No, Mainstream Economists Did Not Just Reject Thomas Piketty’s Big Theory
Did the economics profession just resoundingly reject Thomas Piketty’s most famous theory? You might have thought so if you were hanging around Twitter yesterday afternoon.
Every so often, the University of Chicago’s Initiative on Global Markets asks a panel of top economists to weigh in on hot public policy issues, such as the effect of stimulus spending, whether Uber and Lyft are good for consumers, or if the minimum wage kills jobs. It's a way of gauging mainstream opinion in the field. On Tuesday, it released a poll on Piketty’s trademark argument that inequality will increase when the return on capital exceeds the rate of economic growth, shorthanded as r>g.
Specifically, it asked economists whether they agreed or disagreed with the following statement: "The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.”
Or to simplify: Does Piketty’s theory explain why the wealth gap has been rising for the past 40 years? Overwhelmingly, the panel’s answer was no, with only one out 36 panelists agreeing with the statement.
Afterwards, a number of journalists, economists, and other wags took to Twitter and blogs to talk about how Piketty had just gotten a black eye. Sample headline courtesy of the American Enterprise Institute's James Pethokoukis: “Survey: 81% of top economists disagree with the Piketty inequality argument.”
Except they didn't really. Piketty’s Capital in the Twenty-First Century never suggests r>g is the main reason behind the recent rise of inequality. Rather, it theorizes that, in the absence of government intervention, r>g ensures the future concentration of income and wealth. Tellingly, Berkeley professor Emmanuel Saez, one of Piketty’s longtime collaborators, disagreed with IGM's statement, noting: “Income and savings inequality increases are now fueling US wealth inequality. Down the road [r>g] will be central as predicted by Piketty.”
As Justin Wolfers wrote in the New York Times yesterday, some of the panelists did explicitly reject Piketty’s real argument. For instance, MIT’s Daron Acemoglu wrote in a comment, “Theoretically and empirically the case that [r>g] is a major determinant of inequality or even top inequality is weak.” Acemoglu has co-authored an entire paper making the point. Ultimately, though, IGM was asking economists to opine on an argument that nobody was making in the first place.
I found myself wondering: How would Piketty himself weigh in?
“Well,” he told me in an email this morning, “I think the book makes pretty clear that the powerful force behind rising income and wealth inequality in the US since the 1970s is the rise of the inequality of labor earnings, itself due to a mixture of rising inequality in access to skills and higher education, and of exploding top managerial compensation (itself probably stimulated by large cuts in top tax rates), So this indeed has little to do with r>g.”
In short, you can add Piketty to the "Disagree" column, too.
Jimmy John’s Makes Its Employees Sign a Ridiculous Noncompete Agreement
Jimmy John's must think it knows an awful lot about the art of the sandwich, because it's doing its utmost to keep employees from taking their sandwich-making skills elsewhere. According to a noncompete clause the Huffington Post dug up, Jimmy John's makes low-wage employees such as sandwich-makers and delivery drivers agree not to work for competing establishments for two years after leaving the company. Noncompetes tend to be used with managers or high-ranking employees with inside information about the business, but it's not even the strangest part of this situation. The strangest part would be Jimmy John's definition of a competitor.
According to the noncompete clause, employees must agree that for two years after leaving Jimmy John's, they will "not have any direct or indirect interest in or perform services for ... any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches and which is located within three (3) miles of either [their current place of employment] or any such other Jimmy John's Sandwich Shop." The clause, which has come up because of a lawsuit filed against Jimmy John's this summer, has drawn criticism from employees for being broad and "oppressive." Kathleen Chavez, the lawyer representing employees in the case, told HuffPo that the terms of the noncompete would prevent a former Jimmy John's employee from working in 6,000 square miles in 44 states and Washington, D.C.
Rules on noncompete agreements vary by state, but generally such clauses are considered enforceable only when they are appropriately narrow and designed to protect a legitimate business interest. California, which is particularly in favor of competition and the employee's right to change jobs, has a blanket rule that noncompetes are unenforceable. Since Jimmy John's clause is so broad and seems to have little or no vital business justification behind it (what state secrets do those sandwiches contain?), it's likely to be considered unenforceable pretty much anywhere. That said, an unenforceable clause is still problematic if it's scaring employees who don't know any better into thinking they can't work at another sandwich shop—or another restaurant of any sort with a trade in sandwiches—for the next two years.
The Decline and Fall of the San Francisco Bay Guardian
Another alt-weekly is dead. But this one wasn’t just another alt-weekly. It was the San Francisco Bay Guardian, one of the most venerable, staunchly independent, and defiantly weird of America’s great alternative weekly newspapers.
