The Boston Olympics and the Downward Spiral

Imagine if Boston had taken on the Olympics, and imagine if revenue shortfalls and cost overruns had totaled $3 billion. Boston is a large city, but not that large. Taxpayers would be on the hook for $4,550 per person. Not everyone pays taxes, so the average per taxpayer would be higher. It is extremely difficult to make up that kind of shortfall through taxes. A special one-time tax on that scale would drive a significant fraction of taxpayers into bankruptcy, ruining the city economy and reducing future tax revenues. An increase in tax rates over an extended period of time would drive residents and would-be residents beyond the city limits, again reducing tax revenues. Boston would be stuck in a bind, most likely struggling for half a lifetime to keep up with its bills, much like Detroit, Harrisburg, or Puerto Rico. Each place is in a downward spiral created by government debt and taxes. Tax rates are high enough to drive taxpayers away, so that the growth that could solve the governmental fiscal problems can never arrive.

But wait. The likely cost overruns for hosting the Olympics would be much higher than $3 billion. The deficit could easily be $10 or even $20 billion. The Olympics are always more expensive than early estimates suggest, as Andrew Zimbalist notes in Harvard Magazine:

The risks are formidable, and London’s experience in 2012 is instructive. London earned $3.5 billion directly from the Games, yet spent more than $18 billion before factoring in infrastructure investments. Further, tourists stayed away . . .

London’s total Olympics deficit, then, was around $16 billion. But London is a very large city. It can arguably spend that kind of money. A $16 billion deficit in the Boston Olympics would have been made up by the taxpayers at a cost of $25,000 per person. That would have been a tax bill high enough to ruin the city for the next 50 years.

It’s no accident that Boston officials cited this very risk when they elected not to sign the papers for the Olympics. It is a little scary that they came as close as they did to going forward. We have a small group of determined activists to thank for averting this calamity.

Net Not Ready for Stock Market Crash

The stock market gave every indication of a crash this morning, and I have been checking to see how the web infrastructure for Wall Street would fare. It has mostly held up, but the results are far from pretty. On popular sites you might wait ten minutes for the advertising on a page to load completely so you can get the stock quote. Five minutes after the open, I saw apps providing garbage data, partly from Friday, rather than the intended live data.

The trading day now looks more like a flash crash than the rout that was expected at 9:30, but if this is a stress test of Wall Street, it is abundantly clear it is not ready for a real crash. Even now, with volume falling back to an approximation of normal levels, there are data problems, pages that won’t load, apps that can’t get quotes. It is not a heavy traffic day on the Internet as a whole, so the bottlenecks are in the securities industry’s own data centers, and after today there should be plenty of data that shows which areas and connecting points most urgently need improvement.

The Crime of Spotify

Just by using Spotify, you might be breaking the law. I realize that sounds far-fetched, but I’m not making it up. It is Spotify’s own new privacy policy that says so:

With your permission, we may collect information stored on your mobile device, such as contacts, photos, or media files. Local law may require that you seek the consent of your contacts to provide their personal information to Spotify, which may use that information for the purposes specified in this Privacy Policy.

Did you get permission from everyone you know before you signed up for Spotify? I didn’t think so. Pragmatically, though, it is clear that that clause is meant to shift the legal liability from Spotify to you, the user, if something should go wrong, such as a data breach at the Spotify data center. If Spotify screws up someday, how much do you suppose you will owe?

The draconian new privacy policy also gives Spotify permission to copy the photos and location data from your phone and show this information to advertisers. (Supposedly the information is de-identified, but we know by now that there really is no anonymous lifestyle data in a world where every individual life is unique.) Not surprisingly, a firestorm of protest has followed the policy changes, with the more cautious users canceling their accounts.

Video Games, Ad Blocking, and Distractions

Internet ad blocking has been around for a decade but is now becoming a trend. It is hard to measure accurately, but it looks like more than 10 percent of Internet ad impressions are now being blocked, roughly double the rate of last year. When ad blocking is discussed and analyzed, one curious factoid that is often repeated is that ad blocking rates are highest on video game sites. Supposedly this is because gamers are technologically savvy, but this explanation does not quite ring true. Engineers and computer programmers are equally savvy when it comes to using computers, yet we don’t see the same high rates of ad blocking at magazines and forums on these subjects.

