The New York Times International - 29.07.2019

8 | MONDAY, JULY 29, 2019 THE NEW YORK TIMES INTERNATIONAL EDITION

business

In an annual rite of passage, over a million Americans will enroll in their first economics class in the fall, and as the field of economics has evolved, these introductory classes have changed, too. Many economists these days view what we are teaching not so much as a specific subject matter but as a set of analytic tools that are relevant beyond the relatively standardized production and pricing decisions of the business world. This perspective has led mod- ern economists to study families, edu- cation and health, much as they study business strategy, politics, and finance. This broader ambit for economic reasoning provides an opportunity to make introductory economic courses more useful to more students, explor- ing how these ideas can inform the thousands of decisions they confront each day. This approach requires a shift in vision. As an undergraduate, I was taught from the perspective of a spec- tator in the nosebleed seats watching the economic action unfold below. But economics is more useful if we teach students to see themselves as protago- nists on the economic playing field. This shift helps students see that economics is a set of tools that can empower them, providing insight that will guide them toward better decisions. I’ve adopted this perspective in the introductory classes I teach at the University of Michigan. My students describe a sense of wonder at discovering that their daily decisions — how much to spend, how many hours to work or how to allocate household tasks — are the stuff that economists study. Take the theory of comparative advantage, which is a critical concept in international trade. It is traditionally taught as a series of calculations that can explain why England produces cloth that it trades for Portugal’s wine. But comparative advantage is a broader, more useful, and intuitive idea: the insight that a group of people can produce more if each task is done by the person who can do it at the lowest cost. Critically, economics teaches that the relevant cost is what we call the opportunity cost, which is not the number of

hours a task takes you but rather what you forgo by not pursuing the next best use of your time. This idea explains why it would have made sense for Ringo Starr to play drums for the Beatles, even if it was true, as some have said, that Paul McCartney was a better drummer. The opportunity cost of Mr. McCartney’s playing drums frequently would have been higher, because it would have meant forgoing his regular work on bass guitar. My students have applied the same idea in their own lives, discovering that they’re better off assigning the task of cooking dinner to whichever roommate doesn’t have a big paper due, rather than to the best cook. (And during exam week, they assign the task to the local pizzeria.) Many of their parents probably used the same idea years earlier when deciding who should get up at 3 a.m. when the baby fusses, discovering that the opportunity cost is lower for whoever can be more produc- tive the next day, even when sleep deprived. The same idea guides much of the business world, explaining why your dentist rarely cleans your teeth, your vet rarely weighs your pup and law part- ners rarely draft motions. In each case, the question about how best to allocate tasks rests on the same calculation, which involves identifying the best alternative use of your time. This approach can even guide shop- ping decisions. After all, when you’re deciding whether to buy pre-cut vege- tables, you’re effectively asking whether to assign the task of chopping your veggies to yourself or someone else. Start thinking this way and you’ll quickly see that the ideas that guide your everyday decisions also propel international trade, which is why American engineers design iPhones, while foreign workers — who have fewer alternative opportunities — do the laborious work of putting them together. By assigning tasks this way, Americans have gotten cheaper iPhones, and Chinese and Indian con- sumers have gotten greater access to advanced technology. This approach to teaching tweaks the incentives facing students. As they discover that economic ideas are rele-

vant to their personal and professional lives, it becomes more likely that the benefits of engaging with economics will outweigh the costs. It shouldn’t be surprising that a field that traditionally focused on the production decisions of a mythical widget factory failed to attract many female students. A broader approach to social science is likely to engage a more diverse array of students. Fewer than one-tenth of the students who take introductory economics classes will major in economics. And among that select group, fewer than one in 100 become economists. Yet everyone can benefit from applying the tools of economics. This can happen only if instructors focus on showing how their tools can help people from all walks of life, rather than on training the tiny sliver of students who will become economists. It may also require a change in mind-set. Economists have traditionally been reluctant to give people advice because we have little to say about matters of taste. If you choose an apple rather than an orange, the argument goes, it’s most likely because you prefer the apple. We have no business telling you which fruit to buy. Fair enough. But it would be wrong to conclude that economics can’t help you make better fruit-buying decisions. If your family eats a lot of apples, it’s worth pointing out that you can get a better deal buying the two-pound bag if it’s less than twice the price of the one-pound bag. Even if cheaper apples are available on the other side of town, they may not be a good deal, once you account for the opportunity cost of your time. And it would be foolish to buy apples without first checking whether there’s a sale on useful substi- tutes, like oranges. You’re also likely to make better buying choices if you note that even if a pound of candy is cheaper than a pound of apples, the true price of the apples may be lower, once you account for the health consequences. And before you forgo the apples, consider the reality that buying food processed in polluting factories comes with a hidden cost to the planet. Indeed, one of the most useful pay- offs from learning some economics is that it allows you to see the unseen costs. To some, that makes the field seem dismal. But I think of it as a superpower that will help you make better choices.

