Facebook faces the tragedy of the commons

The openness of social networks enables creativity but invites exploitation

John Gapper

It is hard to keep up with the stream of scandals, big and small, involving social networks such as Facebook and Twitter. From unwittingly aiding Russian efforts to subvert elections to finding themselves exploited by extremists and pornographers, they are constantly in trouble.

The latest is YouTube failing to stop videos of children being commented on by paedophiles, while letting advertisements appear alongside them. Only months after Alphabet’s video platform faced an advertiser boycott over extremist videos and had to apologise humbly, companies such as Diageo and Mars are again removing ads.

Each scandal produces fresh calls for networks to be treated like publishers of news, who are responsible for everything that appears under their names. Each one forces them further to tighten their “community standards” and hire more content checkers. By next year, Facebook intends to employ 20,000 people in “community operations”, its censorship division.

Tempting as it is for publications that have lost much of their digital advertising to internet giants to believe they should be treated as exact equivalents, it is flawed: Facebook is not just a newspaper with 2.1bn readers. But being a platform does not absolve them of responsibility. The opposite, in fact — it makes their burden heavier.

A better way to think of Russian political ads, extremist videos, fake news and all the rest is as the polluters of common resources, albeit ones that are privately owned. The term for this is the tragedy of the commons. Open ecosystems that are openly shared by entire communities tend to get despoiled.

Garrett Hardin, the US ecologist and philosopher who coined the phrase in 1968, warned that “the inherent logic of the commons remorselessly generates tragedy”, adding gloomily that, “Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons.”

His prime example was the overgrazing of common land, when the number of farmers and shepherds seeking to use the resource of free feed for animals becomes too high. He also cited companies polluting the environment with sewage, chemical and other waste rather than cleaning up their own mess. Rational self-interest led to the commons becoming barren or dirty.

Here lies the threat to social networks. They set themselves up as commons, offering open access to hundreds of millions to publish “user-generated content” and share photos with others. That in turn produced a network effect: people needed to use Facebook or others to communicate.

But they attract bad actors as well — people and organisations who exploit free resources for money or perverted motives. These are polluters of the digital commons and with them come over-grazers: people guilty of lesser sins such as shouting loudly to gain attention or attacking others.

As Hardin noted, this is inevitable. The digital commons fosters great communal benefits that go beyond being a publisher in the traditional sense. The fact that YouTube is open and free allows all kinds of creativity to flourish in ways that are not enabled by the entertainment industry. The tragedy is that it also empowers pornographers and propagandists for terror.

So when Mark Zuckerberg, Facebook’s founder, denounced Russia’s fake news factory — “What they did is wrong and we’re not going to stand for it” — he sounded like the police chief in Casablanca who professes to be shocked that gambling is going on in a casino. Mr Zuckerberg’s mission of “bringing us all together as a global community” is laudable but it invites trouble.

Hardin was a pessimist about commons, arguing that there was no technical solution and that the only remedy was “mutual coercion, mutually agreed upon by the majority”. The equivalent for Facebook, Twitter and YouTube would be to become much more like publishers, imposing tight rules about entry and behaviour rather than their current openness.

They resist this partly because it would bring stricter legal liability and partly because they want to remain as commons. But every time a scandal occurs, they have to reinforce their editorial defences and come closer to the kind of content monitoring that would change their nature.

It would cross the dividing line if they reviewed everything before allowing it to be published, rather than removing offensive material when alerted. Defying Hardin, they aspire to a technical solution: using artificial intelligence to identify copyright infringements and worse before their users or other organisations flag them for review.

More than 75 per cent of extremist videos taken down by YouTube are identified by algorithms, while Facebook now finds automatically 99 per cent of the Isis and al-Qaeda material it removes. It is like having an automated fence around a territory to sort exploiters from legitimate entrants.

Machines cannot solve everything, though. If they could exclude all miscreants, the commons would turn into something else. The vision of an unfettered community is alluring but utopias are always vulnerable.

Armageddon outta here

Preparing for a financial disaster might not be a bad idea

Dido Sandler

 A scene from Armageddon, the film that told the story of an asteroid heading towards Earth © Getty

Brexit negotiations fall off a cliff, causing a huge shock to the UK economy. Radical Labour then wins the next election and we are back in the 1970s, with a massive surge in public spending, interest rates and inflation, a balance of payments crisis, rocketing taxes and a run on the pound.

