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IAC Creates Match Group

Greg Blatt, IAC’s CEO since 2010, will lead the new Match Group housing online dating ventures and more.

IAC is reorganizing and rationalizing. Greg Blatt, who has been chief executive officer of the company since 2010, will become chairman of the newly created Match Group, which will house the firm’s online dating businesses, Tutor.com, fitness site DailyBurn, and the company’s interest in Skyllzone. (IAC is the parent company of The Daily Beast.) Match.com CEO Sam Yagan will serve as CEO of the newly constituted Match group. Search & Applications is headed by CEO Joey Levin.

Match.com

Simon Dawson/Bloomberg, via Getty

The move is part of a rationalization of the many operating units of IAC into three groups: the newly formed Match Group; the search and applications business, which accounts for about 60 percent of IAC’s revenues; and media businesses, which include Vimeo, The Atavist, and The Daily Beast.

“For the last three years Greg has served as CEO of IAC and during this time our stock price has doubled and profits have increased more than 180%,” IAC Chairman Barry Diller said in a statement. “As Chairman of the Match Group, he’ll be integral in exploiting new opportunities and continuing the growth trajectory that he himself has helped pilot.”

“Businesses like Tutor.com, DailyBurn and Skyllzone all require a common set of skills that Match has deployed so effectively,” Blatt, a 10-year veteran of the company, told employees. “Basically, I’m coming into a situation that already has great leaders in place and strong business momentum.”

Recognizing that many of its businesses don’t need central oversight, IAC does not plan to name a new CEO. “Greg and I agree that a less centralized operating structure, pushing talent and decision-making closer to the businesses, is now the best way to achieve our growth objectives,” Diller said.

Taperin’ Time

Bernanke Lays Off Accelerator

The Fed announced it would cut back on its economic stimulus Wednesday. The chairman’s last decision signals confidence in the economy and Washington.

Yes, things are really getting better in the U.S. economy.

Bernanke

Alex Wong/Getty

That’s the conclusion of Federal Reserve Chairman Ben Bernanke and his colleagues at the Federal Open Market Committee. On Wednesday, the Fed announced it would scale back—or taper—the $85-billion-per month bond buying program by $10 billion per month. The reason? The economy is improving, and the Fed thinks the better times are here to stay.

There has been “meaningful cumulative progress in the labor market,” Bernanke said, noting that since the Fed started its bond-buying efforts the economy has added 2.9 million payroll jobs and the unemployment rate has fallen from about 8 percent to 7 percent. Meanwhile, the data flow has been generally positive—with household spending, business investment, and housing prices all moving up. And to top it off, Congress and the White House—whose tax increases, spending cuts, and brinksmanship have put a damper on economic growth—are showing signs of hugging it out. “Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing,” he said.

While this move represents a change in policy, it doesn’t mark much of a departure. The Fed will continue to purchase $75 billion worth of bonds and mortgage-backed securities per month, as part of an effort to keep long-term rates low. In addition, Bernanke said the Fed will maintain its policy of keeping short-term interest rates close to zero—at least for another year.

As part of this statement, the Fed enhanced its so-called “forward guidance,”—i.e. telling the markets what to expect in the future. In the past, the Fed had said that it would start to unwind stimulative efforts once unemployment fell below 6.5 percent. But today, Bernanke said that the Fed would maintain its zero-interest rate policy “well past the time that the unemployment rate declines below 6.5 percent” — so long as inflation remains contained. All of which means banks and companies will be able to gorge on cheap short-term money for another year or two. In its current forecast, the Fed predicts the unemployment rate will fall to between 6.3 percent and 6.6 percent in the fourth quarter of 2014.

Analysts are likely to spin this as a first move in tightening and a decrease of support for the economy. But the change is only marginal. The Fed is still intervening significantly in financial markets, and stands willing to do more if necessary. In fact, Bernanke expressed more concern than usual about the prospects of inflation being too low. “The committee is determined to avoid inflation that is too low as well as inflation that is too high.”

In other words, the Fed isn’t really putting on the brakes. It is just taking its foot off the gas pedal a tiny bit. And as Bernanke passes control of the steering wheel to Janet Yellen, it’s still going at a very rapid clip. “We intend to maintain a highly accommodative policy.” Bernanke said.

Breakdown

Stop Whining About Uber

Users of the car-summoning app were steamed when nasty weather drove up prices. But that’s how things work in the real world.

Don’t hate Uber because it jacks up prices.

The car-summoning service came in for some criticism over the weekend. Users know that at times of high demand—rush hour, or when it’s raining—prices can easily double during a “surge.” It’s a reflection of supply and demand. But over the weekend—a cold, holiday-season weekend when it was snowing, sleeting, and generally unpleasant to be outside—the surge prices rose to up to 7 and 8 times the usual. Many users cried foul.

