April 30, 2008 4:20
Is McCain really willing to be as radical as his health care plan?
Karen Tumulty declares over on Swampland that "The Great Health Care Debate of 2008 is Finally Engaged," and she's definitely right that the approach McCain announced yesterday is radically different from what Obama and Clinton have been talking about. It is pretty much the same as what the Bush administration has been promoting for several years (and that Ramesh Ponnuru talked up in the pages of Time a few months ago) with little result. It's basically about forcing individuals to pay taxes on the value of the health benefits they get from employers, but then giving them a tax credit to make up for some of that. The result, Shawn Tully writes in Fortune: "The raison d'être for corporate health benefits would vanish."
Now delinking health care from jobs is something that really does probably need to happen, but it's not unique to McCain's proposal. Democrat Ron Wyden's much-discussed bill would do it as well, and I suspect that if either the Clinton or Obama plan were enacted, the responsibility for health insurance would slowly but inevitably migrate away from employers.
So what's so radical about the McCain plan? For one thing, it appears to dramatically reduce the tax subsidy for health care--it would be limited to a $5,000-per-family credit, while existing corporate plans are often much more generous than that. This would put downward pressure on health care spending, which would seem to be a good thing. It would of course do so by giving people less money to spend on health care, which isn't going to be popular. But if universal health care is going to keep costs in check then it too would have to include limits on spending.
The really big difference between McCain's plan and that of the Democrats is that McCain envisions an atomized market full of individuals making their own health care decisions. This the way most of the rest of the U.S. economy functions, so why shouldn't it work for health care? Well, there are lots of reasons. Commenter Crust lists a few:
1. Individuals have less bargaining power and sophistication than employers.
2. Negative selection.
3. Greater frictional costs from advertising to individuals, etc.
There are parts of the health care business that work really well as conventional free markets--elective laser eye surgery is a particular favorite of libertarian health wonks. But many health-care purchasing decisions would seem to be better made by experts. And if insurers are left to their own devices in a market composed purely of individual customers, they'll end up offering their services mostly to those who don't really need them. The upshot is that in many, perhaps most, cases health-care consumers are better served by banding together (not necessarily as employees of a single firm; health insurance purchasing cooperatives can serve the same function).
McCain does propose the creation of what he calls a Guaranteed Access Plan for "those without prior group coverage and those with pre-existing conditions." But it's not clear to me why creating such a state-supported black hole is preferable to requiring some kind of community rating by health insurers. And it signals that McCain perhaps doesn't really believe that free-market health care solves everything.
April 30, 2008 2:49
The Fed cuts a quarter point. What?!? You don't find that exciting?
So after two days of gabbing, the folks on Federal Open Market Committee did what was mostly expected of them and cut the intended Federal Funds rate down to 2%. I really can't be bothered to come up with something to say about a measly quarter-point rate cut, so I'm going to outsource to my buddy Andy Busch at BMO Capital Markets:
Taken together, the Fed's actions are disappointing from the standpoint of the US dollar and for dampening commodity prices. Fed is clearly still willing to risk inflation over growth at this point. I think this is a mistake as holding off from cutting would've given them room to cut later should they need it and would've cooled some commodity inflation. The 8-2 vote shows opposition to the easing remains within the board.No tough love from Bernanke & Co. yet on inflation nor on the economy. US dollar should get beat up.
April 30, 2008 2:34
Everybody in Alabama will eventually go to jail
So they let my old friend Don Siegelman out last month. But now the Bond Buyer reports (thanks to Mrs. CC for the tip; link only works if you have a subscription, and it's highly unlikely that you do) that:
The Securities and Exchange Commission today filed securities fraud charges against Birmingham Mayor Larry Langford, Alabama bond dealer William Blount, and lobbyist Albert LaPierre in connection with undisclosed payments to Langford linked to Jefferson County, Ala., municipal bond and swap deals.
I don't think this one's Karl Rove's doing, though. And apropos of my earlier post about metro daily papers and the Internet, the Bond Buyer posted the story at 1:58 p.m. As of 2:34 p.m., my beloved former employer The Birmingham News did not yet have the news up on its site homepage.
Update: 2:51 p.m., and still nothing at The News.
Update: Now I found it! Pulitzer-Prize-winner Brett Blackledge posted the news at 12:24 on the News' Breaking News blog. But the numbnuts who run the website make no mention of it either on the News' homepage or on the al.com web page. So the point still stands; it just wasn't the reporter's fault.
