Streetwise Professor

Thirteen months into his administration, Obama has deigned to release an outline of his proposal for his signature policy issue: health care “reform.”  So glad he was able to make the time, even though what has been produced in all these months is only slightly more complete than the infamous produced-over-a-weekend-under-crisis Bernanke-Paulson TARP legislation outline.  It is quite a performance.

In a nutshell: it strips out from the pending bills noxious but irrelevant-in-the-scheme-of-things elements like Bribes for Ben; takes the worst elements from the House and Senate bills; and adds (as hard as it is to believe) even more destructive elements.

Two features are particularly destructive: the creation of a body empowered to review and reject insurer premium increases, and taxes on capital income to finance the huge costs of the proposal.

Price controls like those included in the Obama proposal are the last refuge of economically illiterate.  Lenin called anti-Semitism the socialism of fools: the epithet fits price controls as well.  Like anti-Semitism, Obama’s call for price controls is economically ignorant demagoguery.

There are examples stretching back over millennia demonstrating the destructive effects of such controls.  Except in exceedingly rare cases of true monopoly—which the health care insurance market is most definitely not—these controls result in shortages, rationing, declines in quality, rent seeking, regulatory arbitrage and corruption.  (Regarding regulatory arbitrage and rent seeking, some of the provocatively-named Enron California electricity trading strategies were intended to circumvent price controls, pure and simple.  Price controls also lead to otherwise-inefficient organizational choices, such as excessive vertical integration.)

Price controls will be the death of a private market for insurance.  But perhaps that’s exactly the intent, no?

Hard as it is to believe, the Obama proposal is even more costly than the Senate bill; definitive estimates are unavailable (and would be unbelievable in any event) due to the paucity of details, but guesstimates put the cost within hailing distance of a trillion dollars.   (Leading me to endorse the wisdom of a bumper sticker I saw: “I hope Obama doesn’t know what comes after trillion.”)

Part of this additional cost is due to undoing Bribes for Ben and related special favors with a “free ice cream for EVERYONE not just Ben (or Mary)” strategy.  But what the heck, it’s not their money, right?  Well, not yet, anyways.

As is his wont, Obama attempts to deflect criticisms of budgetary impact by striking the Fiscally Responsible pose by claiming that the proposal includes sufficient sources of additional revenue to make it budget neutral.

Several things.  First of all: IT’S THE SPENDING, STUPID.   The deficit issue is of the Fram Oil Filters you-can-pay-me-now-or-pay-me-later variety.  What really matters is whether the spending is justified.

Second, some of the purported sources of money to cover the cost are, quite frankly, figments of the imagination.  A big chunk is from cracking down on Medicare waste, fraud, and abuse.  Well, what has been done about that in the last year?  (Crickets chirping.) Well, nothing.  Not because waste/fraud doesn’t exist, but because it’s virtually impossible to eliminate.  Promises to eliminate “waste, fraud, and abuse” were baloney when Reagan made them to argue that his policies would not create deficits.  They are baloney now.  Indeed, at this late date, claiming to pay for any huge program by eliminating waste, fraud, and abuse is itself an abusive fraud.  (And again, if waste can be wrung from Medicare, the question remains: is this health care proposal the best way to spend that money?)

Third, and most importantly, the tax elements of the proposal are extremely destructive.  In particular, not only (like the existing bills) does it effectively increase substantially marginal tax rates (through the phase out of subsidies on insurance premia), it increases taxes on capital income by extending Medicare taxes to various sources of capital income (pejoratively described as “unearned income”).

Capital taxes are a terrible idea.  Capital is already heavily taxed.  What’s more, as elegantly described by Steve Landsberg here and here, capital taxes are particularly distortive.  As Landsberg notes, capital taxes are really a tax on “earned income” because in the first instance you have to earn the income that you save to generate capital income.  It is, therefore, categorically false to sell these as taxes on “unearned income.”

As a result of these distortions, these taxes are inimical to growth.  They discourage capital formation and bias decisions towards current consumption rather than future consumption.

But we should not be surprised.  Obama demonstrated his ignorance of, and indeed disdain for, the economic consequences of capital taxation during the Democrat primary debates.  He said he didn’t know whether capital gains tax cuts would cause revenue to rise or decline, and what’s more, didn’t care, because it was all about “fairness”:

GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.

So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.

