A blog about business and economics.

March 2 2015 1:25 PM

If the Supreme Court Guts Obamacare, Republicans Might Just Keep It Alive

On Wednesday, the Supreme Court will finally hear oral arguments in King v. Burwell, the conservative lawsuit designed to cripple Obamacare by cutting off subsidies to millions of Americans who have come to rely on them for purchasing health insurance. Quite reasonably, Republicans have started to worry that if the challenge succeeds, their party might face a wee bit of backlash from the hordes of voters who suddenly won’t be able to afford their medical coverage. So, over the past week, a few GOP members of Congress have started publicly outlining a plan to contain the fallout from a potential win at the high court.

Their idea: Keep Obamacare and its subsidies alive. But, you know, only temporarily.

As Ezra Klein argues, the word “plan” might be too generous here. Unless it’s a vote to repeal or hobble Obamacare for the 56th time, the Republican leadership is just about incapable of passing legislation through the House of Representatives. And the notion that conservative hardliners will suddenly circle around a bill meant to prop up health care reform in the wake of a gruesome legal defeat seems a bit fanciful. But it’s a concept, at least. A coherent thought. And it shows that some Republicans are aware that this case has backed them into a political corner.

The problem is that even if voters don’t think they like Obamacare, they will almost certainly like even less the grisly spectacle that unfolds as millions lose their coverage due to a politically motivated court case. Currently, the federal government offers middle-class families subsidies, in the form of tax credits, to help them buy insurance on the state and federal health care exchanges that were created under the Affordable Care Act. The plaintiffs in King argue that’s illegal. Based on a four-word passage of the health law that may or may not have been a drafting error, they contend that Washington cannot give subsidies to residents of the 37 states that chose not to set up their own exchanges for either political or technical reasons, and instead relied on

If the justices agree, it could have ugly consequences for the entire U.S. health-insurance system. At least 9.3 million Americans would lose their subsidies, according to an analysis by the Robert Wood Johnson Foundation and Urban Institute. About 8.2 million would end up uninsured, as coverage would become too expensive (people who can’t afford a health plan are exempted from Obamacare’s individual mandate to buy coverage). While the dropouts would generally be younger and healthier, those remaining in the marketplace would likely be on the older and infirm side, which would cost insurers and potentially send premiums skyrocketing, forcing more people out of coverage. The end result would be “a textbook case of an adverse selection death spiral,” as the brief puts it.

It’s hard to predict exactly who would get blamed. Americans might reflexively split into their partisan camps, letting Democrats and Republicans point fingers at the other side while the carnage unfolded. But some conservatives (and liberal writers like Jonathan Chait) are predicting a bloodbath for Republicans if they simply stand pat as our health finance system implodes. Internal polling by GOP activists, reported on by Byron York, suggests that voters want lawmakers to “do something to restore subsidies” if the court nixes them. Last week, Ben Sasse, a conservative senator from Nebraska, wrote a fretful Wall Street Journal op-ed predicting a “deluge of attacks on Republicans for supposedly having caused this. Daily White House emergency briefings. Liberal interest-group ads of wheelchairs going over cliffs. President Obama’s cheerleaders in the media screaming that ideologues are killing patients.” This, Sasse worries, could force red-state governors to finally "fold" and build their exchanges in order to get Obamacare’s subsidies. Instead of taking that risk, he believes that Congress should pass a bill extending the subsidies for a “transitional” 18 months, by which point there might be a Republican in the White House who could scrap and replace the health law for good.

This weekend, Sasse’s idea got a boost from a trio of three more Republican Senators—Orrin Hatch, Lamar Alexander, and John Barrasso—who wrote in the Washington Post that they would support providing a “bridge away from Obamacare” that would provide “financial assistance to help Americans keep the coverage they picked for a transitional period.” The rather short piece didn’t specify a time frame, and it included some noise about giving states more “freedom and flexibility” to mold their insurance marketplaces (which is basically a euphemism for deregulating so insurers can offer skimpier coverage than Obamacare currently allows). But the gist was clear enough: Should the King plaintiffs prevail, the GOP’s only significant idea is to keep Obamacare basically in tact until their ever-fractious majority can converge on something it likes better. If you think the House's Tea Party faction wouldn’t go for it, consider that Rush Limbaugh says he can’t think of a better way to deal with the fallout of a conservative high court win. But he's pretty terrified of how the Obama administration might parlay it politically.  

