A blog about business and economics.

Aug. 18 2014 6:36 PM

It Now Costs $245,000 to Raise a Child, Before College

Kids. They’re expensive. The Department of Agriculture has released its latest report on what families spend raising their children, and it’s full of all sorts of statistics to make you think long and hard about adopting a dog instead. The headline figure: A middle-income married couple can now expect to spend $245,000 on their precious one from birth through age 17 (in other words: pregnancy and college not included). As a point of reference, the median new home sells for about $273,000. Meanwhile, in 1960, the inflation-adjusted price tag for a child was about $198,000. So in half a century, the expense has jumped about 24 percent.

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One big culprit here is the ever-growing cost of child care and education, which has expanded from 2 percent of the typical family's budget to 18 percent, even as total spending has shot up. However, those averages mask some pretty big differences between families: 45 percent of middle-income couples spent nothing at all on this category. That means some families really are draining their bank accounts dry on day care and private school, while others manage cheaply with stay-at-home parents and public school.

There are also big class differences. As shown on the graph below, richer families tend to spend more overall on their children, but they devote less of their income to it. “On average,” the USDA reports, “households in the lowest income group spent 25 percent of their before-tax income on a child; those in the middle-income group, 16 percent; and those in the highest group, 12 percent.” In any event, it’s almost never too late to opt for the beagle.

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Aug. 18 2014 3:00 PM

How Ferguson Highlights the Dangers of For-Profit Policing

Jeff Smith, a New School professor and former Missouri state senator, had a sensational op-ed in this weekend’s New York Times that dived into the economic forces that have helped shape the strife in Ferguson. His big point is that the local police have a strong financial incentive to arrest, ticket, and otherwise harass the city’s black residents for minor offenses, because that’s how the department funds its budget.

How so? From Smith:

St. Louis County contains 90 municipalities, most with their own city hall and police force. Many rely on revenue generated from traffic tickets and related fines. According to a study by the St. Louis nonprofit Better Together, Ferguson receives nearly one-quarter of its revenue from court fees; for some surrounding towns it approaches 50 percent.
Municipal reliance on revenue generated from traffic stops adds pressure to make more of them. One town, Sycamore Hills, has stationed a radar-gun-wielding police officer on its 250-foot northbound stretch of Interstate.

When you split a metro area into dozens of tiny local governments (St. Louis County, to be clear, doesn’t include the actual city of St. Louis, which spun off from it in the 19th century), they tend to duplicate each others’ services, which is of course extremely expensive. But raising taxes so that each tiny borough can afford its own police and fire department is a nonstarter, since wealthy residents can always just move one town over. End result: You have police departments that self-fund by handing out tickets. And thanks to the delightful racial dynamics of U.S. law enforcement, black residents are disproportionately stopped and accosted, even though police in Ferguson are less likely to find contraband when they search black drivers than when they search whites.

Michael Brown wasn't being pulled over for speeding when he was shot. But we're talking about the broader issues that poison the relationship between a community and the cops who are, theoretically, paid to protect them.

In a way, you can think of it as a small-bore version of the problem with civil forfeiture laws, which allow state and federal governments to confiscate property allegedly involved in crimes and which are often accused of encouraging “for-profit policing.” The same way the Justice Department puts the heat on its lawyers to increase forfeiture claims in drug cases—because that’s where they can skim money—local police have every incentive to crank up their traffic stops.  

Smith’s solution to the problem is to remerge St. Louis and its nearby suburbs, which will help the metro area feel less fragmented and help give the black community of Ferguson more political power to demand better treatment from police. As I wrote last week, while the city is two-thirds black, its government is mostly white, because the young, poor, and often transient black community has trouble mobilizing votes. In St. Louis, by comparison, the black population has been able to establish stronger civic institutions and exerted more influence. Of the many formidable problems that Ferguson has come to symbolize, we can add for-profit law enforcement to the list.  

Aug. 15 2014 5:03 PM

Why the Future of Work Is Doomed, in One Video

This past January, the Economist set off alarm bells when it noted in a story on the future of work that 47 percent of jobs were at risk of becoming automated in the next two decades. Telemarketers. Retail salespeople. Commercial pilots. Economists. Even actors and editors. Like it or not, the robots are coming, and sooner or later they'll probably come for your job.