We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year — $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.

And what I want is not oppressive taxation. I want businesses to thrive, and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don’t have it and that we’re able to invest in our infrastructure and invest in our schools.

And you can’t do that for free.

. . .  .

GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.

OBAMA: Well, that might happen, or it might not.

Obama says he wants growth, but virtually all of his policies are aggressively anti-growth.  The tax features of his health care proposal are just a particularly egregious example of that.

The climax of the conflict over healthcare is impending.  Nothing in Obama’s plan addresses the fundamental, and completely merited, sources of widespread hatred of the existing legislation; indeed, it incorporates all of these, and adds more.  Thus, it will only further stoke the political conflict.  Despite Obama’s Nixonian denials that he is not an ideologue, he has decided to wage an all out battle over a highly divisive ideological vision.  One can only hope and trust that the checks and balances baked into the system for the very purpose of stemming such recklessness are sufficient to overcome what has become the greatest act of political adventurism in American history.

Spain’s intelligence service, Centro Nacional de Inteligencia (CNI), is investigating “speculative attacks” against the country (via the CDS market), and Europe generally (via the currency market).  This article in El Pais tells the story.  Based on my shaky Spanish, it seems that Zapatero is blaming “Anglo-Saxon” speculators and journalists and pundits with conspiring against Spain, and the European project generally.

The speculators are indeed out in force, and there is a game of chicken between them and the European governments individually and collectively.  But the speculative attack is driven by the shaky finances in the Eurozone, and especially in Greece, Spain, Portugal, and Ireland.  The politicians have created the opportunity through profligate fiscal policies, and it is more than a little rich to hear them take umbrage at the markets holding them accountable.

If you chum the waters, Mr. Zapatero et al, why are you surprised when the sharks appear?

This was a musical weekend with SWP daughter #1.  Friday night was saw a solo acoustic performance by Scott Miller, a country-ish, rocker-ish at a local venue, the Mucky Duck.  I am mainly familiar with him through his recordings with his band, The Commonwealth, and most of the songs he performed Friday were SM&C tunes.

He was an excellent musician, and entertainer.  He had a very cynical, jaded attitude, which was actually quite funny.  He put everything into the show.

He performed two Civil War-themed songs, and one about Sam Houston.  Not everyday that you hear a song about the travails of the Confederate defenders of the Mule Shoe at Spottsylvania on May 12, 1864, facing a massive Union attack in the dripping woods with muskets rendered useless by  rain-soaked powder.

Last night went to a more conventional show, by Everclear at the Houston House of Blues.  Everclear has been a favorite of mine since 1995.  The only original band member is frontman Art Alexakis, who’s almost as old as I am, and definitely has much higher mileage:)  The rest of the band could probably be his kids.  Nonetheless, he put on a very energetic show, hitting most of the best Everclear songs including Santa Monica, Volvo Driving Soccer Mom, Father of Mine, Heroin Girl, etc.  Only song I was really hoping to hear but didn’t was Rock Star.  And Local God and The Drama King.  Alexakis is an excellent songwriter, and it was great to hear songs I’ve listened to zillions of times live.

The lead off band was one of the best I’ve ever heard, Clayton Senne. He/they were infectious, playing mostly high tempo, singable/danceable tunes.  The drummer was a kick.  Mr. Happy, banging away with abandon, all the while a big ol’ sh*t eating grin on this face.  His very wide face: saw him downstairs after the show, and he was about as wide as was tall.  But he was great, as was lead singer and keyboardist Senne.  Like my daughter said, it was like a great combination of Something Corporate and Ben Folds.

Sat upstairs in the balcony, instead of standing on the main floor.  In some sense, probably a good idea after standing at the Mucky Duck for the entire 2 hour show on Friday.  Though I have to say, a good fraction of the people up there sat stock still in their seats.  How is that possible, when a good band is putting on a good, high tempo show?  And if you just want to sit motionless, why spend 50 clams when you could do that at home for free?  I don’t get it.

If I thought I might have been a little to rough and negative in my assessment of the Department of Defense’s report on the Fort Hood massacre, reading Ralph Peter’s jeremiad on the subject suggests if anything I was too lenient:

There are two basic problems with the grotesque non-report on the Islamist- terror massacre at Fort Hood (released by the Defense Department yesterday):

* It’s not about what happened at Fort Hood.