They probably already have found, say, people that are on dialysis in the 37 states with federal illegal subsidies and they've already made deals with this patient, "We're gonna feature your story when you lose your dialysis in June when the court rules."  They're gonna have 'em ready to go.  ‘Look what the Republicans have done now.  Their hatred of Obama is so boundless that they're willing to let patients die in order to deny Obama the success.’  I can hear it all now. And that's what the Regime wants. [The “Regime” is Limbaugh’s affectionate term for the Obama White House.]

There's an obvious downside to the temporary extension plan for Republicans. The Democrats might just win the White House again in 2016, which would lead us back to the same argument in 18 months. Except, that would be 18 more months for Americans to get used to Obamacare and its subsidies, making it all the harder to do away with them. And forcing an apocalyptic standoff over this particular issue with a brand-new president doesn't seem like an especially promising political tactic. But hey, if talk-radio Republicans are willing to entertain the idea, maybe the House will be, too.

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Feb. 27 2015 11:24 PM

Venmo Issues Apology for Security Shortcomings

Venmo has responded to concerns about its security and customer support in a note of apology to users on its blog.

The popular mobile payments app, owned by eBay’s PayPal, began facing questions about its security and support systems earlier this week after I published a story in Slate about a user who had $2,850 stolen from his Chase bank account through the app. The story also documented structural weaknesses in Venmo’s approach to security, including its lack of two-factor authentication and poor customer communication practices. In a somewhat terrible response to those concerns, Venmo CEO Bill Ready said earlier on Friday that the company has preferred not to alert its users to possible instances of fraud because “in many of these cases, we want to handle it seamlessly so we’re working behind the scenes.”

Venmo didn’t respond to multiple requests for comment for my initial story, or to follow-up inquiries I sent today, but late this evening passed along a link to its blog post. “We never want you to be disappointed and we’re sorry if that’s been the case,” Venmo general manager Michael Vaughan writes. “Our support team is the lifeblood of Venmo and we aim to be the biggest advocates for you. As we grow rapidly, we are working diligently to keep the level of service you should expect, and we’re hiring more people to work in support (if you are interested in joining us).” As of November, Venmo had about 70 employees; PayPal has more than 10,000.

“I want to assure you we are continuously improving product and security measures,” Vaughan writes in the post, which documents a number of the company's security practices and explains steps that users can take on their own to prevent theft. “We have a bunch of things we’ve been working on and we’ll share more of those with you soon. While we know that we measure up favorably against the industry standards for fraud prevention, we aren’t sitting back.”

You can read the full post at Venmo’s blog. And, if you missed it, the original Slate story is here.

Feb. 27 2015 6:15 PM

Looks Like Uber Got Hacked

No one is safe, not even multibillion dollar ride-hailing companies. According to the latest Uber update, as many as 50,000 of its drivers may be affected in a security breach that occurred last May.

Uber says it discovered in September that one of its databases “could potentially have been accessed by a third party” (note the double hedging here). Upon realizing this, the company continues, it “immediately changed the access protocols for the database and began an in-depth investigation,” which showed that there had been one instance of unauthorized access. From that breach, the hacker would have gained access to only names and license numbers of drivers, Uber says.

While 50,000 people is a lot, it’s not nearly on the same scale as the estimated 80 million customers that were put at risk in the recent Anthem insurance breach, or the 70 million affected by the Great Target Hack of 2013. Uber also seems to be handling this well. The company is notifying drivers and offering one year of free “ProtectMyID” monitoring from credit report firm Experian. Uber has also filed a so-called “John Doe” lawsuit in an attempt to track down the alleged hacker.

In the meantime, the company seems to hope its blog post on the matter will disappear from Internet memory. The URL is impressively unsearchable.

Feb. 27 2015 5:16 PM

Venmo’s Terrible Excuse for Not Telling You When Someone Steals Your Money

On Wednesday, I published a story on Slate about a Venmo user who had $2,850 stolen through the app from his bank account. In the piece, I documented several apparent issues with Venmo’s security and customer support: It doesn’t offer two-factor authentication, routes all support inquires through an email address (and can be slow to respond to those emails), and, at least until Wednesday, didn’t alert you if your email and password settings were changed from within the account. Venmo also encourages new users to link their bank accounts directly to the app, without any warnings as to why this might be unwise.

