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Apple’s Dumb Penny-Pinching

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.

Apple Store in Grand Central New York

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.


When Fast Food Pays

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.

Big Mac

Diether Endlicher/AP

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.”

The Restaurant Opportunities Center, a union-affiliated group, issued a report last year on companies that take the “high road,” flagging chains that pay better than peers and offer career-advancement opportunities, like El Fuego in Philadelphia and Zingerman’s in Ann Arbor.

Everyone Chill

Relax, We’re Not Detroit

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?”

Detroit Bankruptcy

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, 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.

Tokyo Story

Japan’s Decision

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.

Cold Cash

An Intuitive Thermostat?

The Nest thermostat promises to save energy by programming itself and adjusting to users. Dan Gross adds a couple to his own home to find out if the product lives up to the hype.

Can a $250, Apple-like programmable thermostat save the planet?


From two Apple expats comes the Nest Learning Thermostat, a cleverly intuitive household thermostat that picks up on your daily schedule as well as your heating and cooling habits and programs itself accordingly. (Nest Labs/MCT, via Newscom)

Residential heating and cooling consumes about 10 percent of U.S. energy production. Heating and cooling accounts for about half of the total energy bill of a typical American household.  So if a device can help make a significant dent in usage, it can save a lot of watts, a lot of money, and a lot of emissions.

But the traditional ways of reducing home heating and cooling costs—turning the thermostat down in the winter, turning it up in the summer—are pretty blunt instruments. The demand for energy in a home can vary greatly over the course of a day and a month. It would be much easier if somebody—or something—was watching your habits, figuring out when you didn’t it mind it being a little colder or when you were gone or when you were not occupying parts of the house, and then adjusted the temperature accordingly.

That’s what Nest does.

Programmable thermostats have been around for awhile. But people aren’t always rational. They neglect to program them or don’t bother to use the most useful features. In the U.S., says Tony Fadell, chief executive officer of Nest, there are some 250 million thermostats, of which only 40 percent are programmable. And of those, only 10 percent have been programmed to save energy.

Why? Programmable thermostats are designed by engineers, and pitched toward installers—people who, in other words, never actually use them. “They never make it easy or clever to put in your schedule,” said Fadell, a longtime Apple executive who helped create the iPod. “There was very little consumer orientation.”

The best energy-saving ideas—car engines that turn off in neutral, timers that turn off electric lights when nobody is in the room—remove human agency from the equation. So the gang behind Nest set out to create a thermostat that is programmable, but that would also program itself, based on consumer behavior. “It learns what you want, and predicts what you want in the future, and if you don’t like it, you simply change it,” said Fadell. “And it learns from that and it continually adapts.” In addition, the Nest designers concluded it should be able to downshift to a state of lower energy usage when the house is empty, and it should be able to be manipulated via a smartphone. The final innovation? Nest would bypass installers and go directly to consumers.

Blue Equals Green

Insurance’s Liberal Turn

They’re powerful, they’re greedy, and liberals are often suspicious of them. But the insurance industry’s obsession with profits is turning them toward progressive positions on issues like gun control and climate change.

The list of progressive heroes continues to expand: Rachel Carson and Ralph Nader, James and Sarah Brady, David Boies and Ted Olson. Aetna and MetLife.

Wait, what? Insurance is a large and varied industry, and frequently plays the heavy and bogeyman, especially the health insurers. When they’re not denying coverage, they’re jacking up rates to unsustainable levels. Insurers have a great deal of power. You have to buy their products in order to get a mortgage, drive a car, or open a store. Pretty soon, you’ll have to buy health insurance or pay a fine. Many organizations, entities, and businesses can’t operate without insurance coverage, at least if they are remotely prudent.

MetLife and Aetna

Are MetLife and Aetna forces for social progress? (Wilfredo Lee/AP; Bebeto Matthews/AP)

The people who work in insurance are bean counters, numbers geeks, people who are obsessed only with actuarial tables, profit and loss tabulations, and mortality rates. Social change, justice, equity, and low-impact lifestyles matter little to them. It’s all about whether the premiums they can charge and collect can cover the losses they have to pay out.

