The IRS says it will recognize all same-sex marriages—regardless of where the couples live. Daniel Gross on why tax law is often the true heart of civil rights.
Benefits. Vision care. Discount cards. Joint tax returns. This is hardly the stirring language of great leaps forward in civil rights and human dignity. And a day after the 50th anniversary of Martin Luther King Jr.’s “I Have a Dream” speech, such talk seems especially mundane. Form 1040-ES is not exactly the stuff of soaring rhetoric.
And yet it is incredibly important. We’ve noted that the case that led to the Supreme Court overturning the Defense of Marriage Act was, at root, a tax case. When Thea Spyer died in 2009, her partner, Edith Windsor, was angered that she was liable for federal estate taxes on assets left to her by Spyer. Because the tax code wouldn’t recognize her as a spouse, Windsor had to pay more than $363,000 in federal estate taxes. And so she went to court—and won. Earlier this week, Walmart quietly, belatedly joined the growing number of large corporations that offer benefits to employees’ domestic partners.
Of course, there’s a long way to go. Gay marriage is legal only in 13 states. The Republican-controlled House of Representatives is profoundly uninterested in passing legislation that would expand the rights of (and obligations to) gay Americans. But the striking down of DOMA has empowered the federal government to act on its own where it can. And with a type of urgency rarely seen in the Obama administration. Earlier this month, the Pentagon announced that starting next week, same-sex spouses will be eligible for the same type of benefits that opposite-sex spouses enjoy (housing, health care, etc.). Earlier this week, the Department of Health and Human Services said same-sex couples can gain access to the same type of Medicare benefits that opposite-sex married couples enjoy. For example, they can now get coverage to pay for nursing-home costs in the same nursing homes where their spouses live.
In the latest such move, on Thursday, the Internal Revenue Service announced that same-sex married couples can file joint federal tax returns—regardless of where they live. Even couples who live in states like Texas or North Dakota, which don’t yet recognize gay marriage, can file joint federal returns as long as they marry in a state like California or Iowa, which do. The move “assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change,” said Treasury Secretary Jack Lew.
It may sound like a small thing, but it’s actually a big thing.
It’s common to hear people joke that with the growing legality of gay marriage, gay couples will officially be able to enjoy the same misery and travails that married heterosexuals do. Just so, gay married couples will be able to face the same frustrations with the tax code that married heterosexual couples do. Some will find that they pay higher taxes as a result of a joint filing, thanks to the marriage penalty. But more will find that they benefit from filing jointly—their combined income may be taxed at a lower rate than if they were to file separately. They’ll be able to take two exemptions instead of one. And so on.
Ultimately, though, the significance of the IRS’s move isn’t about the money that gay couples may save (or lose). It’s about what taxes signify. Taxes, after all, are the price and cost of citizenship. Tax breaks are a perk of citizenship. Being taxed to the fullest extent of the law, and enjoying tax breaks to the fullest extent of the law, are markers that the government accepts and regards you as a full citizen. And until now, the federal tax code hasn’t recognized gay couples as fully participating citizens.
Turns out a lot of Republicans love Obamacare, reports Daniel Gross. Or at least, they like coverage for their kids, health-care rebates and a ban on denying coverage for preexisting conditions.
The Affordable Care Act, known as Obamacare, is starting to take effect. And here’s a shocker. While the overall legislation is wildly unpopular among Republicans—90 percent disapproved, according to a June poll—individual components seem to be catching on like wildfire among the GOP crowd.
Nurse Lauri Snetsinger, left, checks a patients blood pressure at The Health Center in Plainfield, Vermont on June 6, 2013. (Toby Talbot/AP)
Take, for example, the requirement that insurers continue policies to children whose parents have coverage until they turn 26. The Commonwealth Fund last week released an interesting study (PDF) of young people and Obamacare. It found that between 2011 and 2013, the number of people aged 19 to 25 who had been on a parent’s health insurance plan in the previous year rose from 13.7 million to 15 million. “Of the 15 million young adults on a parent’s plan, an estimated 7.8 million likely would not have been eligible to enroll in that plan prior to the Affordable Care Act,” the Commonwealth Fund reported. The report also found that Republicans were more into this provision of the ACA than Democrats. In March 2013, 73 percent of young Republicans surveyed had heard of the provision, compared with 63 percent of Democratic youths. Maybe it’s because they were more likely to be benefitting from the expansion. “In March 2013, 63 percent of Republican young adults had enrolled in a parents’ policy, compared with 45 percent of Democrats,” the report said.
That’s a pretty significant difference. What accounts for it? It could be that young Republicans are less likely to leave the nest and get their own jobs with benefits than young Democrats. Or it could be that Republicans simply love their kids more. But it is more likely that Republicans, being generally better off than Democrats, are more likely to have solid employer-based health insurance in the first place. The kids of well-off people don’t typically enter the workforce or the military at the age of 18. They go to college, then take a gap year, or go to graduate school, or try to get in on the ground floor of professions like media, entertainment, politics, and finance by taking a series of internships, or part-time jobs, or volunteer jobs, none of which may come with insurance. And so the (likely) Republican parents of Republican youths aren’t making their kids take out health savings plans or buy crappy high-deductible plans, or simply fend for themselves—as most Republican politicians think everybody else’s kids should do. Thanks to Obamacare, the grown-ups are putting their kids on their insurance plans.
Rebates are a second, apparently non-objectionable component of Obamacare that has already kicked in. The ACA set standards for the insurance industry, stipulating that firms must spend a certain amount (80 percent) of the premiums they collect on patient care. Under Obamacare, insurers that choose to spend more money on administration, or marketing, or salaries, or dividends have to send rebates to customers. This summer, the first rebates were sent out, some $500 million to 8 million Americans. Now, these rebates are likely to have been shipped disproportionately to Republican households—those with high-end, employee-subsidized coverage. But I haven’t been able to turn up any examples of people refusing thechecks, or sending them back, or burning them—an act FreedomWorks is suggesting people do to their fictional “Obamacare cards.” (If you did burn your Obamacare rebate check, please tweet at me: @grossdm I’d love to speak with you.) Republicans, like Democrats, enjoy receiving checks in the mail.