I first contacted Venmo on Monday and, after initially pointing me to its online security and privacy policies, the company did not respond further. My attempts to follow up with Venmo since the story ran have also gone unanswered. But Venmo is apparently speaking to other media outlets. It sent a run-of-the-mill statement on its policies to BuzzFeed and Gigaom, and Friday afternoon the Verge published comments from an interview with Bill Ready, the CEO of Venmo and its parent company Braintree. They’re not exactly reassuring.

Ready explains that Venmo has until now preferred to deal with fraud without looping in the user because “in many of these cases, we want to handle it seamlessly so we’re working behind the scenes.” This is despite the fact that Venmo’s user agreement instructs consumers to notify the company within two days if they suspect their account has been compromised to keep their maximum liability from rising to $500 from $50—something that becomes much tougher to do if the service isn’t alerting you to suspicious activity in the first place.

Venmo isn’t the first tech company to defend its practices in the name of a frictionless user experience. Uber, the multibillion ride-hailing company, automatically tacks on a 20 percent gratuity to each fare to keep the experience cashless and hassle-free. Snapchat, which has suffered a few security snafus of varying severity, used to automatically link users’ accounts to their phone numbers to simplify onboarding and friend-finding. Even BuzzFeed, which sees itself as first and foremost a tech enterprise, defended its decision to quietly delete thousands of posts from its website—a huge journalistic sin—as a move that benefited the user.

While wanting a smooth user experience is all well and good, it often feels like—and Ready’s comments seem to confirm—a desire to be frictionless can lead companies to sacrifice some pretty important stuff. “It’s a big issue, balancing the customer experience with the fraud measures that you want to have in place,” says Matt Tatham, a spokesman for Experian, a global credit report and fraud monitoring firm. “Nowadays, just log-in password isn’t enough. You need extra layers to make it difficult for people to take advantage of any site, whether it’s mobile payments or something else.”

In this respect, Venmo is quite different from traditional financial institutions. As anyone who has forgotten to notify a bank or credit card company of major travel plans probably knows, fraud departments will often freeze accounts as soon as they notice irregular spending patterns. Credit card issuers also charge merchants transaction fees in part to have money for anti-fraud efforts. Those measures might at times feel inconvenient, but they also deliver some important peace of mind. As a colleague noted this afternoon, “I really like the experience when my credit card company calls to tell me that they’ve already caught the fraud. It sucks to have to wait a day or two for a new card, but it beats not knowing.”

For now, Venmo is trying to send a message that it takes security concerns seriously. “I think there are some valid points around how we can communicate more effectively on a couple of these issues,” Ready told the Verge (though at least in the story, he didn’t elaborate on which ones). Venmo is working to enable two-factor authentication. It also notes that users who want more protection can add a four-digit PIN to their accounts—this is true, but that PIN isn’t required to log into your account in a desktop browser or complete a transaction there. And while Gigaom’s Kif Leswing reported Friday that changing his account password produced an email alert, when I and three other colleagues tried this from within our accounts we still weren’t getting notified.

At any rate, are people concerned enough about having their accounts compromised on Venmo to actually leave its service? If so, you’d think Venmo would be more inclined to add extra layers of protection at the cost of convenience. At least to me, not being immediately alerted to fraud exemplifies a bad user experience. But for others, maybe the “seamless” factor really is more important.

Feb. 27 2015 5:15 PM

Drugs and Prostitutes Are a Surprisingly Large Chunk of Italy’s Economy

Last fall, the European Union gave new meaning to the phrase stimulus spending when it began requiring its member states to start incorporating illicit activities—including drug trafficking, prostitution, and illegal alcohol and cigarette sales—when calculating the size of their economies. The goal was to make it easier to compare stats like gross domestic product across borders. The Netherlands, for instance, already counted the cash generated by legal marijuana sales in its national accounts. Germany, where prostitution is legal, tallied up the money from sex work. So European officials decided other countries could claim credit for those sorts of activities, even if, technically, they weren't above board.

So, which country's GDP got the biggest jolt? Perhaps this shouldn't be shocking, given that its former prime minister was indicted for allegedly sleeping with an underage prostitute, but the answer seems to be Italy. As the think tankers at Brussels-based Bruegel write, there's limited information out there about the ways the recent accounting changes affected different nations' statistics. However, this month the Organization for Economic Co-Operation and Development published a brief showing how much adding illicit activities in the mix changed GDP figures in 2010. Italy seemed to get the biggest boost, with its economy growing by a full percentage point. Spain was a close second, tacking on an extra nine-tenths of a point. These numbers aren't necessarily gospel, since sizing up a black market with precision is nearly impossible, but they are part of the official record.

