Moneybox

Huge business news today as it's confirmed that Yahoo will be buying Tumblr in a $1.1 billion all-cash transaction. Making aquisitions has been key to Yahoo's strategy forever, under a whole range of executives, but this is an unusually rich purchase. In inflation-adjusted terms, however, it doesn't come close to matching the big pickups of the dotcom era. These are the top-ten richest acquisitions the company has ever made:

1. Broacast.com $7.6 billion, 1999
2. Geocities $4.9 billion, 1999.
3. Overture Services $2.06 billion, 2003.
4. Tumblr $1.1 billion, 2013.
5. Right Media $750 million, 2007.
6. Kelkoo $696 million, 2004.
7. eGroups $568 million, 2000.
8. Hotjobs $554 million, 2002.
9. Zimbra $386 million, 2007
10. Blue Lithium $333 million, 2007.

Looking back at this list, the criticism that jumps out isn't anything in particular about the companies Yahoo has chosen to buy. It's more that they seem to have a relatively poor sense of timing. The majority of these have the look of "buy high" to them, coming in the middle of economy-wise M&A wave when what you'd want to see a cash-rich company do is go bargain hunting during downturns. I'd have to think harder about whether buying Tumblr makes any real sense, but I will say that overall market conditions are much more favorable to buying just about anything in 2013 than they were in 1999. The creditworthy can get money very cheaply these days, so spending a lot of money on buying something makes sense.

You know what sounds like could provide a huge lift to the American labor market? Suppose a bunch of rich foreigners decided they wanted to buy expensive items manufactured right here in the United States of America. Imagine they especially wanted to buy houses, lifting boats specifically in the construction sector that's been hammered by years of a weak housing market. Great news, right? Sadly not in today's United States where we manage to make lemons out of every cup of lemonade, and a surge in foreigners wanting to buy up New York City real estate is of course portrayed as bad news:

“There’s a great deal of interest in New York, which is seen as relatively cheap compared to other global cities,” said Yolande Barnes, director of research for Savills, an international real-estate firm.

The growth in high-end projects in Manhattan comes as housing for the working and middle class is in increasingly short supply in the city. These buildings are proving so profitable that they are warping the local real-estate market, making it more difficult to put up more-affordable housing.

How is it that we've managed to turn this good news about housing exports into bad news about middle class affordability? Well, it's artificial scarcity. Back in the 1980s there were "voluntary" quotas for how many cars Japanese companies could export to the United States. Not coincidentally, that's when Honda came up with Accura and Toyota came up with Lexus. And imagine today if you told Japanese car companies that they were only allowed to manufacture a few cars a year. Well, they would only build luxury cars and people would say that foreign demand for Japanese automobiles is bad news for Japan because the middle class is now priced out of the car market. In the real world, though, Japanese firms try hard to address the mass market and foreign demand for Japanese cars is good news because it lets Japanese people make money by selling cars to foreigners.

By the same token, foreign interest in snapping up pieds a terres in New York City ought to be great news. It should create a lot of jobs for architects and construction workers. It should create upstream jobs for the people who cut the timber and make the metal that goes into buildings. It should create jobs in factories as people build the stoves and refrigerators to stock the new houses. And it should create downstream jobs as the construction workers and oven manufacturers take their paychecks to buy a new car or a night on the town. There should be a construction boom in New York and a construction boom in Silicon Valley and it should be providing lots of employment for working class men. But instead we're having housing shortages in New York and in Silicon Valley. Not because we don't have the technology to build lots more houses, but because we don't have the zoning codes. So with only a handful of projects able to squeeze through the eye of the needle, we get projects that address only the very highest end of the market and the simultaneous occurence of joblessless and lack of affordable houses.

Matt O'Brien has a good post about how many people refuse to admit that the problems of the 2010s aren't the same as those of the 1970s. That said, I also like Christina Romer's point (PDF) that in a sense we really are replaying the central political problem of the 1970s—the people in charge are refusing to admit that they have the ability to solve the major macroeconomic problem of the time.

Today that problem is unemployment and stubbornly low levels of investment spending. In the 70s it was, obviously, inflation. But the remarkable thing about the inflation of the 1970s is how long a span we went with key Federal Reserve officials insisting that curbing inflation expectations was beyond their power. And they invoked arguments you'll be familiar with today. They thought there were major credibility and time-consistency problems. They thought money was already tight as evidenced by high interest rates so there was nothing more to be done. They noted, accurately, that the structure of the American economy was changing and then insisted, wrongly, that this somehow made it impossible or irrelevant for them to do their own jobs properly. People looked to high-profile politicians to provide solutions, and so high-profile politicians cooked up solutions. Gerald Ford wanted us to Whip Inflation Now largely through a campaign of exhortation.