April 30, 2008 1:41
Taco Bell concerned that obesity rates not rising fast enough
From an e-mail that just landed in my inbox:
Irvine, Calif., April 30, 2008 – Is that a rumble of hunger in your stomach, or a rumble of anticipation as you stare at Taco Bell’s all-new Big Bell Box Meal? Hunger will meet its match beginning today with a Bacon Club Chalupa, Beef Crunchy Taco, Bean Burrito and Cinnamon Twists loaded into one big box and paired with a large drink, all for only $4.99 for a limited time at participating Taco Bell® restaurants!“The Big Bell Box will satisfy even the biggest hunger at a great value for your money,” said David Ovens, Chief Marketing Officer, Taco Bell Corp. “By combining some of Taco Bell’s favorite items and packaging them together in a convenient and portable box, we provide even better value for the hungry man.”
Taco Bell is supporting the launch of the new Big Bell Box with broadcast TV advertising featuring comedic radio personality Adam Corolla who prompts viewers to “eat like a man” and that they “deserve a meal made for men.” ...
A meal made for fat men, that is. Or for a family of three (I'm figuring they share the Cinnamon Twists for dessert) looking to make ends meet in these semi-recessionary times.
April 30, 2008 11:45
Why newspapers will continue to milk their current business until they die
This struck me as the smartest of a bunch of smart observations by former Dallas Morning News (and still syndicated) personal finance columnist Scott Burns in a Q&A with Talking Business News (via Romenesko):
As much as I love newspapers, they are hamstrung by their attachment to a business model that no longer works. The longer management views them as “properties” — rather than collections of talent awaiting redeployment — the greater the danger career journalists face.
The classic case of redeploying talent in the modern business world is probably that of Intel in the mid-1980s, when it completely shifted its resources from the hypercompetitive memory chip business into what Andy Grove called "the relatively new field of microprocessors."
Clearly, newspapers need to be redeploying talent onto the Internet--and probably doing so in a way that's consonant with the open, link-driven architecture of the Web--if they hope to still be around two or three decades from now. But for metropolitan dailies like the Dallas Morning News it's almost impossible to imagine how they'll ever make anywhere near as much money online as they do as the monopoly purveyor of printed information into local homes. Which makes me think that most of them will stick to their current doomed but still moneymaking ways until it's too late.
This is less the case for newspapers with national or global reach, which were never monopolies in the same way that the metro dailies were, and can realistically hope to someday replicate some significant portion of their paper revenues online. (And I like to think--perhaps delusionally--that magazines will survive and thrive on paper much longer than newspapers do.)
But the owners of the metro dailies are stuck with a really difficult choice: They can gamble current profits on a redeployment of talent that may pay off with smaller but sustainable profits down the road, or they can milk their current business for all it's worth until they simply can't anymore. From the perspective of society in general and my friends in the newspaper business in particular, it would be far better if they took the former route. For the owners of newspaper companies, though, it's not so cut-and-dried.
Obviously one can also do a little of both, which is the strategy most metro newspapers are trying to follow. But if Felix Salmon's dispiriting report of a panel on "The Future of Print Media" at the Milken Institute conference yesterday is any indication, many of them are handling the transition to the Internet so unwillingly and ineptly that they've effectively chosen the second, milk-the-business-until-it-dies path whether they intend to or not. Which means it will be up to somebody else to redeploy all that talent.
April 30, 2008 9:35
The economy's 0.6% solution
It's always dangerous to read too much into the advance GDP estimates made by the Bureau of Economic Analysis--they're subject to revision in subsequent months, and the changes can be substantial. But today's report that the U.S. economy grew at an estimated 0.6% annual pace, adjusted for inflation, in the first quarter is nonetheless eye-catching.
It's eye-catching because that's exactly what it did in the fourth quarter of last year as well. And while most signs are that economic activity is currently contracting, the tax rebate payments that that began showing up in bank accounts this week may put second-quarter GDP growth in territory not all that far from +0.6% yet again. (Then again, it may not: I just got a report from Roger Kubarych at the German-Italian bank Unicredit, who's not a particularly pessimistic guy, and he says he's still expecting a GDP contraction of 0.75% to 1%, annualized and adjusted for inflation, in the current quarter.)
As for the third quarter, who knows. A lot will depend on whether housing prices, still careening downward in the most recent Case-Shiller survey, have begun to stabilize by then. But it is now looking at least possible that we'll get out of this housing semi-disaster with only a mild recession or even just a "growth recession" in which the economy slows but doesn't contract for any kind of sustained period--which is a much better fate than I thought awaited us a couple of months ago.
April 30, 2008 5:54
What do Costa Ricans have against street addresses?
They don't really have street addresses in Tokyo, and I've always chalked that up to a combination of the city's plethora of really short streets running into each other at odd angles, and the widespread Japanese desire to remain undecipherable to foreigners.
They don't really have street addresses in Managua, either, and when I was there on my one and only visit 13 years ago, I chalked it up to the fatigue of war and the hodge-podge rebuilding (and failure to rebuild parts of) of the city after a devastating earthquake in 1972.