Then there’s the case of pre-existing conditions—another aspect of Obamacare that is popular among some Republicans. In the old days, they used to say that a conservative is a liberal who has been mugged by reality. When it comes to health insurance, it seems a liberal is a conservative who has been mugged by an illness. After having a devastating stroke in 2012, Sen. Mark Kirk had an epiphany about the inadequacy of rehabilitation services for poor people. “My concern is what happens if you have a stroke and you’re not in the U.S. Senate, and you have no insurance and no income,” he told National Journal. “That’s the question I have been asking, and the reality is that if you’re on Illinois Medicaid and are a stroke survivor, you will get just five visits to the rehab specialist.”
The same holds for the pre-existing condition ban. Clint Murphy, a former political operative, McCain campaign staffer, and cancer survivor turned Georgia real estate agent, recently wrote of his conversion on Obamacare. Although he had long since been cancer free, Murphy still wasn’t able to get insurance as a self-employed person. “I have sleep apnea. They treated sleep apnea as a pre-existing condition. I’m going right now with no insurance,” he said. Murphy said he can’t wait for the exchanges to bet set up in Georgia, so that he’ll be able to purchase insurance without being denied for a pre-existing condition. And even as they cavil about ripping up Obamacare, and hence the ban on pre-existing conditions, it is common to hear some Republicans speak kindly of the ban.
This is a dynamic we’ve seen over and over again in the past 80 years. Republicans shriek, cry socialism, and offer full resistance to any effort to expand social insurance. Then, after a certain amount of time passes and social insurance measures become popular and effective, they stand foursquare behind them and demand they be protected. Every single stinking component of FDR’s New Deal was a disaster, but don’t you dare touch Social Security! Lyndon Johnson’s Great Society program was a debacle, but keep the government out of Medicare! Obamacare must be torn up root and branch, just don’t kick junior off my insurance plan!
Taco Bell added some spice and declared the creation of a new taco. Obama got a second dog ... identical to his first. Even Apple may have hit a wall. Daniel Gross wonders if America is plumb out of ideas.
Is this the month America officially ran out of ideas? It sure seems like it.
Brainstorming, developing, and commercializing new ideas is vital for the American economy, and for our society at large. Earlier this summer, the government’s bureaucrats revised—upwards!—their estimate of the size of the economy based in part on the value of ideas generated over time. Sure, we have prodigious natural resources in this country. But at the end of the day, it’s the quality and quantity of ideas—content, patents, technology, new business models, companies—that will propel growth. Alas, there are signs that the stream of idea creation is dwindling to a trickle this August.
Exhibit A: Hollywood’s next brilliant idea seems to be making another Batman movie, only this time starring ... Ben Affleck?
Exhibit B: Miley Cyrus’s cringe-inducing performance on the MTV Video Music Awards on Sunday night.
But we have problems more serious than poor casting decisions. Fast-food innovation is a favorite topic around these parts. It’s a core American industry and speaks to many of our strengths, particularly branding and industrializing food. I’ve written about Taco Bell, whose last great innovation, Doritos Locos Tacos, may have lead to the creation of as many as 15,000 jobs. But this month it followed up with a pale imitation: the Fiery Doritos Locos Taco. Look, putting the mélange of ground beef, lettuce, and cheese inside a giant Dorito was brilliant, out-of-the-box thinking, a game changer, a stroke of genius. The new idea of making the said Dorito shell spicier and adding a splash of lime is derivative at best.
If you’re simply changing the flavor of the shell and not doing much to reengineer the stuffing, you’re not really moving the ball forward. Which seems to be what the ultimate American idea factory—Apple—is doing. Over the past decade, Apple’s facility with ideas has turned the also-ran computer maker into a device, content, app, and software company worth $461 billion. But Apple may have hit a wall. Its stock has slumped over the past year, off by nearly one third. Absent a big surge in the final quarter, 2013 could be the first down year for the company’s stock since 2008. And what’s Apple’s next big thing? A golden iPhone 5s. In other words, a phone that is quite similar to the one already on the market, but with a shimmering shell. As if on cue, Paul Krugman’s column on Monday wondered whether Apple today is in the same situation as Microsoft in the 1990s—a behemoth out of new ideas and not well equipped to thrive in the evolving world. “Anyway, the funny thing is that Apple’s position in mobile devices now bears a strong resemblance to Microsoft’s former position in operating systems.” Maybe Apple should just call its new product the Fiery iPhone 5s.
Yes, the technology world is developing apps and devices at a furious pace. But by one measure, we’re just not developing idea-based companies the way we used to. Trends in initial public offerings of stock are great proxies for the level of enthusiasm about new ideas. The number and value of initial public offerings is lower than in the past decade. So far this year, IPO proceeds are running at a rate 7.5 percent below that of 2012, even though the overall stock market remains buoyant. And many are coming from old economy firms. The Wall Street Journal noted Monday that technology firms account for only 16 percent of IPOs this year. “By that measure, 2013 could be the second-worst showing since at least 1993.” So far this year, there have been 22 tech IPOs, which raised $3.2 billion between them. By contrast, Facebook alone raised $16 billion in its May 2012 initial public offering.
Amidst the back-to-school frenzy, college campuses are turning into shipping terminals. Dan Gross on the rise of the American University as an exporter.
The back-to-school season is an important economic event. Students of all ages go back-to-school shopping for clothes and supplies. There’s a brisk trade in college textbooks. On campus, cable companies and credit card firms angle to sign up young customers.
More and more students are leaving the U.S., or at least working for people outside of it. (Gene Chutka, via Getty)
But amid the frenzy, there’s a barely perceptible—yet crucially important—economic trend that unfolds in late August and early September. It’s as if college campuses (particularly the areas that house graduate programs) are temporarily transformed into ports, shipping terminals and cargo airfields. Why? Universities are among the most prolific exporters America has.