"Humans Need Not Apply," a new mini-documentary from C.G.P. Grey, tackles just how wide-ranging the repercussions of automation could be in the labor market going forward. "This stuff isn't science fiction," the narrator explains in a staccato, robot-esque tone. "The robots are here right now. There is a terrifying amount of working automation in labs and warehouses around the world." That includes Google's self-driving cars and bots trading on the New York Stock Exchange, as well as computers writing fan fiction and composing classical music.

The automation of the workforce isn't going to happen overnight and it might still be a long time before your favorite radio tunes are composed by a bot. But if you want a dark take on what the labor market could look like several years or decades down the line, just check out the video.

Aug. 15 2014 2:17 PM

The Transcripts From Market Basket Board Meetings Read Like Outtakes From The Godfather

Boston's ongoing Market Basket saga has all the elements of a Hollywood drama: A beloved but ousted CEO, decades of family infighting, and of course billions of dollars at stake. The affordable-grocery chain has faced strikes and demonstrations ever since former chief executive Arthur T. Demoulas was forced out in June by a board controlled by his rival and almost identically named cousin, Arthur S. Demoulas. Earlier this week, the company issued a final warning to protesting employees that they had until Friday to return to work or would lose their jobs.

In case the Market Basket story needed to get any more cinematic, the Boston Globe has unearthed transcripts of Market Basket board meetings held over the past decade that highlight the tensions within the company and between its warring family members—and at times sound like a real-life enactment of scenes from The Godfather. The heated exchanges get off to a good start in June 2003 as the board quibbles over how to improve the contentious tone of board meetings. This back-and-forth is between former chairman Bill Shea (a representative of Arthur T. Demoulas) and Arthur S. Demoulas:

Mr. Shea: Then I'm going to challenge you not to interrupt other people.
Mr. Demoulas: Oh, well, you do that.
Mr. Shea: How about that?
Mr. Demoulas: You do that. That's very nice of you.
Mr. Shea: Huh?
Mr. Demoulas: Yes.
Mr. Shea: The first time you interrupted today—
Mr. Demoulas: I'm so threatened by you, pointing your finger at me.
Mr. Shea: The first time you interrupt today—
Mr. Demoulas: What are you going to do?
Mr. Shea: —you're going to hear the same thing.
Mr. Demoulas: Oh, is that right?
Mr. Shea: That's right.
Mr. Demoulas: Oh, well—
Mr. Shea: Or we'll adjoin the meeting.
Mr. Demoulas: See, you're already threatening me.
Mr. Shea: I'm not threatening you. You threatened me.

In October 2011, a debate about shareholder distributions prompts this exchange between then-independent director Nabil El-Hage, Shea, and Arthur T. Demoulas:

Mr. Demoulas: Now, to a restriction on how we wheel and deal out there, I do not know of any restriction that’s out there; and I do not care to have any restrictions, quite frankly.
Mr. El-Hage: You're not Catholic, are you, Arthur?
Chairman Shea: No. Is anybody anymore?
Mr. El-Hage: That's a serious question. You're Greek, so you practice Greek Orthodox.
Mr. Demoulas: Right.
Mr. El-Hage: That explains it, because in my religion only the Pope is infallible. So I really think as a matter of prudent business practices, anybody, no matter how good you are—and you are good—wouldn't be hurt by consulting with your board when it comes to that kind of money. That's a lot of money.

And finally in August 2012, a discussion of placing spending limits on "godfather" Arthur T. Demoulas yielded these comments from the former chief executive. For the best effect, we suggest replacing the words "company" and "management" with "family" as you go:

Mr. Demoulas: I'm here as a business person, trying to run a business, and do it as simply, as efficiently, and as sensibly as possible. If I wanted to be a director, I'd be sitting in one of those B director seats. It doesn't excite me. I enjoy what I'm doing. What I do is I run a business, and I've been doing it for a long time. We've got a family operation here. And you want to move things along without going through a lot of unnecessary discussions and opinions and viewpoints when at the end of the day, at the end of the day, I'm going to make the decision. Now, if you're telling me you want to come down here—if you're telling me you want to come down here to inform you of what has been done or what we have committed to, I've been doing that right along.
Mr. El-Hage: Understood.
Mr. Demoulas: If you're telling me that you want me or Don or the other members of management to come down here to indicate to you at some midstream place to look for your approval on either structure or whether it's a go or a no-go, I think that is a problem. I think it's a problem for the company. I think it is not in the best interests of Demoulas Super Markets, Inc. I think it's not in the best interests of Arthur T. negotiating. And I don't think that's where the responsibility should lie.