Clearly, a bad Brexit will not have the same global inflationary impact as the quadrupling oil price in the 1970s — a key catalyst then to the decade’s economic woes. Although some investment managers expect less profligacy from Labour than the party’s pronouncements suggest, when John McDonnell, the shadow chancellor, admits that he is planning for a possible sterling crisis, many feel that preparing for a financial apocalypse might not be a bad idea.

Life for the wealthy has become easier since the 1970s, yet in other ways more challenging. Workforces have become globally mobile, with money now transferred around the world at the flick of a button.

When former French president François Hollande introduced a 75 per cent tax on the super-rich, many wealthy French workers simply upped sticks and left, with London’s property market being one of the main beneficiaries.

In 1970s Britain, there were harsh foreign exchange controls preventing individuals taking their money out of the country. But they did not always work. Julian Chillingworth, chief investment officer of Rathbones, says Britons took flights to Jersey or Switzerland with suitcases stuffed with cash. “It was slightly embarrassing getting stopped in customs,” he says. “And people did get stopped.”

Nowadays, it would be very difficult for a government to limit financial flight, says Brian Tora, a consultant at JM Finn. But not imposible.

With better communications, however, has come transparency. In the 1970s, once assets were stashed safely offshore, they were difficult to trace. Whereas now, warns Rachel de Souza, partner in the private clients team at RSM, HM Revenue & Customs has the information to tax you on most worldwide income. More countries are adopting Common Reporting Standard rules, which have been brought in to tackle tax evasion.

To avoid HMRC’s clutches permanently, a wealthy investor would need to be out of the UK for five years, preferably living in a low-tax jurisdiction such as Switzerland.

Prime minister Theresa May at the European leader’s summit in October this year © Aurore Belot/AFP/Getty Images

Advisers have a host of sensible ideas to protect investors’ finances. De Souza suggests selling assets rich with capital gain to a third party or a company to lock in the gain at the present lower tax rate. The wealthy should also consider switching their investment mandate from income to growth, as capital gains tax should remain lower than income tax under a Labour administration.

Ben Simpson, chief executive of Menzies Wealth Management, says wealthy families should look into making gifts to kids, as no inheritance tax is payable if you survive seven years.

“Sometimes the simplest strategy is the best,” he says. And Jason Hollands, managing director of Tilney Bestinvest, recommends paying school fees upfront, to pre-empt the potential imposition of VAT — a key policy plank of a government under Labour leader Jeremy Corbyn.

Wealth managers are unfazed, however, about any potential hard left effect on investment performance. They typically hold only 10-15 per cent in UK equities in client portfolios.

Overseas income is usually taxed when crystallised. The UK markets reacted negatively to the vote for Brexit, but the aftermath was marked by a swift recovery.

Jim Wood-Smith, chief investment officer at Hawksmoor Investment Management, believes a Corbyn victory would provoke a similar reaction. “The markets will get over it,” he says.

“They got over hurricanes, got over North Korea sending a . . . ballistic missile over Japan.

They’re getting over a lot very quickly these days.”

St Helier in Jersey, where Britons in the 1970s took their cash to escape stringent foreign exchange controls © Matt Cardy/Getty Images

Most experts, however, would agree that the only certainty at present is the persistence of uncertainty. David Miller, executive director of Quilter Cheviot, says the wealthy should diversify across a range of assets, both paper and physical. They should look at property, gold, art, violins as well as securities in different areas of the world to insulate against government intervention or geopolitical shock, he says.

But even gold may not be safe. In the 1930s, President Roosevelt nationalised nearly all the physical gold held in the US. In times of financial Armageddon, even the investment of last resort might not be enough.

It Started as a Tax Cut. Now It Could Change American Life.


