Starbucks sold out 1,000 rose-gold $450 gift cards in seconds last week. Turns out they’re just more free loans for the super-rich coffee chain.
Huge companies like Starbucks have it pretty good. They don’t have to pay their employees all that much. They don’t pay much taxes. Thanks to the Federal Reserve, they can borrow at very low costs. Oh, and customers are rushing to lend them money for free.
It’s not that Starbucks has asked caffeine addicts for a loan. Rather, last Friday it held a flash sale on the luxury online retailer Gilt.com of 1,000 $450 limited edition rose-colored metal Starbucks card. They sold out in a matter of seconds.
I can certainly understand the appeal. Coffee means a great deal to a lot of people (including me). Receiving a coffee-related gift triggers a Pavlovian response – elation, anticipation, a faux caffeine rush. What better way to show your love and care for someone this holiday season than by giving them a card stocked with a year’s supply of espresso shots?
Well, there are several problems here. To begin with, the $450 card only loads $400 of value. Which is to say you’re paying $50 for a small rectangle of metal. That’s a lot to shell out for a cash receptacle, especially since Starbuck’s gives out regular loadable cards for free.
Second, $400 is a lot of money to load on a coffee card. Back when I used a Starbucks card, I typically loaded $50 at a time, which was enough to fuel a month’s worth of purchases of coffee for home use and pit stops for espresso and chocolate-covered graham crackers. When the balance hit zero, I’d add another $50. Last year I switched to the Starbucks app, which is essentially a Starbuck’s card on an iPhone. I’ve set it so that every time the balance slips below $10, it loads another $50.
It can take a few months, or even a year, to spend $400 at Starbucks. And some recipients might not use the card at all. They might use up their own cards first, or use the payment app, or decide to pay with a debit card or cash on some of their visits. Or they might stop patronizing Starbucks and start patronizing a hipster java upstart like Stumptown. Or they might take the advice of countless personal finance gurus and start making coffee at home. Or they might realize that they should be scaling back on the caffeine use and stop going.
In other words, lots of things could happen that would mean that the full amount of the gift isn’t used. In the retail trade, this is known as “breakage.” Breakage is a feature, not a bug, of the gift-card system, and it’s one of the most pernicious aspects of the trend. When balances aren’t used, they are simply pure profit for the retailer that sold the card. They get money upfront and never have to deliver any goods or services.
Even when recipients do use the full value of gift cards, retailers are still making out like bandits. Even in this age of low interest, idle money has value. When you buy a gift card, you are effectively making an interest-free loan to the company for the period until the card is redeemed – a week, a month, six months, a year. Large companies like Starbucks have very efficient treasury operations that sweep all available cash into interest-earning savings instruments. Cash is a resource like any other, and companies hate to see any resource go to waste.
The economy added 203,000 jobs in November, according to today’s data—and the unemployment rate dipped for the right reasons. There’s just one downside: stubbornly stagnant wages.
We’ve learned at least one thing this fall. The implementation of the Affordable Care Act and the approach of the health insurance mandate isn’t causing companies to fire workers en masse, hold back from hiring, or rush to place employees on part-time status.
Quite the opposite. In the last few months, hiring has been ramping up. On Friday, the Bureau of Labor Statistics reported that the economy added 203,000 payroll jobs in November. The unemployment rate, which is compiled from a separate survey, dipped to 7.0 percent from 7.3 percent in October.
The report contained plenty of good news. With the revisions for the previously reported September and October numbers, the economy has added 816,000 jobs in the past four months, and 2.29 million in the past year. This rate of job growth, an average of 204,000 a month since September—virtually all of it driven by private-sector hiring—has finally become sufficiently strong to drive down the unemployment rate. The labor participation rate and the size of the labor forces both rose in November from October. There was strength across the board, as virtually every major sector—manufacturing, construction, business services, health care, retail—added positions.
Clearly, companies are not holding back on hiring due to regulations, uncertainty, or the rollout of a complicated and confusing new health-care plan. Nor are they reacting to the requirement to offer insurance to employees who work more than 30 hours per week by slashing hours and moving people to part-time status. In fact, in November, the number of people who were working part-time for economic reasons—i.e. they’d prefer to be working full-time but can’t get the hours due to slack demand or employer decisions—fell by 331,000, or 4.1 percent, from October. The total number of people working part-time for economic—7.719 million in November—was off by more than 5 percent from November 2012.
There are a couple of other items worth noting.
A big theme for the last several months has been the end of fiscal austerity. For the last several years, in a trend atypical for expansions, the public sector has been cutting jobs while the private sector has been adding them. That’s why I’ve dubbed this the “conservative recovery.” Between May 2010 and July 2013, government slashed 1.165 million jobs. By contrast, in every month since March 2010, the private sector has added jobs—8.058 million so far. But as states and cities repair their finances, as tax revenues rise across the board, and as the federal government has become less mindless about cutting, the slow bloodletting of public employment seems to have come to an end. Last month, while the federal government cut 7,000 positions, state and local government added a combined 15,000 posts, which means the government sector added 8,000 jobs. State government employment has risen for four straight months, adding 41,000 jobs since July, while local government has added 68,000 jobs in the past year. Overall, these gains are a drop in the bucket and pale in comparison to private sector jobs growth. But they means that one of the big forces that has weighed on the overall job market is lifting.
Alas, while the pace of job creation is picking up, wages still aren’t budging. In a nutshell, companies, which have racked up record levels of profits and are sitting on record amounts of cash, are still being extremely Scrooge-like when it comes to paying their employees. Last month, according to BLS, averagely hourly earnings bumped up by four pennies to $24.15. In the past year, per the BLS, “average hourly earnings have risen by 48 cents, or 2.0 percent.” That’s better than a poke in the eye. But, as has been said in this space a dozen times, if big American companies want to see more robust demand for their goods and services, they’re going to have to loosen the purse strings. Companies are hiring more. Now they just have to a pay a little more.