Why Ringo was on drums

Economic View

B Y JUSTIN WOLFERS

Economists study daily decisions like how many hours to work and how to allocate household tasks.

ed in the background, mainly monitor- ing Boeing’s progress and checking pa- perwork. The nation’s largest aerospace manufacturer, Boeing was treated as a client, with F.A.A. officials making decisions based on the company’s deadlines and budget. It has long been a cozy relationship. Top agency officials have shuffled between the government and the industry. During the Max certification, senior leaders at the F.A.A. sometimes over- ruled their own staff members’ recom- mendations after Boeing pushed back. For safety reasons, many agency engineers wanted Boeing to redesign a pair of cables, part of a major system unre- lated to MCAS. The company resisted, and F.A.A. managers took Boeing’s side, according to internal agency documents. After the crash of the Lion Air plane last October, F.A.A. engineers were shocked to discover they didn’t have a complete analysis of MCAS. The safety review in their files didn’t mention that the system could aggressively push down the nose of the plane and engage repeatedly, making it difficult to regain control of the aircraft, as it did on the doomed Lion Air flight. Despite their hazy understanding of the system, F.A.A. officials decided against grounding the 737 Max. Instead, they published a notice reminding pilots of existing emergency procedures. The notice didn’t describe how MCAS worked. At the last minute, an F.A.A. manager told agency engineers to remove the only mention of the system, according to internal agency documents and two people with knowledge of the matter. Instead, airlines learned about it from Boeing.

“HE REALLY WANTED ABDICATION” The F.A.A. department that oversaw the Max development had such a singular focus that it was named after the company: The Boeing Aviation Safety Oversight Office. Many F.A.A. veterans came to see the department, created in 2009, as a sym- bol of the agency’s close relationship with the manufacturer. The top official in Seattle at the time, Ali Bahrami, had a tough time persuading employees to join, according to three current and former employees. Some engineers believed that Mr. Bahrami had installed managers in the office who would defer to Boeing. “He didn’t put enough checks and balances in the system,” Mike McRae, a former F.A.A. engineer, said of Mr. Bahrami. “He really wanted abdication. He didn’t want delegation.” Before the certification of the Max be- gan, Mr. Bahrami called a group of

F.A.A. engineers into his office, the current and former employees said, and asked some of them to join the group. Many didn’t want to change jobs, according to a complaint filed by the Na- tional Air Traffic Controllers Associa- tion, the union representing F.A.A. engineers. “I got dragged kicking and scream- ing,” said Richard Reed, a former systems engineer at the F.A.A. Mr. Reed said he had just left surgery when agency officials called to ask whether he would work in the office. “I always claimed that I was on drugs when I said ‘yes.’ ” The F.A.A. said in a statement that Mr. Bahrami “dedicated his career to the ad- vancement of aviation safety in both the private and public sectors.”

For decades, the F.A.A. relied on engineers inside Boeing to help certify aircraft. But after intense lobbying to Con- gress by industry, the agency adopted rules in 2005 that would give manufac- turers like Boeing even more control. Previously, the agency selected the company engineers to work on its be- half; under the new regulations, Boeing could choose them, though the F.A.A. has veto power. By 2018, the F.A.A. was letting the company certify 96 percent of its own work, according to an agency official. Nicole Potter, an F.A.A. propulsion and fuel systems engineer who worked on the Max, said supervisors repeatedly asked her to give up the right to approve safety documents. She often had to fight to keep the work.

