution is a simple one. Ban borrowing by municipal governments. This solves the temptation to play games with public money and public debt. If Chicago had to budget based solely on its tax base, you would have a different city. Karen Lewis would not be head of the teacher union, because there would  not be a teacher union. You can afford barnacles like Karen Lewis when someone else is paying her salary.

The Nation State

Economists are the near perfect example of the aphorism “a man good with a hammer sees all the world as a nail.” They are convinced that the totality of life on earth can be packed into one of their spreadsheets. The idea that people might not want the most efficient or most cost effective thing is alien to the mind of the economist. Despite mountains of obvious examples in daily life, they insist that people are moist robots, acting out of self-interest. Despite that, this post is worth the read.

Before the late 18th century there were no real nation states. … If you travelled across Europe, no one asked for your passport at borders; neither passports nor borders as we know them existed. People had ethnic and cultural identities, but these didn’t really define the political entity they lived in. …

Agrarian societies required little actual governing. Nine people in 10 were peasants who had to farm or starve, so were largely self-organising. Government intervened to take its cut, enforce basic criminal law and keep the peace within its undisputed territories. Otherwise its main role was to fight to keep those territories, or acquire more. … Many eastern European immigrants arriving in the US in the 19th century could say what village they came from, but not what country: it didn’t matter to them. … Ancient empires are coloured on modern maps as if they had firm borders, but they didn’t. Moreover, people and territories often came under different jurisdictions for different purposes.

Such loose control, says Bar-Yam, meant pre-modern political units were only capable of scaling up a few simple actions such as growing food, fighting battles, collecting tribute and keeping order. …

The industrial revolution … demanded a different kind of government. … “In 1800 almost nobody in France thought of themselves as French. By 1900 they all did.” … Unlike farming, industry needs steel, coal and other resources which are not uniformly distributed, so many micro-states were no longer viable. Meanwhile, empires became unwieldy as they industrialised and needed more actual governing. So in 19th-century Europe, micro-states fused and empires split.

The author is confusing a lot of things here. There were nation states before anyone thought of inventing passports. The British had a clear sense of national identity by the time of the Thirty Years War and most argue that the 100 Years War was the birth of nationalism. Certainly the French and English saw themselves as nations by the the 17th century. When you look at how people identified with the local polity, the Romans clearly had a firm understanding of citizenship.

That said, the idea of nationalism is a recent development. The English and French caught the fever first and then the Spanish and Italians. The Swedes had a national identity in the Thirty Years War. Central and Eastern Europe, however, were late to the game. Outside of China, India and Japan the rest of the world still struggles with the concept. If not for the West forcing these concepts on the people of Africa and the Middle East, tribalism would still be the natural method of self-organization.

Agrarian societies are not in need of a large public works projects, at least not the simple sort of farming in place for thousands of years. Maybe large scale irrigation would have been helpful, but farming adapted to the land. Road maintenance for getting crops to market would have been useful and the Romans did a lot of it, but the European model worked just as well.

As a result, in purely agrarian societies, there was never an economic need for coordinating loads of people into creating publicly held assets. The pillaging of France by the English in the 100 Years War, did change the economy, creating a demand for talent to build and maintain large estates. That probably sowed the seeds for later economic innovation like road building an irrigation projects.

Industrial societies, on the other hand, need large scale public works and that can happen in two ways. One is with the lash in low trust societies. The other is through coordinated cooperation in higher trust societies. A group of people can come together for mutual economic benefit and hire a bunch of men to do the work that the rich guys need done. There is obvious exploitation here, but it is not slavery.

It is important to note that the Industrial Revolution did not start in Africa or the Fertile Crescent. The elements for industrialization were in place in England, which is why it started there first. The combination of demographics, social structure and limited political institutions built on a national identity allowed large scale economic operations to flourish in England before anywhere else.

As industrialization flowed on to the continent, the countries with “far-reaching bureaucracies needed to run complex industrialized societies” were the last to industrialize. In the case of Russia, industrialization destroyed the “far-reaching bureaucracies” needed to maintain order. The riots and revolts of the 19th century in central Europe were largely due to the collision of these existing “far-reaching bureaucracies” and the changing economics.