As fast food workers strike for higher wages, pundits are dismissing their demands as unrealistic. But an exploding burger chain in Detroit proves the naysayers are thinking in a box.
Around the country Thursday, fast-food workers and their allies demonstrated to call attention to the plight of low-wage service workers. One of the demands is that highly profitable, massive enterprises like McDonald’s and Burger King should pay employees $15 an hour, which is more than double the legally-required minimum wage in most parts of the country.
Many observers regard such a suggestion as absurd on its face— “economic fantasy at its most delusional and counterproductive,” as my colleague Nick Gillespie put it here on Wednesday. These are low-end jobs in a generally free labor market. Nobody is forcing anybody to work at McDonald’s for $7.50 an hour. Besides, these companies couldn’t function if their labor costs were to double. I mean, who can make money on fast food while paying $15 an hour?
But if you look hard enough, you can find some enterprising souls who are doing just that. I first wrote about Moo Cluck Moo this spring, when the high-quality fast-food burger-and-chicken joint on a hardscrabble location in Dearborn Heights, Micighian, was paying $12 an hour. Even in a weak labor market, with plenty of people willing to work for less, the owners decided they’d construct their business model so that they would pay significantly above the market. In September, Moo Cluck Moo raised wages to the unthinkable level of $15 an hour.
Of course, this was a small-scale experiment—a single restaurant, in an area with very cheap rent (about $1,200 per month), with no budget for advertising and marketing. “Our first store was more or less a laboratory to see how we should run it while paying a living wage,” said Harry Moorhouse, who founded Moo Cluck Moo with Brian Parker. The proof would be if it could succeed and then scale. And it’s working. The company is plowing the profits from the first store into expansion. And on Friday, Moo Cluck Moo will double in size when it opens a second store in a strip mall near an Ikea in Canton, Michigan, a town about 10 miles west of Detroit. Unlike the first store, which had no seats and no parking, this one will have 29 seats and plenty of parking. (The rent there is higher: about $2,400 per month.) “It’s near a working-class neighborhood, Westland, that we think is underserved,” said Moorhouse.
Now, Moo Cluck Moo is still a very small enterprise and a very small employers; it takes four or five employees per shift to run the restaurant. But its early success and expansion gives the lie to the notion that you can’t run a quick-service restaurant while paying people $15 an hour. Perhaps you can’t run it in the way McDonald’s does, with its high rents in high-traffic areas, with its model of franchisees kicking lots of money to corporate, and the huge marketing, advertising, and corporate headquarters expenses. But it can be done.
Even with its $15 hourly wages, labor “is only 25 to 30 percent of our operating expenses,” Moorhouse said. Moo Cluck Moo is raising prices at its chains by a few percentage points—from $3 to $3.25 for the hamburgers—“but that’s due to the rising cost of meat,” he said. And deciding that you’re going to spend more on labor just puts pressure on the owners to design the business so that it can open and expand efficiently. “We’re going to open Canton for about $70,000 all in,” said Moorhouse. “We don’t have to be on the corner of Main St. and Main St. We’re better off adjacent to a working-class neighborhood, where rents are lower.” These are the core customers for fast food, so they appreciate having a new choice. “And the folks from upper middle class neighborhoods will drive to us.”
When will corporate America realize it doesn’t pay enough?
President Obama gave a big, progressive, somewhat impassioned speech about inequality, wages, and the economy on Wednesday.
US President Barack Obama speaks at the Town Hall Education Arts Recreation Campus on December 4, 2013 in Washington, DC. (Brendan Smialowski/AFP/Getty)
Welcomed by the left, and sure to be jeered or ignored by the right, it was full of plenty of old-time Democratic economic gospel and present-day center-left thought leadership. But it was a little bit light on the main factor that can combat the scourge of low wages and rising inequality: an appeal to the conscience and self-interest of businesses.
There was nothing new, or even objectionable, in the speech, which took a circuitous historical route to its subject. The U.S. has typically accepted greater inequality because we had a great deal of social and economic mobility. But the data behind that has clearly broken down, he argued. And that’s bad for America for a host of reasons. Countries with greater income inequality tend to have more frequent recession. Income inequality is bad for social cohesion, “not just because we tend to trust our institutions less but studies show we actually tend to trust each other less when there’s greater inequality.” And it’s bad for democracy.
The solution he offered is basically what has been the Democratic growth agenda for the last two decades. (It’s all there in Gene Sperling’s 2006 book, The Pro-Growth Progressive) That agenda includes “simplifying our corporate tax code,” more trade, smarter regulation, better skills and education, universal pre-school, more support for unions, bolstering retirement security, aid to urban areas and the unemployed, inter alia.
All those efforts are great, and many of them are likely to bear fruit in the long-term. But to a degree, Obama—and other people who focus on Washington—are missing the forest for the thicket of policies. The real problem is that companies in the U.S. do not pay enough, and that they have conditioned themselves (and their investors, and board, and employees, and politicians) not to raise wages even as their profits and cash holdings rise to record levels. Consider that corporate profits have soared from $1.2 trillion in 2009 to about $2 trillion this year, and that between the end of 2006 and mid-2013, corporate America’s cash holdings rose from $850 billion to $1.48 trillion. And yet the response to this remarkable turnaround has been effectively to reduce wages. Median household income in 2012 was below where it was in 1999, and has risen in only five of the last 12 years (PDF).
This is not a problem that can be corroded by a higher minimum wage, or stronger unions, or universal pre-K. Rather, it would require a wholesale change of heart among America’s business class. They’d have to start taking pride in offering higher wages each year—rather than, say, offering higher dividends or stock buybacks each year. They’ve have to make it part of their strategic mission to aspire to pay above the median, and thus help drag wages up.
In his speech, Obama cited the “extraordinary companies in America that provide decent wages, salaries and benefits, and training for their workers, and deliver a great product to consumers.” He name-checked software company SAS and outdoor retailer REI. There are some companies, he noted, that realize that “paying a decent wage actually helps their bottom line, reduces turnover. It means workers have more money to spend, to save, maybe eventually start a business of their own.”