A job fair in Atlanta in last year. While Republicans promote their tax plan as a way to encourage job growth and economic expansion, its constraints on state and local taxation could restrict spending on health care, education, transportation and social services. Credit Bob Andres/Atlanta Journal-Constitution, via Associated Press        
The tax plan has been marketed by President Trump and Republican leaders as a straightforward if enormous rebate for the masses, a $1.5 trillion package of cuts to spur hiring and economic growth.
But as the bill has been rushed through Congress with scant debate, its far broader ramifications have come into focus, revealing a catchall legislative creation that could reshape major areas of American life, from education to health care.
Some of this re-engineering is straight out of the traditional Republican playbook. Corporate taxes, along with those on wealthy Americans, would be slashed on the presumption that when people in penthouses get relief, the benefits flow down to basement tenements.
Some measures are barely connected to the realm of taxation, such as the lifting of a 1954 ban on political activism by churches and the conferring of a new legal right for fetuses in the House bill — both on the wish list of the evangelical right.
With a potentially far-reaching dimension, elements in both the House and Senate bills could constrain the ability of states and local governments to levy their own taxes, pressuring them to limit spending on health care, education, public transportation and social services. In their longstanding battle to shrink government, Republicans have found in the tax bill a vehicle to broaden the fight beyond Washington.

The Long and Winding Road to a Haircut


People queue to withdraw money from an ATM in Caracas

CAMBRIDGE – Default is back. Sovereign finances weathered a wrenching global recession and a collapse in commodity prices surprisingly well over the past few years. But failed economic models cannot limp along forever, and the slow bleeding of the economies of Puerto Rico and Venezuela have now forced their leaders to say “no mas” to repaying creditors.

Earlier this year, Puerto Rico declared bankruptcy. At the time, the United States commonwealth had about $70 billion in debt and another $50 billion or so in pension liabilities.

This made it the largest “municipal” bankruptcy filing in US history.

The debt crisis came after more than a decade of recession (Puerto Rico’s per capita GDP peaked in 2004), declining revenues, and a steady slide in its population. The demographic trends are all the more worrisome because those fleeing Puerto Rico in search of better opportunities on the US mainland are much younger than the population staying behind. And in September, at a time of deepening economic hardship, hurricane Maria dealt the island and its residents an even more devastating blow, the legacy of which will be measured in years, if not decades.

More recently, in mid-November, Venezuela defaulted on its external sovereign debt and debts owed by the state-owned oil company, PDVSA. Default on official domestic debt, either explicitly or through raging hyperinflation, had long preceded this latest manifestation of national bankruptcy.

While the government and PDVSA owe about $60 billion to foreign bondholders, these entities reportedly owe a comparable (if not larger amount) to Russia and China. According to the International Monetary Fund’s most recent World Economic Outlook, Venezuela’s real per capita GDP has contracted nearly 40% since 2008. By 2022, the cumulative toll is expected to leave per capita income at about half its level a decade ago. Such an economic collapse, rare outside wartime, understates the extent of human suffering implied by the prolonged food and medicine scarcities that plague the country.

Sovereign debt restructuring has a long and often torturous history. Relatively few cases have been resolved quickly or amicably, and they are usually cases where the restructuring involves only some concession on the interest rate and a lengthening of maturities on outstanding debt.

They usually do not involve writing off a substantial portion of the principal owed. In other words, there is no significant “haircut” for creditors and only limited debt relief, at best, for debtor governments.

Obviously, there are significant differences between Puerto Rico and Venezuela regarding the origins of their economic crises, their political systems, their relationship with the US and the rest of the world, and much else. Nonetheless, some notable similarities are likely to emerge as their debt sagas unfold.

For starters, prompt resolution can be ruled out (or nearly so) in both cases. As Christoph Trebesch and I document, a common pattern in the often-hostile back and forth between sovereign debtors and their creditors is the protracted nature of the resolution process. Initial restructuring terms often are too timid, relative to the haircut needed to restore solvency. As a result, restructuring efforts have often been piecemeal.

Moreover, this pattern has emerged whether the creditors are bondholders (as in the case of Puerto Rico’s debt and about half of Venezuela’s), commercial banks, or official creditors (as in Greece). For example, between the early 1980s and 1994, Brazil had six different external debt restructuring deals, and Poland had eight, before the decisive restructuring under the more encompassing Brady Plan restored medium-term debt sustainability.

Another similarity between Puerto Rico and Venezuela that is likely to emerge stems from the severity of the economic damage that has already been sustained. Our work suggests that the size of the cumulative haircut is linked to the magnitude of the realized output losses. And, for both economies, bleak recovery prospects cast a long shadow over payment capacity.

On that basis alone, the haircuts will likely be on the high end of historical experience.

Venezuela’s previous debt restructuring, during the emerging-market crisis of the 1980s, was almost 40%.

Research by Juan Cruces and Trebesch, who provide estimates for the size of debt write-offs, shows that in almost half of the 64 restructuring episodes from 1980 to 2011, the cumulative haircut ended up amounting to more than 50%. In 15 cases, more than 75% of the face value of external debt was effectively written off.