The paper, founded in 1966, is shutting down for “financial reasons,” the San Francisco Chronicle reported on Tuesday. The decision was made by San Francisco Media Co., the parent company that bought it in 2012 from its founder, Bruce Brugmann. “It is the hardest decision I’ve had to make in my 20-year newspaper career,” the San Francisco Media Co.’s publisher, Glenn Zuehls, said in a statement. A notice on the Bay Guardian’s website says the final issue will be published on Wednesday, although one of the paper's fired leaders vowed to SFist that it will "live on in some form."
The loss of the paper in its current incarnation may not deal a great blow to San Francisco. The Guardian, like many alt-weeklies, had been sliding for years as readers and local advertisers turned from print media to the Web.
Over the decades, though, the Guardian as an institution had come to stand for something more than just convenient concert listings, seamy classified ads, and snarky coverage of the local political scene. It was an embodiment of a certain vision of the city—a vision of San Francisco as a haven for artists, immigrants, eccentrics, hobos, bohos, gays and lesbians, and any extant members of that perennially endangered species, the local working-class family.
Today, as the city’s booming technology industry drives housing prices beyond the means of even the upper-middle class, that vision has begun to take on a sepia tone.
It was, in many ways, Brugmann’s vision. An inveterate gadfly, he wielded the Guardian as a bullhorn in his endless battles with the city’s business interests, real-estate developers, and his personal bête noire, the Pacific Gas and Electric Co. The paper also reflected the old-school leftist ideology of longtime editor Tim Redmond, who left in 2013 after 30 years rather than acquiesce to the new owners’ plans to slash editorial staff. It was a brawling, muckraking paper whose reporters doggedly pursued injustice wherever their editors agreed it existed—which is to say, wherever the perpetrators were rich or powerful or aligned with the forces of capitalism.
PG&E, which Brugmann saw as an illegitimate private monopoly run at the public's expense, was not the only target. In the 1960s and ’70s, the paper led a long-running activist campaign against high-rises and new public transit lines in the city's downtown, which it decried as "the Manhattanization of San Francisco." In the 2000s it was home to investigative reporter A.C. Thompson, whose Guardian stories were credited with exonerating two local men wrongly convicted of murder.
It was also the purveyor of such hard-hitting features as an annual special issue on nude beaches.
The Guardian’s politics were often glossed as progressive, but critics reckoned that was a misnomer. Progress in the sense of modernization or urbanization had little place on its agenda. It could actually be rather reactionary in its defense of what it saw as San Francisco’s historic character. In a city that leaned left to begin with, even former employees admit the Guardian’s editorials often amounted to “preaching to the choir.”
That predictability left it vulnerable to competition from upstart rivals, most notably the SF Weekly, which at times leaned libertarian but was generally more catholic in its outlook. (Former Slate media columnist Jack Shafer was the Weekly’s editor for a brief period in the mid-1990s. Now at Reuters, Shafer wrote an astute piece last year about the forces behind alt-weeklies’ long decline.)
In the 2000s, the rivalry flared into open combat, with the Guardian suing the Weekly for selling ads below cost in a bid to drive the Guardian out of business. The case dragged on for years in what the New York Times’ David Carr called “one of the last great newspaper wars.” The Guardian kept winning in court, but the Weekly and its corporate owners refused to give up—or pay up. At one point the Guardian got so frustrated that it seized two of the Weekly’s delivery vans.
In the end, they both lost. Locked in brutal battle with one another, they failed to meet the greater challenge of the media’s move online, which has punctured the business models of newspapers nationwide. The young readers who once turned to alt-weeklies now turned to blogs.
Many of the alt-weeklies that are now failing in cities around the country will scarcely be mourned. While they trained generations of young reporters and occasionally produced inspired journalism, most were formulaic copies of a handful of innovators like the Village Voice and the Chicago Reader. The Bay Guardian was never quite in that class, but it was a genuine article nonetheless, capturing sides of the city’s character that the broadsheet Chronicle overlooked.
“For all its bluster, the Guardian did a lot of important civic journalism, and a lot of investigative journalism,” said Tali Woodward, who wrote for the Guardian from 1999 to 2006 and is now director of the Master of Arts program at the Columbia Journalism School. “It was the opposite of today’s blog-heavy, commentary-style journalism in a lot of ways, because even though it had a viewpoint and was very political, it was really a reporter’s paper.”
Even one of the Guardian’s former sworn enemies couldn’t muster any joy in the news of its passing. “I feel weirdly bummed out,” admitted Tommy Craggs, the editor in chief of Deadspin, who wrote for the SF Weekly from 2002 to 2006. “It’s just shitty to see what’s happening with alt-weeklies.”