It may sound counterintuitive at first. The University of Mississippi doesn’t actually send much of anything overseas. And most American exports consist of goods like grains, or cherries, or electric turbines, or airplanes. Exporting typically involves putting this stuff on a plane or a boat and shipping it overseas. In 2012, exports of goods came to an impressive $1.56 trillion. But the U.S., which is primarily a service economy, also exports services—like money management, or tourism, or health care, or education. In fact, many Americans are in the export business even though they may never leave the country. In 2012, service exports were $649 billion, up a healthy six percent from the year before.
Higher education is small but rapidly growing service export. When a student comes from China to get a master’s degree in engineering at Georgia Tech, or a student from Brazil enrolls in UCLA’s MBA program—the tuition he pays is tabulated as an export. And an expensive one, at that. Despite the high price tag of American degrees, U.S. universities remain remarkably competitive in the global marketplace. For all its problems, the U.S. higher education system—especially the post-graduate education system—is the best in the world.
Let’s look at the numbers.
Universities and college graduate programs have long been an attraction for foreign students. Barack Obama, Sr., came to study at the University of Hawaii in the 1950s. Indra Nooyi, came from India to study at the Yale School of Management in the late 1970s—and now runs Pepsi. Since 1972, the number of foreign students in the U.S. has risen every year, with the exception of the three years after 9/11. The long-term trend can be seen here. From the recent low of 564,766 in the 2005-2006 academic year, enrollment has risen sharply. According to the Institute of International Education, total international student enrollment in the U.S. rose six percent in the 2011/2012 academic year to a record 764,495 students. That figure, which is almost double the total of 1989-1990, was divided between 309,342 undergraduate students and 300,430 graduate students. Of the graduate students, 153,735 were studying for master’s programs and 117,564 were in doctoral programs.
To a degree, this particular export tracks global population trends. China supplies the largest number of students (194,029 total, including 90,000 graduate students), followed by India (100,270, including 59,014 graduate students). South Korea comes in third with 72,295 (including 23,000 graduate students.) Saudi Arabia sends a surprisingly large number of graduate students to the U.S.—6,133 in the most recent academic year. Data by country can be seen here. The most popular fields of study for foreign students, which can be seen here are business and management (166,733), followed by engineering (141,285), mathematics and computer science (71,364), and then social sciences (66,163).
The CEO of Cosi recently promised investors he would reverse the chain’s money-losing streak by improving customer service. Not a bad idea, argues Daniel Gross, but first he needs to increase wages.
It’s never attractive when the rich and powerful blame the help for their woes. But that’s precisely what Stephen Edwards, chief executive officer of embattled café/sandwich joint Cosi, did last Friday.
Brendan Fitterer/St. Petersburg Times/Zumapress/Newscom
On a conference call (listen here) with investors to discuss the company’s disappointing quarterly results, Edwards said the food was fine. “People love our product,” he said. “They love our sandwiches.” But at the top of the call, he noted that the service at company-owned stores (74 are owned by the company and 59 by franchisees) wasn’t up to snuff. “Service is where we are experiencing the greatest shortfall and where will be focusing the majority of our efforts,” he said. “We have a culture that has lost engagement with the process of serving food to people in a hospitable way.” In order to thrive, the company must “make sure we have what we would call Class A hospitality and service in the stores.”
Edwards never mentioned wages and pay, and neither did any of the worried investors who dialed in to the call. But the CEO’s earnest complaint highlights yet another way in which companies’ insistence on paying low wages has a negative impact on their business.
Some background: Cosi is a little like Friends—a 1990s era darling whose popularity carried it well into the aughts and is struggling to stay relevant in the 2010s. In fact, a typical Cosi looks something like Central Perk, the spacious coffee joint where Ross, Rachel, and the gang hung out. It was designed as a sort of third place—like Starbucks, but with good sandwiches. Like many consumer-driven businesses, Cosi peaked in 2008, when it had $135.5 million in sales. But things have gone south, thanks to a pinched consumer, and competition from below (Subway and Quizno’s) and above (Panera). Revenues slipped to $102.1 million in 2011, and to $98 million in 2012. The company has notched annual losses several years in a row. The number of stores has fallen from 159 in 2009 to 124 at the end of July. In the most recent quarter, revenues were off 11 percent from the year before, from about $26.3 to $23.4 million. At restaurants open for more than a year, customer traffic was down 5 percent.
Here’s the sad long-term stock chart.
All of which has left Cosi, which fortunately has no debt, facing an existential crisis. “If we maintain this trajectory, we are heading toward yet another year of unprofitability,” said Edwards, who took over as CEO in June. “This cannot stand.”
The company faces some of the same challenges that its peers face. Fewer people are buying high-margin fountain beverages. There are long periods of the day when the store is open when there isn’t much traffic (i.e. between meals.) But the overriding problem is that not enough people come in, not enough people enjoy the service, and, as a result, not enough customers come back. “We get a number of remarks from customers about how much they love our food and products but they’ve just been disappointed time and time again by the service that they’ve received in the store,” Edwards said. “The complaint is someone was rude to me, my salad was incomplete, they left the basil off my TBM.” And so the company is now working on ways to make service better, faster, more friendly and engaged—“Class A,” as Edwards called it.
LinkedIn’s embrace of high-schoolers might stem from a voracious appetite for growth, or it might be because the social network realizes teenagers are idea-producing economic actors in a way they’ve never been before.
LinkedIn, the very popular business networking site, is throwing open its electronic gates and inviting teenagers in. The excuse seems to be the rollout of University Pages, which will enable high school students to explore university-related content. Effective this week, the minimum age to join LinkedIn in the U.S. has fallen from 18 to 14.