Give the gift of light this year! You may look like a Scrooge at first, but your present will be paying dividends for years to come.
My bright idea for a high-tech gift for this holiday season is actually a 19th century invention: a light bulb.
Most people would regard a light bulb in their stocking with the same enthusiasm with which they’d greet a lump of coal. But they shouldn’t. For this year, when you give the gift of an expensive, highly-efficient, LED, you’ll be bringing light—and an annuity that could pay out a couple hundred dollars of dividends over the next decade.
The Daily Beast
Much to the chagrin of traditionalists, luddites, and aficionados of wasting energy, the old-fashioned incandescent light bulb is going away. They’re not being banned. Rather, new standards stipulate that bulbs manufactured and sold in the U.S. must meet higher energy efficiency standards. Since the technology behind old-fashioned incandescent can’t really get there, they’re going bye-bye. The phase-out of incandescent light bulbs began with the 75- and 100-watt bulbs. Starting next year, 40- and 60-watt incandescent bulbs will be phased out, too.
Many Americans have been angered by the transition. For the available replacements, while they may be more efficient when it comes to turning energy into light, have been inferior goods. Compact fluorescents take a while to heat up, don’t offer the same light quality, and contain mercury, a highly toxic substance. The next generation, light emitting diodes (LEDS), are extremely expensive and only come in a few shapes and sizes.
Of course, proponents and manufacturers of LEDs say they are worth it. They use much less electricity to generate the same amount of light and last much longer. Sure, they cost ten times as much. But over their lifetime, thanks to lower operating costs, they’ll more than pay back the investments. This is why cities with long-term planners, capital budgets, and the ability to borrow have embarked upon campaigns to install large number of LEDs—i.e. New York City and Los Angeles.
But people don’t think the same way that cities do. We see bulbs as cheap, disposable goods, not as long-term capital assets. When one wears out, you throw it away and replace it with a similar version that costs as little as possible. And even if there were a better technology out there, few of us would take the time and money to remove perfectly good bulbs, destroy them, and replace them with new LEDs. That would require spending hundreds of dollars up front. Worse, the paybacks are embedded in utility bills that don’t break out the savings.
And yet the logic is undeniable. Since March, Cree, the lighting company based in North Carolina, has been selling 40-watt and 60-watt LED bulbs through Home Depot. And this week it introduced a 75-watt bulb.
Black Friday wasn’t a bust—shoppers spent about as much as they did in 2012. But until big retailers pay employees more, they shouldn’t expect a real boom in holiday sales.
Judging by the first returns, the big holiday shopping season was something of a disappointment. According to the National Retail Federation, shoppers estimated that they would spend about 2.7 percent less over the 2013 Thanksgiving shopping weekend than they did in 2012.
We shouldn’t draw too many conclusions from this widely quoted data point. To begin with, NRF’s number is an estimate based on what consumers said about their intentions, not an actual measurement of sales. Thanksgiving Day and Black Friday represent two days of shopping and consumption out of 365. What’s more, the retail landscape is changing so rapidly that comparing one year’s results to another is like comparing apples and oranges. With online sales growing at a rate three or four times that of brick-and-mortar sales, you’d expect stores to struggle just to maintain flat sales from last year. The rush of stores open on Thanksgiving undoubtedly pulled spending back from Black Friday. And this year, many companies pushed back Black Friday sales to the week before Black Friday, which certainly pulled some sales forward. Meanwhile, Hanukkah came early this year, which means that a small chunk of consumers had likely completed their shopping before Thanksgiving.
To these variables, we should add a few more. It could be, at the margins, that a small subset of Americans is put off by the increasingly unpleasant, dangerous, and desperate Thanksgiving/Black Friday shopping frenzy. (The Huffington Post helpfully aggregated instances of Black Friday violence.) Still others are deciding they don’t want to be implicated in the distasteful trend of Fortune 500 companies forcing low-paid service workers to report for duty on what should be a holiday. On the Wall Street Journal editorial page, Peggy Noonan urged consumers to boycott stores on Thanksgiving.
And yet, at the end of the day, the numbers will be OK, and about as expected. Retailers may suffer as they lose share to online shopping, and those that slashed margins in an effort to draw shoppers into the stores will find that it might not have made as much sense. Sales for the season are projected to rise 3.9 percent from 2012, That may be disappointing. But it makes perfect sense. Through the first ten months of 2013, retail sales (excluding autos and auto parts) were up 3.2 percent from the first ten months of 2012. In other words, consumers generally spent in the past week much as they have for the past year.
Retailers may believe they have a right to expect better. After all, the flow of economic data has been pretty decent. The U.S. economy has never been larger. We have more people working than at any time since August 2008. Financial failure is way down, and the economy has just entered its 54th month of expansion. The annus horribilus of 2008 is slipping into the past.
And yet consumer confidence remains at depressed levels. The Gallup Economic Confidence Index was sandbagged by the October government shutdown and debt-ceiling brinkmanship. While it has rallied steadily since the resolution of the Washington crisis, it is still deep in negative territory—and is below where it’s been for much of the past year. Other measures of consumer sentiment are bumping along at low levels. The Conference Board’s measure of consumer confidence last week fell for the second straight month and stands at 70.4—a level typically seen in recessions. (The ThomsonReuters/University of Michigan Consumer Sentiment Index rose a bit in November.)
It doesn’t take an economics Ph.D. to understand why. Simply put, in this expansion, the fruits of growth have not spread evenly. Sure, the stock market boom is making people feel wealthy, but fewer Americans own stock than did three, or five, or ten years ago. Yes, the typical American is in better financial shape than several years ago. But the fuel that powers spending for most shoppers is wages, not savings, or dividends, or capital gains, or home equity. And while wages and private income are rising—personal income was up 3.6 percent in the third quarter of 2013 from 2012 percent—they’re not rising at a rate that would spur exuberance.
