Jabley.com

I ran across an interesting forum on economist.com that extends upon a post written by Arnold Kling at EconLog. The post examines the issue of compensation, particularly that of exorbitantly paid investment bankers clustered at the favorable tail of the income distribution. In light of these “rents” (economic parlance for what essentially amounts to excess payments), asks Dr. Kling, why aren’t there more investment bankers? I’ve sometimes wondered the same and Kling’s prompting has distilled my thinking on the subject.

Kling’s concludes that investment bankers enjoy continually high rents because would-be competitors simply have better things to do with their lives.

In short, the distribution of wealth represents differences in taste. Many people prefer jobs with less income and more of other characteristics.

I think that many people steer away from finance and accounting as a matter of taste. But people who choose different occupations are not all satisfied with simply making their own choice and letting other people make their choices. Just as there are people who believe that it is in bad taste to smoke or drive an SUV, there are people who believe that it is in bad taste to be an investment banker. And just as there are people who want to see government do something to punish smokers and SUV owners, there are people who want to see government punish those who choose high-income careers.

Though operative, this reasoning fails to fully explain why high salaries persist in IB. I’d argue one reason for the theory’s inadequacy resides in its acceptance of some flawed assumptions.

Assumption #1: IB Has Few Barriers to Entry

Kling offers that, outside of financial knowledge, there exist few barriers to entry in IB.

I can see how doctors earn rents–there are obvious barriers to entry. And the field of entertainment generates winner-take-all results, in part because being popular makes you more popular. But a lot of the big money is in finance–investment banking. One would expect more people to go into investment banking and compete away those rents.

He continues.

I am pretty sure that all of my daughters could master finance if they wanted to. Both economic theory and my wife are telling them that they should major in accounting, but none of them will do so. I may be naive, but I suspect that there are a lot of people who could raise their incomes by going into investment banking. They are not prevented from doing so, but they choose other careers as a matter of taste.

My personal observation has been that IB is highly specialized and that there are often substantial barriers,  specifically those of the type Kling characterizes as “obvious” in other professions. Take, for example, any of the go-to banks in biotechnology. Most biotech bankers have terminal degrees in their respective fields of science and some have stacked an M.D. on top of their doctoral training for good measure. Those lacking these credentials almost uniformly have extensive experience in industry; few, if any, land these jobs due to accounting prowess or dumb luck. These bankers aren’t paid high wages because they are financial wiz kids (if anything, the financials are simpler in this sector). Rather, they are highly paid because the basic knowledge required to effectively interact with clients creates a relatively high barrier to entry. Though I’m not as familiar with other IB sectors, I suspect this barrier isn’t limited to biotech, but extends to many capital intensive sectors, such as IT, where Dr. Kling has profitably operated.

Assumption #2: “Banking” is Homogenous

The first comment to Kling’s post (offered by KipEsquire, who has one of the most phenomenal descriptions of a professional life I’ve seen recently) correctly observes:

The term “investment banking as a career” is comparable to the terms “health care as a career” or “education as a career” — you are lumping together far too many and too varied occupations for your thesis to have any potency. (P.S. Yes I am an investment banker. No I am not in the top 1% of incomes. Go figure.)

Bingo. Like KipEsquire, I’m an “investment banker” who, to this point, has helped raise what amount to seed and VC rounds. Take 7% of what I place, deduct expenses, and I assure you there’s not a seven figure remnant in my firm’s bank account. Lumping the services I provide into the same pot as the fat cats who structure multi-billion dollar M&A transactions is akin to comparing a Ford to a Ferrari; they’re both cars, but the similarities end there. In an addendum, Kling accepts this criticism as valid.

Assumption #3: Banking Isn’t Highly Competitive

Dr. Kling suggests that IB is a field in which qualified people can move in and out of the field unencumbered by competitive forces (again, note that Kling seemingly argues “qualified” refers to those who possess a mastery of finance, but in the interest of further exploring this idea, let’s also grant these candidates an M.D., Ph.D., or J.D.).