Austin Slomowitz, campus recruiter, works at the LinkedIn headquarters in Mountain View, California, June 27, 2013. (Randi Lynn Beach/The Washington Post,via Getty)
There are two ways of looking at this. The cynical way is to note that this might be the desperate act of a mature social media giant that has saturated the market. Some phenomena gain scale so quickly that the bosses determine the only place they can go to find new customers is the younger demographics. Mobile phone companies, having signed up every adult and teen, for years have been targeting tweens and preteens. Facebook has long allowed kids as young as 13 to get a Facebook. Last year, The Wall Street Journal reported that Facebook was looking into ways to let kids younger than 13 access the site. LinkedIn now has 238 million members and counting. To maintain its breakneck growth, it almost has to look for younger members. (Disclosure/Humblebrag: I’m a LinkedIn Influencer.)
There’s a second, less cynical way of looking at the move. LinkedIn is a business site. It’s a way for people to keep up with their peers’ careers, to make connections, to scout out investors, clients, and contacts. And young people today are integral parts of the corporate economy—to a level not seen since the bad old days of child labor in factories and farms. This isn’t about seeing kids as consumers. Rather, it’s about seeing kids as actors in the economy, as people who work and have great ideas.
When I was a teenager back in the early 1980s, kids’ work was typically very small scale entrepreneurship—mowing lawns, lemonade stands, shoveling snow, baby-sitting. When we interacted with large corporations, it was as entry-level, minimum-wage employees of McDonald’s or the Gap. My first “job,” was working for the Gannett Company as a delivery boy for the Lansing State Journal at the age of 11. People would use the original social network—friends, family, neighbors—to find out about jobs or scare up business.
But today’s entrepreneurial kids paint on a much broader canvas. The Internet has given them the tools, the ability, the platforms, and skills to create and sell products and services—in short, to participate in the ever-growing digital economy. Young people can do everything their elders can: run fundraising campaigns, start websites and blogs, sign up with ad networks, buy and sell on eBay, build apps. This fine website about the New York Mets, which has ads and merchandise for sale, is run by two high school students (one of whom happens to be my nephew.) On the Internet, when it comes to doing transactions or creating content, if you’re competent nobody cares whether you are old enough to buy a drink or drive a car.
And increasingly, big companies are eager to do business with youngsters. Consider:
When the earth opens and swallows your house, who do you call? The sinkhole remediators—and in Florida, their business is doing anything but sinking.
Nothing serves as a metaphor for Florida randomness quite like a sinkhole. One minute you’re sitting in your air-conditioned condo in a gated community. The next minute, the earth opens up and swallows the building. That just happened in Clermont, Florida, at a Disney-area resort.
To some extent, sinkholes are to Florida what wildfires, earthquakes, and mudslides are to Los Angeles. They’re common occurrences, due to circumstances of geography, geology, and human intent on building. And every time they open, somebody has to fill them.
“I would say Florida is probably the sinkhole capital of the world,” said Frank Vitale, vice president and general manager of LRE Ground Services Repair. “And the majority of the sinkholes usually happen in the Central Florida area. That’s considered Sinkhole Alley.”
I caught Vitale on the phone as he was leaving the site of the Clermont sinkhole, where he had just done a hit for CNBC. LRE, founded in 1989, is the state’s largest sinkhole remediation firm. ”It’s definitely grown over the last 10 years, but in the last five years it has kind of exploded,” Vitale said. In the past several years, the firm has added about 80 workers—its labor force now numbers 130—and it fills about 300 sinkholes per year. “We’ve completed over 4,500 jobs, with 1,500-2,000 of them in the last five years.”
Most are far more mundane than the dramatic scene at Clermont. Such catastrophic sinkholes, which involve the wholesale destruction of property, account for about 1 percent of all sinkholes. Garden-variety sinkholes typically involve cracks in the drywall, doors, and windows that don’t close the same way they used to, foundations that seem to settle in strange ways. The sinkhole remediation specialist’s job is relatively simple, though logistically complex. The main technique is pressure grouting, in which they pump concrete into the ground at a high pressure to put a solid cap on the limestone. In effect, they try to give the house the solid sub-foundation that Mother Nature failed to provide. More-complex jobs might involve chemical grouts that bind the soil, and “underpins,” which involves putting structures resembling stilts underneath homes.
The market is clearly growing. The data show (PDF) the number of sinkhole-related insurance claims in Florida soared to 7,244 in 2009 from 2,360 in 2006, before falling a bit to 6,694 in 2010.
Watch jaw-dropping footage of terrifying and mysterious sinkholes.
Still complaining about the deficit? The latest monthly statement from the U.S. Treasury shows that even without destroying the social safety net or striking a grand bargain, it’s being erased.
Rand Paul is complaining about trillion-dollar deficits. Republicans are gearing up for more brinksmanship, the threat of default, and shutdowns over the massive deficits. President Obama and much of official centrist Washington still dream of a grand bargain, implausible as that may seem. Ideology seems to hold that the massive, 13-figure annual federal deficit is killing the economy.
Paul J. Richards/AFP/Getty
The most recent Treasury Monthly Statement (PDF), released Monday afternoon, updates the figures through July. It wasn’t quite as glorious a month as June, when quarterly corporate and personal income taxes and massive dividends from Fannie Mae and Freddie Mac swelled the nation’s coffers. But it was still pretty good.
In July, the government took in $200 billion in revenues, up 8.3 percent from July 2012. Spending was $297.6 billion, up 17 percent from July 2012. As a result, the deficit for the month was $97.6 billion, up 40 percent from June 2012. The monthly figures tend to bounce around a lot. If an entitlement payment comes on July 31 one year and then hits on Aug. 1 the following year, it can really skew the monthly totals. The same holds for the due date of tax payments.
So it makes more sense to look at the trend. We have now completed 10 of the 12 months of fiscal year 2013. And so far, revenues, at $2.287 trillion, are up 13.8 percent from $2.009 trillion in the first 10 of fiscal 2012. Meanwhile, spending, at $2.894 trillion, is off by 3 percent from the first 10 months of fiscal 2012. As a result, the deficit, at $607.4 billion through the first 10 months of fiscal 2013, is off $367 billion, or 38 percent, from $971 billion in the first 10 months of fiscal 2012.
Two months remain in fiscal 2013. In September, the government typically runs a surplus—it’s another one of the months when companies and individuals make big quarterly payments. If current trends remain intact, the government will essentially break even over the next two months, and the deficit for the full year will wind up somewhere close to where it was through the first 10 months.