* It avoids entirely the issue of why it happened.

Rarely in the course of human events has a report issued by any government agency been so cowardly and delusional. It’s so inept, it doesn’t even rise to cover-up level.

. . . .

The report is so politically correct that its authors don’t even realize the extent of their political correctness — they’re body-and-soul creatures of the PC culture that murdered 12 soldiers and one Army civilian.

. . . .

Unquestionably, the officers who let Hasan slide, despite his well-known wackiness and hatred of America, bear plenty of blame. But this disgraceful pretense of a report never asks why they didn’t stop Hasan’s career in its tracks.

The answer is straightforward: Hasan’s superiors feared — correctly — that any attempt to call attention to his radicalism or to prevent his promotion would backfire on them, destroying their careers, not his.

Hasan was a protected-species minority. Under the PC tyranny of today’s armed services, no non-minority officer was going to take him on.

This is a military that imposes rules of engagement that protect our enemies and kill our own troops and that court-martials heroic SEALs to appease a terrorist. Ain’t many colonels willing to hammer the Army’s sole Palestinian-American psychiatrist.

. . . .

To be fair, there’s a separate, classified report on Maj. Hasan himself. But it’s too sensitive for the American people to see. Does it even hint he was a self-appointed Islamist terrorist committing jihad? I’ll bet it focuses on his “personal problems.”

In the end, the report contents itself with pretending that the accountability problem was isolated within the military medical community at Walter Reed. It wasn’t, and it isn’t. Murderous political correctness is pervasive in our military. The medical staff at Walter Reed is just where the results began to manifest themselves in Hasan’s case.

Once again, the higher-ups blame the worker bees who were victims of the policy the higher-ups inflicted on them. This report’s spinelessness is itself an indictment of our military’s failed moral and ethical leadership.

I agree with Peters pretty much 100 percent.  He is absolutely right that the essential question–and arguably the only one that matters–is the one question this report completely ignores: Why was Hasan even in a position to commit mass murder given all that was known about his jihadist sympathies?  It is hard to argue with Peters’s conclusion (and mine) that mindless political correctness is to blame.  But I’m willing to consider alternative views.

The very fact, however, that the report and its lead authors refuse even to consider in public the issue of political correctness, let alone advance a credible alternative explanation means that (a) it’s almost certain that PC was the primary culprit, and (b) it will continue to wreak havoc in our military in years to come.

In some weird sort of numerical coincidence, the 4000th comment was posted on the 4th anniversary of SWP.  Thanks, all.

Most of those comments have been received since August, 2008, with the number of comments beginning to tick up right before the Russo-Georgian War.  The 3000th comment was posted about 4 months ago, in mid-September, when I was in Hong Kong.  So the pace has been picking up nicely.

And here’s the weird thing.  Comment #4000 was from (gadfly) rkka.  I also recall that he submitted comment #3000.  Gaming the system there, rk?

Keep it coming, folks.  All the comments are appreciated.

Even if I do say so myself.

Yes, today is the 4th anniversary of the launch of SWP.  Its evolution has been a surprise to me, in many ways, most notably in the fact that this idiosyncratic/eccentric blog has attracted far more readers than I had ever anticipated.  That’s a great birthday present, for which I am very, very appreciative.  A hearty and humble thanks to all of you.

And now for a little navel gazing retrospection.

I originally started the blog to be a way of commenting, in real time, about things related to my professional, academic interests.  It has served that purpose, and there’s been a lot to write about.  Ironically, my first substantive post was about a technical malfunction at the Tokyo Stock Exchange, and last week the TSE rolled out a new trading system designed to address the problems that shut it down when the blog started.  But there have also been exchange mergers, intense controversies over energy markets and speculation, stories about manipulation, and perhaps surprisingly, numerous developments in the previously arcane and largely hidden world of clearing, something I’d written about as an academic for almost 10 years to the collective yawn of my colleagues and the profession generally.

The posts I’ve written about these subjects have received some interest, stirred some controversy at times, and now and then have had some policy impact.  A little bird told me that one post in particular caused “several senators’ heads to explode” (I love the smell of napalm in the morning!) and resulted in some uncomfortable moments for some Bush administration officials.  (Yes, rkka, Bush administration officials.)   I know that the clearing stuff in particular has at least contributed to the policy debates on the subject, in part because it cuts against the grain of the post-crisis conventional wisdom.