How to put that growth in context? Well, the new rules didn't just involve sex and drugs. They also reclassified research and development spending in a way that increased GDP. Bruegel points out that Italy got only a slightly larger boost from the tweak to R&D expenditures than it did from adding in all of the mob's favorite industries into its figures. Not a sign of the healthiest economy, but certainly of an entertaining one.

Feb. 26 2015 5:40 PM

The Enormous Black-White Wealth Gap Is Getting Even Wider

The housing bust and and recession led to a seismic collapse of middle-class wealth that, according to at least one prominent economist, has left the median American family poorer today than it was in 1969. But, as the Federal Reserve Bank of St. Louis reminds us in a report, the fallout hasn't been quite the same for families of all races. While there has always been an enormous wealth gap between whites, blacks, and Hispanics, the past few years have only seen it widen.  

Households of all ethnicities saw their net worth decline after 2007. But between 2010 and 2013, white and Asian families experienced a slight rebound. Black and Hispanic families did not.

As a result, the typical black or Hispanic household is a bit poorer compared with the typical white household now than it was a few years ago.

The important issue here isn't the precise ratio of white wealth to black or Hispanic wealth. Rather, it's the divergent paths. Whites and Asians, who tend to have more of their money saved in the sorts of financial assets that have rebounded nicely in the past few years, are recovering. Blacks and Hispanics, who before the crash tended to have an outsize portion of their net worth tied up in their homes, are simply not.

Feb. 26 2015 4:43 PM

Barnes & Noble’s College Bookstores Are Becoming Their Own Business

Barnes & Noble, the retailer cursed with selling, you know, books, said on Thursday that it plans to spin off its college bookstores unit into Barnes & Noble Education, a separate publicly traded company this summer. The college business has been a lone bright spot for Barnes & Noble lately, with revenue that rose 1.9 percent to $751.3 million in the latest quarter (as compared with revenue that declined in the company’s retail and Nook segments). Last May, Barnes & Noble announced an ambitious plan to grow its number of college stores from 696 to 1,000 over the next five years. Nearly a year down the line, it has increased that number to 714.

The college bookstores spinoff will take the place of the Nook business separation that Barnes & Noble had been planning since last June. According to the Wall Street Journal, that plan was nixed after a 55 percent drop in Nook revenue during the most recent holiday season made it a tough sell for investors. From the Journal:

Under the new plan, the Nook business will stay with the core retail stores group, which also includes
John Tinker, an analyst at Maxim Group, said the new structure makes sense. “What this does is create a pure play for investors interested in the college market,” said Mr. Tinker. “Keeping the Nook inside the retail group is logical because they don’t currently know where it stands. Nook losses are shrinking, but it is still uncertain what’s really happening there.”
Barnes & Noble has long argued it needs to have a digital offering for its customers. Retaining the Nook business will allow it to do that.

Michael Huseby, Barnes & Noble’s CEO, said in a statement that spinning off the company’s college arm “will create an industry-leading, pure-play public company with more flexibility to pursue strategic opportunities in the growing educational services markets.” Barnes & Noble values its college business at $775 million, according to a filing, and its spinoff is expected to be complete by the end of August.

Barnes & Noble’s stock rose nearly 7 percent Thursday on the news.

Feb. 26 2015 1:39 PM

The Further This Line Falls, the More Money Companies Are Going to Have to Pay Their Workers

It's been a decent couple of weeks for America's underpaid retail workers. First, Walmart announced it was raising wages for 500,000 of its associates—up to a minimum of $9 an hour this spring, and $10 next year—in a bid to increase morale and performance. Wednesday, TJX, the owner of clothing discounters T.J. Maxx and Marshalls, said that it was following suit. Target is still holding out, but companies are obviously feeling some pressure to up their remuneration for the people who make their stores run.