And yet. Precisely because of their power, they can actually be forces for social progress. They can help—and have helped—achieve goals that social liberals have long advocated but were unable to obtain through the ballot box, the legislature, or the courts. For example, insurers tend to like public policies and regulations that save them money by reducing injuries and removing risk from life. This impulse drives libertarians nuts. But it also means that insurance companies are reliable and active supporters of nanny-state issues. Insurance companies lobbied for mandatory seat-belt laws and regulations that required car manufacturers to put airbags in vehicles. Health-insurance firms would really prefer not to insure smokers, which means they provide cover for employers who want to ban smoking in or around the workplace.

Precisely because of their obsession with numbers and data, they are dispassionate about social issues. There’s little room for ideology—on either side—in the insurance industry. Sure, forcing people to wear seat belts, or forcing car manufacturers to put airbags into cars, may be an intrusion into personal liberty and business operations. But the industry was able to quantify the gains it would reap in injuries avoided and lives saved if they were mandatory.

It so happens that on a number of recent issues, insurance companies’ desire to protect profits and long-term viability aligns with the goals of progressives. Take Obamacare. Acting entirely out of self-interest, the U.S. health-insurance industry ultimately supported the Affordable Care Act. The insurance firms were willing to swallow the bitter medicine of not being able to deny people for preexisting conditions in exchange for the individual mandate and other measures that would increase their business. Corrupt bargain in the service of bigger industry profits? That’s one way of looking at it. But you could also regard it as a giant leap forward, a “big fucking deal,” in the words of Vice President Joe Biden. Increasing the number of people who have health insurance, and subsidizing their efforts to do so, is an instance in which a progressive policy goal meshes with insurance companies’ bottom line.

Sometimes insurers can achieve what progressives can’t in the legislature. The left has been generally horrified at the policy response to the Sandy Hook massacre. Congress refused to act on more aggressive gun control. And states like Kansas and Utah actually passed laws permitting adults to carry guns in schools. Five hundred MSNBC segments on the topic couldn’t stop these laws from going into effect. But insurance companies are stepping in. Regardless of executives’ beliefs about gun control, they know that more guns being carried around tends to lead to more shootings, which leads to more health-insurance and life-insurance claims.


The Man for the Job

Ignore the tabloid jokes about Spitzer’s self-immolation in a prostitution scandal. He’s a guy who can actually see through Wall Street’s bullsh--t, writes Dan Gross.

Former New York governor Eliot Spitzer has declared that he will run for the post of New York City comptroller. Cue the tabloid jokes about Spitzer’s self-immolation in a prostitution scandal. It’s understandable if his past is a deal-breaker for lots of people. It wasn’t simply a matter of indiscretion or infidelity, but lawbreaking and participating in the sex-for-hire industry. Is he electable? Should someone try to seek redemption at the ballot box and in the public arena rather than by doing anonymous good works?

I’m not sure. But it is clear that Spitzer’s professional past, temperament, and skill set match up very nicely with the job for which he’s applying. The comptroller is a sort of hybrid—in-house auditor, fiscal manager, pension administrator, the guy who manages the city’s relationship with Wall Street and the capital markets. (Here’s the official job description.)

(Full disclosure—I have known Spitzer for more than 10 years and have repeatedly crossed paths with him—as an interview subject, as a fellow columnist at Slate, as a guest on his television show, and, most recently, in Chelsea Market a few weeks ago, where we discussed the state of the housing market.)

New York City, along with New York State and many other jurisdictions, engages in the practice of putting crucial financial and money-management decisions in the hands of elected officials, rather than in the hands of career bureaucrats. And because of the city’s size and financial heft, there’s a lot at stake. The comptroller oversees the city’s five public-employee pension funds, which combined have about $140 billion in assets and manage money on behalf of 237,000 retirees and 344,000 employees of the city and related entities. The comptroller also helps deal with bond issuance. New York City has about $41 billion in general-obligation debt outstanding. In 2012, the city issued $8.1 billion in new-money bonds, and sold another $6.6 billion in bonds to refinance existing debt at lower interest rates.

The stakes are extremely high. The costs of poor management in these areas are massive, for all taxpayers. The potential for corruption and debacles is pervasive. Municipal finance has historically been a cesspool of conflicts of interest—investment firms help fund the campaigns of officials who dole out underwriting assignments, and the revolving door swivels rapidly. Money-management assignments are often doled out less on merit and more on personal connections. Wall Street firms have routinely sold financial products and investment strategies to unsophisticated city and state money managers that wind up causing big losses for the taxpayers. Alabama’s largest county effectively filed for bankruptcy after having engaged in a complex derivatives transaction with JPMorgan Chase.