The financial crisis of course played a big role in SWP over the past year.  I’ve often felt like a seismologist must during “the big one.”  At once fascinated by the opportunity to witness historical events involving instruments and institutions that I’ve written about (largely in academic obscurity) for years beforehand, and simultaneously more than a little uncomfortable at getting so much intellectual stimulation/satisfaction out of what were truly traumatic developments.

But the biggest surprise in the development of the blog is the whole Russia thing.  Perhaps it was meant to be: a Russian visitor was sitting next to me in my home office, writing applications for internships here in the US while I was writing the first SWP post four years ago.  But writing about Russia wasn’t even in the back of my mind when I started SWP.  Like Topsy, the idea just growed.

People ask me all the time: what’s the deal with you and Russia?  Why do you write about it so much?  Well, it’s a mixture of a lot of things.  As an aspiring US Navy officer in the late-1970s, the USSR was obviously a major matter of interest and concern.  After my aspirations took a U-turn, I had the opportunity to take a Russian history course from the amazing Arcadius Kahan at the University of Chicago, and sat in on some lectures from the almost as amazing Richard Hellie.

The interest went dormant for some years as I pursued my professional goals, but was reignited by a variety of things.  Notably, my increasing involvement in energy-related issues as an academic, and my longstanding fascination with institutional economics and property rights issues and the intersection between politics and economics.  The summer before SWP, I wrote a piece for Energy World magazine called “Just Say No–to Gazprom” that was my first foray into writing about Russian energy politics.  It soon became clear to me that Russia represented a fascinating case study in the effects of resource intensity (and arguably dependence) on economic development and the evolution of economic institutions.  Also, Russia is sufficiently like the West, and sufficiently engaged with it, to be familiar and not too alien, but different enough to provide interesting contrasts and cross-sectional variation.  (China, in contrast, being a blank slate and otherworldly place to me.)  Put all that together with my tendency to go overboard in my intellectual enthusiasms, and well, here we are.

There is also an element of Skinnerian conditioning involved.  The Russia material has–overwhelmingly–attracted the most comment and attention.  It’s always more rewarding to write about something that people seem to care about enough to react to, so it’s fair to say that like the rat pushing the little bar and getting food in return, SWP has focused more on Russia because that’s where the positive reinforcement is.  And believe it or not, I view even the critical comments positive reinforcement, because it lets me know you care enough to write 🙂  To paraparhase what Brendan Behan said about publicity, there’s no such thing as a bad comment, except on your obituary.

Truth be told, the blog has absorbed more of my time than I’d anticipated.  Mrs. SWP claims she has a love-hate relationship with it (the blog! the blog!); she likes the fact that it’s attracted some attention and gives me an outlet, but hates how it has the tendency to become a time sink.  As in all things, achieving balance in this is tricky.

That’s the past.  What about the future?  Well, if anything, the history of this blog has reinforced my agreement with the old saw that it’s hard to make predictions, especially about the future.  SWP reacts to the world, for the most part, and the world moves in strange ways.  It’s likely that the main subjects–derivatives markets, Russia, military developments, AGW, and from time-to-time, politics–will remain the focus in the future, but as for the specifics–who knows?

All I can say is that I hope whatever the future holds, you all continue to check in from time to time, and that new folks join in.  Thanks again for your time and interest, and “see” you soon.

The American Economic Association/American Finance Association Meetings are just about over.  I made a quick trip there to comment on a paper.  Upon returning home, I downloaded a couple of the papers presented that seemed of interest.  Good call on one, bad call on the other.

The bad one is “Centralized versus Over The Counter Markets” by Viral Acharya of LBS and NYU, and Alberto Bisin of NYU.  Although the motivation of the paper is admirable, the execution is execrable, and is representative of a lot of what is wrong in the profession.

The motivation is to compare the efficiencies of alternative ways of organizing derivatives trades: centralized exchanges and over-the-counter (OTC) markets.  Great.  Big question.  I’ve written a lot about it, and would be very interested in seeing other takes thoughtful on the subject.

The paper concludes that organized exchanges are (constrained) first best efficient, and more efficient than OTC markets.  A quick review of the paper makes it clear, however, that they’ve rigged the game to produce that result.