Until big retailers—and their fellow employers—loosen the purse strings and consciously decide to pay employees more, they shouldn’t expect to see a boom in holiday sales.
Employees forced to work on ‘Black Thursday’ for low wages aren’t the only ones having a grim holiday—Walmart’s miserly ways are part of the downward spiral of its business model.
“We don’t call it Black Friday, we call it Black Thanksgiving,” said Michael Ahlef, 22, a Walmart cashier who said he was willing to risk arrest at a protest in Minneapolis because he was so desperate for the company to introduce a living wage. “They’re going to have to start listening to us soon,” he told The Daily Beast.
Lucy Nicholson/Reuters via Landov
The action was one of many protests and events that organizers were planning in more than a dozen cities, including Los Angeles, Chicago, the Bay Area, Seattle, Dallas, Sacramento, Miami, Minneapolis, and Washington, D.C., meant to call attention to Walmart’s low wages and the continuing demands it places on employees, including working through holidays. For many Walmart employees, working through the holiday season is both an economic necessity and an edict from management.
Ahlef said there simply were no other employment opportunities where he lived in the town of Sauk Centre, Minnesota. “If you don’t want to work in manufacturing, it’s either Walmart or fast food, and fast food pays even worse,” he said. Ahlef, who works late shifts five days a week, earned $17,000 before tax last year.
The coordinated actions produced few fireworks by mid-day. A few protesters were arrested outside a Walmart in Alexandria, Virginia, and at events in Texas and Chicago. In Southern California, a man in a Santa suit was arrested. And the protesters were generally dwarfed by legions of shoppers rushing in and tussling for bargains on Thanksgiving Day and Black Friday.
These twin phenomena—labor actions by low-wage service workers and the continuing encroachment of the Christmas shopping season into November—are actually two sides of the same coin of economic desperation. Four years into an economic expansion, and at a time of record profits and cash holdings for companies, service workers are still not getting meaningful wage increases. And the labor movement, which represents only about seven percent of private-sector employees, can’t be of help much. This year, adding insult to injury, retailers are forcing their low-paid employees—many of whom are unable to afford the necessities of life—to work on a national holiday to accommodate and prepare for frenzied shopping activity by consumers who are themselves desperate for bargains.
But Walmart and its peers are desperate, too. The only type of strike that puts fears into the hearts of retailing executives, that would make them think they need to change the way they do business is, a buyers’ strike. Nothing concentrates the mind of a Walmart executive so much as the prospect that shoppers may indicate their displeasure with the status quo by not showing up, or by turning to alternatives.
And there are signs this is happening. In fact, more stores are opening on Thanksgiving precisely because shoppers simply haven’t been showing up at Walmart and its competitors the way they used to. Despite the brave face and eager smiles of bricks-and-mortar CEOs, this may not be a particularly good year for malls and big box stores. As the Wall Street Journal reported. “About 140 million people are expected to shop over this holiday weekend, a decline from the 147 million who planned to do so last year, according to the National Retail Federation.” Should that forecast materialize, that would represent a pretty significant decline: seven million fewer people!
The majority of gift cards go to waste, unused by consumers and left to rot in landfills. But there’s a green alternative—cards made of wood—that allow you to gift without the guilt.
For holiday shoppers, gift cards are the easy way out. They’re light. They’re quick, and bound to delight. They’re also problematic on a few levels, as I noted several years ago. When you buy gift cards, you’re lending money to retailers for free. And when gift cards go unused, the money spent purchasing them goes to waste.
Gift cards are also wasteful in another way. They’re made of environmentally unfriendly plastic and consume a lot of resources. And when they’re discarded, they often wind up in landfills.
Just as shoppers, grocers and stores are switching from plastic to paper bags, so, too, are some shifting from plastic to paper gift cards. “In 99 percent of the cases, gift cards get used in the first year of their life and then are thrown away,” said Johan Kaijser, head of sales at Sustainable Cards, a company with operations in Sweden and Boulder, Colorado (where else?) that makes gift cards out of wood. While small, these cards can pile up. There are about 30 billion in the world, and it is inefficient to recycle them. “If you do the math, it is like 150,000 tons of PVC plastic,” said Kaijser. And most of that is going to the landfill or getting burnt.”
The most energy-efficient means of doing gift cards would be simply to send them as digital apps. But as mobile payments systems rise, gift cards are holding on. In fact, sales are rising. Last year, according to CEB Tower Group, sales of gift cards amounted to $110 billion, up 10 percent from 2011. People still like handing over gifts personally. And, ironically, some of the biggest e-commerce companies—iTunes, or Spotify, or Amazon.com—maintain large plastic gift card programs because they want to have a tangible physical presence.
So long as gift cards are trading hands, it makes sense to try to produce them more sustainability. “We need to push the producers to offer more environmentally sound materials,” said Kaijser. Sustainable Cards uses a Nordic birch veneer, and then layers on a cellulosic paper structure. The cards can also be coated with a thin corn-based plastic overlay. Just like plastic cards, the wood-based cards bend, and can be embedded with magnetic stripes or barcodes. Once used, the cards go through the same kind of lifecycle as the plastic card—except they biodegrade more quickly and don’t release as much toxic stuff when they do so. The cards that are entirely wood can be composted. As a result, “they have about 50 percent of the environmental footprint,” said Kaijser.
Of course, as is often the case, there is a price to be paid for sustainability. Depending on the volume of an order, the wood cards can cost between 10 and 15 cents per card, while PVC cards can be as cheap as 7 cents for large volumes. For smaller volumes, Kaijser said, the differential between wood and PVC is about 10 percent.
This is a small but, um, growing business. Sustainable Cards was founded in 2006, produced its first cards in 2010 and has doubled sales every year since then. With 15 employees, it has revenue of about $2.5 million per year. Customers include hospitality chains like Hilton and Four Seasons, which use them for key cards; airlines and rail customers, which use them for loyalty program cards; and retailers like the Body Shop and Starbucks. Because customers tend to hold gift cards, key cards, and loyalty cards in their hand, they can be an integral part of companies’ own sustainability messaging.