So as you listen to people complaining about the annual deficit, remember that it is melting away. The miracle cure for deficits, it turns out, isn’t ripping up the social safety net, or a grand bargain. It’s growth, combined with some fiscal restraint, and higher taxes. Compared with a year ago, there are about 2.2 million more people working today, at slightly higher wages, paying slightly higher taxes. The combination of those forces pushes collections higher. Meanwhile, spending on anti-poverty programs like unemployment benefits falls as unemployment claims decline. Winding down the wars in Iraq and Afghanistan has reduced the Pentagon budget. And the sequester has taken a bite out of the budget of many agencies. The combination of those forces pushes spending lower. The latest update on this year’s fiscal situation confirms that each of these trends is fully intact.
Faced with plummeting profits, the makers of the BlackBerry have hinted they may be up for sale. Fat chance. Daniel Gross on the device’s swift rise, and faster decline.
On Monday morning, BlackBerry’s board of directors announced the Canadian device-maker is going to “explore strategic alternatives to enhance value and increase scale.” This is director-speak for: Our business is faltering. Nobody has approached us about a takeover. We’re worried about the future. And so we’re thinking of doing something, most likely a sale. Any takers?
The company’s stock moved up modestly on the news; shares rose about 6 percent through mid-day, after having risen about 5 percent on Friday. That’s what typically happens when a publicly held company puts itself up for sale. Investors expect a buyer will pay a premium for control. But the fact that the stock rose only modestly, and that it is still trading at about $10 a share, tells a broader story about the fragility of brands in technology—and why BlackBerry may not be so easy to sell.
Research in Motion, which changed its name to BlackBerry recently, was once one of Canada’s hottest exports this side of Celine Dion. But in the space of a few years, the company went from a world-beating juggernaut to a desperate also-ran. At its currently inflated price, BlackBerry is worth about $5 billion. But look at the chart below: a few years ago, with the stock trading at $140, it was worth about 14 times its current value.
BlackBerry’s fall isn’t just a tale of an indebted, overextended, bubble-era firm without revenue hitting reality—its revenue and profits were real, and they were spectacular. But the half-life of a piece of hardware is very short these days. So, too, is the business model of vaunted technology brands.
It may be difficult for youngsters to realize, but BlackBerry was a defining part of the business culture of the past decade. When the BlackBerry 6000 series was introduced in 2003, it was a huge advance in cellphone technology. You could make phone calls (this is back when people made phone calls) and text, but also get emails, swap documents, and surf the Internet. Within the space of a few years, if you were somebody, you had a BlackBerry, and your thumbs were sore from typing on the little keyboard. And BlackBerry held sway over its users through the early years of the smartphone revolution. People who actually used their phones primarily for work, who needed to type a lot (accurately), needed and loved the BlackBerry. The iPhone, with its apps and video capabilities and typo-prone keyboard system, was for play; the BlackBerry was for work. A year ago this week, when my BlackBerry ended up at the bottom of a swimming pool, I thought my world had come to an end. At that moment, the device on which I depended on to tweet, to write, to edit, to read, and to stay in touch, went dark—I was like an addict going through withdrawal. There is a reason they called it the CrackBerry.
The users weren’t the only ones addicted to it. Investors loved BlackBerry, too. The type of growth that Research in Motion posted—not to mention the profits that went along with it—was irresistible. Between 2007 (PDF) and 2009, revenues rose from $3 billion to more than $11 billion, while profits rose from $531 million to $1.9 billion. The subscriber base rose from about five million in 2006 to 25 million 2009. And the growth continued through the deep recession: $2.457 billion in profits on $15 billion in profits in the fiscal year that ended in February 2010; $3.411 billion in profits on $19.9 billion in profits in the fiscal year that ended February 26, 2011 (PDF).
But as the iPhone and other smartphones began to gain traction, things began to fall apart, slowly and then all at once. The company found that sales of its devices slipped at the same time it needed to ramp up spending on research, product development, and sales marketing. The result was a vicious earnings downdraft. In the fiscal year that ended in February 2012, revenue fell 7 percent while the cost of sales rose about 7 percent. That pushed net income down to $1.164 billion, a decline of 66 percent in one year. Revenue fell off a cliff in the most recent fiscal year, from $18.4 billion to about $11.1 billion—down 40 percent. As subscribers began to leave, the company reported a $1.235 billion annual loss for fiscal 2013 (which ended last February.) The most recent quarterly results (PDF) showed a small bounce-back in revenue but continued losses.
As the Time Warner-CBS dispute drags through its second weekend, leaving subscribers in eight markets in the dark, Daniel Gross says it’s not just intransigence keeping the cable giant from giving in—but a crumbling market.
The grudge match between media titans Time Warner Cable and CBS continues, with the two sides unable to agree on the network’s demands that Time Warner Cable pay it more to send its programming to customers. And so as Friday dawned, the Great CBS Blackout of 2013 entered its eighth day. For a second straight weekend, Time Warner Cable subscribers won’t be able to watch Tiger Woods play golf, or Bob Schieffer grills guests on Face the Nation.
When two sides who stand mutually to benefit from an agreement are unable to do so, it’s either because one side is irrational and impossible to deal with—like, say, the House Republicans—or because one or both parties have so much riding on the outcome that they can’t afford to give an inch. And that’s increasingly what it looks like here. But contrary to what many observers might believe, it’s not the 20th century fuddy-duddy television network business that is in trouble. Rather, it’s the 21st century cable business.
The stock charts and the company’s earnings certainly don’t back up the story. Time Warner Cable’s very impressive five-year chart shows the stock has risen more than four-fold since the spring of 2009. So far this year, it is basically matching the S&P 500.
So what’s the problem? In a nutshell, Americans are cutting their cords. They’ve been cutting the cords on home-based telephones for years and switching to mobile phones. And just now they are starting to cut the cord on cable service to the home. Combined, these trends are overturning the business model of cable companies. In time, they also will upset their balance sheets. Time Warner Cable is finding that its core business is under assault.