These new nation states were justified not merely as economically efficient, but as the fulfilment of their inhabitants’ national destiny. A succession of historians has nonetheless concluded that it was the states that defined their respective nations, and not the other way around. …

“nation building” … required the creation of an ideology of nationalism that emotionally equated the nation with people’s Dunbar circle of family and friends. That in turn relied heavily on mass communication technologies. … Nationalist feelings … arose after mass-market books standardised vernaculars and created linguistic communities. Newspapers allowed people to learn about events of common concern, creating a large “horizontal” community that was previously impossible. National identity was also deliberately fostered by state-funded mass education.

The key factor driving this ideological process, Maleševic says, was an underlying structural one: the development of far-reaching bureaucracies needed to run complex industrialised societies. For example, says Breuilly, in the 1880s Prussia became the first government to pay unemployment benefits. At first they were paid only in a worker’s native village, where identification was not a problem. As people migrated for work, benefits were made available anywhere in Prussia. “It wasn’t until then that they had to establish who a Prussian was,” he says, and they needed bureaucracy to do it. Citizenship papers, censuses and policed borders followed.

Again, national identity came to France in the 15th century. Early in the war, English armies would be stocked with all sorts, as well as English. Similarly, the armies loyal the French King were stocked with Scots, English and French. By the end of the war this was no longer true. The French fought for France and the English fought for England. French national identity is what drove France’s involvement in the Thirty Years War two centuries later. The idea that nationalism was born in the Industrial Revolution is at odds with history.

It is fair to argue that the Industrial Age allowed for the industrialization of the state. The managerial revolution is why we have a managerial class. I suppose one can argue that this then let nationalism sweep the continent. A better answer is that the barbarism of the Thirty Years War ended Christianity as the organizing force on European elites. Nationalism filled the void, eventually giving the people a new foundation myth and a sense of destiny. Still, the Industrial Age certainly helped accelerate the modern bureaucratic state along with the spread of various Rousseau-ist cults as a organizing philosophies.

Banksters

The beginning of the end of the Roman Republic was when the ruling class loss respect for and the willingness to abide by their own rules. Scholars don’t frame it like that because it’s hard and boring. Instead they focus on economic changes like the flood of slave labor after the defeat of Carthage and Corinth. Alternatively, the political changes make for nice stories because the characters are interesting. The road off the cliff, however, started with the loss of respect for the spirit of the laws and customs.

The point when our politicians stopped punishing criminal financiers will similarly be looked at as an inflection point. There was a time when politicians and wealthy members of the ruling elite faced criminal punishment for breaking the law. Nixon was run out of DC for talking about what Obama boasts of doing. Michael Milken went to jail for two years for what is common today on Wall Street. A great trivia question is how many bankers went to jail for the sub prime mortgage scandal. The answer is zero.

This article on Bloomberg points this out.

Yesterday, we looked at why bankers weren’t busted for crimes committed during the financial crisis. Political corruption, prosecutorial malfeasance, rewritten legislation and cowardice on the part of government officials were among the many reasons.

But I saved the biggest reason so many financial felons escaped justice for today: They dumped the cost of their criminal activities on you, the shareholder (never mind the taxpayer).

Corporate executives theoretically work for the owners of the company, namely, the shareholders. But there is an agency problem in that owners can’t closely manage and object to the actions of these executives. Collective owners, such as mutual funds, seem to have no interest in doing so. What we end up with is a management class that works for itself instead of on behalf of the owners of the publicly traded banks. Many of these executives committed crimes; got big bonuses for doing so; and paid huge fines using shareholder assets (i.e., company cash), helping them avoid prosecution.

As for claims like those of white-collar crime defense attorney Mark F. Pomerantz, that “the executives running companies like Bank of America, Citigroup and JP Morgan were not committing criminal acts,” they simply are implausible if not laughable. Consider a brief survey of some of the more egregious acts of wrongdoing:

Foreclosure fraud: Of all the crimes committed during the financial crisis and in its aftermath, this is one that should have been the easiest to identify and prosecute.

Any bank that owns a mortgage with the debtor in default must follow a simple set of legal steps in order to foreclose. The procedure is time consuming, specific to each state’s laws and involves lawyers, so foreclosures are expensive. Hey, it is the cost of issuing credit, and a simple reality of the rule of law. There are no shortcuts.