In a new declaration, the pope warns that the ‘culture of prosperity deadens us,’ taking aim at free market capitalists and consumers alike.
“How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?”
I guess Pope Francis doesn’t watch Bloomberg TV.
This quote is one of the many zingers Pope Francis aims at global capitalism in his just-issued Apostolic Exhortation (here’s the PDF version)
The economic sections were a small component—items 54-60 of a 106-item, 86-page document. But they were noteworthy for injecting the Vatican into the raging global debate about inequality. And they are likely to delight many followers and alarm many others who generally look to the Vatican for guidance on spiritual and policy matters. Earlier this month, Sarah Palin kicked up a storm when she expressed concern about some of Pope Francis’s views on a range of issues—from poverty to the treatment of gays. “He’s had some statements that to me sound kind of liberal, has taken me aback, has kind of surprised me,” she told CNN. I wonder what she’s thinking now that Francis has unleashed a broadside at supply-siders, defenders of the prerogatives of finance, and at consumers in general.
Francis, of course, hails from Latin America, the wellspring of the radical, feared ‘Liberation Theology’ movement of the 1960s and 1970s. While no leveler, Francis is allergic to ostentation. He doesn’t like the imperial trappings of the office. He has no entourage, and moved into rooms at the Casa Santa Maria, the Vatican hotel, instead of occupying the large papal penthouse at the Apostolic Palace. Not for him the Red Prada slippers of his predecessor. His church has cracked down on showy displays of wealth. This fall, he suspended of the Bishop of Limburg, who spent millions of Euros renovating his residence.
Francis has been relentless in talking about the church’s mission and need to serve the poor. Poverty and inequality used to be accepted as an order imposed by God. Today, Francis forthrightly pinned the blame on humans. The global economy has grown in every year since 1944 except one—2009. Broadly speaking, living standards are rising around the world, and hundreds of millions of people have been lifted out of abject poverty. Yet there are glaring, often violent deficiencies in the system.
Popes have never been big fans of Darwinism. This Pope takes direct aim at economic Darwinism. “Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless,” he wrote. Francis has little use for those who argue that cutting taxes for the rich helps the poor. “Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world,” he said in a mini-rant that wouldn’t be out-of-place on MSNBC. “This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”
A new alcohol combines two successful consumer trends: Cinnabon-licensed products and flavored vodkas.
Two great tastes that go together. Chocolate and peanut butter. Taco Bell tacos and Doritos. And now, Cinnabons and… . vodka?
The Daily Beast
Yes. This morning I had a chance to sample the combo.
I originally thought the pitch from Beam, the big spirits company, and Cinnabon would be about some gooey, unabashedly sweet cinnamon buns, smothered in hot icing, infused with alcohol. But it’s the other way around. The flavoring and essence of Cinnabon has been distilled into Beam’s Pinnacle Vodka.
The result is actually quite good. I had a Proustian moment when sniffing the liquor. The memories of a hundred business trips came roaring back as I recalled the unctuous Cinnabon aroma that wafts through airports. The sweetness cuts through the usual harshness of Vodka and leaves a cinnamon taste on the tongue. It’s even better when paired with some actual Cinnabons.
The collaboration between two large companies is the logical outgrowth of a few big trends. One is the rise of flavored vodkas, which are appealing, especially to younger (legal) drinkers. Pinnacle comes in 30 (!) flavors, including Cherry Lemonade, Cookie Dough, Pomegranate, Rainbow Sherbet, and Whipped (as in whipped cream). A second is the relentless expansion of Cinnabon, which has branched out from mall stands and airport kiosks to deals with Burger King and Taco Bell and to consumer packaged products. A third is the continued appeal of indulgence, even in this age of nutritional labeling and increasingly aggressive fat police.
The idea started with Beam. Sales of beer and soda are stagnant or declining. But sales of spirits have actually been growing nicely, as this study shows (PDF). That’s in part because outfits like Beam are rolling out new flavors and products to appeal to the desires of their customers. “People are very specific about what they desire. If they want blackberry, they won’t take blueberry,” said Bill Newlands, president for North America at Beam. Pinnacle is the leading flavored vodka brand in the U.S. And the parent company has enjoyed a nice run in the stock market, as shown by this two-year chart.
Since customers already were taking up cookie dough-flavored vodka, it was natural to think of a Cinnabons-flavored version. “We had started to work on creating something in this zip code, and internally we said we need to have something that tastes like a Cinnabon,” said Newlands.
Despite pushback from the city council, Walmart will open its first two stores in D.C. next month. But getting a job there will prove difficult since the chain received 38 applications for each job opening.
Walmart is constantly in the news as a metaphor for what’s ailing America. On Monday, it was the news that employees had set up bins to collect food for needy employees at a store in Ohio. On Tuesday morning, we were presented with a Walmart-related news item that explains why the company can get away with paying so many so poorly.
A Walmart employee wears the company's customer service slogan on his jacket, March 16, 2005 in Bentonville, Arkansas, USA. (Gilles Mingasson/Getty)
Seeking growth in the low-end of the retail market that it has largely saturated, Walmart has been trying to push into cities. Urban areas, with their unions, liberal politicians, and generally high costs for real estate, insurance, and lack of parking, were not a natural fit for the company that started in rural Arkansas and grew by planting giant boxes in rural areas and exurbs. But Walmart in recent years has made tentative inroads into close-in suburbs and the city limits of Chicago, Los Angeles, and other large population centers.
Zoning boards and city councils often throw up obstacles to expansion. Walmart has no stores in the five boroughs of Manhattan. Earlier this year, in Washington, D.C., the City Council passed a law explicitly aimed at keeping Walmart out. City Council passed a law saying certain big box retailers would have to start pay at $12.50 an hour, 50 percent higher than the District’s $8.25 minimum wage. But in September, Washington, D.C. Mayor Vincent Gray vetoed the bill.