I'm still trying to figure out what's up with the Costa Rican capital San Jose, where the Curious Capitalist family spent Sunday night. The central part of the city is laid out in an orderly grid, with numbered streets and avenues. Yet street addresses, and even intersections, are hardly ever used. Instead, locations are usually described in terms of their distance (200 meters south, 300 meters west) from some landmark like the Pizza Hut or the bus station located on the site of long-gone Coca-Cola plant (known simply as "Coca-Cola").
This is (sorta) charming, but hugely inefficient. Reported the LA Times in November:
Postal authorities say that 1 in 5 pieces of mail is undeliverable because they can't figure out where the addressee lives. The problem is worse in new subdivisions, where neighbors don't know one another and can't advise carriers.Mail is just one problem. Emergency crews, cab drivers, utility workers and delivery people spend an inordinate amount of time on cell phones and knocking on doors to find out where they are supposed to be.
According to the article, Costa Rican postal officials are now trying to change this, assigning an address to every building in the country--although they haven't set aside money yet for all the street signs they're going to need to make the new system stick.
I'm still scratching my head, though, at how things got to be this way in the first place. The main explanation in the LAT article--that for Costa Ricans it's "a reassuring link to their country's agrarian past"--just doesn't seem adequate. I mean, in rural areas and even suburbs I kind of get that. But in the downtown San Jose grid it's just perverse. You have to go out of your way there not to use the already existing street names. And yet that's what everyone does. Was there some traumatic historical experience that caused this? Was the despised William Walker a big believer in street addresses? If anybody has any ideas, please do share.
April 29, 2008 4:30
Not Nordtopian, but certainly a Nordophile
Robert Waldmann has coined a new word (he did it almost a week ago, but hey, I've been on vacation):
Nordtopian adj based on the illusion that the Nordic model can and might be adopted elsewhere.
Now this blog has certainly exhibited many telltale signs of Nordophilia (which I guess is why Felix Salmon pointed the Waldmann link out to me), but I don't think I'm a Nordtopian. That is, I'm dubious (or full of dube, if you prefer) that a political/economic system that has evolved in a few nations of 5-9 million people would translate to a country of 300 million or even 50 million. Tyler Cowen had a fascinating (if far from definitive) post last year exploring some of the reasons why. A sample:
1. Perhaps homogeneity is the advantage, not smallness per se. So a Denmark of 150 million people might work quite well, if only there were 150 million Danes. There aren't, and if we imagine the Danish population growing they might not stay so homogeneous in nature. Peer effects dissipate or perhaps turn negative at some scale.
I don't disagree with that. And I don't know that I could bear living in a land of 150 million Danes. (Hej. Hej. Hej. Hej. Hej. Hej! Hej...) But I keep writing about Denmark and Sweden and the Netherlands (which isn't Nordic, but does have lots of tall blond people and an excellent pension system) because (a) it amuses me, (b) I like herring, and (c) it seems really silly not to look to other countries to get economic policy ideas. Also, there was so much smug cant spouted about the superiority of the American way of capitalism in the late 1990s (and even since then), that it seems important to point out that there are other ways of capitalism that seem to work just as well as and at times even better than the American version.
Oh, and did I mention that Denmark again topped the Economist Intelligence Unit's rankings as the best country in the world to do business? (Thanks to Sean Gregory for the tip.) Finland came in second, the U.S. 10th. And one more thing: I learned last week that business guru Clayton Christensen is of mostly Danish ancestry. But I don't think he's a Nordtopian.
April 29, 2008 12:00
Clinton joins McCain in the race for panderer in chief
So now Hillary Clinton has decided to endorse John McCain's silly idea of a three-month federal gas tax holiday. Only Barack Obama, who voted for an Illinois gas tax holiday back in 2000 but has since seen the error of his ways, is standing firm against this nonsense.
Why's it nonsense? First of all, because the impact would be minuscule, probably reducing the cost of a gallon of gas by less than a dime.
But the big issue is that artificially low gasoline prices over the past couple of decades are at least partly to blame for many of the nation's woes today, from the huge trade deficit to a crumbling transportation infrastructure to the war in Iraq. Basically, U.S. drivers haven't been paying anywhere near the real environmental, infrastructural, and military costs incurred in getting gas into their cars and then burning it. As a result we've overconsumed, and become ever more dependent on the world's oil-exporting countries--all as a result of undertaxing gasoline.
Don't believe me? Just listen to an expert:
"We know the broad contours of some things that have to happen," said Douglas Holtz-Eakin, former director of the Congressional Budget Office who is now at the Council on Foreign Relations. "You have to price oil on a permanent basis to provide incentives to shift away from it. It's the key issue -- and the hardest one to make progress on."