When Paul Volcker came around and accepted responsibility for the problem, the adjustment turned out to be quite painful. But it wasn't logistically difficult to pull off, it didn't take very long, and all things considered we would have been a lot better off deflating in 1973-75 than waiting all the way until 1980-82.

We're talking about different problems that need to be solved with different policies. But in both cases, the first step to fixing policy is for the people with the ability to change direction to admit that they have the power to make change happen. In both the United States and Europe, central bankers need to move past claims about their own impotence and accept responsibility while public figures need to move beyond "now more than ever" thinking and address the outstanding problem of the day.

IBM brought a little Watson roadshow to Capitol Hill this week to show off some of its capabilities now that the Jeopardy!-playing supercomputer has been studying health care. IBM is a little cagey about what the specific plans and agenda are here, but if you look at this video of Watson as an oncology diagnostics tool, I think you'll come to see very quickly that there's an important public policy issue that legislators are going to have to confront:

The video talks about Dr. Mark Norton, a clinical oncologist, as the user of this software. And surely it's true, the first users of Watson as a diagnostic tool will be doctors. But on some level having a doctor use Watson would be like hiring a skilled carpenter to work in the Ikea warehouse. The whole point of this machine is that it can amass all the background oncological knowledge of a medical doctor and then people who don't have that knowledge can go use it.

That will make this kind of initial consultations cheaper and more widely available, and then doctors will spend their time focusing on things that Watson can't do (yet), meaning those services will also become cheaper and more widely available.

Maybe the right person to go through this Watson exercise with you is a nurse or a nurse practitioner. Or maybe what's really needed is a kind of professional we don't have yet, someone whose training is primarily focused on a counseling and social work function—providing the "human element" that the medical database and digital diagnostic tool lacks. Medical science is about diagnoses and treatments, but there's much more to the on-the-ground practice of effective medicine than that scientific core.

Where legislators come in is that health care is one of the most heavily licensed and heavily regulated fields of endeavor in the world. Already there are substantial state-to-state differences in what nurses are allowed to do without the supervision of doctors, differences that tend to reflect the entrenched political power of doctors rather than any sound public policy research. These "scope of practice" regulations are a state matter, but with the federal government picking up such a large share of the health care tab, congress really ought to take an interest.

The Congressional Budget Office is out with its score of the president's proposed budget (dead on arrival in the House of Representatives, naturally), and it does exactly what a budget should, making the deficit larger in the short term but smaller in the medium term.

Doing this would not eliminate the long-term economic challenges of population aging and federal responsibility for health care needs, but it would leave us with a budget deficit that's clearly sustainable—quite a bit smaller than the nominal growth rate of the economy, and with the debt burden shrinking.

"A former U.S. Postal Service official has been sentenced to 18 months in prison for accepting at least $40,000 in bribes to help a Maryland company receive $6 million in contracts," according to the AP.

Unacceptable conduct, obviously, but in many ways the real scandal here seems to be the low price of the bribe. A talent agent takes 10 percent, even 15 percent of his services are consolidated with those of a contract lawyer. But this guy doesn't have a 10 percent broker's fee, he's got a measley 0.667 percent commission.

Jay Goltz, proprietor of a small retail store, has hit upon e-commerce's real threat to his business which he accurately says goes beyond economies of scale or even ability to avoid sales taxes. It's impossible to make money competing with Amazon, he says, because Amazon itself isn't making money:

Why would a company choose to operate without a profit? Because it wants to provide great value? Check. Because it wants everyone to love the brand? Check. Because it wants to gain market share? Check. Because it wants to put everyone else out of business, so that it can one day flick a switch to raise prices and make a fortune? CHECK!

Don’t believe me? Well, here is Jeff Bezos of Amazon, explaining why making a profit isn’t important. Of course, he doesn’t say he’s planning to raise prices after he puts a lot of people out of business, but let me translate something for you: Gaining market share by not taking a profit makes the most sense if you are planning to raise prices later when you have less competition.

True enough. And I've heard this theory from a number of people: Obviously Amazon can't say that its plan is to obtain a monopoly over all retail in America and then hike prices, but that must be the real plan.

And maybe it is. But it's hard to see how that plan would work. Part of the genius of the Internet is that it makes it much easier for brands to directly market their wares to people. It's easy to see how Amazon might put Kmart out of business, but the only way for Amazon to put Samsung out of business would be to actually manufacture mobile phones and televisions. And if Amazon ever starts trying to charge outrageous markups on Samsung's products, people would just buy directly from Samsung. Amazon would probably be more efficient at delivering things quickly, but then any price premium Amazon charges would be in effect an upcharge for fast delivery, not a monopoly rent. And most of the time delivery speed just isn't that big a deal. 