The veto paved the way for the opening of two stores, one on H Street just north of Union Station and the other on Georgia Avenue in northern D.C. early next month. And potential employees are enthused. As NBC’s Washington, D.C. affiliate reported “the stores will hire a combined 600 associates after combing through the more than 23,000 applications it received from potential employees.” That’s stunning. Walmart received 38 applications for every opening, making the odds of an applicant getting a job at Walmart far greater than getting into Harvard. And all this competition for positions that we know do not pay all that well.
What gives? This isn’t taking place in a low-wage broken-down mill town where unemployment is high and there are few options. The Washington, D.C., metro area has been a boom town for the last 12 years, fueled by a higher level of government spending, contracting, outsourcing, and a real estate boom. The city grows ever more upscale and yuppified by the day. Richard Florida, the prescient analyst of urban revival, has called the area “a boom town of the new economy.” The D.C. metroplex has six of the richest counties in America. The unemployment rate of the Washington-Alexandria-Arlington metro area in August was 5.4 percent, significantly below the national rate. The unemployment rate in the areas of Maryland adjacent to D.C. was 5.2 percent. In the past year, the D.C. metroplex has added 33,000 jobs, or 1.1 percent of the total.
But that hides a reality in this economy. The labor market is actually several labor markets in one. And some of those markets are doing quite poorly, even in booming areas with comparatively tight labor markets. We know, for example, that in October the unemployment rate for people with bachelor’s degrees (or more) was 3.8 percent, while the unemployment rate for those whose highest level of education was completing high school was 7.3 percent, and the rate for those who hadn’t completed high school was 10.9 percent. Put another way, people who haven’t completed high school are nearly three times more likely to be out of work than those who have completed college. And people who haven’t attended college are twice as likely to be out of work as those who have completed college. Among African-Americans, the unemployment rate is 13.2 percent, while the unemployment rate for whites is 6.2 percent.
Slack in the labor market—and the continuing weakness of unions—makes it very difficult for all but the most skilled workers to negotiate higher wages. And the intense competition for positions at the lower rungs of the labor market mean companies can have their pick of candidates while offering comparatively low wages. It’s good for Walmart that the company is finally making inroads into Washington. Perhaps the new stores will help boost the chain’s stagnant domestic sales. It’s good for the 600 new hires to have jobs at a stable company. And there’s more where that came from. Walmart said it hopes to open three more stores in D.C. in coming years, which will employ another 900 people. But the fact that the chances of getting a job at Walmart are far lower than the chances of getting into Georgetown Law School highlights a continuing problem.
Walmart continues to blame outside factors—the food stamps cut, the ACA, and the government shutdown—for dwindling sales. But the real reason for its troubles? Its own business model.
Wal-Mart touches more consumers than virtually any other company—140 million customers each week. The registers at its 4,135 U.S. stores ring up millions of transactions every day. Its sophisticated IT systems collect a wealth of information about the supply chain, the behavior of consumers, and real-time action in the consumer economy. And yet at some level, America’s largest retailer remains remarkably clueless about what is happening in the economy.
Even though the economy is growing, its sales aren’t. Strangely, fewer people are coming into Walmart’s stores. Traffic at stores open more than a year fell .4 percent in the third quarter from the year before, and as a result same-stores sales fell .3 percent. Yet the company doesn’t seem to know why. And the pronouncements it makes should lead observers to think twice about whether the company is missing the forest for all the trees.
Consider. If the government telegraphs that food stamps are going to be cut—and may be cut sharply in the future—you might expect the people who depend on them to start taking evasive action, perhaps by saving more and shopping less. Walmart cashes about 18 percent of food stamps in the U.S. Ergo, any cut would be bad news for the company. But as I noted, Bill Simon, president and chief executive of Walmart U.S., last month said (PDF) the cuts could actually work to the company’s benefit. Simon said that “when the benefits expanded, our market share actually went down.” (Translation: When people had more money to spend, they were more likely to go to places other than Walmart.) And so with customers who lose benefits becoming more price-sensitive—“in other words, everybody’s benefit is going to get cut, price will become more important. And when price is more important, we’re more relevant.” That reasoning was wrong, apparently. Last week, when Walmart announced disappointing quarterly sales, Simon said the coming fourth quarter could be tough because of “recent SNAP reductions.”
Another example of macro-cluelessness came in Monday’s Wall Street Journal. Businesses have been complaining about how the Affordable Care Act will affect their own operations from day one. Now some are saying it is already negatively impacting consumer behavior. Never mind that one of the first planks of the ACA to be implemented put money into the hands of consumers; some $504 million in rebates were sent out earlier this year. And never mind that the balance sheets of hundreds of thousands of poor people— the type of people who shop at Walmart—are being improved because of the expanded eligibility for Medicaid. Since October 1, in fact, states have signed up more than 400,000 people for Medicaid—which is to say, free healthcare. And never mind that none of the people who have signed up for insurance plans, many of which are subsidized, has to make a payment until December. And never mind, further, that the penalty for not signing up, which will be leveled at some point in 2014, starts at about $95 and can’t be higher than one percent of a person’s income. Walmart is convinced that the higher costs associated with the ACA are inhibiting the capacity of consumers to spend—even though it acknowledges there is no empirical evidence to support this contention. From the Journal article: “While it is not coming through in customer research, we do know that some of our customers are concerned about the impact of the Affordable Care Act,” Carol Schumacher, vice president of investor relations, told analysts on Thursday. “For many of our customers, having to afford health care and insurance may be another line item in their personal budget that they may not have had to cover previously.”