Aug. 15 2014 12:01 PM

To Appear Less Heartless, SeaWorld Is Building Bigger Bathtubs for Its Killer Whales

SeaWorld Entertainment has finally acknowledged that public revulsion over the company’s treatment of its killer whales is hurting business—and a few oh-so-lucky cetaceans will get to enjoy their very own “water treadmill” as a result. On Wednesday, SeaWorld’s stock price crashed by about a third after management delivered an earnings report chock full of dismal revenue and attendance figures. Today, according to the Wall Street Journal, SeaWorld is responding by announcing plans to spruce up its orca habitats. They will now have bigger, fancier swimming pools to call home:

The company plans to upgrade the killer whale tanks at three of its theme parks, beginning with the San Diego location. The new enclosure in San Diego will be almost double the size of the current one, holding about 10 million gallons of water and extending to a depth of 50 feet. The company wouldn't specify the cost of the upgrades, only saying it would be several hundred million dollars.          

And about that new exercise equipment:

The San Diego facility will include a "water treadmill" system letting the whales swim against a stream of moving water, allowing them more exercise but also opening the door to new research into how the animals burn energy. The system will be the first of its kind in the world, the company says.

More exercise will be nice. None of this addresses the fundamental issue: that these are massive, highly social mammals, who normally travel upwards of 100 miles in a day, and who are being kept in captivity in order to do tricks for tourists. A bigger bathtub prison is still a bathtub prison.  

Aug. 15 2014 9:17 AM

This For-Profit College Wants to Compete With the Ivies. And It’s a Brilliant Business Idea.

Here’s a rule of thumb about colleges: They’re only as good as the students they admit. While there’s certainly evidence that, all things being equal, some institutions of higher education are better investments than others, schools that admit smart, wealthy 18-year-olds tend to graduate smart and soon-to-be-successful 22-year-olds.

That's partly why the Minerva Project, a startup profiled by Graeme Wood in this month’s Atlantic, is an intriguing business idea. Minerva is an accredited, for-profit college with stated ambitions to become the first elite American liberal arts institution founded in about a century. Of course, the words “for-profit” and “elite” are generally considered to be oil and water in education circles. But that’s partly because the corporate sector has preyed on students at the low end of the market. They made their money charging students exorbitant sums for mediocre educations they tend never to finish.

Minerva, backed with a good hunk of Silicon Valley venture capital money, is different. Its CEO, Ben Nelson, is a brash tech-type who sold the photo-printing company Snapfish to Hewlett-Packard for $300 million some years ago and has zero experience in higher ed beyond his college days. But he’s poached some academic stars to help bring his concept to life. For instance, the first hire, and founding dean, was neuroscientist Stephen Kosslyn, a former Harvard University dean who has apparently scoured the academic literature on the psychology of education to design a curriculum.

Everything about Minerva is, according to its pitch, designed to deliver the maximum amount of learning for the minimum cost. So while it does have an office in downtown San Francisco, it doesn’t have a leafy campus. It doesn’t even really have classrooms. Instead, students take intensive seminars via an online platform. Introductory courses and lectures aren't part of the deal. Undergrads are expected to learn the basics of subjects on their own, possibly via the free, open courses offered on sites like Coursera and EdX. The startup works from the precept that content is free. Minerva is there to teach students how to think.

As for collegiate community, the first class of 33 students, which started class this month, are living in dorms in San Francisco. But in the coming years, as the student body theoretically grows, Minerva expects to open up locations in global metropolises like Berlin, Buenos Aires, Hong Kong, and New York, so that students will be able to hop from city to city and gain some cosmopolitan polish during the journey. If all goes right, they’ll be groomed for the Davos circuit by their early 20s. And for the privilege, they’ll pay just $28,000 per year, tuition, room, and board included.

All this may tickle your B.S. detector. Minerva’s plan raises all sorts of questions, which Wood ably explores in his Atlantic piece. On the one hand, most top-tier universities don’t put nearly the emphasis on teaching that they should, and it’s at least interesting to see someone attempting a radical alternative that tries to drag Ivy-style education into the Internet age (all without accepting any federal aid). On the other hand, you’re talking about a for-profit enterprise boasting a pretty untested pedagogical approach that will mostly appeal to students with a serious autodidactic streak. Who else is going to mind teaching themselves Psych 101 so they can enjoy plugging themselves into all those advanced, online seminars?

