Welcome to the Week in Business, a look at some of the biggest stories in business and economics.
The hit Broadway musical “Hamilton” has been a bonanza for the show’s producers and investors—the Times estimated this week that the show is earning a profit of six hundred thousand dollars a week, and could eventually reach a billion dollars in sales. But “Hamilton” has also been a bonanza for another group: scalpers, who have been using ticket bots to snap up seats online, then reselling them at a huge markup. The Times calculated that scalpers could be making as much as sixty million dollars a year from the show—enough, in any case, that the producers announced that they’re raising the price of the two hundred best seats in the house, from about four hundred and seventy dollars to eight hundred and forty-nine dollars. (The prices of other tickets are also going up, but by significantly less. The producers also expanded the number of ten-dollar seats that are available by lottery.)
The price hike makes excellent economic sense, and it also illuminates how the Internet has made it easier for Broadway shows, sports teams, and performers to raise prices without necessarily alienating fans. Pricing live events is tricky. You want to set the cost high enough to make a lot of money but low enough to guarantee a full house. Set the price too high and you might have empty seats or be accused of price gouging. Set it too low and the resulting scarcity risks making the event even more popular, sacrificing money to the secondary market, where scalpers reign.
In this light, online marketplaces like StubHub and SeatGeek have been a boon to people like the producers of “Hamilton,” because, although they’ve provided a venue for scalping, they’ve also made it easier for producers to discern what to charge. The prices at these sites are, in effect, fair-market ones: they show exactly what people are willing to spend to attend an event. Jeffrey Seller, the lead producer of “Hamilton,” told the Times that he arrived at eight hundred and forty-nine dollars by “continually monitoring the secondary market and finding out where the average is.”
The existence of an open secondary market also has a less-obvious advantage: it lets consumers know that a price hike is fair. Having tickets sell at huge markups on these marketplaces makes an equation clear to the public: either scalpers are going to get their money, or the people who created, funded, and worked on the show will. Given that choice, who wouldn’t want the profits to go to the show?
Dodd-Frank Reform: To Rig to Fail
Congressman Jeb Hensarling, a Republican of Texas, delivered a straightforward message in a speech to the Economic Club of New York, on Tuesday: the Dodd-Frank Act is broken and can’t be fixed. The occasion for his speech was the unveiling of his new financial-reform plan, which would scrap Dodd-Frank entirely and replace it with a new regulatory regime. Its broad thrust would be to reduce regulation and give financial institutions more freedom.
For those concerned about oversight of the financial industry, two aspects of Hensarling’s approach are especially important. The first is a provision that would free big banks from major Dodd-Frank regulations, as well as from some international rules on capital and liquidity, if they meet higher capital requirements—including, notably, a non-risk-weighted leverage ratio of ten per cent, barely higher than the current (risk-weighted) 8.5-per-cent requirement. In effect, Hensarling is saying that if banks have enough of a cushion against potential losses, they can otherwise regulate themselves.
Raising capital requirements is a good idea, since banking of any kind—not just the opaque and complex Wall Street variety—is risky. But, on its own, Hensarling’s proposed leverage ratio is far too low to be an adequate deterrent to practices like the disastrous lending and trading that helped lead to the crash of 2008. If you want capital requirements alone to carry the weight of financial regulation, you need banks to carry truly substantial amounts of capital. The Stanford professor Anat Admati, who is a vocal advocate of higher requirements, argues for twenty to thirty per cent of a bank’s assets. Hensarling’s requirement would make the system far more dangerous.
This is also true of Hensarling’s desire to fundamentally reshape the way financial regulators work, by compromising their independence from Congress—the second particularly important aspect of his plan. Specifically, he would require that all new regulations pass a “rigorous cost-benefit test,” replace the head of the Consumer Financial Protection Bureau with a bipartisan commission, and mandate that all regulators’ budgets be subject to the congressional budgeting process, including those of the Federal Reserve, the C.F.P.B., and the Federal Deposit Insurance Corporation. (The Fed and the F.D.I.C. fund their own operations, and the Fed also funds the C.F.P.B.)