That was in 2006, before Holtz-Eakin became the main economic adviser to the McCain campaign. But this is one matter where the economic advisers always seem to lose out to the political hacks. And the McCain-Clinton gas tax plan is a monument to cynical political hackery at work. Yeah, it would just be temporary, and it wouldn't cost all that much. But it's just all wrong.
Now there was a non-pandering argument against raising the gas tax that one of my favorite Alabama legislators, Bill Fuller, used to make back when I was covering the Statehouse in Montgomery in the early 1990s: It's a regressive tax that falls heaviest on poor people in rural areas who can't afford to replace their gas-guzzling 1969 Plymouths. Okay. But it's 15 years later now, and ever fewer of those 1969 Plymouths are still on the road. The people stuck with gas guzzlers now are mostly middle-class folks who bought big SUVs and pickup trucks. Do we really want--even in a token, temporary way--to be retroactively subsidizing their poor decisions?
April 29, 2008 11:11
Oh, so I wrote a column
It's in the issue of Time that came out last Friday, with Barary (Oblinton?) on the cover, and online here. It begins:
On those awkward occasions when he is asked about his nation's currency, President George W. Bush has a simple response. "We believe in a strong-dollar policy," he'll say--or words to that effect. For his Treasury Secretary, Hank Paulson, the mantra is, "A strong dollar is in our nation's interest."The dollar hasn't been paying much attention, apparently. It has lost 41% of its value against the euro, its main global competitor, since Bush took office in 2001. And Paulson, when he's not busy battling financial crises here, can usually be found in China beseeching the authorities there to let their currency rise against the dollar.
It should be pretty obvious, then, that the U.S. doesn't have a strong-dollar policy. What's more, it almost certainly shouldn't have one. The huge trade deficits that the country has been running for the past decade seem like a pretty good indication that the dollar was overvalued in global currency markets and needed to come down. Read more.
I finished the column Monday morning in the speakers' room at the World Health Care Congress in Washington, where I was about to moderate a panel. While I was typing away, George Shultz, who was on the panel before mine, came in and sat down next to me. He's a former Treasury Secretary, and held the job when the Bretton Woods system of fixed exchange rates was finally and definitively cast aside. There had to be something I could ask him about the dollar. As I pondered what to ask, though, people started lining up to talk politics with Shultz or get him to sign a copy of his new book. Then it was time for him to go on stage. Oh well.
April 28, 2008 5:07
A smarter way to regulate mortgage lending?
There was a story this morning on the cover of the New York Times about the mortgage industry fighting back against new regulations coming down the pike from the Federal Reserve. The Fed wants to require lenders to do things like make sure people taking out subprime loans can afford them, and clearly disclose fees instead of rolling them into interest payments.
That reminded me of a conversation I had a couple weeks ago with Richard Thaler, a behavioral economist at the University of Chicago, who recently wrote a book with legal scholar Cass Sunstein. The book is called Nudge and it has a very interesting thesis: that by paying attention to pitfalls in human psychology, policy makers can silently guide people to make better decisions.
One part of the book that many reviewers have been ignoring argues that in trying to better regulate the mortgage industry, policy makers should overhaul disclosure requirements, since, in the words of the authors, the Truth in Lending Act "is now hopelessly inadequate." It was nice to require everyone to report interest rates as APRs, but with all the bells and whistles of modern mortgages, that's not cutting it anymore.
What Thaler and Sunstein propose is a system they dub RECAP, for Record, Evaluate, and Compare Alternative Prices. RECAP would work for all sorts of products with complex pricing schemes. The first example they give explains how it would work for cell phones:
The government would not regulate how much issuers could charge for services, but it would regulate their disclosure practices. The central goal would be to inform customers of every kind of fee that currently exists. This would not be done by printing a long unintelligible document in fine print. Instead, issuers would be required to make public their fee schedule in spreadsheetlike format that would include all relevant formulas. Suppose you are in Toronto and your cell phone rings. How much is it going to cost you to answer it? What if you download some email? All these prices would be embedded in the formulas. This is the price disclosure part of the regulation.
The usage disclosure requirement would be that once a year, issuers would have to send their customers a complete listing of all the ways they had used the phone and all the fees that had been incurred. This report would be sent two ways, by mail and, more important, electronically. The electronic version would also be stored and downloadable on a secure Web site.Producing the RECAP reports would cost cell phone carriers very little, but the reports would be extremely useful for customers who want to compare the pricing plans of cell phone providers, especially after they had received their first annual statement. Private Web sites similar to existing travel sites would emerge to allow an easy way to compare services. With just a few quick clicks, a shopper would easily be able to import her usage from the past year and find out how much various carriers would have charged, given her usage patterns.