But then, that might be part of Minerva’s genius, at least as a business concept. Its entire design is geared toward a self-selecting group of students who are already probably predisposed to do well for themselves once they leave campus, just by virtue of their willingness to learn by their lonesome (not to mention their parents’ ability to pay tuition). No one can say for sure how gifted Minerva’s inaugural class is, in part because it doesn’t accept SAT scores. (Its rationale there is that rich students have a big SAT advantage.) However, Wood interviews a few of the students for his piece, and at the very least they come off as well-spoken and precocious.

Aside from self-selection, Minerva has something else important going for it: The school isn’t really catering to Americans, for the most part. As of now, about one-fifth of its class is from the United States. In the future, it expects that number to drop to one-tenth, even while the number of students enrolled grows exponentially. This was something that Nelson spent a great deal of time emphasizing to me when I interviewed him two years ago. Wealthy and well-to-do parents in China and India are desperate to send their children to American-style schools. But elite U.S. institutions aren’t expanding their class sizes to accommodate all of those well-schooled, multilingual international students. And so, as Nelson put it, the global education economy is suffering from “lockjaw.”

Whatever noise Minerva may make about changing education in the U.S., its real first order of business is to pick up bright students who are being shut out by the education establishment. Conceptually, it sounds like a clever exercise in brand-building: Its plan is to market itself on the strength of academics like Kosslyn and on its U.S. pedigree, while scouring the entire world for the handful of kids who are smart enough to make it look good.  

Aug. 14 2014 4:09 PM

The Working Class Is Sinking and Dragging Walmart Down With It

Business continues to disappoint at Walmart's U.S. locations. The big-box retailer reported on Thursday that sales at existing stores were flat in the latest quarter after declining for the previous five. It said traffic dipped 1.1 percent (though customers who made it in chose to spend slightly more) and cut its full-year earnings outlook on higher-than-expected health care costs and company spending on e-commerce.

Walmart has now spent months explaining away the poor performance of its U.S. division. In the first quarter it blamed the weather; in Q4 2013 it cited cuts to government benefits and increased taxes; and in Q3 2014 it gave perhaps the vaguest excuse of all, a "challenging global economy and negative currency exchange rate fluctuations." In a sign that it might be finally shouldering some responsibility for its results, Walmart a few weeks ago ousted U.S. chief Bill Simon and appointed former Walmart Asia head Greg Foran to replace him.

In fairness to Walmart, those excuses aren't crazy. Dollar stores, which typically cater to the lowest income bracket, have struggled to reclaim shoppers amid the slow economic recovery. Family Dollar, which is being bought by Dollar Tree, has said that government cuts to food-stamp spending were "not a positive" for its customers. Middle-class consumers are spending less as well—a fact that's hurting casual-dining chains like Red Lobster and Olive Garden and retailers like Macy's, which lowered its full-year sales outlook after missing estimates on Wednesday.

Setting U.S. results aside, Walmart's earnings didn't look that bad. Its revenue beat expectations and e-commerce sales—an area it has focused on improving—gained 24 percent (discounting currency fluctuations). "I’m encouraged by the performance of our International business, our Neighborhood Market sales in the U.S. and by our e-commerce growth," Doug McMillon, Walmart's president and CEO, said in a statement. "Stronger sales in the U.S. businesses would've also helped."

Aug. 14 2014 3:15 PM

Ferguson Is Mostly Black. Why Is Its Government So White?

Ferguson, Missouri, is a majority-black city governed mostly by whites. The mayor is white. The police chief is white. The police force is 94 percent white. Only one of its six city council members is black. These facts, as much as anything, have shaped the protests over the police shooting of Michael Brown. Ferguson, with a 67 percent black population, is a place where the largest community has little political voice.

Why is that? David Kimball, a political science professor at the University of Missouri–St. Louis, has studied the dynamics of race and elections in St. Louis proper. He says that the pattern in Ferguson is common throughout the city’s inner-ring suburbs, where blacks have gradually replaced whites in recent decades.

The issue boils down to who votes. Ferguson is roughly two-thirds black, but compared with the city’s whites, the community is younger, poorer (the city has a 22 percent poverty rate overall), and, as the New York Times recently wrote, somewhat transient, prone to moving “from apartment to apartment.” All of these factors make black residents less likely to go to the polls, especially in low-turnout municipal elections. And so whites dominate politically. “The entire mobilization side of it is what accounts for the difference,” Kimball said.