Finally, on Monday, the internet was aflame with outrage over an extremely telling anecdote from a single Walmart store. It seems that in an employee-only area in a store in Canton, Ohio, Walmart had set up bins to solicit food donations from Walmart workers to help feed… other Walmart workers. The Cleveland Plain Dealer has the depressing story here. A sign above the bins reads: “Please donate food items here, so Associates in Need can enjoy Thanksgiving Dinner.” Now, the article notes that this decision was taken at the store-level, and that Walmart has a series of policies and vehicles through which Walmart employees kick in funds for an employee assistance fund.
But this is insane. And it’s a great metaphor for what is happening in the U.S. economy. “That captures Walmart right there,” Kate Bronfenbrenner, director of labor education research at Cornell University’s School of Industrial and Labor Relations, told The Plain Dealer. “Walmart is setting up bins because its employees don’t make enough to feed themselves and their families.”
This—not the food stamps cut, or the ACA, or the government shutdown—is the real reason for Walmart’s continuing sales struggles. Low-wage workers, four plus years into the recovery, aren’t getting paid enough to consume more. Employers large and small, while sitting on record amounts of cash and ringing up record amounts of profits, don’t feel compelled to share the bounty with employees. Labor share of national income is at a post-World War II low. This has real world implications. Walmart, of course, is the nation’s largest private-sector employer, with 1.4 million employees. Aside from accounting for a big chunk of overall retail employment, Walmart sets the benchmarks and norms for a large part of the service industry. The company’s sales are stagnating in part because it doesn’t pay its employees sufficient wages, and because many other companies follow suit. Yes, Washington may be playing a role in Walmart’s travails. But the real source of the problem is in Bentonville.
When Snapchat shot down Mark Zuckerberg’s billions this week, the markets got a clear picture of the perverse logic that now rules social media—and the problems that lie ahead.
The buzz of this week was that Snapchat, the pre-revenue/no-revenue instant-messaging craze, turned down a $3 billion buyout offer from Facebook.
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Much of the commentary centered around the folly, or heroism, of Snapchat’s young founders Evan Spiegel, who is 23, and Bobby Murphy, now 25. Why should they take a lowball offer and go to work for someone else when an independent Snapchat might be worth $6 billion, or $12 billion, or $20 billion, in a few years? On the other hand, should the energy surrounding social media dissipate, should investors start demanding that companies have actual revenue and profits again, or should Snapchat be surpassed by the next new thing, the founders will look like chumps.
But the failed pickup effort says as much about Facebook—and the broader social media and technology industry—as it does about Snapchat.
The narrative that emerges is one in which the math team member tries, without success, to ask the cheerleader out. The New York Times noted that Zuckerberg “traveled to Venice, Calif., to meet with the company, according to Snapchat’s founders, instead of them visiting him at his headquarters in Northern California.”
It’s ironic. If the markets were a high school, Facebook’s balance sheet and market position would make it the 220-pound jock.
The idea that Facebook should be a supplicant to anybody is absurd. Investors love Facebook, and have given it a stock market value of $120 billion. The company’s stock trades at 126 times earnings, meaning that investors are very enthused about its growth prospects. And Facebook has been able to do what so many have failed to do: turn a profit on Internet advertising, while reaping lots of revenue from mobile. In its most recent quarter, sales rose 60 percent from the year earlier. Mobile advertising, a tough nut to crack , accounted for about half of the company’s ad revenue. Users like the company’s products. Facebook last quarter claimed 728 million active users, up 25 percent from the previous year. It’s growing rapidly off a very high base. This is the chart of Facebook’s performance as a public company.
But of course, this isn’t enough. In fact, it’s not nearly enough. Facebook doesn’t just want to be big, profitable, and growing. It wants—no, needs—to be perceived as popular. Mark Zuckerberg, the 29-year-old CEO and founder of Facebook, says the company is so beyond trying to run with the Winklevii. “People assume that we’re trying to be cool. That’s never been my goal—I’m like the least cool person there is,” he said in an interview with Atlantic magazine editor James Bennet this fall. At another point, he noted that “We’re almost 10 years old and we’re definitely not a niche thing at this point, so those angles on coolness are pretty done for us.” But the dude doth protest too much. Facebook needs to be seen as cool—as a cool place to work, and as a cool place to hang out.
While Obama crashed and burned over health care, his nominee to head the Fed sailed through her confirmation hearing. But will Janet Yellen be any different from her predecessor?
President Obama’s press conference on Thursday was something of a horror show. By contrast, the confirmation hearing of Janet Yellen, the president’s nominee to be the next Chair of the Federal Reserve, was more like something from the Rocky Horror Picture Show. The general theme of the three-hour session was Damn it, Janet. I love you!
Federal Reserve Board Chairman nominee Janet Yellen following her confirmation hearing on November 14, 2013 on Capitol Hill in Washington, D.C. (Alex Wong/Getty)
The Senate remains a remarkably politicized place. Tea Party rogues like Ted Cruz of Texas and Mike Lee of Utah are gumming up the works. Republicans are filibustering Obama judicial nominees. And a grand bargain on taxes and spending remains elusive as ever. But at the Yellen hearing, the members of the Senate Banking Committee signaled that they essentially accept the status quo. Several senators posed objections and concerns about the Fed’s quantitative easing policies, but few signaled discomfort with the prospect of the first woman nominated to head the central bank taking charge. And none indicated he or she would try to block a vote.
In her brief opening statement, Yellen signaled that she was essentially prepared to stay the course of keeping short-term interest rates low and creating new money to purchase bonds to keep long-term interest rates low. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” she said.
Now, in recent years, the Fed’s expansive monetary policies have been extraordinarily divisive. Remember Texas Gov. Rick Perry’s comments that Ben Bernanke’s efforts to stimulate the economy could be construed as “treasonous”? The Republican Party has a large Situational Hard Money Caucus—a group that freaks out at the prospect of inflation when the Federal Reserve keeps interest rates low during a Democratic presidency, but didn’t blanch at low-interest rates during the Bush administration.