Why now? There are lots of little reasons, to start. States are hiking their minimum wages—in all-important California, the floor will be $10 in 2016—meaning that these companies would have faced higher payroll costs regardless. Meanwhile, Walmart is trying to combat its toxic public image as the king of low-wage employment, which hasn't been helped by the steady protests organized by the worker group OUR Walmart. At the same time, its labor practices, designed to ruthlessly minimize expenses, have become a major business liability in recent years, as badly understaffed supercenters haven't been able to keep merchandise stocked on shelves, leaving it to stack up in storage while customers head elsewhere. The company's new chief executive, Doug McMillon, thinks that improving customer service is key to turning around its performance and is betting higher pay will lead to happier, more productive staff (and the best research suggests he's right).* And if Walmart is offering higher wages, its competitors will probably need to do the same to compete.

But that brings us to the big issue. The job market isn't just healing. It's now getting somewhere close to normal again. There are about 1.7 unemployed workers per job opening now, close to the lows of early 2007. That line you're looking at? The lower it falls, the more impetus companies will have to raise their compensation, since employees will feel more comfortable quitting to go looking for a higher paycheck elsewhere. And indeed, as Matt Yglesias notes today, more and more Americans have been saying "so long" to their bosses lately.


Jordan Weissmann

There is one potential sour note here. Since the recession, many Americans have simply given up on finding work after facing grueling stretches of unemployment. One reason the job market looks like it's getting tight now is that many of those people are sitting on the sidelines, and it's unclear if the recent good news will bring them back. The labor force participation rate for workers between the ages of 25 and 54—basically, people who are too young to be retiring—has ticked up slightly in recent months after a period of decline followed by stagnation. But it's too early to tell if that's a blip or the beginning of a sustained trend.

We want those missing workers to return to job market. If they do, that should help alleviate the need for companies to increase wages. If they don't, well, at least a few more Americans should be in for a raise.

*Correction, Feb. 26, 2015: This post originally misspelled Walmart CEO Doug McMillon’s last name.

Feb. 26 2015 12:16 PM

For Women in Tech, Silicon Valley Is Way Worse Than D.C., New Orleans, and Kansas City

This post originally appeared in Inc.

There's been much written lately about the dearth of women in technology, and about the droves of women who are leaving tech companies. Much of the conversation has centered around Silicon Valley startups, given their reputation as the source of hot new technology.

But some new research from SmartAsset, which draws on data from the U.S. Census Bureau, shows that if you're a woman working in tech, Silicon Valley really isn't all it's cracked up to be. For women, the hotbed of tech innovation is more likely to be New York, where the sheer number of women working in tech is three times that of Silicon Valley. And while women face a substantial pay gap compared with men in Silicon Valley, there are two other major metro areas where women working in tech actually get paid more, on average, then their male colleagues.

To figure out which cities are the best for women working in tech, SmartAssets ranked cities based on the percentage of the tech industry that is made up of women, the gender pay gap in tech in each city, the average wage for women in tech minus the cost of housing (to account for cost of living), and the three-year employment growth for women in tech.

In no city do women make up more than 37 percent of the tech workforce. But women in tech have it a whole lot better in cities such as Washington, D.C.the top-rated citythan they do in any West Coast city. In two cities, women in tech, on average, actually get paid more than their male colleagues.

SmartAsset has not done a study on best cities for men in tech, but they did do a study of best cities for tech workers overall. Omaha, Nebraska, topped that list, followed by Colorado Springs, Colorado.

The best city for women in tech, according to the research, is Washington, D.C. In the nation's capital, about 37 percent of tech jobs are filled by womencompared with a national average of about 25 percent—and women in tech, on average, earn 93.3 percent of what men do. Perhaps that's not hugely surprising, given that an analysis of the Inc. 5000 showed Washington, D.C., to be the best city for women entrepreneurs.

In the second-ranked city, Kansas City, Missouri, women make up about 33 percent of the tech workforce and on average make 106.6 percent of what the guys do. Women in tech outearn the men in Arlington, Texas, too, and by a hefty margin: 107.4 percent. Arlington is ranked 15th.

So what is going on in Silicon Valley, the supposed tech epicenter of the U.S.? In San Jose, California, which ranks 11th, women make up only 23 percent of the tech workforce and make 86.4 percent of what men do. In San Francisco, 21 percent of the tech workforce is female and women earn about 88 percent of what the guys do.

That means the highest-ranked city in California, with an impressive third-place finish, is Fremont, where women in tech get paid 86.7 percent of what men do. Like Washington, D.C., Fremont owes its high ranking partly to the fact that three-year job growth for women in tech has been heady: 44 percent in Fremont and 49 percent in D.C.