My guess is that Amazon's growth-first strategy really is exactly what it looks like—a strategy to pursue growth first that shareholders tolerate because Jeff Bezos is executing it really well and he has a compelling vision. But "drive the competition out and then raise prices" is very much a meatspace business strategy. In a world where physical location doesn't matter very much, it's hard to see how you could pull it off. And even if you could pull it off, you'd still have to just assume that the Justice Department and the FTC would for some reason fail to enforce the antitrust laws.

I was looking at local crime statistics over the weekend and was surprised to see that D.C. is experiencing a 16 percent year-to-date decline in aggregate murders despite a rapidly rising population. Rick Nevin has looked at similar numbers from other large American cities that have reported statistics, and it turns out that D.C. is typical. It's not completely clear that you should extrapolate too much from the data that's already in, but according to Nevin if you do extrapolate you get the result that 2013 will have the lowest murder rate in a century (PDF). In other words, we'll not only have reversed the great crime surge of the 1960s and '70s but actually exceeded the postwar peace and basically gotten back down to the murder rate of a largely pre-urbanized United States.

Kevin Drum of course wants to talk about lead, and certainly everyone should remind everyone they know that additional lead abatement is possible and highly cost-effective.

But more broadly, the good news about crime levels needs to inform more of our public policy debates ranging from gun regulation to drug prohibition to just general talk of declining living standards. Personal safety is hard to purchase on the open market, but it's extremely valuable and we appear to be doing a much better job of delivering it than we did 40 years ago.

With the S&P 500 at levels that haven't been reached since the go-go days of the late-1990s, there's talk of 2013 being the new 1999. Joshua Brown devastates that comparison in a lengthy post, but the core of it is right here:

Here's a very rudimentary but essential thing to be aware of - in 1999 the S&P finished at 1469, earned 53 bucks per share, and paid out $16 in dividends. These are nominal figures, not adjusted for inflation.

The 2013 S&P 500 is earning double that amount - over $100 per share. The index will also be paying out double the dividend this year, more than $30 per share, and returning even more cash with record-setting share repurchases.

So that's the fundamentals. Earnings are double what they were, and dividends have doubled accordingly. It's a very different market. Gillian Tett, who I normally think is one of the most reliable financial journalists around, recently pooh-poohed current share prices as based on unsustainable central bank interventions. This seems to me to be superficially correct but fundamentally mistaken. What is true is that had the Federal Reserve implemented tighter monetary policy over the past two years, share prices would be much lower today than they are. But under the Fed's status quo policies, inflation has been below target and unemployment has been high. There's a strong case money's been too tight, and zero case that money's been too loose. Looking forward, you get much the same situation. If the FOMC implements new tight money policies at its next meeting, that will, indeed, crush the market. And that's something investors should consider. But why would the Fed implement tight money policies with unemployment high and inflation low? Are they deranged sociopaths?

Perhaps they are—the European Central Bank does, in fact, turn out to be run by deranged sociopoaths. But to say that the stock market will not be able to sustain its current prices if central bankers begin implementing wildly inappropriate monetary policies is simply to state the obvious. That's not a bubble. Prosperity is everywhere hostage to public policy and always has been. There are never guarantees that the powers that be won't do something extremely foolish. For all we know, something will go horribly wrong next month and we'll all die in a nuclear war. But it would be odd for the survivors to look back and say, "Well there sure was a doozy of a stock market bubble."

Prices are more or less in line with earnings and dividends. Interest rates are low because inflation is low. Everything is as it should be. If central bankers screw up, we're doomed. But that's a reason for them to avoid screwing up.

American Airlines is looking to speed boarding times on its airplanes by offering advanced boarding to people who don't want to stick roller bags in the overhead compartment.

The basic idea is that folks with just an underseat laptop bag or purse can shuffle in quickly and sit down, and then everyone else will get on and start wrangling bags into the compartments. That way, in theory, you won't have as many people stuck waiting in the aisle while others are fussing with the compartment doors.

It makes sense, but it underscores the extent to which airlines are tying themselves in knots with different priorities. The industry has been working to fly fewer planes so the remaining planes will be fuller. It's also been raising checked-bag fees to try to reduce plane weights and ground crew costs. So now you have more carry-on bags per plane. At the same time, a boarding procedure that was once designed to fill seats with optimal speed has become a welter of frequent flier perks. The first-class people board first, of course, but there are also multiple tiers of elite travelers and even holders of certain co-branded credit cards getting early boarding. The new problem of slower boarding seems like one of these squeezing-a-balloon situations, where now problems are popping up on the other end. I'm a known air travel apologist, and I think the dilemma American is working with here mostly underscores that it's a really difficult business. But I'm skeptical of this initiative. It seems to me that managers need to step back, take a deep breath, and decide what their overall objective with the boarding scheme is. Do they want it to be as efficient as possible, or do they want to degrade average efficiency in order to optimally serve their high-volume elite customers?