And so the sort of person you’d want in the post is somebody who knows Wall Street inside and out, who can see through the conflicts of interest and b.s. that Wall Street firms peddle, whom Wall Street regards as someone to fear rather than a mark, and who has sufficient financial resources that he or she won’t be tempted to dole out favors to money managers in exchange for the prospect of lucrative post-government employment.

Spitzer fits those requirements perfectly. A child of New York City privilege, and a graduate of Princeton and Harvard Law School, he came from the same milieu as many Wall Streeters. Better than any other elected official, he understood what motivated investment bankers and traders, the language they spoke, and the ways in which their industrial norms could prove damaging to the markets and its participants. That’s what made him such an effective anti–Wall Street crusader when he was attorney general. His staff didn’t need to explain to him how investment-banking firms tied research reports to underwriting assignments. And so a decade ago, while the Securities and Exchange Commission slept, Attorney General Spitzer used his prosecutorial tools to end corrupt practices in investment banking, mutual funds, and insurance.

Thanks to his father’s real-estate empire, Spitzer is also personally well-off. He simply doesn’t need campaign contributions or a promise of employment from the Wall Street firms who want to do business with the city. Firms that want the city’s business will have to suck up to him, rather than the other way around, as is typical.

Bigger, Better

Recovery Spring!

The U.S. added 195,000 new jobs in June, capping off a surprisingly strong spring. Daniel Gross on the bright spots—and the one measure that’s still really, really depressing.

It’s recovery spring! In the labor market, at least.

The stock market has endured several rough weeks, thanks to global economic turmoil and the prospect of the Federal Reserve scaling back its provision of monetary ether. The U.S. economy is churning ahead in low-growth mode, struggling against the sequester and higher payroll taxes at home and volatility and macroeconomic slowdowns abroad. But the jobs market, the sickest portion of the U.S. economy and a classic lagging indicator, seemed to gather strength between April and June.

Friday morning’s jobs report contained some good news. The economy added 195,000 payroll positions in June, significantly above the pace of recent growth. In addition, as it does every month, the Bureau of Labor Statistics looked back at the prior two months and revised the data. And, as has frequently been the case in recent years, BLS discovered more jobs. The April figure, reported last month as a gain of 149,000, was revised to a gain of 199,000. The May figure, initially reported as a gain of 175,000 jobs, was revised upward to 195,000. For those counting at home, that’s 589,000 new jobs in the past three months. Compared with a year ago, there are 2.293 million more Americans with payroll jobs today. That’s quite decent.

One shift worth noting. In the early years of this recovery, the manufacturing, industrial, and production sectors often led the way in job growth. But this report shows that services, which comprise most of the U.S. economy, are now carrying the baton. Leisure and hospitality added 75,000 posts; profession and business services added 53,000; retail added 37,000 jobs; and employment in financial activities (shudder) rose 17,000. Construction added 13,000 jobs.

The unemployment rate, which is calculated from the household survey (in which BLS calls up people and asks them about their employment status), held steady at 7.6 percent in June. While the number of people reporting themselves as employed rose by 160,000 in the month, the labor force grew by 177,000 jobs. In the past year, the labor force has actually grown by nearly 700,000, a reversal of a troubling trend.

So here’s the dichotomy. It’s a pretty good time to have a job in the U.S. Firings, layoffs, and bankruptcies are trending down, which means employees are less fearful about their short-term prospects. And with the labor market tightening ever so slightly, companies finally have to pay a little more. The outstanding feature of this expansion has been that wages have continued to slide even as corporate profits have boomed. June provided some evidence that this trend may be starting to reverse. Average weekly earnings rose by 0.4 percent in June from May, and are up 2.2 percent since June 2012. By recent standards, that’s a significant raise.

But it’s still a bad time not to have a job. There is a huge amount of slack in the U.S. labor market. The official unemployment rate may be holding steady at 7.6 percent, but BLS also compiles alternate measures of “labor underutilization.” When it conducts its household survey, it asks people whether they are working part-time but would prefer to be working full-time, whether they’re discouraged, or only marginally attached to the workforce. The so-called U-6 measure takes into account all these frustrations. In June, the U-6 stood at 14.3 percent from May, and down only slightly from 14.8 percent in June 2012.