I may be naive, but I suspect that there are a lot of people who could raise their incomes by going into investment banking. They are not prevented from doing so, but they choose other careers as a matter of taste.

There is an entire cottage industry dedicated to helping people land IB jobs, the existence of which suggests a competitive market (go to amazon.com and search for “investment banking” and you’ll find dozens of career guides, at least one of which is in its 5th edition). I doubt such an industry exists for, let’s say, bank tellers.

An Alternate Explanation

My answer to Kling’s question is admittedly pretty simplistic. At a fundamental level, I think there aren’t more investment bankers for any reason other than the fact that the world simply doesn’t need more of them. If Lehman Brothers or any other well-capitalized firm needed more bankers, they clearly have the resources to hire, train, and pay them exceedingly well. Simply put, banks don’t need more bankers, they need better ones. I’d argue the reasons for this are numerous, but include such things as the volatility of the industry (firms don’t want to hire several bankers only to lay them off a few months later).

Jablet and I were crushed tonight when we found that our favorite Lexington area Italian restaurant has apparently gone out of business. Lexitalia had very good food and it was quite affordable. The location, however, was terrible and is almost certainly why they ended up closing. Lexitalia owners, if you read this, please reopen elsewhere. Downtown would work great for you and you could easily charge twice the price for your food.

After four days of Seattle-like weather, the Jablet, Emmy and I decided to take advantage of the gorgeous day that was yesterday and take our first trip to Red River Gorge. The Gorge, part of the Daniel Boone National Forest, is approximately 75 miles outside of Lexington and is best known as a rock climber’s paradise, but we just went there to hike. After wandering around lost for a while, we finally found the trailhead to Wildcat trail, a 5.4 mile loop trail that descends through the forest down to and around a large stream, and then rapidly ascends back toward the trailhead. A great, semi-strenuous hike that took a little over 3 hours (including a break at the stream); we saw no other people on this hike—exactly what we needed. Readers, if you have any favorite hiking trails in the Gorge, please post them here. Click thumbnails for enlarged images (the leaf looks pretty neat when the full image is viewed, but the file is over 1MB).

Buried in one of the Dell support forums, I found a fix for the “can’t adjust baud rate” problem with my Dell 1600n multifunction device. I still think it’s stupid that a company that relies on broadband technologies to drive its service has me setting a baud rate to 9600, but I must confess that it seems to have rather fixed my fax issues; I both sent and received a test fax, and it sees to work OK. I image there are other folks out there about to throw in the towel in trying to get their 1600n to work with Vonage, so I decided to post these instructions for you. Let me know if this is of help.

Instructions for changing Dell 1600n Baud Rate

1. 1) Press Menu
2. 2) Press #
3. 3) Press 1, 9, 3, 4 on the number keypad (in sequence)
4. 4) Press Menu again. At this point wait a few seconds and you will see the word “TECH” displayed on the LCD display.
5. 5) Press Menu
6. 6) Press Select
7. 7) Press the < - or -> keys to navigate to “Modem Speed”
8. 8) Press Select
9. 9) Press the < - or -> keys to select the baud rate (options: 4.8, 9.6, 12.0, 14.4, 28.8,33.6)
10. 10) Press Select once you have the baud rate you want displayed. Vonage suggests 9600, but many people have good luck with higher rates as well
11. 11) Press Return
12. 12) Press Return again. At this point you will be taken back to the main menu on the LCD display. It will still say “TECH”. You need to get out of this mode so you have normal access. Do the following.
13. 13) Press Menu
14. 14) Press #
15. 15) Press 1, 9, 3, 4 on the number keypad (in sequence)
16. 16) Press Menu

Last October, the Jablet and I decided to ditch our long distance and local phone company and try out Vonage, the current market leader in the still-emerging consumer voice over internet protocol (VoIP) market. Having used the service for a time sufficient to uncover both its strengths and weaknesses (and to some extent the pros and cons of VoIP technology as a whole), I decided to draft a review that outlines the arguments for and against jumping on the VoIP bandwagon. There are a bunch of other reviews out there, but I think this is distinguished from many of the others insofar as it reflects our overall experience over the past six months, not simply a day or two of intense use as is typical with most technology reviews. I’ll probably make this a piece that evolves over time, so if you have some relevant information, please post a comment or trackback and I will update this post to reflect any particularly salient insights.