For mortgages, lenders would be required to provide a spreadsheet, too. It would break down the cost of a mortgage into two categories—fees and interest—and it would also, importantly, provide a digital interface for third party vendors to come along and sell comparison services. Similar to what Morningstar does for mutual funds. With downloadable data, third parties could create systems to flex the assumptions behind a mortgage (how much interest rates will go up; the year you go to sell your house), and then help you make a better decision about which sort of loan to pick. There could also be some sort of worst-case scenario feature. That would have been handy.
April 28, 2008 12:12
Wrigley and Mars and Buffett: Sweet!
Let's be honest. A lot of corporate mergers don't make sense. But chocolate-maker Mars buying gum-maker Wrigley with all-around-smart-guy Warren Buffett helping to finance the deal? Do I get M&Ms thrown at me if I call that delicious?
On this morning's conference call, there was a lot talk about the "strong cultural and strategic fit" between Wrigley, a company whose chairman is the great-grandson of its founder, and Mars, another old family firm, one that remains in the closely guarded hands of Forrest Mars Sr.'s heirs. Under the Mars umbrella, Wrigley will get to keep running as a stand-alone company—importantly, still based in Chicago—and will pick up Mars's non-chocolate sugar brands, including Starburst and Skittles. Mars, a privately held company whose sales of $22 billion far eclipse Wrigley's $5.4 billion, will get a partner that makes it practically impenetrable at grocery and convenience-store check-outs (that's a really profitable place to be, BTW), and even more of a force in growing candy markets overseas.
All that is worth $80 a share in cash to Mars—a 28% premium to Friday's close. That values Wrigley at about 4.12 times 2007 revenues, according to a little math done this morning by Citigroup analyst David Driscoll. Not too shabby for Wrigley considering similar deals have recently gone for 2.5 to 3.0 times trailing 12 month sales.
And what does Buffett get for his $4.4 billion of debt financing and eventual equity stake (of at least 10%) in the Wrigley subsidiary? A company he has ogled for years. Wrigley is right up his alley. In his words, it's a "business that's easy to understand, with favorable long-term economics, and able and trustworthy management." Buffett's Berkshire Hathaway already owns See's Candies, which he gushed about in his annual letter to shareholders this year. Add in Mars's deep pockets and history of investing in its brands for the long-term—ah, private ownership—and who isn't a winner?
Oh, yeah, Hershey. Really, really should have had a V8 on this one. Wrigley tried to buy you in 2002, silly! More recently, Cadbury has apparently come a courtin', but, it seems, been rebuffed by the Hershey Trust, which controls 78% of Hershey's votes and doesn't want to lose its control. Maybe now Cadbury will make another go of it? Reuters thinks so. It's candy consolidation time, folks.
April 28, 2008 11:32
Greetings from beautiful downtown San Jose
That's in the Mercado Central in San Jose, Costa Rica, this morning. We're going to catch a plane to Newark in a few hours, and I'm back at work tomorrow. I'm tempted to post lots of out-of-focus long-distance shots of sloths and monkeys, but I'll leave it with this cool photo, taken from the car window somewhere along the Pacific Coast by Curious Capitalist Jr.:
April 25, 2008 9:31
A thoroughly modern monopoly
Hi, That Anonymous Dude. Great to see you in the Comments section again. I rented a Ford Focus, which does, in fact, have pretty decent gas mileage.
It also has an E-ZPass transponder on the front windshield. I haven't seen that in a rental car before, but it makes perfect sense. Apparently, the car rental companies have been trying this out for a couple of years, but now it seems standard. Avis, where I rented, charges $1.50 a day on top of tolls to use the system.
That got me to thinking about the company behind E-ZPass. As anyone living in the Northeast knows, E-ZPass is ubiquitous--12 states, from Maine to Illinois to Virginia, use E-ZPass to let motorists electronically pay tolls for highways, bridges and tunnels. The company that sells the transponder technology is called Mark IV.
Mark IV has what we like to call sustainable competitive advantage. Good luck trying to break into this business. It's true there are other companies that make electronic-toll technology--a firm called TransCore makes the devices used in Florida's SunPass system, for example--but Mark IV really has the Northeast locked up.
Mark IV first got this gig back in 1994 when a consortium of 22 state and local highway agencies decided to use its technology. I guess it makes it a lot easier to convince people to go electronic if you can tell them their transponder will work over a quarter of the country. (If you are a transportation geek and want to know the inside story of how Mark IV won that contract, check out this story that ran in Toll Road News last month.)
My theory is that unless Mark IV really screws something up royally, they will never lose this contract. It took that consortium 18 months to test and agree on a common technology the first time around. The costs of switching at this point are so high that I think it's safe to say Mark IV is in something of a transportation sweet spot. That's especially true since there's so much opportunity for growth: car rental companies, late adopters still paying with cash, a growing driving population.