One final note. For months, we’ve been suggesting that the end of austerity-induced unemployment is at hand. Over the past few years, state, local, and federal budget cuts have led to the loss of nearly a million public-sector jobs—which doesn’t usually happen in a typical recovery. Over the past few years, I’ve dubbed this as “conservative recovery,” because the private sector adds jobs each month while the public sector cuts them. June was no different. The private sector added 202,000 jobs, while the vast government sector cut 7,000 jobs. The federal government cut 5,000 jobs and state governments slashed 15,000 positions. But in one bright spot, local government added 13,000 jobs in June, and has added 29,000 jobs in the past two months.

Play Money

The Winklevii Bitcoin Gambit

The infamous pair plans to cash in on Bitcoins with a new trust, but it’s not clear whether the setup will work with a digital currency. What is clear is that the Winklevii are too immersed in Silicon Valley’s culture of insta-fortunes to consider trying a real business.

The Winklevoss twins, Cameron and Tyler, immortalized in The Social Network as the Winklevii, are back in the news. Seeking to cash in on the craze for Bitcoin, the alternative digital currency, they announced Monday their intent to sell shares to the public in the Winklevoss Bitcoin Trust. (Here’s the prospectus.) The offering of about 1 million shares at about $20 each is for an exchange-traded fund—kind of like a mutual fund that trades like a stock. The idea is that people buy the shares, and the Winklevoss Bitcoin Trust uses the money to buy Bitcoins.

Winklevoss Twins Bitcoin

Michael Loccisano/Getty, George Frey/Getty

I had three thoughts upon reading the prospectus: (1) Dudes, really? (2) A tweet: faux business guys set up a faux hedge fund to invest in faux currency. (3) This is why you shouldn’t send rich kids from Greenwich to Harvard and then to Silicon Valley.

The Winklevii will go down in history for having played a much-disputed role in the origins of Facebook. In the world’s first recorded allegation of square-jawed crew dudes being victimized by hoodie-wearing computer scientists, the Winklevoss twins claimed that Mark Zuckerberg had essentially stolen their idea. The twins walked away with a settlement that gave them $20 million in cash and shares that are worth a few hundred million dollars.

Rather than use the cash to lead the lives of playboys, the Winklevoss twins have decided the best revenge is entrepreneurship. They want the world to see them as tech nerds, not crew dudes. “It’s always been this David and Goliath, blueblooded jocks versus this hacker kid, when really it’s a fight or dispute between privileged parties,” Cameron told The New York Times. “The similarities between us and Zuckerberg are actually greater than the dissimilarities.”

They’ve set up a venture-capital firm that has made investments in Hukkster, which allows you to track favorite items on shopping sites and then lets you know when they go on sale, and SumZero—founded by their Harvard compadre Divya Narendra, also depicted in The Social Network—an online community for financial professionals to exchange research ideas. (Think of it as a virtual manifestation of the Greenwich Country Club.) Both seem like decent, if derivative, ideas.

The Winklevoss twins further amped up their nerdiness by plunging into the strange world of Bitcoin. In April they let it be known that, in the words of The New York Times, they had “amassed since last summer what appears to be one of the single largest portfolios of the digital money, whose wild gyrations have Silicon Valley and Wall Street talking.” Of course, at about the time they were disclosing their big position, Bitcoin started to crash. “We have elected to put our money and faith in a mathematical framework that is free of politics and human error,” Tyler Winklevoss said.

Now they’re setting up a financial mechanism that will give average joes the ability to get in on the Bitcoin action. In exchange, an entity controlled by the Winklevoss twins will get an unspecified sponsor’s fee.

Paula Deen Undone

Racism Is a Tough Sell

In business, it’s OK to be a sexist, a felon, or an adulterer. But a racist? Uh-uh—especially if your brand has a national reach. Daniel Gross on Paula Deen’s swift fall.

Paula Deen has come undone.

Paula Deen appears on NBC News' "Today" show

Paula Deen appears on NBC News’s “Today” show, June 26, 2013. (Peter Kramer/NBC/NBC NewsWire via Getty)

First came details of a lawsuit in which a former employee alleged racial insensitivity on the part of Deen. Then came her amateurish, tentative apologies on YouTube. A mawkish attempt at self-exculpation in an interview on the Today Show with Matt Lauer didn’t go much better.