What is VoIP?
Before delving into the specifics of Vonage’s service, it is necessary to briefly describe what VoIP is, how it works, and why it is a reasonable alternative to a traditional landline. Simply put, VoIP services use your high speed internet connection to place phone calls. When you order service from a VoIP provider (Vonage, Packet8, AT&T CallVantage, BroadVoice, Lingo, etc.) you are shipped a router that is outfitted with a special phone adapter. You connect your broadband modem to this router, plug your phone into the phone port, and start using the service; in most cases, setup really is that simple. Since the overarching purpose of VoIP is to ditch your local phone company, the switch often only makes sense for cable or fiber optic customers, since many DSL providers require that you keep a standard land line open.

Advantage #1: Price
The primary advantage of any VoIP service is price. For $25 or less per month you can get unlimited phone calls, free long distance in the US and Canada, and just about every calling feature imaginable (voicemail, caller ID, call waiting, three-way calling, and tons of other features that you will never need). If you attempt to get equivalent services through the traditional channels, you would pay at least $50 to your phone company plus whatever long distance charges you rack up. From a value standpoint, Vonage is hard to beat. I would note that some other VoIP services (e.g. Lingo) are less expensive than Vonage and extend the free long distance features to include international calls to regions such as Western Europe.

Advantage #2: Quality Phone Calls
When we ordered Vonage, we were skeptical and didn’t immediately cancel our traditional phone service. After a short amount of time, however, we were satisfied that there were few noticeable differences in overall call quality relative to the traditional phone company and completed the transition. So far, there have been only two exceptions to the “high quality” observation. The first exception, which we have largely remedied, was caused by simultaneously talking on the phone and performing other bandwidth-intensive functions. We have apparently fixed this problem by tweaking the settings on the “bandwidth saver” that allows us to specify the bit rate for voice transmission. The second circumstance in which we have observed minor difficulty with call quality has been when we have had conversations with other individuals outfitted with similar VoIP services. We have experienced some deterioration in call quality both with Vonage to Vonage and Vonage to Lingo calls. I don’t quite know why it is, but it appears as though having at least one traditional land line (or cell phone) involved in the call measurably increases overall call quality.

Advantage #3: Secondary Numbers
A meaningful benefit of the Vonage service is the ability to associate a given router with multiple phone numbers originating from different area codes or even different countries. For example, if I have a client in Phoenix, I could simply add a number originating from the 602 area code. My client could then simply dial that 602 number, have it ring to my Vonage router anywhere in the world, and incur no long distance charges for the call. These numbers can be turned on and off at will and only cost five dollars a month—a pretty good deal, I think.

Advantage #4: Portability
Voice over IP doesn’t care where you are. Due to the fact that you aren’t linked to a phone line, but rather just to a router, your Vonage number can travel with you. For example, if we went overseas on a trip (or even moved to another country), we could simply pack or Vonage router, plug it into a broadband connection anywhere in the world, and start making phone calls as if we were back home. Some people use this strategy to stay in more frequent contact with friends and family overseas. I know of people who have shipped US-based VoIP routers to family members in India who can now call back home free of charge. Similarly, some military families are using VoIP technologies to stay in more frequent contact with family members deployed overseas.