For the last many years, cable companies have proved that distribution can be king. Those fat pipes they built to deliver television reception to American homes, it turned out, could also deliver premium television channels, on-demand events and content, as well as high-speed Internet service and telephone service. To the modern family, these services are utilities no less important than electricity or water. And people with means are willing to pay up for premium products. So Time Warner Cable, and many of its colleagues in the information distribution business, had the best of both worlds. They had the reliable recurring revenue streams of a utility and the growth associated with innovations.
But that was last decade’s story. This decade’s story is a little different. It’s very difficult for Americans to replace the water and electric utilities. Sure, you can build a well or put in solar panels, but these expensive propositions don’t guarantee reliability. But getting television programming from other providers is possible—often at a lower cost. You can put a satellite dish on your roof. Phone companies offer their own form of cable service. Or, as an increasing number of people do, you can forgo an expensive smorgasbord of cable programming and instead curate your own viewing experiences through the internet—Hulu, Roku, Apple TV, Amazon Prime, Netflix, iTunes, etc. The viewing experience in these other venues might be different—you may watch on a small screen instead of a big television, you sometimes have to wait for buffering. But it’s a pretty good substitute. And it’s much cheaper and generally hassle-free. People don’t have to wait for Hulu to come to the house and install service.
Young people are particularly prone to cutting the cord. And so the same thing is happening to cable business as is happening to CBS Evening News. Every month, a chunk of its audience dies off, and new consumers come of age who have no experience with the product and no intention of trying it. Of course, CBS and its competitors can respond by selling its products through these alternate distribution channels. When your business is owning, maintaining, and repairing the distribution channel, you have fewer options. And you have a lot more expenses. Creating content is actually quite cheap—companies might spend a few bucks on a viral video, or a few hundred thousand dollars to commission a book, or tens of millions of dollars on a sitcom. But cable companies have to spend billions to build out their networks, and then billions more to maintain them. Much of that investment is financed with debt.
It’s possible, it really is. Daniel Gross sits down with the Cleveland Clinic CEO who is making it happen.
“If you want to get rich, you ought to go to Goldman Sachs.” That’s the message one of the nation’s largest employers of physicians has for young doctors.
Being a physician used to be a clear path to the American 1 percent. Practices tended to be entrepreneurial small businesses, which had great success passing through ever-higher costs to public and private insurance organizations. The more patients they saw and the more procedures they conducted, the more they got paid. According to a 2011 survey, the average salary for a dermatologist with six years of experience was $365,000; for an orthopedic surgeon, it was $485,000.
Mark Duncan/AP; Embed:Cleveland Clinic
But that golden age has come to an end. In recent years, we’ve seen a rare decline in the rate of health-care spending growth. The recession has brought greater sensitivity to all sorts of spending, while transparency is forcing hospitals and physicians to compete on price. And now the Affordable Care Act, which contains an array of measures explicitly intended to reduce spending, is about to hit. “People recognize that we’re going to get paid less for what we do starting in 2014,” said Delos Cosgrove, chief executive officer of the Cleveland Clinic, which employs 3,200 physicians. That’s why Goldman, he says, is a better bet if you want to get filthy rich.
The Affordable Care Act is more of a symptom than a cause of the impending crunch in health spending. But the impact on physicians as businessmen is one of the big economic subtexts of the act’s implementation.
Cosgrove, a heart surgeon, stopped by The Daily Beast’s offices to talk up the Cleveland Clinic’s business model, which differs significantly from much of the health-care industry. “We’re a not-for-profit, group practice with physician leadership, and our doctors are on a straight salary,” said Cosgrove, who has been practicing medicine for nearly half a century. Disconnecting compensation from the number of tests or procedures ordered removes financial incentives for unnecessary and expensive activities. It can also create a more collegial environment. “If you get a case and I don’t, it doesn’t affect your salary,” he said. Cosgrove also said that transforming doctors from businesspeople into workers removes the headaches of managing a practice. “I did 22,000 procedures and never sent out a bill,” he said. “I just concentrated on being a doctor.”
As reimbursements rates fall, and public and private insurance companies look for ways to reduce costs, this model of salaried doctors working for hospitals could be the wave of the future. Cosgrove said that 75 percent of graduating medical students want to be salaried. The turnover rate at Cleveland Clinic is about 4 percent. By contrast, the turnover rate for physicians at large practices was 6.8 percent in 2012.
Cosgrove, a Vietnam veteran, is neither an Affordable Care Act champion nor a fierce critic. Physicians, administrators, suppliers, and health-care entrepreneurs must reckon with the fact that costs have to come down, he says. “I think the basic premise is we had to change,” he said. “Health care had gotten so expensive that we could no longer afford it without digging into other things like education.”
Threatened by competitors and consumer indifference, Apple has been cutting costs. But, Dan Gross argues, the tech giant would do better to increase employee pay.
Only in America can a company with $145 billion in cash sitting on its books cry poverty. On Friday, a Wall Street Journal article on Apple’s retail operations highlighted the chain’s challenges finding a new leader and as rampant growth declines. A nugget buried within the story, highlighted by Business Insider, noted that the chain is trying to improve results in part by cutting the budget for spending on store supplies like paper and pens.
Customers at the Apple store at Grand Central Station in New York, New York. (Andrew Gombert/EPA, via Landov)
Now, you could argue that Apple stores don’t need paper and pens. But this is the equivalent of sending out a memo urging employees to reuse paper clips. It’s a decent idea, a good impulse, but it doesn’t address the core problem.
Apple’s core (sorry) problem is the same one that the U.S. economy at large faces. The corporate sector is doing well, the rich are doing great. But broad domestic demand just isn’t materializing to the degree they would hope. In fact, Apple’s retail operations have been a smashing success. Last year, the Journal notes, Apple stores were bringing in $5,971 per square foot, a 17 percent increase from 2011. That’s way more than Tiffany’s. But this year, “sales per square have fallen to $4,542, down 4.5% from $4,754 the same time a year before.” Total sales for the most recent quarter also slumped—“the first drop in year-on-year quarter sales at the stores since 2009, when the company changed how it recognized revenue.”