To illustrate the point, Kimball told me about a recent school board election in which the city’s racial fissures came to the fore. In 2013, Art McCoy, the young and promising school district superintendent, was suspended by the board without explanation. McCoy, who later resigned, was black, as were three-quarters of the district’s students. Six of the school board’s members were white, while the other was Hispanic. Local outrage grew quickly.

“It’s a white school board and then you have this black superintendent, who so many people are impressed with,” Esther Haywood, president of the St. Louis County branch of the NAACP, told the St. Louis Post Dispatch. “Why are they trying to get rid of this black superintendent? We don’t know.”

In the wake of the controversy, three black candidates chose to run for the school board; despite the anger over McCoy’s ouster, only one managed to win a seat.

“I think the school board election is illustrative, because all the elements are there," Kimball said. "You’d think, OK, this is going to motivate the African American community. We’re going to see some changes. It’s kind of depressing from the standpoint of democracy serving all the constituents in the community.” In other words, democracy doesn’t always serve the poor.

Aug. 14 2014 1:14 PM

Your Morning K-Cup Is About to Get Way More Expensive

Office managers and coffee addicts take note: Stock up on K-Cups now.

Keurig Green Mountain said on Thursday that it will raise prices on coffee products and its signature K-Cups by as much as 9 percent beginning Nov. 3. It's the latest in a long line of companies to implement a price hike in response to the soaring cost of coffee beans. Starbucks, Folgers, Kraft Food Groups, and J.M. Smucker Co. (the distributor of Dunkin' Donuts packaged coffee) have all taken similar steps in recent months, announcing price hikes between 8 and 10 percent.

Coffee devotees are suffering the far-reaching consequences of Hemileia vastatrix, a parasitic fungus better known as coffee leaf rust that is devastating crops of beans in major producer countries. In the past two years alone, the rust has caused more than $1 billion in economic damage across Latin America and the Caribbean. At the same time, Brazil, the world's largest producer of arabica beans (the variety favored by roasters), has lost nearly one-fifth of its crop to severe drought.

Unfortunately, coffee leaf rust is something experts have known about for centuries and have been largely unable to stop. Researchers are working on developing new, resistant types of beans, but those could be years or decades off. For now, your best bet is to hit the stores and fill your shelves before costs go up.

Aug. 14 2014 12:32 PM

The Amazing Safety Record of U.S. Bike-Share Programs

Here's an astonishing fact about U.S. bike-shares: In seven years and some 23 million rides, not a single death has been tied to the programs.

That sparkling safety record, reported by Reuters this week, is all the more mind-boggling when you consider the people who use bike-shares. In addition to serious riders, you have novices and tourists—all of whom have to navigate through pedestrians and rush-hour traffic and horrifically crowded places like Times Square, often for the very first time. But we learned in May that New York's Citi Bike program was fatality-free through its first year of operation, and now that statistic is being extended to bike-shares across the country.

It might seem natural to fear that adding cyclists to busy city streets will increase serious accidents and injuries. But urban planning and public safety experts have long believed just the opposite. They call it the "safety in numbers" effect—the more people you put on bikes, the safer they become.

In 2003, public health consultant Peter Lyndon Jacobsen documented this phenomenon in the journal Injury Prevention. "Research at specific sites has shown that collisions between a motorist and a person walking or bicycling diminish where more people walk and bicycle," he wrote. Earlier analysis showed that accidents per cyclist fell sharply as the number of bike riders in an area rose past 50 per hour. Jacobsen theorized that increased presence of cyclists put them on motorists' radars and thereby forced them to drive more safely. More than 10 years later, Jacobsen's theory is widely agreed upon by bike-sharing advocates.

Cyclists are now so common that urban pedestrians will often tell you they are now more worried about getting hit by a bike than a car. (As a New York City resident, I can add that this is a perfectly reasonable concern.) Yesterday, the New York Police Department announced the two-week initiative Operation Safe Cycle, focused on ticketing cyclists who violate the rules of the road: riding against traffic, running red lights, and failing to yield to pedestrians. (The NYC blog Gothamist nodded to the historically tense relationship between cyclists and New York cops by publishing one example of a commonplace image: an NYPD vehicle parked in a bike lane.)

"Drivers and cyclists tend to speak in mutually exclusive terms," says Nick Bohnenkamp, executive director of the Denver B-cycle sharing program. "Many of us fall into both of these categories, but at any one time we are just in one of them. Bike-sharing is helping people get out of the driver category and into the cyclist one more often." Should that remain the case, hopefully we can look forward to another seven years or 23 million rides with zero fatalities—whichever takes longer.

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