Advantage #5: Wife Approval Factor
The long term viability of a gadget is largely dependent on the degree to which your wife (or significant other) actually recognizes the benefits of the technology. This wife approval factor (WAF) is the unspoken arbiter of whether or not a technology product remains in the house. Items that appeal to both the Jablet and I are few and far between. The only technology item in our home that exceeds Vonage in terms of the WAF is our wireless router. The reason for the high WAF, I think, is that the benefits of Vonage are very concrete. Jablet simply makes the same phone calls she used to make, but pays less for them. I understand that MythTV also has a very high WAP; that’s the next project.

Disadvantage #1: Shoddy 911 Service
This is the BIG one. Since a VoIP number does not physically reside in any given location, it has been problematic for Vonage to establish reliable 911 services for its customers. I went through Vonage’s standard procedures for establishing 911 services, but when I tested it out to make sure that a 911 call actually landed to the appropriate operator, I was connected to a clueless person at the local police department. After I researched the situation a bit more, I found that this was the extent of Vonage’s 911 services—getting you in touch with your local equivalent of Barney Fife. Vonage claims to be well on the way toward finding a solution for this problem and has made the issue a top priority for 2005. I, however, am skeptical and detect a bigger problem; it wouldn’t’ surprise me if this issue lingers for quite some time. The company is currently involved in a major dispute with SBC over their 911 infrastructure; Vonage is trying to get congress involved. In the meantime, Vonage’s lack of real 911 services has already become a bit of a PR nightmare, with at least one state suing the company over the absence of this critical feature. This is a serious issue that has already cost at least one person their life.

Disadvantage #2: Number Portage
One of Vonage’s major claims is that you can keep your old phone number. Some of my friends have successfully ported their number to Vonage, but I’m here to tell you that this won’t necessarily be possible. We went through a three-month long number portability headache when we switched to Vonage. After becoming frustrated with our local phone company over the slow pace at which they were releasing my old phone number, I called to investigate. To make a long story short, federally-mandated number portability only applies to transfers within and between cell phone providers and landline carriers; the law does not apply to VoIP providers. I investigated this thoroughly, calling not only the FCC, but the Kentucky Public Service Commission as well. So basically, if your local phone company agrees to transfer your number to a VoIP provider, they are likely doing so as part of a contractual arrangement with the VoIP company. The thing that made me mad about this is that Vonage swore up and down that our number would be easily and rapidly ported from our local phone company. If they just told me from the outset that our number would not have been ported, that would have been fine. I really wouldn’t have cared all that much. But because of their insistence, we proceeded to order several phone number-specific items (personal checks, engraved dog collar, etc.) that immediately became obsolete once the true situation became apparent.

Disadvantage #3: Single Physical Connection
One of the lesser problems with Vonage is that you can only plug a single phone line into the router. If you’re cheap, this means that you will only have one phone working in your house. The rational means by which you can sidestep this limitation, however, is to simply purchase one of those base station/peripheral unit setups for around $100. These systems allow you to place phones throughout your home while only plugging the base station into the phone port. It’s not that big of a deal, but if you have a phone from 1985, VoIP will force you into the 21st century. Alternately, you can disconnect the phone company’s input lines into your house; once you do this, you should be able to plug in your vonage router and have it ring through every hard wired line in the house. I, however, think that this is a bit of a silly solution. I’d rather just buy the $100 phone and leave my traditional phone lines in tact for future potential owners of our house.

Disadvantage #4: Faxing
The Vonage router comes with a second phone port in case you choose to purchase a fax line. We didn’t order the fax line initially ($9.95/month), but did so recently for business purposes and to accommodate the fax-intensive tax season. I’ve been really disappointed with the fax features; for some reason it appears as though fax capabilities; they simply don’t work for us and we are going to cancel the service. A few days ago I got on the phone with a tech support specialist who told me that I needed to turn off ECM (error correcting mode) and switch the baud rate to 9600 in order for faxing to work. First, I don’t like the idea of turning error correcting mode off; I don’t really know how it works, but it sounds like something that I would want turned ON. Second, didn’t the 9600 baud rate get left back in 1992? Apparently the manufacturers of both of my fax machines agree with me, since it isn’t possible in either case to override the machine’s default baud rate. A good friend of mine tells me that he has not been able to replicate this problem, so it would be most evenhanded, I suppose, to say that the quality of your fax experience may be unpredictable. Update: see this post for an update on the fax situation