Yellen was present at the creation of quantitative easing, and is pledging to continue the policy until it works. But she didn’t get all that much flack about it. The objections to quantitative easing were generally pro forma and not particularly articulate. Sen. Mike Johanns of Nebraska acknowledged the struggles of the economy but bizarrely suggested the Fed should consider getting rid of all its holdings over a 24-month period. He didn’t explain why the dumping of $4 trillion in assets would help economic growth. Sen. Pat Toomey of Pennsylvania, who used to work at the Wall Street-oriented Club for Growth, complained that interest rates were too low for savers, but that Dodd-Frank and other regulations were raising costs for corporate borrowers. (Note: thanks to the Fed’s quantitative easing efforts, corporate borrowers are paying next to nothing to borrow. In May, IBM sold $1.2 billion in seven-year bonds at an interest rate of just 1.625 percent.) Sen. Richard Shelby of Alabama tried to catch Yellen in a gotcha. Republicans have tried for the last several years to make it seem as if quantitative easing is a tool of the hard left. When Yellen noted to Shelby that quantitative easing had been supported by conservative icon Milton Friedman, Shelby asked: “What about Keynes?” The response: “I don’t know that Keynes thought about that.”
Of course, there are grounds for skepticism of the Fed’s policy. We’re not sure how it all ends, and the benefits certainly aren’t trickling down to all sectors of the economy, as many senators noted. I never thought I’d see the day when a Republican Senator from a poor state with no income tax would lecture a Berkeley Professor about the failures of trickle-down economic policies. But that’s precisely what Sen. Bob Corker did in his question session.
For their part, Democrats seemed to want to talk about everything but quantitative easing and monetary policy. They expressed concern about unemployment and the behavior of big banks. A few lobbed softballs. Sen. Chuck Schumer of New York: “I think you’ll make a great chair, and your Brooklyn wisdom shines through.” But one of the toughest questioners was Sen. Elizabeth Warren, who (correctly) went right after Yellen and the Fed for being asleep at the regulatory switch during the credit bubble, and for generally being as enthusiastic about regulation as kids are about eating cauliflower. “Do you think the Fed’s lack of attention helped lead to the crash?” Warren asked.
Stocks are booming, with the S&P and the Dow each near record highs. Does President Obama deserve the credit? The answer is: yes, but only some of it.
The Standard & Poor’s 500 stands about 1766, near a record high. The Dow Jones Industrial Average is at about 15,727, also near a record high. Since the lows of March 2009, both indices are up nearly 140 percent.
Traders work on the floor of the New York Stock Exchange on November 7, 2013 in New York City. (Andrew Burton/Getty)
Does President Obama deserve the credit? This was a question I was asked earlier this week on CNBC in a discussion with Reagan-era economist Art Laffer. The answer is: yes, but only some of it.
In general, I believe that efforts to pin stock market success (or failure) on political figures aren’t useful. That’s in part because much of the discussion, which is generally driven by those on the right side of the ideological spectrum, overlooks the historical record. Many market pundits hold as a foundational truth that bad things happen to markets and investors when Democrats control the White House and good things happen when Republicans run the show. They are, of course, wrong. Over the past century, markets have generally done better under Democratic presidents than under Republican ones. The worst crashes (1929, 1987, 2008) happened when Republicans were in office. And many of the greatest bull runs—the Nifty Fifty market of the 1960s, the boom of the 1990s, the current bull run—took place under Democrats. The dopes who dumped stocks in early 2009 fearful that President Obama would be bad for the stock market have missed one of history’s great rallies.
What’s more, policy and presidential rhetoric don’t really impact markets nearly as much as many analysts believe. The two administrations of George W. Bush, in theory, should have been a golden age for investors. Taxes on capital gains and dividends were slashed to very low levels, companies and financial institutions were lightly regulated, and labor unions were generally ignored. And yet the S&P 500 was about 35 percent lower on the day President Bush left office than on the day he entered office.
The historical rule tends to hold that presidents get credit for bad things that happen on their watch and for the good things that happen on their watch. But in the case of the stock market, I’d give Obama only a small percentage of the credit for the market boom— say 15 to 20 percent. The most important thing the Obama administration did for the economy—and for the markets—was to reverse the free fall of late 2008 and early 2009, stop the panic, and create the conditions for growth. The administration’s implementation and management of TARP and the auto and financial sector rescues, which began under the prior administration, were vital—and largely effective.
The stimulus passed in 2009, even though it was too small, added meaningfully to economic growth in 2009 and 2010. The economy began to expand in 2009. And even though it has been jolted and threatened by political actions—by Republican brinksmanship, by Obama’s inability to forestall crises, and by needless austerity—the U.S. economy has chugged along in low gear, adding more than 7 million jobs since early 2010. That’s not bad, but it’s not the kind of underlying growth that should lead the stock market to boom as it has.
So who else is responsible for the market boom? I’d give the Federal Reserve about 35-40 percent of the credit. Here’s why. The Fed, along with the Bush and Obama administrations, was an important actor in the bailouts. We tend to focus on TARP when looking back at the financial crises, but other, more obscure and underreported actions—the Fed’s guarantee of the commercial paper market, the Treasury’s guarantee of money-market funds, and the bailout of AIG—were just as important. Many of those were led by the Fed. And for the last several years, the Fed has attempted to goose the economy by keeping overnight interest rates at zero, and by purchasing bonds and mortgage-backed securities to push long-term rates down. These efforts at quantitative easing have helped stock markets in several intended and unintended ways. First, by pushing bond yields down to miniscule levels, the Fed has forced people seeking a return to plunge into riskier assets, like stocks. Second, the lower-rate environment has allowed many consumers to refinance mortgages and to gain access to lower-cost credit, which has freed up cash for other purchasers. That’s also good for stocks.
With an Ohio Walmart hosting a holiday food drive for its own workers, The Daily Beast's Michael Tomasky criticizes the notoriously stingy company for not paying them more.
Hailed as a perfect answer to the evils of fiat money, the virtual currency has come crashing down because the invisible hand is paralyzed without government.