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Macromuddle

More and more I feel like economics reporting is based on crude principles of adding up “good news” and “bad news.” Sometimes this makes sense: by almost any measure, an unemployment rate of 10% is bad news compared to an unemployment rate of 5%. Other times, though, the good/bad news framework seems so tangled.

For example: house prices up is considered good news but inflation is considered bad news. A strong dollar is considered good news but it’s also an unfavorable exchange rate, which is bad news. When facebook shares go down, that’s bad news, but if they automatically go up, that means they were underpriced which doesn’t seem so good either. Pundits are torn between rooting for the euro to fail (which means our team (the U.S.) is better than Europe (their team)) and rooting for it to survive (because a collapse in Europe is bad news for the U.S. economy). China’s economy doing well is bad news—but if their economy slips, that’s bad news too. I think you get the picture.

I was reminded of this when reading an article in the New Yorker by James Surowiecki about the ever-boring topic of facebook’s shares. Surowiecki writes:

Dual-class share structures used to be rare and confined largely to family-run enterprises or media companies, such as the New York Times, where they could be justified as protecting the company’s public mission. The received wisdom was that active investors are good for companies and for the market as a whole, and that companies need to put shareholders first. . . . Whereas the C.E.O.s of most public companies have to spend time kowtowing to investors, Zuckerberg and his peers are insisting on the right to say, “Thanks for your money. Now shut up.”

Huh? I’m no economist, but . . . if the damn stock is such a bad idea, nobody’s forcing you to buy it! Zuckerberg and his peers aren’t “insisting on the right” to do anything; they’re offering a financial product in the market.

Surowiecki continues:

There’s reason to be concerned at the spread of the dual-class structure. One study that examined a large sample of dual-class firms from 1994 to 2001 found that they notably underperformed the market.

Now I’m just confused here. Who’s supposed to be “concerned” here? As a New Yorker subscriber, am I supposed to be concerned that dual-class firms underperformed the market? I just don’t get it. Why should I care? If the shares underperform the market, people can buy a piece of Facebook for less. That’s fine too, no?

11 Comments

  1. Jonathan says:

    The larger issue is that facebook is not really an entirely public company. At least that was the issue I saw, it seems that theoretically you would be able to use voting shares to change management. That does not seem to be the case here. Am I wrong in thinking that?

  2. Peter Flom says:

    I was an economics major for 1 semester in college. Then I noticed all the Nobel prize winners disagreed with each other.

    :-)

    • Nick Cox says:

      Now you are a statistician and all the leading statisticians agree with each other?

      • Andrew says:

        Nick:

        Just to clarify, my complaint here is not with economists but with economic reporting. The reporting on facebook’s share price reminds me a bit of sports news, where Derek Jeter’s batting average or Tiger Woods’s latest scores are presented as some sort of morality play.

        • Nick Cox says:

          I agree. I was just having a minute piece of fun with Peter’s comment.

          It’s reported (Neil Gilbert, Biometric interpretation, Oxford U.P., 1973) that Fisher defined ‘variance’ as the attitude of one statistician to another, which has added flavour, as he was responsible for variance as a statistical term and was especially good at disagreeing with other people.

  3. fernando says:

    First lesson in economics: Any relative price change has redistributive consequences.

    Trivially, if prices of widgets go up, good for sellers, bad for buyers. It matters what’s your side of the transaction.

    Mankiw has an interesting note on his blog today about musician Jack White and the pricing of records.

  4. [...] 28, 2012 While browsing Andrew Gelman’s recent posts I also came across this gem, which reinforces my priors in every possible way. So of course I loved it! He writes: More and [...]

  5. “If the shares underperform the market, people can buy a piece of Facebook for less.”

    This is wrong, surely? If the price of a share is low, the expected return must be high. To say that the shares underperform is to say, on the contrary, that they are consistently overpriced.

    Of course that merely means that Zuckerberg and his peers are ripping the investors off. Whether they deserve it is another question.

  6. [...] brings me to Andrew Gelman’s blog post yesterday, taking issue with Jim Surowiecki’s latest column, on Facebook. [...]

  7. [...] Felix Salmon, James Suroweicki, Andrew Gelman and Matt Yglesias on the rise of dual-class share [...]

  8. Nameless says:

    We’re supposed to be concerned because, if dual-class firms underperform the market, it means that they suffer from slower growth and lower productivity. The implication is that the dual-class status is a drag on growth. If dual-class firms become more common, the economy grows slower.