Other cities in the Top 10: Houston; New York; Tucson, Arizona; New Orleans; Milwaukee; Philadelphia; and Plano, Texas.

Another interesting finding: While Silicon Valley may be the seat of all things tech, in raw numbers, there are more women working in tech in New York than in the Valley. There are about 22,000 women in tech in New York city while no other city has more than 10,000 women working in tech. That may be one reason New York women make 95.6 percent of what New York men dobetter networking opportunities.

I am sure there are a million explanations for these disparities, and for the fact that Silicon Valley and San Francisco both ranked relatively poorly in the study. Some of these explanations may even be totally reasonable and legitimate. But seriously. Move to Kansas City.


Feb. 25 2015 3:39 PM

The Internet Has Already Revolutionized Prostitution. But Could Better Apps Make It Truly Safe?

These days, prostitution is very much an online enterprise. Escorts advertise on personal websites and email with clients before meeting up. Johns, meanwhile, post reviews on the Internet much the same way they’d rate a restaurant on Yelp. All of this, according to Scott Peppet, has made the black market safer and somewhat more lucrative for sex workers, at least compared with the days when they could mostly walk the streets looking to pick up men. But the University of Colorado Law School professor believes that technology could make prostitution even safer, if only we’d let it.

In his 2013 Iowa Law Review article “Prostitution 3.0?,” Peppet argued that state laws banning the “promotion” or “advancement” of prostitution have stopped entrepreneurs and nonprofits from creating apps or sites that could tell sex workers whether their clients have a criminal background or sexually transmitted disease, or that could assure clients that a sex worker isn’t the victim of human trafficking. Of course, if you’re of the opinion that prostitution should be banned as a matter of principle, then such government restriction makes good sense. But Peppet makes a fascinating point: Many people oppose prostitution not because they’re against selling sex, but because of the problems associated with it, like disease and trafficking. At the same time, states have stopped companies from offering products that might make the market safer and less objectionable. If they didn’t—if we could have prostitution without risks to health and safety—maybe voters would feel comfortable decriminalizing it. In any event, prostitution isn’t going to disappear. Technology could at least make it a little less hazardous.  

In a blog post this week, Modeled Behavior’s Adam Ozimek cheekily referred to Peppet’s idea as “Uber for Prostitutes.” To learn a bit more, I called the professor up to discuss the online evolution of the world’s oldest profession, and how he thinks his ideas could clean it up further. The interview below has been edited and condensed for clarity.

Slate: Your paper discusses how the Internet has already transformed prostitution in many ways. What does the business look like in 2015?

Peppet: It’s useful to think about different types of prostitution. What I call prostitution 1.0 is traditional street prostitution. The basic problems with street prostitution are that neither side knows much about the other. It's very hard for them to know about criminal background, STDs, about trafficking. The buyer [the John] has no idea if the seller [the prostitute] has been coerced or is healthy. And vice versa. The seller has very little idea if the buyer is a decent person or violent. It's a pretty dismal market, prostitution 1.0.

Prostitution 2.0—and I didn't coin that term—describes what's happening today. In the United States, at least, and in most places it seems, the vast majority of prostitution is taking place off the streets. Prostitutes and buyers are finding each other online, and finding each other because prostitutes have websites where they advertise. There are sites where buyers review prostitutes, and in some cases where prostitutes review buyers. They can say, "Hey, this person wasn’t very nice" or "this person didn't pay.” And so there are all sorts of technologies that are changing prostitution—at least, high-end prostitution. They are allowing prostitutes to screen out clients a little better. Prostitutes can email with a client in advance and can say, "Hey, I need to know where you work and I need to know your name." They can Google that person. They can do a little bit of research to make sure that person is acceptable. Prostitutes can contact each other about a potential client and say, "Hey did you have any problems with this person?"

And likewise, clients can look at reviews of prostitutes and decide what to pay.

At least the early empirical evidence suggests that this has allowed prostitutes to stay physically safer and that there are fewer pimps in that market. There may be less disease transmission—and there are higher prices. Prostitution 2.0 seems to be better than prostitution 1.0. The question is "how much better?"

Out of curiosity, why doesn’t law enforcement shut down more of these websites, or go after them? I know Craigslist was basically pressured into closing its adult-services section.

That's a good question. Some of them are housed offshore. And in many, many countries where prostitution is now legal—countries like Germany, Canada, and Great Britain—those problems aren't there.