Instantly, a bevy of Fortune 500 companies that were more than happy to do business with Deen, have dropped her like a hot (sweet) potato. The sharp and swift fall makes for a concise case study on the impact of reputation on a personal brand.

Deen may have been known to most laypeople as a television chef and cookbook author. But the beauty of today’s world is that you can quickly leverage fame gained in one arena into others. She had a show on the Food Network, restaurants, a line of cookware sold in Walmart, Home Depot, Target, and other stores, cookbooks, an endorsement deal with the pork giant Smithfield. Deen was also able to mine commercial gold out of self-inflicted wounds. Critics had long warned that a diet larded with pork, butter, cream, and sugar could lead to diabetes. Lo and behold, after Deen revealed that she had diabetes, she signed a deal with pharmaceutical firm Novo Nordisk to help promote a diabetes drug.

Within a week, all of it—well, almost all of it—has melted away. Giant corporations that were happy to plaster Deen’s face on their products and stock their goods in their store have run away. Political correctness run amok? No. It illustrates a larger truth. In 2013, no national brand, in any industry, can afford to have an association with a person who expresses racial animus, or who taints a company with the stain of racial animus. It’s just not acceptable. It is OK for endorsers and business partners to be gamblers (Michael Jordan), convicted felons (Martha Stewart), or adulterers (too many to name). The commercial culture will tolerate multiple divorces, trips to rehab, and all sorts of boorish behavior. You can even recommend that people eat really unhealthful diets. But the hint of racism is simply a deal-killer. No questions asked.

Here’s your checklist of former Paula Deen sponsors who have cut ties with the embattled celebrity chef.

Of course, companies will be more likely to stick with an employee, or a business partner, if they are minting money. Over his long career, Rush Limbaugh has suffered astonishingly little blowback for off-color remarks. (It was sexism that got him into the most trouble with advertisers.) But in Deen’s case, her ratings at the Food Network were already slipping. Deen’s show had been running for 11 years (a close approximation of the life expectancy of people who subsist solely on her cuisine), which is an extremely long time. But as The Wall Street Journal reported, Deen’s show was slipping: “Ratings for Ms. Deen’s show “Paula’s Best Dishes” were down 15% in total viewers—and 22% in the 18–49 demographic that advertisers care most about—for the 2012–13 season, compared with last season, according to Nielsen ratings provided by Horizon Media.”


The Gay Tax Bonanza

Let’s not forget: the case that brought down DOMA was essentially about taxes. Daniel Gross on why gay couples can finally look forward to April 15—and what it will mean for federal coffers.

It’s safe to say that no federal tax season will be greeted with as much joy and glee as next spring’s. Thanks to today’s Supreme Court rulings on gay marriage, in April 2014 gay couples residing in states where gay marriage and same-sex partnerships are legal will be able to file joint returns.


Jewel Samad/AFP/Getty

Many of the economic arguments made for gay marriage revolve around the notion of stimulus—let gay people marry, and they’ll spend money throwing fabulous bashes, providing employment to caterers, florists, and hotels. Maybe. If that money weren’t spent on weddings, it would likely be spent on other goods and services. But there’s something to be said for simply making our systems more fair and less arbitrary, regardless of the effect on national finances or employment.

Wednesday’s rulings are a step in that direction. As things go, the right of two adults to file a joint tax return, or of one adult to file a return as “head of household,” might appear to be symbolic. After all, married people often file separate returns. But it means something. Marriage is, among other things, a set of financial relationships that helps delineate how to create and preserve wealth, how to share property and pass it on, how to create financial security and deal with retirement and health care. The tax code—what we choose to tax, which activities get preferential treatment, which activities are singled out for opprobrium—actually says a lot about us as a society.

And until today, the federal tax code generally treated gay people as second-class citizens.

The case that helped bring down 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. Instead of benefiting from the provision of the Internal Revenue Code that lets spouses inherit unlimited amounts of assets from predeceased spouses, Windsor received a federal-estate-tax exemption on only the first $3.5 million of assets. On the sums above that amount, Windsor had to pay more than $363,000 in federal estate taxes.

