Does this statement disturb you?

In 1950, finance and insurance in the United States accounted for 2.8% of GDP, according to US Department of Commerce estimates. By 1960, that share had grown to 3.8% of GDP, and reached 6% of GDP in 1990. Today, it is 8.4% of GDP, and it is not shrinking. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.

It’s certainly not surprising is it? It makes perfect sense considering the rise of banking and Wall Street over the last generation or so. This blog has said before that this rise also lead to greater levels of compensation, and thus drew talent that may have otherwise focused on other areas (like science or education). This probably further grew the industry’s share of the economy. And when people read these kinds of comments about the rise of Wall Street it is worrisome that they always think this is a bad thing.

Consider the following. Your grandparents likely retired on a pension and collected social security and hardly ever needed to save for retirement. In 1950 the average person lived to be 68 years old. Retirement didn’t last very long, if at all. In 2009, we were living to be 78, and we all know this number is only going to rise with time. That’s an extra decade of living expenses. How is that being paid for? Pensions have had to invest considerably more money in order to deal with the burden of people living longer. Reforms here and there occasionally soften the blow for them, but the burden is still much higher than it used to be. Pensions now invest in riskier securities, and get better returns too. Wall Street’s role was to facilitate the transactions that enabled these pensions to survive just a little bit longer and pay the retirements of all these people.  And to say nothing of the rising insurance needs of the aging population.  Those premiums are invested too. When a new demand is born, an industry grows.

When you consider that baby boomers are just now retiring the rise of Wall Street makes even more sense. These were the first group of people that may have to sustain their retirement with personal savings and investments. 401(k)s became very popular in the 1980s and of course still are; IRAs too. Now people were taking their retirement into their own hands. This gave rise to the mutual fund industry and now you have a bulging population entering the prime of their careers and saving for their own retirement. Again, an industry grew to service this demand.

Just as everyone was taking responsibility for their own retirements, the internet was about to start growing too. With the internet, people were able to take their own financial management to a new level. Soon, people would be able to buy and sell stocks within a few minutes, and then seconds through online brokerages. Once again, an industry rose to meet this demand.

Further still, consider the globalization that has occurred. More so than ever before, we are engaging in huge levels of trade, moving trillions of dollars to Moscow, Beijing, Tokyo, London, Singapore, Dubai, and Rio. This movement happens at the speed of light and the infrastructure to enable it was built and managed by the finance industry.

The rise of Wall Street shouldn’t be concerning at all. Given the changing demographics and economy, it makes perfect sense. And what of the greed and the financial crisis? Unfortunately, finance is not a stable industry. The financial crisis had a lot of causes, and Wall Street was certainly part of that. Together with a poor incentive structure, they again rose to meet a demand. This is a case of the industry getting ahead of itself.

No one should be surprised nor concerned that the industry continues to be a large part of the economy. Our lives are more financially complicated. The financial crisis is a perfect example of the growing pains. It’s impossible for this industry to grow and meet demand without making mistakes. Everyone made mistakes. I’m no apologist for the criminal, greedy, and immoral acts in any industry. But the rise of finance as a share of GDP is merely a reactionary metric of the way the world has changed.

Image: Jan Tik

Cats were always my thing growing up. But, as evidenced by the branding on my site at some point dogs entered my life. Enter: The Sheconomist too. Dogs are great, and mine is the best, and now I consider both types of furry animals to be valuable members of a stable household.

One of the best ways to get a pet is through a local adoption agency or shelter. And one of the most well known is the Humane Society. If you’ve ever gotten a pet before from a shelter or rescue you’ve no doubt encountered some kind of fee in order to take your furry friend home. Depending on the age and species, this fee likely ranges between $50 and $200. Have you ever wondered where they came up with that number?

Well the fee needs to cover the basic costs for the animal including shots and food. And the shelters have back-office operations too. But many of these places survive on donations and volunteers. Why not just up the price to $500 for a puppy and then you’re good to go? There’s an added benefit of keeping out certain people who might want a dog today, but aren’t willing to make the financial commitment to treat them properly in the future.

But $500 is steep, and you can get a pure-bred animal for that price. So there’s an upper limit on pricing. Which means to keep the operation running, these organizations rely on subsidies (in the form of money and labor). So what about the other end of the spectrum? Why not just give all the animals away? This would allow these organizations to save millions more animals than they do now. Aside from not having the resources, they run into the issue of less than ideal individuals picking up animals that might not get treated in the best way.

