Published on the 13th of April, 2007
Competition, as any freshman economics student will tell you, brings down prices. It works for computers and for phone calls and for cars. Why not for hedge funds? Investors have been paying the same fees since practically the dawn of the hedge fund: a 2 percent management fee plus 20 percent of profits. Now that there are thousands of funds competing for capital, why hasn’t “2 & 20” become “1 & 10” or even “0 & 5”?
Quality is a major concern; no discounted fee will ever be deep enough to compensate for the cost of investing money with an incompetent manager. (Heart surgeons don’t tend to compete on price, either.) A hedge-fund manager who cuts his fee is signaling that he can’t persuade other investors to trust him…
Continued at New York Magazine, subscription free.
Published on the 7th of April, 2007
Most people reading this column probably believe that taxes are a bad thing, but why? Popular wisdom is that taxes are bad because it’s painful when you pay them. That’s pretty much the opposite of the truth: taxes are a bad thing only when you don’t pay them.
When you pay a pound’s worth of tax, the government collects a pound’s worth of tax. The economy has not shrunk. (It might shrink, if the government then spent the money unwisely - but we’re talking about taxes here, not government spending.)
The problem comes when you don’t pay the tax. If Gordon Brown plans to tax your overtime pay at 41 per cent, you may decide to stay at home. You’re denied your income, and Mr Brown is denied his tax revenue. For this reason, economists like taxes that avoid such problems - which we call ”deadweight losses” - as much as possible. But this leads to some arresting concepts: the rich should pay lower tax rates than the poor, for instance, and there should be a tax on being middle-aged. It’s not as crazy as it sounds.
Take the idea that the rich should pay less than the poor. By this I don’t mean that the rich should pay less of their incomes in tax, but that if the Duke of Westminster earns one extra pound, he should pay less tax on it than I would pay if I earned one extra pound. Organising the tax system in this way reduces deadweight loss. If you raise taxes for the low-income bracket - as Gordon Brown did by abolishing the 10p rate of income tax - then you discourage overtime for people in that bracket. But you collect cash from those earning above the bracket without discouraging work and causing deadweight loss, because their overtime pay will not attract extra tax.
Continued at ft.com, subscription free.
Published on the 7th of April, 2007
Dear Economist,
My best friend - single, male, Jewish, six-figure earner - has been interviewing like mad in order to escape a hellhole called Detroit. He has only had one job offer, albeit an excellent one (40 per cent salary increase) in LA. Thoroughly frustrated by the dating scene in Motown, he has decided to move.
I think he is being too hasty.
His final destination is surely New York, where the availability of dateable Jewish women is far greater. I am concerned that he won’t be employable if he decides after a year that LA isn’t really for him (it won’t be).
He’s an intelligent person with desirable skills so I have no doubt that he will be able to secure a comparable job in NYC. It only takes time.
How do I convince him that he’s making a mistake?
John, via e-mail
Dear John,
There is something in what you say. Real option theory states that you shouldn’t naively take the first option with a positive net present value. Better options may come along later, and taking the first option will preclude them.
Your friend must not exercise his option too soon.
However, the foundations of this theory need to be questioned. It assumes that the first choice really is irreversible, and that inaction would keep options open. But is it true that moving to LA will cut off a later move to New York? Even if so, is time in Detroit really keeping open the window of opportunity, rather than spreading a stain on the resume? I am not so sure.
Most important, even real option theory admits that you should take the first offer if it is good enough. A 40 per cent raise is plenty. Are you trying to keep the dateable women for yourself?
First published at ft.com.