It sounds like a 1 percent problem. But there’s a principle at stake here. Because it refused to recognize her marriage as valid, the federal government essentially confiscated a chunk of Windsor’s property. And the government’s refusal to recognize gay marriage as legitimate enshrined this attitude throughout the tax code.

After hearing the Supreme Court ruling that declared DOMA unconstitutional, plaintiff Edith Windsor explained why she took her case to the Supreme Court.

Up and Up

The Fed’s Spring Awakening

The Federal Reserve says the economy is getting better. So why are investors so miserable?

Federal Reserve Chairman Ben Bernanke made a little news today. No, he didn’t shed any light as to whether he will be serving another term once his current term expires next January. (We can safely assume he won’t.) And no, he didn’t announce a significant, imminent change in the policy under which the central bank buys $85 billion of securities in a month. In its statement, the Federal Open Market Committee, the Fed’s policy-making body, basically said there would be no change to the quantitative easing policy, designed to keep interest rates low and support the economy.

Wall Street Federal Reserve

A trader works in a booth on the floor of the New York Stock Exchange as Federal Reserve Chairman Ben Bernanke speaks on television on June 19. (Richard Drew/AP)

Bernanke essentially said that he and his colleagues are now believers in the Recovery Spring theory—the heretical idea that the U.S. economy is powering ahead at a pretty good clip. In fact, the economy has been doing well enough for long enough that Bernanke said he could envision a time when the Fed wouldn’t have to support the economy by buying billions in long-term securities each month. Without giving concrete commitments, Bernanke said that if the economy continues to perform as the Federal Reserve expects, the taper—a reduction in the rate of asset purchases—could start later this year. Eschewing specific triggers, he nonetheless outlined some targets. When unemployment falls below 7 percent, the Fed would consider reducing the pace of asset purchases and ending them. When unemployment falls below 6.5 percent, the Fed might start considering rates.

In fact, the overall picture from inside the Fed is one that readers of this column may recognize—a relatively optimistic take on America’s short- and long-term prospects. Bernanke and his colleagues have been looking at the same data we’ve been looking at: the steady rise in jobs, consumption, and retail sales; the continuing recovery in housing; and even the coming end of state and local austerity.

There’s still the problem of the federal government, though, with its needless sequester. “The main headwinds to growth are, as you know, federal fiscal policy,” said Bernanke during today’s press conference. But given the headwind created by budget cuts and tax increases, he said, the fact that the economy is moving ahead is indicative that things are basically sound.

In fact, this spring, the Fed—like some other smart folks—has become more sanguine about America’s prospects. Check out the Fed’s projections for economic conditions for the next couple of years. Compared with the March forecasts, the June forecasts assume a slightly higher rate of growth, and slightly lower rates of unemployment and inflation. Recovery Spring!

All that sounds pretty good. But as Bernanke spoke, investors freaked out a little bit. The Dow Jones industrial average fell a little more than 200 points, or about 1.3 percent, by Wednesday’s close. And interest rates on government bonds rose. That is to say, investors were dumping both stocks and bonds. Which sounds only half right, given Bernanke’s forecast. If the economy is getting stronger, you would expect signs of inflation to pick up, and that would boost interest rates. What’s more, should the Fed reduce its asset purchases, it would remove a big player from the market. The rational reaction to both of these moves is to sell bonds.

But stocks are in large measure a bet on future economic growth. So if Bernanke is more optimistic about growth, why were investors suddenly more pessimistic about stocks? It’s basically a knee-jerk reaction. Think of stock investors like caffeine addicts who are told that the substance that improves their life and helps them get through the day is going to be less available in the future. Imagine someone told you you’d have to taper your coffee consumption. You’d throw a fit and be miserable. Well, the Fed has been like Starbucks for stock investors for the last several years. By buying bonds and keeping interest rates at rock-bottom levels, the Fed made stocks seem more attractive. The Fed’s efforts have also supported economic activity, which is good for stocks. And the last four years, in which the stock market has doubled as the Fed has relentlessly expanded its balance sheet, have conditioned stock investors to rely on the central bank.

Sun’s Up

Owning a Piece of the Sun

Save the planet, turn a profit. That’s the thinking of Mosaic, a company that lets you invest in solar panels, and promises a pretty decent return. Daniel Gross gives it a whirl.