Except the banks took many short cuts and did so on purpose and with the goal of improperly expediting the process. They failed to review the documents of the mortgages they were foreclosing on, then told courts they had. They didn’t verify information, but claimed to have done so in sworn affidavits. They hired $8 an hour burger-flippers to “robosign” these documents, pretending the underlying legal work had been done. They knowingly used falsified records, some of which they bought en masse. They were aided by a company called DocX, which had a price list of fabricated documents for use in court. (DocX, by the way, was eventually indicted on charges of mortgage fraud).

After creating phony dossiers on borrowers, the banks signed and notarized affidavits stating they had taken all of the legal steps. In many cases, even the notarizations were fakes. Submitting a falsified notarized affidavit to a court is perjury and fraud.

Of course, the burger-flippers who did the paperwork didn’t think up the whole scheme — someone much higher did. Somewhere between these low-level workers and the chief executive officer were managers who masterminded robosigning. So far, just one midlevel executive has been convicted at Bank of America, while scores of others have gone untouched.

Mortgage underwriting: Then there are the crimes committed in mortgage underwriting, where defects were knowingly ignored. The FBI investigated these cases early on, but investigators never moved forward with prosecutions.

Maybe the scale of the financial penalties bank agreed to pay had something to do with this inaction. Bank of America, for instance, using shareholder money, paid $16.65 billion to settle allegations of fraudulent mortgage originations, securitizations and servicing. One can’t help think that this money bought immunity from prosecution for executives.

Money Laundering: Banks have been laundering staggering sums of money for drug dealers and terrorists. Hey, there are big bucks in high net worth narco-terrorists. Awash in cash, drug cartels relied on big banks to launder their ill-gotten money. Apparently, it was just good business to grab a slice of that pie. However, these are deeply offensive, very illegal activities, and deserve not just penalties, but jail time.

How much of this dirty money made its way through the banks? One analysis estimates that $1.6 trillion of tainted proceeds has been laundered through major money-center banks around the world.

A U.S. Senate report linked HSBC to drug lords and terrorists, leading to a record $1.9 billion fine. The Federal Reserve faulted Citigroup over its controls, allowing money laundering to go on. And Wells Fargo admitted to laundering money for Mexican drug gangs.

• Market manipulation: We haven’t even gotten to the manipulation of markets in violation of U.S and international law. Whether it was aluminum or Libor rates, prices were either improperly manipulated or illegally rigged, with knowledge of the bank executives and the traders they employed and supervised. Let’s not forget manipulating the multitrillion dollar derivatives market.

Fraud, skimming and bid-rigging: Then there is just good old-fashioned fraud and bid-rigging: State Street Bank was accused of skimming money off of the pension transactions it handled while BNY Mellon was accused of skimming money for “fictitious” foreign-currency costs for pension funds.

Accounting fraud: We could spend months discussing how some executives at banks cooked their books, but really, this is so well known that it hardly merits mention.

So next time you hear the claim that “there were no crimes committed by bankers,” just remember that this may be the biggest lie of the 21st century.
That’s a strong and accurate indictment. When you add in the multiple LIBOR scandals and the ISDAfix scandal, the image we get is of a rapacious bandit class rampaging through the world financial system like pirates. Theft, graft and corruption will always be a part of the financial class. Banks attract bank robbers and the banking system will always attract grifters and confidence men. It is the duty of the civil authorities to police the financial system and punish the people who commit crimes.
If there’s going to be a reform of the ruling class, it has to start with the bandit problem on Wall Street. The reforms following the Great Depression ended for a generation the type of spiritual corruption we see today. Those reforms were not perfect, but they gave an advantage to the type of men who put their reputation and their firms reputation ahead of quick profits. Top to bottom the modern financial firm is filled with men who would gladly murder their mother for a bigger bonus check.
The answer lies in those reforms a century ago. Separating commercial banking from investment banking is where it must start. The former is vital to a strong economy, while the latter is just gambling and popular only in good times. Similarly, retail banking should be separate from commercial banking. A firm offering boat loans and second mortgages should not be financing factory expansion and land acquisition. They have different regulatory needs and different degrees of transparency.
For any of this to happen, the ruling class has to abandon the idea that you can have a civil society based on purely transactional relationships. When all relationships are measured purely on monetary terms in the moment, there’s no reason to be honest in your dealings with others. Completely bankrupting the other guy is fine because you win the deal. Squeezing your vendors into poverty is acceptable, even if it destroys your ability to do business down the road. All that matter is the here and now. That’s a recipe for a low-trust society, not western civilization.