“Leadership was targeting a high level of delegation,” Ms. Potter said. When F.A.A. employees didn’t have time to approve a critical document, she said, “managers could delegate it back to Boeing.”

PLAYING DOWN RISKS In the middle of the Max’s development, two of the most seasoned engineers in the F.A.A.’s Boeing office left. The engineers, who had a combined 50 years of experience, had joined the office at its creation, taking on responsibil- ity for flight control systems, including MCAS. But both grew frustrated with the work, which they saw as mostly paper pushing, according to two people with knowledge of the staff changes. In their place, the F.A.A. appointed an

engineer who had little experience in flight controls, and a new hire who had gotten his master’s degree three years earlier. People who worked with the two engineers said they seemed ill-equipped to identify any problems in a complex system like MCAS. And Boeing played down the impor- tance of MCAS from the outset. An early review by the company did- n’t consider the system risky, and it did- n’t prompt additional scrutiny from the F.A.A. engineers, according to two agency officials. The review described a system that would activate only in rare situations, when a plane was making a sharp turn at high speeds. The F.A.A. engineers who had been overseeing MCAS never received an- other safety assessment. As Boeing

raced to finish the Max in 2016, agency managers gave the company the power to approve a batch of safety assess- ments — some of the most important documents in any certification. They believed the issues were low risk. One of the managers, Julie Alger, del- egated the review of MCAS. Previously, the F.A.A. had the final say over the system. The F.A.A. said that decision re- flected the consensus of the team. Boeing was in the middle of overhaul- ing MCAS. To help pilots control the plane and avoid a stall, the company al- lowed MCAS to engage at low speeds, rather than just at high speeds. The overhauled version would move the stabilizer by as much as 2.5 degrees each time it engaged, significantly pushing down the nose of the plane. The earlier version moved the stabilizer by 0.6 degrees. When company engineers analyzed the change, they figured that the system had not become any riskier, according to two people familiar with Boeing’s dis- cussions on the matter. They assumed that pilots would respond to a malfunc- tion in three seconds, quickly bringing the nose of the plane back up. In their view, any problems would be less dangerous at low speeds. So the company never submitted an updated safety assessment of those changes to the agency. In several brief- ings in 2016, an F.A.A. test pilot learned the details of the system from Boeing. But the two F.A.A. engineers didn’t understand that MCAS could move the tail as much as 2.5 degrees, according to two people familiar with their thinking. Under the impression the system was insignificant, officials didn’t require Boeing to tell pilots about MCAS. When the company asked to remove mention of MCAS from the pilot’s manual, the agency agreed. The F.A.A. also did not mention the software in 30 pages of de- tailed descriptions noting differences between the Max and the previous itera- tion of the 737. Days after the Lion Air crash, the agency invited Boeing executives to the F.A.A.’s Seattle headquarters, according to two people with knowledge of the matter. The officials sat incredulous as Boeing executives explained details about the system that they didn’t know. In the middle of the conversation, an F.A.A. employee, one of the people said, interrupted to ask a question on the minds of several agency engineers: Why hadn’t Boeing updated the safety analysis of a system that had become so dangerous?

Relaxed oversight at the root of Boeing’s crisis

B OEING, FROM PAGE 7

Natalie Kitroeff and Jack Nicas reported from Seattle, and David Gelles from New York. James Glanz, Mike Baker and Kitty Bennett contributed reporting.

After the first fatal crash of the 737 Max, in October 2018, federal regulators realized they didn’t fully understand the software system that had sent the plane into a nose-dive.