It’s hard to get a 4.5 percent annual return on your money without taking too much risk. Banks pay less than 1 percent. Blue-chip stocks pay dividends at about2 percent. The U.S. government borrows for about 30 years at 3 percent.

Mosaic Investments


But I found one way to get a decent interest rate while also boosting my personal green credentials: I bought a very small piece of a solar electric power plant in New Jersey.

Solar power is growing by leaps and bounds. But it requires a large personal investment—i.e. spend $15,000, take advantage of tax credits and rebates to put a small system on your roof. And it only pays to put panels homes that have south-facing roofs and aren’t surrounded by trees. Or it requires a large corporate investment, like the giant retailers putting arrays on their giant roofs, or the huge farms sprouting in the desert. There are very few options for people with limited resources.

That’s where Mosaic comes in. Essentially, it’s crowdsourcing investments for small-scale solar projects, like a Kickstarter for green energy. But it isn’t seeking donations, and it’s not offering silly rewards like tote bags or invitations to launch parties. Rather, it’s offering fixed financial returns, much like a corporate bond, or a bond backed by a mortgage. It’s an example of financial engineering meeting electrical engineering. “Our mission is to create shared prosperity through clean energy,” said Mosaic’s CEO Dan Rosen. “We see a huge opportunity for transitioning our world to clean energy ahead of us and we want to make it possible for communities to prosper from this massive transformation.”

When you construct a solar energy system, you’re basically constructing a stream of income that will flow over a period of many years. But you need a lot of money up front in order to build it. Mosaic is trying to bridge that gap. Among the many models being used to finance solar development is one in which a company builds and owns the solar array on the roof of another company’s store, or a government building, or a public agency, and then agrees to sell the power to the building owner at a fixed price for a long period of time. Mosaic is in the business of providing financing to the people who build the arrays. It raises funds not from venture capitalists or banks, but from individuals. And as the solar array owner receives revenue, it pays back the loan that Mosaic made. Mosaic then makes payments back to its investors. (Here’s a brief description of how it works.)

Started in 2011, and based in Oakland, Mosaic did a bunch of pilot projects in California—like putting 120 panels on the Asian Resource Center in Oakland, California. Then at the beginning of this year, it launched real projects, like one in which 293 investors kicked in $95,275 (that’s an average of $325) to build a 78 kilowatt installation on an affordable housing project in Salinas, California.

To learn about Mosaic in more detail, I opened an account. Most of the projects are available only to investors who live in California. But some are available for people out of state. So I was eligible to buy a piece of a $350,000 loan backing a 487-kilowatt, 1,694-panel system that was constructed on a convention center in Wildwood, New Jersey, and went into operation last year. The promised return: 4.5 percent interest, and the return of principal over a 114-month period.


What Deficit?

I hate to say I told you so, but I told you so. The golden age of deficit reduction has arrived. But will Republicans ever admit the truth? Unlikely.

It may not seem like it, but the Golden Age of Deficit Reduction we’ve been writing about is truly upon us.

Foriegn Holdings

Though the monthly treasury statement shows a $139 billion deficit for the month of May, a look inside the data shows why we are entering a brief age of deficit-reduction nirvana. (Jacquelyn Martin/AP)

The May monthly treasury statement came out on Wednesday. And while it shows a hefty $139 billion deficit for the month of May, a look inside the data shows why we are entering a brief age of deficit-reduction nirvana.

Many analysts believed the huge revenue gains seen in the first few months of 2013 would wilt away as winter turned into spring. Higher taxes and a gusher of dividends and other income in 2012 helped create huge tax liabilities that people had to pay in the early months of 2013. Yet in May, revenues again rose sharply from May 2012. They came in at $197.2 billion, compared with $180.7 billion in May 2012, or up 9.1 percent. Through the year thus far, revenues are up 15 percent from the year before.

The spending side was a little different. In general, the trend so far this year has been for spending to be down a bit, thanks to the sequester, and less spending on defense and unemployment benefits. But there was a wrinkle in May. As Treasury noted, “since June 1, 2013, the normal date for these expenditures fell on a non-business day, outlays for military active duty and retirement, Veterans’ benefits, Supplemental Security Income and Medicare payments to Health Maintenance Organizations moved to May 31, 2013.” As a result, spending for the month rose sharply from last year, to $335.9 billion, up 10 percent. Thus far this year, spending is up about 1 percent.