Ambitious recent proposals to provide comprehensive assistance to battered Puerto Rico could, in principle, facilitate debt restructuring, though it is too early to say. Venezuela’s ever-more reprehensible regime under President Nicolás Maduro, and the uncertainty created by competing claims (mostly Western bondholders versus Chinese and Russian collateralized loans) sets the stage for a prolonged process culminating in substantial haircuts. While creditors should revise their expectations downward, the real tragedy is for ordinary citizens, for whom the restructuring process implies a protracted period of worsening impoverishment.

Carmen M. Reinhart is Professor of the International Financial System at Harvard University's Kennedy School of Government.

The Ant and the Grasshopper

Jared Dillian
Editor, The 10th Man

I’m sure you’ve heard the fable of the ant and the grasshopper. The ant busted his ass all year growing some grain to store for the winter, while the grasshopper was laying about, playing the fiddle. When winter came around, the grasshopper had no food, so he went to the ant’s house to beg for some. The ant told him to beat it, and the grasshopper starved to death. The end.

Source: read.gov

This tweet was getting retweeted all over the place last weekend. Apologies for the bad language.

For starters, the guy’s Twitter handle is “bitstein.” But anyway. This is the fable of the grasshopper and the ant.

The ant is busting his ass, schlepping into work every day, trading and analyzing securities, making liquid markets, providing clear social benefits.

The grasshopper is a “ponzi monkey hitting refresh 50 times a day,” according to Twitter user @prestonjbyrne. We’ll see who’s got something to eat when winter comes.

At the top of the cycle, there are always people who look down on the working stiffs, the ants. Actually, it seems like the loudest voices in finance these days are people who tell you to be long SPY, Amazon, or even bitcoin—unhedged. I don’t think we should be denigrating people who think it’s prudent to wear a seat belt.

Getting Rich Slow (with an Option)

I’m a big fan of getting rich slow. But I should add a caveat. I’m a big fan of getting rich slow with an option to make more.

I am channeling Taleb here. A wonderful portfolio strategy is to put 90% of your money into safe assets with a stable return—and to speculate on long shots with the remaining 10%, stuff that can give you 10x or 100x or 1000x returns.

Of course, bitcoin falls into that category, but you could argue that the bitcoin ship has sailed—we’re in full tulipmania now. 2014 would have been a nice time to have that idea1. Now, it is too late.

It is too late for a lot of longshots—venture capital, cryptocurrencies, Internet stocks… the 100x returns have already been made. Yes, there is always a bull market somewhere, but the trouble with investing in 2017 is that there are bull markets everywhere.

This is why I am a big proponent of wearing a seatbelt. It’s stupid to be short or flat, but it’s prudent to be careful. Will you miss out on some upside? Possibly. Will you miss out on the downside? Yes, that is the point. Just like the ant—slow and steady wins the race.

Captain Moonshot

So why are moonshots so popular? You wouldn’t buy Amazon at a $580 billion market cap unless you thought there was a reasonable probability of it reaching a $1 trillion market cap. Or even a $2 trillion market cap! Who knows—anything is possible.

But that sentiment—anything is possible—is not always present. There are some points in history where it seems like nothing is possible. That was the case not long ago—in 2009.

If you know a little bit about finance, you know that valuing equities without dividends can be tricky, and a lot of it depends on your assumption of what a “terminal value” might be. This also depends heavily on interest rates, which happen to be low.

So, lots of ebullience + easy monetary policy means these moonshots have very high valuations.

With a little foresight, we might have been able to predict that these conditions would develop—but I think no reasonable person thought it would go this far.

No Shame

If you’re the ant, schlepping back and forth to work, you have nothing to be ashamed of.

Please, please, please, do not have fear of missing out. Fear of missing out is currently manifesting itself in the number of Coinbase accounts exceeding the number of Schwab accounts.

You may think watching other people get rich is bad. But there is nothing quite like the smug satisfaction of sitting on a pile of grain in the winter, with the grasshoppers starving outside, and knowing that all the schlepping paid off.

Sure, some people just have a higher tolerance for risk. Their life isn’t complete unless they are watching their net worth rip around at a rate of 15% a day. There has always been a fine line in this business between investing and speculating. Reflect a little on which one you have been doing.