Snow

Cem Ozdel/Anadolu Agency, via Getty

They shouldn’t. This is how things work.

In many markets, it is completely accepted that prices rise at times of peak demand—especially when supply is relatively limited. This phenomenon is most pronounced in transport. Ride the train at 8:00 a.m. and you pay a peak price. A few hours later, riders pay a lower off-peak price. It can cost $800 to fly from New York to Florida and back in the last week of December, but only $250 in the middle of August. In the Caribbean, resort prices tend to drop in April or May. On Valentine’s Day, restaurants tend to jack up menu prices, or force people into expensive fixed-price dinners. It is even more pronounced with electricity, where utilities and power generators have expensive plants standing by that are turned on only when demand spikes. On very hot days, the peak price can easily double or triple the usual price.

Before Uber, it worked the same way with car services. In Manhattan, when you couldn’t find a taxi, you could try to hail a moonlighting car-service driver or gypsy cab and negotiate a fare. At 5:00 p.m. on a cold, rainy day, the price demanded would inevitably be higher than it would be at 2:00 p.m. on a nice day.

Now, I find the surge pricing to be one of Uber’s annoying attributes. The few times I’ve tried to use the service—generally around rush hour, when it was raining, in a part of town without a nearby subway stop—surge pricing has been in effect. And I always recoiled. Unwilling to pay $25 or $35 for what is usually a $12 cab ride, I’d take my chances with a taxi, or hop on the bus, or run to the subway station, or use Citibike. Sure, I’d be less comfortable and perhaps get wet. But at that moment in time, I didn’t value the service Uber was offering sufficiently to pay for it.

But think about the other side of the Uber equation: the drivers.

Rebel, Rebel

The Opt-Out Economy

Bad news HBO, Walmart, and the NFL: Opting out is now standard practice for a generation of millennials. Must-have TV channels are out, and cheap work-arounds are in.

America’s economy and culture are defined in large measure by business and social phenomena that have exerted a huge amount of peer pressure for people to opt in. Consider football, the leading American spectator sport. Or Black Friday, the leading American consumer bloodsport. Or Facebook, the leading American social network. Sure, there are always outliers and rebels who stand on the sidelines: the Commies who argue against consumption, the nerds who prefer programming to football. But basically, these entities have generally occupied a rare and coveted commercial space. Those who didn’t participate were somehow out of it, not cool, marginalized. And so everybody, when they came of age, opted in.

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Shutterstock

But quickly, almost out of nowhere, we’re seeing an increasing propensity of people to opt out of these powerful trends. And the more people do it, the more acceptable it comes.

Football is the most American of sports, the Alpha Male of games. But revelations about concussions and more evolved parents (even many football players say they don’t want their kids suiting out) is taking a toll. While television ratings remain high (and Super Bowl ad rates are likely to set a new record), more boys are opting out. After growing inexorably for decades, Pop Warner, the largest little league football organization, reported that participation fell 9.5 percent between 2010 and 2012.

After watching football games on Thanksgiving, Americans hit the malls on Black Friday. With the rise of the internet and the growing desperation of bricks-and-mortar retailers, Big Store has been hyping the Thanksgiving weekend shopping season relentlessly. But, as with football, Americans seem to be boycotting what has evolved from a national pastime into a violent bloodsport. According to the National Retail Federation, the number of people who said they’d shop at stores in between Thanksgiving and the following Sunday fell from 147 million in 2012 to 140 million 2013. That’s seven million consumers who opted out. Many preferred to shop online, or were simply turned off by the spectacle. And it’s just beginning. On the Wall Street Journal op-ed page, which usually celebrates American-style capitalism, this was the headline on columnist Peggy Noonan’s column: “Next Year Stay Home, America.”

On social networks like Facebook and Twitter there is immense, unavoidable pressure to opt in. Choosing not to join is choosing not to be part of the conversations among all your friends, frenemies, and interesting strangers. And sure enough, the data show that these networks continue to add users to their impressive membership rolls. But here and there, if you listen closely, you can detect signs of opting out. We all know teenagers who keep their Facebook accounts active, but spend all their time on Snapchat, which doesn’t leave the same digital footprint. And some professionals (ok, me) consciously boycott Twitter for the weekend.

Not too long ago, you simply had to have cable television in order to be part of the national popular culture conversation. That’s where all the most talked-about sports (ESPN), drama (HBO), and news (CNN) took place. If you didn’t have a set-top box and an expensive subscription to 400 channels, you were out of it. And so year after year, cable subscriber numbers grew along with the population. But there’s been a disruption in the force. More and more interesting programming is being delivered by alternate means—through Netflix, or YouTube. Apps, tablets, and workarounds mean you don’t have to have an expensive cable package in order to watch the show your friends are watching—which is a boon for thrifty millennials. And so in 2013, for the first time ever, the number of Americans paying for television reception via satellite or cable, will likely decline.