So what makes this a golden age? Well, according to Thomas Simons of Jefferies & Co., without the shift in spending, “the [May] deficit would have been approximately $103 billion.” That’s significantly lower than the $124.6 billion deficit reported in May 2012.

Next, consider that for the next four months, assuming no big shocks or great changes, the government will essentially break even. That hasn’t been done in well over a decade. In the first eight months of the fiscal year the deficit was $626 billion, down about 25 percent from the first eight months of fiscal 2012. But the Congressional Budget Office is predicting that’s all the red ink we’ll print this fiscal year. It is projecting the deficit for the entire fiscal year will be $642 billion.

Why? Well, as the economy continues to expand, revenues will continue to rise and spending will fall. The government often reports smaller monthly surpluses, and occasionally surpluses, in June and September, as people and companies make quarterly payments. But it will likely come in with a big surplus this June, in part because some spending that usually takes place in June was pushed into May and in part because Treasury is anticipating a humongous $59 billion dividend from the government-owned mortgage company Fannie Mae. Combined with an anticipated surplus in September, the gusher of revenues anticipated in June will more than wipe out the anticipated deficits for July and August.

Easy Money

Why Wall Street Still Loves Booz Allen

The consulting firm that employed leaker Edward Snowden still has the support of investors. Daniel Gross on why this isn’t surprising.

How much does it cost you if one of your employees goes rogue and screws over your business client? If you’re Booz Allen Hamilton, the government contractor that employed leaker Edward Snowden, about $60 million.

On Monday, investors in Booz Allen, which is publicly traded, had their first opportunity to react to the bombshell news that broke over the weekend. And the reaction was something close to a shrug. The stock closed at $17.54, down about 2.55 percent from Friday’s closing price of $18. Given the company’s market capitalization of $2.41 billion, it lost about $64 million in value. Through midday Tuesday, the stock was down less than 1 percent.

Booz Allen & Stock Market Reaction

Booz Allen cyberfacility, September 25, 2012; floor of the NYSE, June 11, 2013. (Jeffrey MacMillan/Washington Post, via Getty; Andrew Burton/Getty)

Snowden, who earned $122,000 a year from Booz Allen until the firm fired him yesterday, willfully leaked information. You would think such a breach in protocol and client-relationship management might be a disaster. After all, the U.S. government provides virtually all of the company’s revenues, and the national-security apparatus places a very high value on the ability to keep secrets. Booz Allen clearly failed to supervise Snowden adequately, or to make an accurate judgment about this particular employee’s willingness to abide by the terms of his employment. The result has been a huge black eye for the government, which will now incur significant financial and reputation costs. Imagine you were a law firm and a paralegal disclosed sensitive information from a major client. Or if an investment bank blew a high-profile public offering. Or if a seafood restaurant routinely served spoiled fish. The market would exact a swift punishment.

But government contracting is a different ballgame. When a company screws up, the government delivers a slap on the wrist—and then awards the company with new contracts. Based on recent history, investors could be forgiven for having a blasé attitude about Booz Allen’s prospects. Overcharging and being overbudget on high-profile fighter contracts hasn’t stopped Lockheed Martin from getting lucrative new high-profile contracts. A 2011 government report found that Boeing overcharged the Army for spare helicopter parts; This morning, Boeing announced it received a $4 billion contract to make helicopters for the Army.

Halliburton and its subsidiaries had a series of problems providing services in Iraq. But the revelations didn’t sink its stock. And in 2010 its subsidiary KBR got a fat no-bid contract to provide services in Iraq.

The reality is that these contractors have become, in effect, arms of the government. The national-security and defense apparatus needs them to carry out essential operations as much as the private companies need their federal benefactor to deliver returns to the shareholder. Government agencies these days simply lack the resources, permissions, and wherewithal to hire all the people they need to conduct operations. Using contractors is a necessity.

On the one hand, it is a fiercely competitive industry in which big firms compete with one another. On the other hand, the fix is in. The government spreads its contracts around between large companies. Small businesses and start-ups have a tough time competing for the biggest of the contracts. And there is a limited number of domestic large players, especially in sensitive defense areas. Lobbying also plays an important role. Big contractors hire lobbyists, make campaign donations, and advertise in the publications that politicos read—all in an effort to work the system to their disadvantage.

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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