The other thing is that a lot of these sites post various kinds of warnings at the beginning saying this is all fiction or this is just for adult connection, it's really not for prostitution. Of course, everyone knows that this is fiction. I really think, to some extent, some of these sites existed because regulators and/or police authorities just haven't gotten after them yet. And like you said, they have certainly begun to go after them and shut many or some of them down.

But you suggest governments should do the opposite, and make legal room for what you call prostitution 3.0. Tell me more about that.

I conclude that prostitution 2.0 is better than traditional street walking, but it's certainly not perfect. It's maybe not that much better, because of a couple of continuing core problems. One of them is the risk of violence. The prostitute continues to know relatively little of the client and the client's criminal history. Two is the problem of STDs and disease. Prostitutes and clients know next to nothing about each other's health status. And three is the very serious problem of trafficking. Prostitution 2.0—technology-enabled indoor prostitution—in some ways is being used to put sort of a gloss of legitimacy around trafficking. Anti-trafficking advocates are concerned that these websites and all of this online technology are actually allowing trafficking to occur or enable trafficking, because it's easy to pass off traffic prostitutes as more legitimate than they really are.

So, these are serious problems. The question I ask is: "OK, could technology adjust any of these problems and how?" And my answer is: Yes, It probably could. For example, if you had an Internet intermediary that could verify any criminal history, STDs, status, anti-trafficking credentials—basically your identity so that they could be pretty clear that this person hasn't been trafficked, because they have a U.S. ID and they have an educational history, and we can basically figure out who they are. If the intermediary is able to do that work and then confirm for both the buyer and the seller that both parties were of good standing, that would clean up the market even more than prostitution 2.0 has cleaned it up already. It would potentially deal with the anti-trafficking concern in the way prostitution 2.0 really hasn't addressed anti-trafficking at all.

I think particularly in countries that are legalizing prostitution, it's really worth thinking about technology and policy as part of prostitution-reform debates. They're really inseparable at this point.

If you were to compare these imaginary sites to a real company, which would it be?

Sure. There are lots of intermediaries in normal markets that serve to verify one or both sides of the transaction—and serve to verify quality, for example. Everything from an art auction house to a car dealership to financial intermediaries. The reason they're able to charge a small fee, as an intermediary, is because they are serving to verify the identity or quality of the goods or person on either side of the transaction. That's a really common function as an intermediary. Think about eBay with its reputational scores—what is eBay doing? In some ways, eBay is connecting buyers and sellers. It's able, with its reputation scores, to reassure buyers and sellers that they're not going to get ripped off. And that's a very similar function to what we're talking about here and we're just talking about a slightly higher level of verification of things like criminal history or health status.

In your paper, you say that the main thing stopping those kinds of services are laws that ban aiding or promoting prostitution. Would we have to eliminate those laws to make the innovations you’re imagining possible?

The answer wouldn't be to eliminate them, but to modify them. A state could say: "Aiding and abetting prostitution might still be problematic in the interim, but if you're developing technologies that significantly improve the lives of participants or the community, that has a safe harbor." So, you just carve out an exception. We could argue about the exact language that a state would use. But all you would be doing is saying: “Look, if you're a pimp manipulating street walkers, we're still going to criminalize that behavior while allowing the technology company or a startup, who was creating a Web app, to do something without being prosecuted."

We’re creating a chicken-and-the-egg problem. We dislike the market as it currently is, and we use it to justify prohibiting these kinds of exchanges. It's conceivable innovation could remedy these problems, except you can't do that. Innovation itself is illegal, because the market has been criminalized. The only way out of that chicken-and-the-egg problem is to allow innovation that has a potential for an individual or social good, and see if you can improve the market efficiently so that the justification for criminalization falls away.

So let’s say a site like this existed. What would stop a prosecutor or the FBI from just asking for data on its users?

One of the things I talk about in the paper is, if you were going to do this, ideally you would have confidentiality protection and some sort of qualified immunity—data couldn't be subpoenaed and used in that way. In addition to writing about market technology, I write about privacy. Yes, creating a database like this is scary—and it serves as the potential for abuse either by whoever has created it or if the state tried to get its hands on it. But again, those are legal problems. Those aren't technological problems. Those are largely legal problems of "OK, how can we protect this sensitive information if we want to try to improve this market?” Because there are real social and individual costs of the problems remaining in prostitution markets. That, for me, is the motivating reason to think about this. You know, people suffer.