Apple’s retail operations face a series of challenges. It’s hard to post breakneck growth year after year. It’s running out of new customers. My household of four people has an iMac, and Macbook, three iPhones, two iPads, and an iPod. We’re pretty much Mac’ed out. There’s also competition. Blackberry sat around while Apple ate its lunch, but the rest of the electronics industry is fighting back against Apple dominance. Samsung has been blanketing the airwaves and the web with ads for its smart phones and laptops, while Google’s Android devices are making headway.
Those are problems particular to Apple. But Apple isn’t the only retailer struggling with slack demand. “Where are all the customers?” read the plaintive e-mail from inside Walmart’s executive bunker in February that was leaked to Bloomberg News. “And where is all their money?” The spending pie isn’t growing with sufficient speed, in part because wages haven’t been rising much. Americans by-and-large spend what they earn in wages and salaries. Yes, we borrow a lot to fund our consumption habits. But in the past several years, America’s collective credit card and home equity line of credit balances have shrunk dramatically. We can’t borrow our way to higher consumer activity.
No, if you want to get more cash into the retail channel, you have to get more cash into the consumer channel. That’s happening, but not fast enough. This year, the government has removed some cash from the consumer channel via the payroll tax increase. And companies are putting cash in. Despite all the handwringing about Friday’s jobs report, with just 162,00 new jobs created, about 2.2 million jobs have been added in the past 12 months. That’s respectable. Wages, however, are lagging badly. Corporate America, especially big companies, has been clamping down on labor costs the way Apple is clamping down on paper and pen costs. In July, average weekly earnings were down .4 percent from the month before, and up nearly 2 percent from the year before.
Wages aren’t keeping pace with overall economic growth in large because many companies that could easily afford to pay a little more would simply prefer not to. Apple says it has about 26,000 U.S. retail employees. An article in the New York Times last year suggested they make about $12 an hour. That’s better than McDonald’s pays, but it’s hardly good. And Apple could easily do better. It has $145 billion of cash sitting on its books. It made $6.9 billion in the most recent quarter. Giving each American retail employee a $2,000 annual raise would cost Apple $52 million a year. That’s a tiny, teensy, weensy sliver of its overall cash pile.
The burger industry is notorious for low wages. But a few chains have demonstrated the halo effects of (moderately) higher pay.
In many industries, especially service industries like retail and restaurants, there’s a widespread belief that companies can’t survive unless they pay as little as possible. Labor is an input. A company that pays more than it has to for any input—raw materials, rent, energy—isn’t doing the best it can.
That’s the mentality at Walmart, and at McDonald’s, where workers making as little as $7.25 per hour walked off the job this week. And it’s the mentality behind the comical financial planning tool McDonald’s and Visa recently put out suggesting that full-time workers’ monthly budgets should include a second full-time job and no line item for food or heat.
Business owners act as if low wages are thrust upon them by circumstances they are powerless to resist. But that’s emphatically not true. Pay is a conscious decision. (In the case of McDonald’s, it should be noted that pay is set by many local franchisees.) “Low wages are not a necessity, they’re a choice,” said Zeynep Ton, adjunct associate professor at MIT’s Sloan School of Business, and author of the forthcoming book The Good Jobs Strategy. Ton examined companies in the retail industry—“the epitome of bad jobs in the U.S.”—and focused on retailers who paid better wages and benefits and had a philosophy that “people are assets to be maximized.” At high-performing companies in low-wage industries like Costco, she found, higher wages often go hand-in-hand with operational excellence.
And there are examples in the casual-dining and fast-food sectors of companies that pay wages that, while not good by anyone’s definition, are certainly better. The best example may be In-N-Out, where workers start at $10.50 an hour. In-N-Out has a strange, somewhat secretive corporate culture. But the California-based chain has stealthily become a huge company, with 283 outlets. “We start all our new Associates at a minimum of $10.50 an hour for one simple reason,” the company notes on its homepage. “You are important to us!” Among the benefits it offers to full-time workers are “a package of medical, dental, and vision benefits,” a retirement plan with “ a Defined Contribution Profit Sharing Plan and 401(k) Plan,” free meals on work days, and paid vacations.
Or take Dicks Drive-in, a six-store chain in the Seattle area, whose menu of benefits resembles that of a technology company. Wages start at $10 per hour, but the benefits include “100% employer-paid health insurance and employer-subsidized dental insurance to every employee who works at least 24 hours per week,” educational scholarships, child-care assistance, and paid community service. It’s a way of—duh!—retaining people. “Almost one-third of all Dick's employees have worked for the company for 2 years or more,” the company notes.
Moo Cluck Moo, a new burger joint in Detroit, where Henry Ford shocked the business world nearly a century ago by doubling factory wages to $5 a day, pays $12 an hour. “We did this because, in our mind, it was the right thing to do,” cofounder Harry Moorhouse told The Detroit News. “This is too hard a job to pay minimum wage. So far, we haven’t lost any employees and we sleep well at night knowing that.”
Fears that the rest of the country will go the way of Detroit are unfounded fearmongering. Daniel Gross on why the Motor City is an outlier.
No, Detroit is not a symbol, a harbinger, or a leading indicator of what is happening to America—despite what you may have read. Since the city initiated bankruptcy proceedings last week, a stream of anguished pieces have tried to warn America that Detroit’s fate is just the beginning. “Come See Detroit, America’s Future,” warns Charlie LeDuff’s op-ed in The New York Times. Meredith Whitney, the false prophet of municipal debt disaster, took to the Financial Times and Yahoo Finance to make her case. Whitney, who predicted dozens of massive municipal defaults in 2010, said: “We know [Detroit’s bankruptcy] is a game-changing event for certain.” In due course, companies will “either get their act together or follow Detroit’s lead.” The obligatory Time cover asked: “Is Your City Next?”