From a “small d”-democratic point of view, these changes might sound harmless, even reasonable. Who could be against cost-benefit tests, for example? But cost-benefit requirements are hard to apply coherently to financial regulation, as the Harvard law professor John Coates IV has argued—because it’s rarely possible to get “precise, reliable, quantified” measures there. How, after all, would you count the economic benefits that arise from reducing the risk of a systemic financial crisis by a few per cent, or from limiting the types of mortgages that consumers can take out? And since the costs of regulation are often more easily measured, the result of imposing a cost-benefit test is to make regulations harder to implement.
Hensarling’s approach to the regulators’ budgets would likely be even more consequential. Independent funding insulates the major bodies from political pressure and gives them leeway to make decisions that are unpopular with politically powerful constituencies. Forcing them to go through the appropriations process would practically guarantee that they will make fewer decisions that are unpopular with Wall Street. That’s why the authors of Dodd-Frank were careful to insure that the C.F.P.B. wouldn’t be funded by Congress.
Hensarling’s plan has little chance of passing Congress, particularly in an election year, and no chance of becoming law with a Democrat in the White House. But it’s significant, paradoxically, as a sign of how effective the Dodd-Frank regulatory regime has been—and another reminder of how much is at stake in November.
Employees vs. Contractors: Chaotic Dancing
The question of whether a company’s workers should be considered employees or independent contractors is arguably one of the most important legal debates of our time. (I wrote about it with regard to Uber last summer.) As the so-called gig economy spreads, more workers are finding themselves in an interstitial state, considered neither traditional employees nor true independent contractors. And, as an opinion that was recently handed down by the U.S. Court of Appeals for the Fourth Circuit reminds us, it isn’t just workers in Silicon Valley’s on-demand economy that have to worry about this.
The case at issue was a lawsuit brought by exotic dancers, in Maryland, against several strip clubs. The clubs said that the dancers were independent contractors, who made money from tips and “performance fees” (i.e., lap dances), and thus didn’t warrant being paid the minimum wage. The dancers backed their claim that they were employees by noting that the clubs determined when they could dance, set rules about appearance, set the fees that they could charge, and actually called them employees. A jury agreed with them, and the clubs lost their appeal, in a decision that centered on the finding that the clubs exercised enough control over the dancers’ work for them to be considered employees.
The decision may not bode badly for Uber, since that company arguably exercises less control over its drivers than the clubs did over the dancers—Uber drivers set their own hours and can drive for other ride-sharing companies, for instance. Still, the law in this area remains profoundly unsettled, and the danger for firms like Uber is that such decisions move toward designating gig workers as employees, which would make their operations much more expensive.
Social Studies: Neurotic Neuroticism
This one isn’t, strictly speaking, a study but, rather, a remarkable erratum to a study that garnered quite a bit of attention when it was published, in 2012, in the American Journal of Political Science. The original article claimed that conservatives rated more highly than liberals on a scale of psychoticism, while liberals rated more highly on a scale of neuroticism. (Psychoticism didn’t refer to “psychotic” in the popular sense, exactly, but was associated more broadly with qualities like impulsiveness, risk-seeking, and authoritarianism.) The erratum pointed out that the correlations reported in the study were based on a misinterpretation of the way the data had been coded, which led the conclusions to be exactly reversed. In other words, liberals scored higher on the psychoticism scale, and conservatives on the neuroticism scale. Considering the many plausible underlying explanations for the original findings, the erratum is a healthy reminder of how easy it is for us to construct just-so stories, and to embrace studies that confirm our assumptions.
What’s More
Richard Thaler on how traditional economics should incorporate behavioral economics.
Netflix has studied which kinds of shows we binge-watch (thrillers like “The Walking Dead”) and which we watch over time (complex narratives like “House of Cards”).
By 2032, non-white Americans will make up a majority of the country’s working class.
It’s a good thing the Fed missed its chance to raise rates.
Donald Trump’s companies don’t always pay their bills.