Look, the NFL, Nordstrom, Facebook and Time Warner Cable aren’t going to collapse in 2014. But the growing incidence and acceptance of opting out—the more people do it, the cooler it becomes—means they will face pressure to change the rules of the games they play. And their travails should make everybody else think twice. Peer pressure, habit, tradition and marketing simply don’t possess the gravitational force they did in the past.

R.I.P., Red Ink

Golden Age of Deficit Reduction

As Washington chewed over the Paul Ryan-Patty Murray budget deal, the Treasury Department announced a walloping drop in red ink. Turns out government didn’t need a “grand bargain” to get its fiscal house in order.

The Murray-Ryan budget deal was anti-climactic. After all this—three years of failed grand bargain talks, the sequester, a shutdown—we have a deal that will cut deficits by a grand total of $22 billion over ten years. No wonder the Tea Party crowd is incensed. Yet the outrage over the federal debt—$17 trillion and rising—won’t stand in the way of this deal. That’s because, thanks in part to the sequester, but thanks largely to the miracle of sustained growth, the annual deficit is shriveling.

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Kevin Lamarque/Reuters

Indeed, on Wednesday afternoon, just as official Washington was chewing over the implications of the Murray-Ryan deal, the Treasury department released the November Treasury Monthly Statement. And it reinforced what I’ve been arguing for months now: We live in the Golden Age of Deficit Reduction.

Consider the numbers. Since peaking at $1.417 trillion in fiscal year 2009, which ran from October 2008 through September 2009, the annual deficit has fallen sharply. It fell to $1.294 trillion in FY 2010, bumped up slightly to $1.296 trillion in FY 2011, fell to $1.089 trillion in FY 2012, and then plummeted to $680 billion in FY 2013. That’s a decline of 52 percent in four years. That’s stunning, considering there was no grand bargain to cut spending, reform entitlements, or raise taxes. Of course, Washington can take some credit. The Budget Control Act of 2011 and Republicans’ general push for austerity since 2011 have helped restrain spending. The expiration of certain components of the Bush-era tax cuts, the enactment of new taxes under the Affordable Care Act, and the expiration of the Social Security payroll tax holiday at the end of 2012 helped produce more revenues.

But a good chunk of the deficit reduction can be chalked up to the national pro-cyclicality of tax collections and entitlement spending. Put simply, when economic times are bad, tax revenues fall off a cliff at the same time that the government has to spend more on programs like food stamps and unemployment benefits. And so the deficit can swell very rapidly during a recession. That’s what happened in 2008 and 2009. But when things turn around, when the economy grows at a decent clip for a long period of time, the process works in reverse. Employment, payroll, and corporate income taxes rise sharply at the same time that government spending on items like unemployment benefits decline. And so the deficit can contract just as quickly as it expanded.

That’s what has been happening in the past few years. In FY 2013, for example, revenues rose by a healthy 13.2 percent ($324 billion) from FY 2012, while total spending fell 2.3 percent ($84 billion) from FY 2012. The sequester and declining military spending (thanks to the unwinding of two wars) helped contribute a great deal to the spending reduction. But lower levels of spending on unemployment benefits, thanks to the improving labor markets and the expiration of curtain extended benefits, accounted for about $24 billion of that $84 billion reduction—or nearly 28.5 percent.

These trends have continued into the first two months of the 2014 FY year. Revenues are rising at a smart pace, and spending continues to fall, led by declines in defense and unemployment benefit spending. In November, for example, the government collected $182.45 billion in revenues, up 12 percent from $162.7 billion in November 2012. At the same time, spending in November came in at $317.7 billion, down 4.8 percent from $333.8 billion in November 2012. As a result, the deficit in November 2013 was $135.2 billion, down from $172.1 billion in November 2012. That’s a decline of 21 percent.

Now, these monthly figures can be pretty noisy. If benefits are paid out on the last day of October one year and then paid out on the first day of November in the next year, it can influence the figures. So it makes more sense to look at the trend. But the data from the first two months of FY 2014 tell the same story. For the first two months, revenues are $381.4 billion, up 10 percent from the first two months of FY 2013. Meanwhile, spending, at $603 billion, is down nearly five percent from $633 billion in the first two months of FY 2013. As a result, the deficit for the first two months—$226.8 billion—is down 22.6 percent from last year. Lower spending on defense (down $11.7 billion) and on unemployment benefits (down about $3 billion) account for roughly half the decline in spending.

Pain Reliever

A Deal to Stop Hurting the Economy

A bipartisan proposal to trim the sequester and forbid shutdowns for the next two years means Washington may finally be ready to quit kneecapping growth.