Specifically, Acharya and Bisin assume that there are different “types” of traders; they differ based on the characteristics of their endowments. Due to their finite wealth, and the risks of derivatives positions, traders are sometimes unable to meet their derivative contract obligations. So far, so good: all that makes sense.

Then they go off the rails.  Specifically, they assume that centralized exchanges set price schedules for a single derivative contract, and specifically, set a price for every trader that varies depending on (a) the trader’s type, and (b) the size of the trader’s positions.  They motivate (b) by arguing that exchanges can view a trader’s entire position.  That is, every trader pays a different price depending on his position and his type.  In contrast, in OTC markets, they assume that no counterparty can observe any trader’s entire position, and hence although prices can be conditioned on type they cannot be conditioned on position.

It’s no surprise, then, that they find exchanges to be a more efficient way of trading.  Exchange prices are conditioned on more information that is relevant in determining the likelihood of default, and the cost thereof, and hence can be set to control default and risk taking more efficiently than is possible in the OTC market.

Perhaps there is a planet somewhere in the universe in which exchanges can do what Acharya and Bisin claim they can do.  All I can say is that on earth they can’t and don’t.  In fact, the situation here on the planet in the Milky Way with the blue sky is almost an inversion of the what they assume.

Specifically, exchanges don’t condition trade prices on anything.  Indeed, the whole idea of clearing on an exchange is to create fungible contracts in which prices are the same for all traders at a given point in time, and don’t depend on the traders’ endowments or positions.  That is, exchanges facilitate anonymous trading among consenting adults by taking actions that make trader types and positions irrelevant to the price determination process.

In reality, collateral depends on position size, but not trade prices.  Moreover, exchanges quite specifically do not condition collateral terms on trader type (e.g., on traders’ balance sheets).  So, even if you argue that collateral variations are effectively price variations, the Acharya-Bisin assumptions are unwarranted. Exchanges are not, as Acharya and Bisin assume, central planners implementing a centrally-imposed price schedule conditional on fine information on trader type and trades.

Put differently, clearing on exchanges creates a potential moral hazard that exchanges control at cost.  The cost can be sufficiently high to make it inefficient to adopt clearing.  Acharya-Bisin assume that exchanges have and can use costlessly the information required to control this moral hazard.  Again, an inversion of the truth.

Also in reality, OTC market participants do condition trading prices on counterparty type, and explicitly take balance sheet risk into account.  Although OTC traders don’t view their counterparties’ entire exposures/positions, they do have noisy signals on this and take it into account when setting trading terms.  Moreover, as I’ve argued before, there are a variety of channels (e.g., the repricing of short term debt) by which diffuse information on the entire risk exposure of a financial institution is aggregated, and affects the incentives of said institution to take on risk.

So, the tradeoffs between exchanges and OTC markets are more complex: exchanges/CCPs have better information on some dimensions, worse on others.  It’s not altogether clear a priori which dominates.  Moreover, there are institutional innovations other than exchange trading and clearing that can mitigate the OTC markets possible information disadvantage: for instance, data warehouses that collect and disseminate information on positions could remedy the supposed weakness of the OTC markets.

And here’s where the Coase question comes into play: If a particular institution is inefficient, what transaction costs precludes agents from adopting it?  Or, to put things differently, if you believe Acharya and Bisin, agents are leaving a lot of money on the table by trading in the OTC market: there are gains to trade to be captured by trading on exchanges.  Why isn’t this happening?  Why does a putatively inefficient mechanism survive, and indeed, thrive and grow relative to the putatively efficient one?  This can happen, and policy can perhaps improve efficiency, but someone who claims that a given arrangement is inefficient, as Acharya and Bisin do, should identify the friction or frictions that precludes a change.  They, suffice it to say, don’t do this.

This model wouldn’t be objectionable if it were a purely theoretical exercise.  But Acharya and Bisin make broad policy recommendations based on their analysis.  The problem is, they are like Humpty Dumpty, who declared: “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

Humpty Dumpty-like, they use the word “exchange” to mean just what they choose it to mean, even though it bears no relation to exchanges in the real world, or the kinds of exchanges that would be the beneficiaries of exchange trading mandates, or efforts to raise the cost of OTC trading.  Their recommendation is a sort of bait and switch: sell the concept of exchange trading on the basis of an idealized model that assumes exchanges have decisive information advantages, and then deliver real world exchanges that are much more limited.