Disadvantage #5: Tech Support
If you order Vonage and actually need to get in touch with a technical support representative, make sure that your new base station unit has speakerphone capabilities because you will be on hold for an extended period of time. When I have managed to get in touch with a Vonage representative, I must admin that I have been impressed. However, by the time a customer service representative has gotten around to answering my question, I’ve been rather testy from the protracted wait. Make sure you have at least 30 minutes when you make a support call.

Summary
Overall we’ve been impressed by Vonage. Call quality is excellent, the service is feature-rich and you simply can’t beat the value. It’s the only bill that we actually look forward to paying each month. The major disadvantage of Vonage’s service—namely lack of true 911 service—makes the switch impractical for individuals with chronic life-threatening medical conditions or for families with children. If keeping your old phone number is a big issue for you, we strongly advise you to confirm both with Vonage and your local phone provider the existence of a number portability agreement prior to initiating service. Lastly, you need to be generally comfortable playing around with computers and routers. While this won’t be a problem for the overwhelming majority of Vonage’s potential customer base, I wouldn’t advise a switch for individuals whose interest is only lukewarm.

On the way back from Atlanta last night, the Jablet and I compiled a list of Lexington/Central Kentucky restaurants we’ve patronized in the past few months. We have included in this list those establishments for which we have a clear recollection of the quality of our meal, the service, and the mood/atmosphere. We have provided first-pass ratings regarding each of the aforementioned elements and have further provided our summary rating. The overall rating is not simply a mathematical average of the three composite scores, but rather is our assessment as to the “total package” each has to offer. As time goes by (and as we go back to these places), we will provide full reviews of these restaurants. A few things to note:

Prices

$: ≤10/entrée
$$: Up to $20/entrée
$$$: Over >$20/entrée

Restaurants where we ordered take out (TO) are marked as such; service and atmosphere scores were not ascribed to these restaurants.

The Ketch
(859) 277-5919
2012 Regency Road
Lexington, KY 40503

The Ketch is a moderately-priced, no frills seafood restaurants that has somehow managed to stay afloat despite its proximity to establishments such as Red Lobster and Joe’s Crab Shack. Located on Regency Road near the intersection with Southland Drive, you should go to The Ketch if you’re in the mood for the seafood basics—crab legs, lobster, fresh shrimp—not a fancy meal. You’re not going to get fine table linens, a great atmosphere, outstanding service (our waitress had a tongue ring-induced lisp that made our interactions with her both challenging and entertaining), or anything else the least bit upscale. That being said, the food was pretty good.

For an appetizer we had a hefty portion freshly-cooked, then chilled, peel & eat shrimp—simple but excellent. Jablet’s bucket of crab legs was massive, but apparently delicious, as it disappeared with remarkable speed. I, on the other hand, ordered a combination dinner that included a crab cake and a small sirloin steak. Yes, I violated the “keep it simple” doctrine and learned the hard way. The steak wasn’t horrible, but it was definitely overcooked, though not charred past the point of no return. The crab cake, though clearly above average, couldn’t touch what you can pick up on-the-fly at a New York City corner café. A notable highlight was the delicious assortment of fresh grilled vegetables—we both agreed they were excellent. Overall, we give this place a B for food (A- if you keep it to seafood basics), a B for service, and an A+ for people watching. Far more interesting than the big corporate competitors.

The Damage:
2 beers
1 mixed drink
Shrimp Appetizer
1 lb bucket of crab legs
Crab cake/sirloin combo
$48 before tip