A pedestrian walks by graffiti in downtown Detroit, which became the largest city in U.S. history to file for bankruptcy on July 18, when state-appointed emergency manager Kevyn Orr asked a federal judge for municipal bankruptcy protection. (Carlos Osorio/AP)
In a word, no.
To be clear, like Detroit, the U.S. as a whole—and many of its companies, states, cities, and consumers—has a significant mismatch between its assets, cash flows, and liabilities. There are large pockets of pain and financial misery throughout the U.S. There will be more failures. But the difference between Detroit and the rest of the country could not be more stark. In recent years Detroit had lost the capacity to stay current on its debts, to fund its operations, and to grow. At the same time, the rest of the country is doing a much better job staying currents on its debt, funding its operations, and growing.
The data and the trend lines all speak to a rapid decline in failure, not an increase. No bank has failed since June 7, the longest such streak since 2008. There have been 16 bank failures in the first 7 months of 2013, down from 39 in the first 7 months of 2012—off 60 percent in 1 year. Since peaking in 2010 at 1.593 million, U.S. bankruptcy filings fell in 2011, and again in 2012, to 1.22 million—a 23 percent decline. In the first quarter of 2013, filings were off nearly 16 percent from the first quarter of 2012 and were at their lowest level since the first quarter of 2008.
Through defaults and pay-downs, Americans have been reducing their credit-card balances—even as retail sales set new records each month. According to CardHub.com, U.S. credit-card debt stood at $788 billion in the first quarter of 2013, down from $985 billion in the fourth quarter of 2008. Since Americans are doing a much better job keeping up with their bills, the quarterly charge-off rate of credit-card debt has fallen from 10.92 percent in early 2010 to 3.83 percent in the first quarter of 2013—a decline of nearly two thirds. At 7.25 percent in the first quarter of 2013, the mortgage delinquency rate is down significantly from its 2010 peak. Sure, the Federal Reserve’s efforts to keep interest rates low have helped. But around the country, American businesses and consumers have become more intelligent and capable of handling their debt.
Now let’s look at the public sector. No U.S. state has defaulted on its debt. In fact, across the U.S., state tax revenue is up 9.3 percent in the first quarter from the year before. Dozens of states, including recent basket cases, are reporting surpluses, including California. Standard & Poor’s, which fatuously downgraded the sovereign debt rating of the U.S. in 2011 because of the lunacy of the House GOP, last month partially reversed its decision. Why? Well, as the U.S. was careening on the road toward being the world’s next Greece, it managed to slash its deficit by 40 percent in a single year. In fact, at the federal level, we are in a golden age of deficit reduction. Yes, several cities have filed for bankruptcy in recent years: Stockton, Vallejo, and San Bernardino in California; Central Falls in Rhode Island. But these are outliers.
Every day the overwhelming majority of borrowers—people, companies, cities, and states—manage to stay current on their debt. The reason, of course, is that sustained growth is the best cure for debt woes. Simply put, the economy is larger than it was in 2009. Compared with a year ago, two years ago, and three years ago, more people are working, at slightly higher wages, and paying slightly higher tax rates. This is not to deny long-term problems or the real failure that happens as a matter of course. But to a large degree, the debt doomsayers misread the data.
One monetary weapon has the long-stagnant economy suddenly surging. But will Prime Minister Shinzo Abe be able to achieve bigger, harder reforms? By Daniel Gross.
Japan has been up against it since its epic stock and real estate bubble burst in the late 1980s. An unwillingness to process economic failure condemned it to a slower-than-normal recovery. An inability to change a calcified work and corporate culture—one hostile to women and immigrants, fearful of competition, and insulated from disruption—prolonged the problem.
In recent years, Japan has exhibited signs of dystopia: men uninterested in having sex, a sharp fall in births, a rise in suicide, and a decline in the population. The remarkable story of Japan’s rise from the ashes of World War II to a global powerhouse seemed to be coming to an end. In 2010 China surpassed Japan as the world’s second-largest economy.
But there are signs that Japan is returning to life. Last December Shinzo Abe was swept into office as prime minister promising to combat Japan’s malaise with an arsenal of three arrows: aggressive monetary policy, fiscal stimulus, and structural reform. With the firing of the first arrow, the financial markets and the underlying economy have begun to react. Investors are taking note. “Notwithstanding all the problems we’ve had, the world is awash in liquidity,” notes Donald Marron, founder of private-equity firm Lightyear Capital and a former director at Japan’s Shinsei Bank. Japan would be a logical next step, and the market is willing to anticipate these changes.
The first—and easiest—effort was monetary stimulus. Central banks can conjure up vast sums of money at the push of a button. In April the Bank of Japan increased the pace of its bond purchases to about $79 billion per month, with a stated intention to double the nation’s money supply by 2015.
In addition to buying bonds—which is essentially Ben Bernanke’s quantitative-easing strategy at the Federal Reserve—the Bank of Japan is going a step further by wading into markets and buying financial assets such as shares of real estate investment trusts and exchange-traded funds. What’s the goal? Creating lots of new yen cheapens the currency, which is a boon for exporters and is modestly inflationary. Creating new money to bid up asset prices is also inflationary. And that’s the point. When an economy suffers deflation, as Japan has done for several years, nobody has any incentive to spend money today. Why buy a computer now when it’ll be cheaper tomorrow? When inflation—and the expectation of inflation—filters in, people decide to buy now rather than tomorrow. The result is higher growth.
Japan’s prime minister and leader of the ruling Liberal Democratic Party, Shinzo Abe, speaks to voters from the roof of a campaign van in Tokyo on July 4. (Franck Robichon/EPA, via Landov)
And it has actually worked. The cheaper yen, off 22 percent against the dollar in the past 12 months, has stimulated higher exports. After several years of decline, in the first half of this year exports rose 4.2 percent compared to the year-earlier period. In June, exports were up a solid 7.4 percent from June 2012. That’s a tonic for an export-driven economy. In the first quarter of 2013, Japan’s grew 1 percent—that’s an annualized rate of 4.1 percent. What’s more, people now expect that inflation will rise.
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.
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.