On Tuesday, Rep. Paul Ryan and Sen. Patty Murray announced a budget deal. Should it pass, the deal would undo a portion of the sequester and raise discretionary spending in fiscal 2014 by $45 billion, from the sequester level of $967 billion to $1.012 trillion. It would offset the spending increases slated for the next two years with new revenues raised from jacking up airline ticket fees and boosting federal employees’ pension contributions.

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Chairman of the House Budget Committee Rep. Paul Ryan (R-WI.) offers remarks while joined by others form the GOP leadership, during a media availability following a Republican Conference meeting at the U.S. Capitol, December 11, 2013, in Washington, DC. (Rod Lamkey/Getty)

Political analysts have been wondering whether this betokens a new era, in which House leadership finally tells the Tea Party caucus to take a hike. And economic analysts are asking whether, after years of erecting stumbling blocks to growth, Washington is finally getting out of the way.

There’s no question that in the last few years, government austerity has weighed on growth. Federal spending has fallen for two straight fiscal years, even as receipts have risen sharply. That has helped make this the Golden Age of Deficit Reduction. But progress on the deficit has come at a price. Each quarter, when it reports the Gross Domestic Product figures (PDF), the government goes through and tells us how much each sector added to (or detracted from) growth in a given quarter. In nine of the last 12 quarters, and in the past four running, the federal government has been a drag, reducing the growth rate by anywhere from .1 percent to 1.19 percent. Increasing spending, even by about $45 billion per year, would mean that in coming quarter, the federal government would add to growth. Not enough to make the difference between recession and expansion, or between excellent growth and meh growth, to be sure. But it would turn a major headwind into a minor tailwind.

Boosting spending and undoing a chunk of the sequester is likely to have a bigger impact on the still-ailing job market. As we’ve long noted, this is a “conservative recovery”. The private sector has been adding jobs every months for the last few years while the public sector has been cutting them. That doesn’t typically happen during expansions. Since 2010, the public sector has cut 1.134 million positions, with the federal government accounting for more than 700,000 of those cuts. (Note: some of those cuts in federal government employment are due to the layoffs of workers hired to conduct the census.)

In recent months, as state and local government finances have improved, states and cities have stopped cutting and started adding employees. Since January, state and local government employment has risen by 87,000. But thanks in part to the sequester, federal employment has continued to trend down through 2013. Compared with January, there were 88,000 fewer federal employees in November. We don’t need the federal government to start massive make-work job programs. We just need it to stop laying people off and furloughing them, and to start hiring (or re-hiring) a modest amount of workers each month. Doing so would make the job market a little bit tighter, boost payrolls, provide a modest amount of upward pressure on wages, and help coax a few more people off the sidelines and back into the labor market.

Then there are the less tangible impacts even this small deal will have on consumers’ and businesses’ confidence. Since the summer of 2011, Washington has been lurching from one manufactured economic crisis to another: threatening a debt default, shutting down the government, furloughing employees and cancelling contracts. These sort of arbitrary and draconian events tend to put a chill on economic activity and make those affected think twice about investing and spending. The Gallup Economic Confidence Index went into a deep rut during the shutdown in October and is only now regaining its pre-shutdown levels. People are much more reassured by functionality than by dysfunction. So at the margins, the Ryan-Murray deal is likely to boost confidence and sentiment. Should it pass, the U.S. would have a real budget for the next two years while forestalling any possibility of a shutdown. And the newfound comity in Congress might ease the path for raising the debt ceiling early next year with a minimum of drama.

But we shouldn’t get too excited. An increase of $45 billion in spending isn’t exactly New Deal 2.0. We still don’t have a much-needed infrastructure spending bill. And Congress, even as it giveth, will taketh away: extended unemployment benefits for those hit hard by the recession are set to expire in January. Since the deal excluded an extension of those benefits, about 1.3 million people are set to lose a vital form of income support in a matter of weeks. Food stamps have already been cut, and congressional Republicans are hell-bent on cutting them further. The combination of those two actions will reduce the spending power of those at the lower rungs of the income ladder, and will negate a portion of the gains reaped from easing the sequester.

Think Twice

Gift Cards Are Corporate Welfare

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.

You're Hired

An Unusually Awesome Jobs Report

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.

$15 an Hour

Jack Up Those Fast Food Wages!

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.

Fast Food Wages

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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.”

Pay Up

It’s the Wages, Stupid

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.

President Barack Obama

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.”

Oh Santa

The LED Stocking Stuffer

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.

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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.

Doorbusters

All They Want For Xmas Is Shoppers

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.

Downward Spiral

Walmart’s Black Thanksgiving Woes

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.

wal-mart protest

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!

Regifting the Globe

Gift Cards Go Green

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.

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sustainablecards.com

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.

Papalnomics

Pope Francis Vs. Capitalism

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?”

pope francis

Franco Origlia/Getty

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.”

About the Author

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Daniel Gross

Daniel Gross is a columnist and global business editor at The Daily Beast.

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Shame on You, Walmart!

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