I asked around and got some more convincing explanations.

• People who play video games know the cost of momentary distraction better than most of us. In a game like Temple Run, if you sneeze or look away for a second or two, you’re dead. We all face the same loss of productivity when these distractions occur, but you have to play a video game to get the instant feedback that measures this loss for you and makes you aware of it.
• Syndicated ads routinely transmit enough data volume to clog up the network connection for a few seconds. A two-square-inch ad can generate 30 megabytes of data for video, scripts, and tracking, and this happens not just when a page is loading, but at completely unpredictable times. The resulting network latency is the same kind of disaster for an online game as a sneeze is. In truth, we all face the same loss of productivity from ads, we just don’t notice it so easily in activities that are not so time-sensitive.
• Video games have the most obnoxious ads you can imagine. A big hairy monster is ready to jump out of the screen and kill you and eat you RIGHT THIS SECOND. You are not quite human if these life-threatening moving pictures don’t upset you for at least a fleeting moment. You don’t have to be a gamer or know the first thing about computers to ask if there is a way to make these horrible images go away.

In short, we grossly underestimate the cost of the distractions that online ads pose. There are thousands of ads. In a day, the number of online ad placements you see can exceed the number of words you hear spoken to you. The degree of distraction that results is costly, but the potential for distraction is enormous. Billions of dollars are spent on basic research into making advertising more “effective,” which effectively means more distracting. Gamers are the canary in the coal mine, reacting first just because they are more sensitive to this issue. We all will have to react within the next few years to save our sanity. Ad blocking is one approach individuals might take. Avoiding computers, video screens, and the Internet is another.

This Week in Bank Failures

With Greece’s bailout renewal secured, its prime minister is stepping down and calling new elections. It is a necessary step to hold the country together as it faces a changed agenda and a fractured political landscape, but it is also perilous, with the government still facing a crisis and less able to respond during the two months of political maneuvering.

I have been skeptical about the decline in oil prices because of the high cost of extraction, but there are indications of technical improvements in the last two or three years that are bringing costs of extraction down for many existing oilfields (drilling and fracturing aside). With U.S. oil prices down 50 percent from last year, dozens of energy companies in bankruptcy, and oil towns turned to ghost towns, there is some concern about whether a few banks might be at risk from this downturn. Banks could take losses not just from loans for energy extraction but also in real estate in formerly booming areas.

The stock market decline in China continues, with stocks losing 12 percent this week on new signs of weak manufacturing, along with worries over disruptions caused by a major industrial disaster in Tianjin. Stocks are down 30 percent from their peak. Banks will take substantial losses on stock market loans when individual stocks decline more than 50 percent. Banks also face collateral liquidity concerns with so many stocks frozen. It is expected that the central bank will ensure liquidity for banks with incidental losses on stock market loans, but will not attempt to save lenders that made stock market loans their core business.

Cecil Bank in northeastern Maryland is up for sale after receiving a prompt corrective action order from the Fed. The bank must do what it can to raise capital or find a buyer, officially within 90 days, but in practice, within a matter of months. A prompt corrective action order also bans dividends, restricts bonuses, and limits the interest rates the bank can pay on new accounts to prevailing market rates. The bank has $300 million in assets and 9 locations. Its financial condition has been in decline for at least five years.

The U.K.’s Co-op Bank reported a first-half loss of £204 million and says losses will continue for two more years before it can return to profit. Regulators last week waived a £120 million fine for prior sloppy technical operations. The fine would have put the bank close to insolvency, and the responsible executives had already been replaced. The bank has closed a third of its branches in the last year in a cost-cutting move, and the cost of branch closings is part of the explanation for its losses.

In a series of class-action settlements, U.S. retailer Target will reimburse cardholders for a tiny part of the inconvenience resulting from the mass leak of personal data from the store network in November and December 2013. Each cardholder affected will receive about $1.14.