RUTH FREMSON/THE NEW YORK TIMES

artists and other cultural creators interested. The street artist who goes by Fnnch said he was creating his largest piece of art for the Otis platform. Fnnch said he intended to retain an interest in his work, which could help him financially. He noted how a recent auction of Jeff Koons’s “Rabbit” for $ million helped the market for the artist, even though none of that money had gone to Mr. Koons. “It would be different if every artist retained 10 percent or 50 percent of his work and benefited from the sale of it,” he said. “A platform like this opens up poten- tial.” Share prices are relatively low, but a minimum investment is often required. At Masterworks, shares in the Warhol work, valued at nearly $2 million, cost $20 apiece, but the minimum investment is $1,000, Mr. Lynn said. Even though these companies are selling shares in the items, the secondary markets are limited or nonexistent. Mr. Lynn said he tells investors to plan on holding their shares for three to seven years. Mr. Karnjanaprakorn of Otis said the company was working on a secondary market. With Rally’s car investments, an investor can enter and exit an offering like any publicly traded security after a 90-day lockup period, said Chris Bruno, chief executive of Rally Rd. That helps Rally track the asset’s value. “Opening up a trading window allows us to regularly re-price the asset,” he said.

tized come with an obligation from the borrower to pay money back, and they offer a stream of income for a fixed period. Art, cars and other luxury items do not offer those guarantees. The actual objects stay in galleries, showrooms or, with most of the cars that Rally has, at two locations where a caretaker maintains them. A similar model is used in real es- tate, in which the use of a property like a condo or a house is divided into fixed amounts and sold to investors, which I wrote about recently. The risk with fractional ownership is that owners struggle to sell their shares. There is an opportunity for a return. The sponsors of these deals seek to eventually sell the assets to private collectors. Rally sold a Ferrari F430, which was on the platform for six months, to a private collector, earning a 17 percent profit. But like many other investments, proponents put this into the category of future of finance, which is a squishy term at best. Scott Lynn, founder and chief executive at Masterworks, which is offering shares in a Marilyn Monroe painting by Andy Warhol, points to Lending Club, a pioneer in this investment model. Along with other peer-to-peer groups, Lending Club makes high- interest, short-term loans to individu- als with money from other retail investors. Leland Sutton, a brand strategist and entrepreneur, is No. 6 on the waiting list to buy shares in the first piece of art offered by Otis, an online platform that plans to offer one or two cultural investments a month. The first offering is a painting by Kehinde Wiley, who painted President Barack Obama’s presidential portrait. Otis paid $237,500 for the painting and has marked it up to $250,000 for the initial offering of 10,000 shares. “It’s more tangible and feasible than putting your money into a Damien Hirst dot painting going for millions of dollars,” Mr. Sutton said. “People understand the cultural value of this and that they don’t need millions of dollars.” Otis is offering a broad range of assets that it will securitize on its platform. “The offerings span across comic books, other artworks, luxury items like Rolex watches and Birkin bags,” said Michael Karnjanaprakorn, founder of Otis. “We believe in a diver- sified portfolio.” The bet on appreciation has some

But Professor Schwarcz said the lack of liquidity was riskier than retail investors might realize. A pool of mort- gages, for example, will eventually turn into a pool of money as the under- lying loans are paid back. But a painting will continue to be a painting. Some companies are working to persuade investors that the assets will increase in value. Mr. Lynn said similar Warhol paintings of Marilyn Mon- roe were approaching $2.5 million in value. To increase value of its Warhol, the company plans to lend the artwork to museums. Rally has a purple 1994 Lamborghini Diablo SE30 Jota on display in its SoHo showroom. The car was priced at $598,000, which was divided into 5, shares at $119.50 a share. The company sold half the shares in two hours, eventually bringing in 976 investors. Having the car on display in a showroom helps increase interest. Whether this approach to securitiz- ing assets works is hard to say. Even Mr. Karnjanaprakorn said it was difficult to predict what would happen. “I have no idea if it’s going to work,” he said. “The things that I’ve seen make me believe it’s going to work. We have close to 25,000 people on the waiting list.” But Professor Schwarcz said this model sounded like a fad. “On a super- ficial level, it’s a tangible interest in the art,” he said. “But on a realistic level, you can’t go to the person who has the artwork and say, ‘Give me a piece of that artwork.’”

Sharing that purple Lamborghini

WEALTH, FROM PAGE 7

Max Niederste-Ostholt, left, Chris Bruno and Rob Petrozzo of Rally Rd., a New York company that sells cars, artwork and other luxury items as securitized investments.

JEENAH MOON FOR THE NEW YORK TIMES

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The New York Times International - 29.07.2019

Relaxed oversight at the root of Boeing’s crisis

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