Unfortunately, this is not a theory you can invest on. Mark IV went private back in 2000.
April 24, 2008 11:44
The people selling gas feel your pain
This afternoon I'm driving home to Salisbury, which for a Manhattanite like me means renting a car and realizing, suddenly, that gas is expensive. $3.50 a gallon? Dang.
When I go for my $40 fill up, though, I will try not to guffaw too loudly in the direction of the person running the gas station, because chance are, he's suffering right along with me.
The economics of selling gas right now—to use a technical term—suck. A typical gross margin on a gallon of gas is about 14 cents, but with the price of wholesale gas skyrocketing and stations not able to raise consumer prices quickly enough to keep up, that margin is down to about 9 cents, according to Oil Price Information Service. Once you subtract costs (fees from credit card transactions alone can reach 9 cents), there are stations out there actually losing money each time they sell you a gallon of gas, and hoping beyond hope that you spend enough on cigarettes, slushies and car washes to make up for it.
Now, next week the big oil companies start reporting earnings, and they'll be spectacular—but don't confuse those companies with the ones selling you your gas. For years, they've been getting out of the service station business. Today, most of the stores with Exxon or Shell or BP signs out front are franchises. And many of those are run by small businessmen. Of the 115,000 or so convenience stores selling gas in the U.S., about 62% are one-store operations, according to the trade group National Association of Convenience Stores (NACS).
So, why doesn't everyone just raise prices? Well, see, that's problematic because the more the cost of gas goes up in general, the more price sensitive consumers get. A recent survey by NACS found that 29% of people would drive 10 minutes out of their way to save 3 cents on a gallon of gas. "If you get a 5-cent overnight increase, you might only pass on 2 cents or no cents," says Jeff Lenard, NACS's communications veep. "If you raise your prices 5 cents and your competition doesn't, you might as well close your store for the day."
Plus, with more big box stores—the Wal-Marts and Costcos of the world—selling gas there's even more downward pressure on margins. Gas might sound like a nice loss leader to Wal-Mart, but to a guy with two kwiki-marts, that's a little harder to pull off over long stretches of time. Here's how things have shaken out over time:
So today's life lesson is be nice to the people selling you gas.
April 23, 2008 6:03
The first Starbucks recession, Part II
Earlier this month, Justin told you about Starbucks CEO Howard Schultz popping by our offices and saying, among other things, that the coffee chain was really starting to feel the pinch from sluggish consumer spending.
Let's put that one in the "you heard it here first" column. Today in reporting preliminary Q2 results, Starbucks played up how much it's getting slammed by the re... economic slowdown, putting the macroeconomy right up there in the first sentence of its press release. "The current economic environment is the weakest in our company's history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers," Schultz said further down in the release. That's had "a substantial impact on our performance," he said—i.e., declining traffic and same-store sales.
Now, as a person who has written a story or two about Starbucks, I can tell you that this is not a gang that's quick to blame the economy for their troubles. When the folks out at the Seattle mothership start pointing fingers, it means something. Yesterday, blog poster Tan Boon Tee took the stock market to task for not better reflecting the gravity of our current situation. Would a Fortune 500 CEO be a good substitute?
In the meantime, Starbucks is also tackling a bunch of other issues, like lackluster innovation and burgeoning competition. There have been a lot of changes recently in response to that. I'm curious to know the extent to which that's registered with customers. Mind telling me how, if at all, your Starbucks experience is different than it was, say, this time last year?
April 23, 2008 10:43
The morning after: What Iowa has to say now
On Monday I got an email from the University of Iowa telling me that Barack Obama had a 75% chance of winning the Democratic nomination; Hillary Clinton was at 21%. I'm guessing I'm not the only business reporter out there who is most comfortable processing the horse race elements of national politics through Iowa's prediction markets—run by professors at the Henry B. Tippie College of Business—which let people buy and sell futures contracts pegged to each candidate's chances of winning. Ah, market forces. Hello, comfort zone.
I checked back in this morning to see where things stand post-Pennsylvania. As of 10 a.m. Central time, an Obama contract was trading at 78.9 cents (indicating a 78.9% chance of winning the nom), and Clinton was at 18.2 cents. Now, Clinton did win Pennsylvania, so I could make some snide comment about the extent to which PA votes matter, but being Pittsburghian by birth, I'll instead take this as evidence that the commentators singing the song about how Clinton is still in it but with a hard road ahead are getting it right.
I should also say that even though the Iowa markets have a terrific track record—a recent study showed them besting polls 74% of the time—they are still markets. The thousand or so people actively trading can make money by being right, or by buying low and selling high irrespective of the underlying value of the contracts. Hence the little arbitrage game that keeps John Edwards contracts selling at 1/10th of 1 cent.