So the pricing then serves two functions. The first is a revenue source, it ties a cost to an item that is essentially inventory. The second is a barrier to entry. If a puppy is worth $150 to you today, it’s more likely worth the hundreds of dollars a year to keep him happy and healthy. If a puppy is only worth $5 to you, you’ll treat him like the impulse purchase he could be.

Being economically minded, I couldn’t help but explore other pricing options. You’ll find at most shelters and rescues, the price of a cat or dog is fixed (as is the animal). But every animal is unique. And some are more desirable than others. These facilities are always trying to move as many animals as they can in order to rescue more. So why not discount some of the animals that have been around for a while and have been tough to move. Like a clearance sale. Likewise highly desirable dogs could be priced higher.

For one thing you risk running into the barrier to entry again on the low-end and on the high-end you might be able to move the pup for twice the price but it will take twice as long. It also doesn’t seem right either. Animals aren’t inventory and the people that care for them treat them like people. We don’t put children up for adoption at varying prices (yes there is a price to adoption) so these animals are priced at flat rates too. What you have then is a product treated and priced like a commodity, but is not.

This is terribly inefficient. But organizations that run on subsidies will always be inefficient because there’s no economic incentive to look for solutions. A lack of efficiency isn’t inherently bad. In fact, in the case of rescues, they are forced to rely on passion and caring of part of the community to keep the organization running. And that’s actually how you want these organizations to be run. These subsidies allow the organization to focus on doing a public good too, which can’t be quantified at all.

Yesterday Mitt Romney released his tax returns to the public and the world.  He made more than $20 million in each of the last two years.  His effective tax rate was less than 15%.

There are no real surprises from any of his returns.  Mitt is likely an honest guy and all we’re really going to see in his returns is just how complicated the financial lives of the Romneys are.  People like Mitt often create small companies just to manage their wealth because it can be so complicated.  There is nothing illegal about it, and really nothing immoral either.  But none of that matters.  I worry that by running for President, and being guilted into opening up his books, Romney may have doomed rich people.

Romney has done what the Occupy protestors have not been able to do, put a face on the 1%.  Previously, the focus was on the greed of bankers.  But Romney is making more than bankers do and it’s just residual income to him.

Be releasing his returns, Mitt Romney has now put into context exactly what people hate about the current tax system.  Sure Warren Buffett can talk about paying a lower rate than his secretary, but Mitt just gave the world a line-by-line inside view of how little he pays in taxes as a percentage of his income.

And there are many the can hope to make political gains based on his income.  The current President has already supported higher taxes on the wealthy, mainly in the form increasing the rates that Romney has benefited from.  GOP lawmakers have countered by saying such tax increases punish the job-creators (a line even a private equity insider says is kind of dumb).  Most of this conversation comes back to the taxes on investment income, which is taxed at a much lower rate than normal income.  This is a conversation that happens every once in a while but quickly falls out of the headlines.  Romney is shining a big, bright light on this tax rate and as long as he’s running it’s going to be a hot topic.

If it’s possible to worry for rich people, I am.  I am no political strategist but it is easy to imagine Obama’s team crafting a message around Romney’s career and taxes to leverage a populist opinion.  This could carry Obama back into the White House and give some power in Congress back to the Democrats.

None of this is necessarily good or bad, it’s just something that could shape the national conversation over the course of most of 2012.  We’ll see what will happen, but Romney’s taxes could give Democrats everything they need to sway enough opinion away.

What could help the rich keep these tax rates?  An improving economy could distract people enough and reshape the conversation back towards other policy issues.

The Super Bowl is now just a couple of weeks away. Tom Brady and Eli Manning, two of the most well-paid athletes in the game, will go at for all the glory of football. And then when that’s over much of the sporting world will focus on professional basketball. Baseball too is only a couple of months away now. These athletes make so much money it’s hard to remember that they are in fact just like many Americans. They’re just blue-collar guys doing what they do.