This is not uncommon, sad to say.  But it is pernicious.  And if this is the best that can be done to support exchange trading mandates, well, there you go.

The other, much better paper is “Danger on the Exchange: Counterparty Risk on the Paris Exchange in the 19th Century” by Angelo Riva of EBS and U-Paris X, and Eugene White of Rutgers.  Rather than construct otherworldy exchanges and decree that their visions should be implemented here on earth, Riva and White do something radical:  they actually take a detailed look at the evolution of counterparty risk sharing mechanisms and defaults on a real world exchange–the Paris Bourse.  They carefully trace the evolution of mutualization of countparty risk on the PB, and pay close attention to a very real-world problem: namely, that mutualization creates the potential for moral hazard that is costly to control.

The empirical analysis could be improved (and when I have some time I’ll pass on some suggestions to them), but this paper undertakes a detailed analysis of actual institutions, and actual agents grappling with hard problems.  The Paris Bourse was a real exchange.  The problems it faced are inherent to any efforts to manage performance risk.  We can learn a lot more from these sorts of analyses, than we can from constructing fanciful exchanges in a galaxy far away.  Formalism is valuable–I even commit formalism from time to time, myself–but it is important that if formal models are intended to be the basis for far reaching policy conclusions, that they bear some relation to reality.   Acharya and Bisin would put their modeling talents to much better use by trying to construct theories that reflect the gritty realities that Riva and White quite clearly document, instead of building models that bring to mind all those economist jokes with punch lines like “I assume the existence of a 100 story ladder.”

A Merry Christmas to all who have taken some of their valuable time to visit SWP.  Yes, even S/O 🙂

In all seriousness, I do appreciate everyone who has visited, read, and especially commented.  It is an interesting little platoon that has assembled here, virtually.

Have a happy holiday, and a joyful and productive 2010!

Craig

A/K/A SWP

Commentor Scott raises the issue of the incentive to collect data, particularly large data sets, if it is imperative to make said data public.  This is a very important issue that I addressed a bit in my first post on the CRU fiasco, but it’s worth a couple of additional thoughts.

Here are some ways to provide incentives:

• Subsidies, in the form of grants or prizes.  This is already done to some degree.  Receipt of such funding to support data collection–i.e., the subsidization of a public good–should be contingent on making this data freely available.
• The provision of complementary services for a fee, such as consulting on the use of the data, or creation of customized data sets.  This is the source of revenues for many providers of open source software.
• Licensing or sale of the data for a reasonable fee.  This has been quite effective for many databases widely used by finance and economics academics (and industry), notably the CRSP stock and bond data (but others as well).
• Conditioning access to data on formal recognition in all working papers and published papers, perhaps including the creation of a “data authorship” category of something of the sort.

In brief, a variety of mechanisms can provide incentives to create information/data.  A variety of mechanisms are utilized in markets for other information goods.  The just listed are some of the most well known.

Intellectual property rights (e.g., granting rights of exclusive use, trade secrets) are other means by which creators can capture a stream of benefits, thereby giving them an incentive to produce information goods.  These may be the efficient arrangement in some settings, but I am dubious that that is the case in the sciences and social sciences.  Science depends on replication, which is incompatible with “I’d show you but I’d have to kill you” secrecy.

I also had an additional thought regarding how to evaluate scholarship for hiring, promotion, tenure, and salary decisions in a research university in an open source, non-journal dominated system.  I mentioned the idea of using citations as a main metric, and evaluating the “quality” of citations based on characteristics of the works in which a citation occurs–such as the number of times the citing author’s work is itself cited.  This is essentially a links-based metric.  Major search engines, notably Google, utilize such metrics in ranking web sites to determine display order.  The concepts underlying search engine ranking algorithms could perhaps be adapted to rank scholarly impact as well.

The creation of a data set that is utilized by other scholars could be an input to the ranking algorithm, providing another incentive to invest in their creation.

Presumably the CRU employees associated with the creation of a climate data set would have achieved a stratospheric impact factor/ranking under such a system because myriad other scholars wold have used the data.  But of course, this would have come at a (private) cost: they couldn’t have controlled the conclusions of the work done with their data (which the emails suggest was an important consideration to them).  But that private cost is swamped by the benefit of permitting open access to other researchers, so the proper response is: tough luck to you.