Here's a look at how things have unfolded over the past year:
DROF_NOM means "Democratic Rest of Field." Those are the people hoping for an Al Gore write-in campaign or somesuch—that contract shot up to 6 cents the day after our very own Joe Klein suggested that Gore might be the answer.
The other interesting chart is the one that shows predictions on whether the Democratic or Republican nominee will win the general election. The never-ending Democratic nomination battle has helped John McCain, but blue is still in the lead. (You have to link to this one, by clicking on the chart):
April 22, 2008 5:27
Pandit-monium at Citi: Why didn't I coin that?
Lots of excitement at Citigroup's annual meeting today, as recounted in Crain's New York Business. Shouting shareholders, wailing employees, an angry, overflowing crowd. New chief exec Vikram Pandit tried to calm everyone down: We're now closer to the end of the write-down cycle than we are to the beginning, he said. With more than $40 billion of mortgage-related write-downs and losses at Citi so far, not exactly confidence-instilling stuff. No wonder the board of directors only got re-elected with about two-thirds of the vote. (Remember that in calmer times, anything less than near-unanimity is practically unheard of.)
The part of Citi's annual meeting that I was paying particular attention to was Shareholder Proposal No. 12: a "say on pay" proposal that would give shareholders (i.e., the company's owners) an advisory vote on executive compensation practices. The idea is to better align firm performance with top-executive pay. No more of this multi-million-dollar-pay-package-while -earnings-take-a-dive scam.
"Say on pay" has become quite the movement. Someone recently wrote a very interesting article on the topic. Since then, activist investors have really been turning up the heat, popping up at annual meetings to rally for the cause; last week, the AFL-CIO debuted a web site so that we all might better track the money being made by executives at companies which are writing off tens of billions of dollars in mortgage-related losses and wiping out years of earnings. Barack Obama, who last year introduced a Senate bill that would mandate "say on pay" provisions like in the U.K., has started talking about the idea again. A similar bill already passed the House.
But as the Citi annual meeting showed, "say on pay" is hardly in the bag. At the meeting, Citi threw out an early figure of 38% voting in favor. The American Federation of State, County and Municipal Employees, the union that submitted the proposal, thinks that the number will easily cross the 40% threshold once abstentions are teased out. That, though, could still fall short of last year's result of 46% voting in favor.
Are shareholders actually okay with how Citi compensates its executives ($15 million for former CEO Chuck Prince; $19 million for CFO Gary Crittenden) in light of its recent performance (dividend cut by 40%; $150 billion of market value gone)? Doubtful. But maybe, like the man at the annual meeting who demanded the directors rise so that everyone could see them, they'd rather find another way to express their rage.
April 22, 2008 12:30
Outsourcing can go both ways, Part II
Hello! And Hej! to you, Henri. It's great to be back.
So, last week Justin mentioned that Singapore's Straits Times newspaper is looking to outsource some copy editing to the U.S. Foreigners? Hiring Americans? As my colleague Coco Masters recently reported, they're after our pilots, too.
In a slightly different sort of turn-about, I recently went to apply for a visa to travel to India, and was faced with this message on the Indian consulate's web site:
Indian Visa Services OutsourcedWith effect from October 01, 2007, visa applicants are requested to obtain visas through:
Travisa Outsourcing, Inc. (All queries relating to Indian visa services should be directed to them)
Travisa is a U.S. company—they've been in the visa and passport expediting business for years. The Indian embassy decided to bring in a heavyweight after being overwhelmed by the surging number of visa applications in recent years.
Earlier today I went to Travisa's web site, and, as it turns out, they're hiring! In New York, San Francisco and Washington DC. That means you can now get a job in the U.S. to do work that Indians have decided not to do themselves. This globalization stuff keeps getting more and more dizzying.
April 22, 2008 9:45
The replacements
The Curious Capitalist family is about to head to Costa Rica for a week. In the meantime, veteran Curious Capitalist stand-in Barbara Kiviat and newbie Bill Saporito (a.k.a. my boss) will be filling in. Be nice to them. But not too nice.
April 21, 2008 3:49
Clayton Christensen thinks we suffer from a medical symptom shortage
I'm in D.C. today, and this morning I moderated a panel at the World Health Care Congress featuring Clayton Christensen. Christensen is the inordinately tall Harvard Business School professor who attained official business-guru status with the publication of The Innovator's Dilemma in 1997 and has shown no signs of relinquishing it since. He's got a book coming out in September called The Innovator's Prescription: A disruptive solution to our health care crisis, which is why he was speaking at a health care conference.