Don’t think so? Consider the following:

• The labor is physically demanding.  Injuries are common, they’re just a hazard of the job.  You just don’t want to be out of commission for too long.
• Of course, you don’t want to get hurt on the job, so safety gear is a must.
• There’s a huge benefit to unionizing. We’ve seen both the NBA and NFL engage in lockout battles with their unionized employees. While a lockout can be initiated by the leagues, make no mistake, it’s the equivalent of a strike. And the labor union and company management/owners have to come together and reach an agreement. They even get pensions.
• You might make good money, but the guys in suits make more. This just seems like a fact of life. Even in the NBA, a properly run organization is going to pay the guys in the suits better than the guys working on the front lines.
• Experience is everything. Sure the up-and-comer doesn’t respect the veterans, but all the hourly guys know the experienced guys are worth more than they’re paid.
• The blue collar skillset is likely not enough to move up in the organization. Sure you might be a star in the production line, but that isn’t enough to move up. You either need to buy your way to the top (Michael Jordan now owns a team) or convince someone to take a chance on putting you in management.
• You can go pro as a teen: it’s less common today than it was years ago. Now it’s usually smart to go to school for a couple of years first and hone your craft.
• Your life revolves around a clock.  You’re expected to produce a certain amount in each shift.  If you come up short towards the end of your day, you might need to work hard and fast or the competition will crush you.
• Professional athletes and blue collar workers alike dress like their peers.  It’s easy to order uniforms in bulk and it’s much easier to manage a team if they all look the same.  It can also create camaraderie.
• And most often everyone is wearing uniforms with their names on them.

Image: Keith Allison

Books don’t get reviewed here very often but when something that crosses the insight of Freakonomics with the subject of sports, you’ve got a potential winner on your hands.

The topics of the Freakonomics books have always taken some kind of conventional understanding and turned it on its head.  Whether it was the connection of legalized abortion to lower crime rates or the revelation of how much teachers actually cheat too, the connections are found by analyzing data most experts have had access to in a different way.  This same approach was applied to sports for Scorecasting.

What makes sports so interesting in this context is that there are already an army of thousands of journalists and statisticians analyzing sports data already.  And yet in a just a few hundred pages I gleamed more about sports than I ever have from watching Sports Center.

Most of our understanding of sports comes from commentators, journalists, and former players themselves.  They are very apt at explaining the mechanics of the game and summarizing the events of a recent match.  But they aren’t very good at the 10,000 foot view of what is going on in a given league, team, or game.  Some examples are in order:

• Why have the Chicago Cubs not been back to the World Series?  Is it really a curse?  The answer may be explained by the Cubs possibly having an incentive to lose, and keep losing.
• Hindsight can always make a coach look brilliant or stupid.  Despite statistics saying football teams should go for it on 4th and short, coaches only do it when they have to.  It seems much of their decision making may be based on the reaction if they take a risk (even a calculated one in their favor) and it doesn’t work out.
• Baseball isn’t really my thing, but have you ever noticed there are considerably more people who bat .300 than .299?
• Home field advantage is another mystery.  It does exist.  And fans do play a factor, but not in a way you would expect.  As it turns out, the benefit of playing at home can almost be completely explained by the referees.  That alone makes the book worth it.

This is but a sampling of the questions that are asked and answered in this book.

Sports are fascinating intellectually because so many people put so much energy into it.  Not just athletes devoting their lives to a game, but fans too.  We can appreciate the high level sports around us because they are often important contributors to a local economy.  However the sheer level of sports obsession goes beyond mere economics.  There’s a community element to be shared amongst fans.  And our caveman brains probably interpret the competition as a war in some way or another.

It’s no surprise then that a book like Scorecasting could draw an audience.  Sports bring all people together, and economists too.  My only complaint about the book really has nothing to do with the book itself.  It’s that the authors haven’t quite their day jobs yet to focus on this material full-time.

Image: Ed Yourdon

I’ve been on Weight Watchers three months. I have to lose two pounds a week. I’m at 38 pounds now. They come and weigh me every two weeks. I ain’t never missed a weigh-in. Never going to. I’m feeling much better. But I ain’t giving away no money… I’m not giving away no free money. I thought this was the greatest scam going— getting paid for watching sports — this Weight Watchers thing is a bigger scam.

I feel this way about any celebrity endorsement of anything.  At the same time, I wish I could be so lucky as to be paid to be healthy.

Via Freakonomics

More videos from BBC Earthflight

If you’ve been wondering why people are so up in arms about SOPA and PIPA, this video does a great job of explaining it.

The plain English version is this: If these laws passed and someone posted a comment on Weakonomics linking to a site that might be doing something like letting you download movies illegally, I can get shut down. In the real world, if someone tried to sell bootlegged CDs in a single Walmart, the copyright owner could conceivably shut down every Walmart in the world. It’s impossible to police such things, especially on the internet.

Via: @acedtect