I'm pretty dubious of business gurus, but Christensen is really good. He's quiet and sober and calm, but throws in just enough movement and humor to keep you alert, and has some really cool insights. My favorite from this morning was his explanation of why he thought molecular diagnostics and imaging technology were disruptive technologies that would eventually bring down costs dramatically:
"The body has a limited vocabulary of symptoms," he said. "There are not enough symptoms for all the disorders out there." That's why medical care consists of so much trial and error, and why hunches and judgment are such a big part of making correct diagnoses. It's why we need House.
Molecular diagnostics and MRIs and CTs have the potential to make medical diagnosis a far more reliable, rote process. Which you means that most of time you won't need to have doctors doing it anymore. Especially not misanthropic, painkiller-addicted doctors with fake American accents. Which will presumably cut medical costs dramatically.
Or at least, that's Christensen's take. I don't know if it's realistic. But I can report that it sounded mellifluous and wise.
April 18, 2008 1:20
Why the next president should keep the capital gains tax rate right where it is
From an editorial in today's WSJ:
The facts about capital gains rates and revenues are well known to our readers, but we'll repeat them as a public service to the Obama campaign. As the nearby chart shows, when the tax rate has risen over the past half century, capital gains realizations have fallen and along with them tax revenue. The most recent such episode was in the early 1990s, when Mr. Obama was old enough to be paying attention. That's one reason Jack Kennedy proposed cutting the capital gains rate. And it's one reason Bill Clinton went along with a rate cut to 20% from 28% in 1997.
It is in fact possible to give the accompanying chart such a reading (I'd show it here but, as a blogger working for a major media corporation, I'm a little worried about the copyright thing). But it's only possible if you believe that financial market fluctuations (and with them capital gains realizations) are driven entirely by changes in the tax code. Which just can't be true. There's been a huge rise in asset prices over the past quarter century, and there are just all sorts of reasons for it apart from the decline in the capital gains tax rate. We're currently in the midst of major drop in asset prices, and you certainly can't pin that on any change in the capital gains tax rate.
So I'm starting to think that Clinton or Obama, if either is elected president, ought to keep the danged capital gains tax rate where it is, at least for two or three years. Because capital gains realizations are going to be way down, no matter what, and capital gains tax receipts with them. Why let the WSJ editorialistas blame that on the higher rate?
April 18, 2008 10:02
"Serious" economists and capital gains taxes
Commenter common sense writes, apropos of my intemperate anti-Charlie Gibson screed:
You don't know of any SERIOUS economist who agrees that cutting capital gains increases revenue? Not one? I guess you use the word serious to mean 'agrees with me and my friends', and everyone else as 'stupid'.I did 5 minutes of internet research and found an economist that, unlike you, actually has a Phd in economics from a university that even you would refer to as 'elitist'. He fully supports Gibsons assertions. I'm willing to bet your small paycheck I could find others...
Heck, I'm just one of these corn fed simpletons here in the flyover zone in the midwest but even I can read a graph where 2 events are followed by upward trending lines. I could even describe the reality-based logic that blows your tortured argument out of the water buy why bother? I'm just 'stupid'.
The fact that you take such an important sophisticated topic and take such a pejorative position means that, well, you're not making it as an economic reporter either. If I were you I'd demand a refund on your undergraduate public affairs degree. Shameful. ...
Now I'm all for getting a refund on my college tuition, because, you know, refunds are great. (Almost as good as tax cuts!) I agree that "serious economist" is a lame and somewhat obnoxious formulation and calling Charlie Gibson a "supply-side nut job" was pejorative. But I was mad, and this is my blog, dang it.
Why was I mad? I was mad because Gibson, by repeating the claim that capital gains tax cuts increase revenue, was presenting what is almost certainly a false claim as fact.
April 17, 2008 2:42
So, uh, when did Charlie Gibson turn into a supply-side nut job?
I didn't watch the debate last night. I'm afraid I just can't bring myself to watch presidential debates. Which helps explain why I've never really made it as a political reporter.
But I can, after a suitable amount of time has passed, bring myself to read at least parts of the debate transcript. Such as Charlie Gibson's questions to Barack Obama about capital gains:
GIBSON: You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent. It's now 15 percent. That's almost a doubling, if you went to 28 percent.But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.
...
GIBSON: And George Bush has taken it down to 15 percent.
...
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?
...
GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.
I've left out Obama's responses, which were mostly about fairness 'n' stuff, because he failed to give the only appropriate answer, which was that, no, history doesn't show that. Yes, capital gains tax cuts invariably result in a revenue increase the next year, because investors aren't idiots: If they see a cut coming, they're likely to delay capital-gains-generating transactions until after the tax rate drops. But I don't know of any serious economist who thinks that cutting the capital gains tax rate increases revenue over time.