Years ago, Craggs gleefully poured gas on the Weekly/Guardian conflagration with a column in which he subjected a hand-written letter from Brugmann to psychoanalysis by a local graphologist. Yet the Guardian’s demise had him feeling uncharacteristically wistful on Tuesday. “It should have been a fun rivalry,” he said, “but it had a nastiness behind it, especially on the Weekly’s side.”
The saddest thing about the Guardian’s downfall is that the paper has faded from relevance at a time in San Francisco’s history when the high-flying tech sector is threatening to engulf everything about it that the Guardian and its loyal readers held dear. There is a backlash transpiring in the streets, on blogs, and in magazines. For once, the Guardian is not leading the charge.
New Converse Lawsuit Says There Can Only Be One All Star
Will the real Converse All Star please stand up? First popularized as iconic basketball sneakers and inextricably linked to counterculture figures and the high-schoolers who imitate them, the Chuck Taylor All Star is one of the world’s most famous sneakers. It’s no surprise that imitators have cropped up over the years, and now Converse is trying to knock imposters off the racks with a lawsuit against 31 companies including Walmart, Skechers, and Kmart.
The New York Times reports that Converse is accusing the companies of trademark infringement and seeking monetary damages; Converse is also pursuing a complaint with the International Trade Commission to bar look-alike counterfeits from entering the country.
The design infringements include one or two black stripes and, probably most importantly, the rubber cap above the toe, which have led the company to write more than 160 cease-and-desist letters, according to the Times, which also stresses how difficult trademark infringement cases can be in the fashion world—functional designs can’t be protected, and the attributes in question must be directly linked to the company in consumers’ minds.
In short, Converse needs to prove that when people see the black stripes on the soles and the rubber toe cap, they actually think “Converse.”
I have no legal degree, admittedly, but I did spend many years as a counterculture-obsessed teen, and when I purchased off-brand rubber-toed footwear with black stripes and flat laces, it was solely to supplement my one legitimate pair of worn-in, white canvas Chucks. In other words, I wanted more Converse, but could not afford the real thing, so I purchased an imitation.
No, Washington, D.C., Is Not the Most Expensive City in America
Yesterday, the Washington Post reported that, according to a recent government study, the D.C. region was "the most expensive place to live in the country, ahead of the pricey markets of New York and San Francisco." I hate to be the guy complaining that somebody said something wrong on the Internet, but the study stated no such thing.
The Post article is based on a report by the Bureau of Labor Statistics that looked at how much the average household spent on housing and related expenses in 19 U.S. metro areas—meaning cities and their surrounding suburbs. And indeed, Washington metro residents shelled out the most for their homes, their utilities, and things like furniture.
Here’s the problem. Looking at what the average household spends on housing doesn’t actually tell us whether a metro area is expensive. It just tells us what people spend, whether it’s because they can’t find more affordable options or because they’re well off and want to own an oversize home with a nice backyard. Washington, D.C., isn’t the cheapest city in which to rent an apartment. But the region has the highest median income among the top 25 largest metro areas. And if you’ve ever driven through its particularly affluent suburbs, you know they’re chock-full of McMansions that probably push up average spending on things like home furnishings and air conditioning bills. Washingtonians—and their suburban neighbors—spend a lot on housing in part because they can afford to.
There’s a slightly bigger point to make here. Even if Washington, D.C., did have the least affordable housing in the country, that wouldn’t necessarily make it the least affordable city. As I’ve written before, judging whether a city is relatively expensive means taking into consideration factors like transportation, since it’s much cheaper commuting every day on a bus or subway than it is to own a car. In cities with weak public schools, families have to worry about the cost of educating their children. Taxes change the equation, too. And so on. Any report that only looks at a few statistics about housing costs to declare which city is the least affordable would be misleading at best.
Man Wants $150,000 for Ebola.com, Compares Self to a Doctor
Because no calamity is complete without a little bit of small-time profiteering, the Washington Post reports that the owner of Ebola.com now wants $150,000 for the URL. Jon Schultz is a "merchant of disease domains," according to the Post, who also owns such properties as birdflu.com and H1N1.com. He bought Ebola.com in 2008 for $13,500, and now, with thousands of infections in Africa and the entire U.S. beside itself about a few cases in Dallas, he thinks it's time to cash out. “We’re getting inquiries every day about the sale of it," he told the Post. "I have a lot of experience in this sort of domain business, and my sense is that $150,000 is reasonable."
Is there anything inherently wrong with making a little money off a public health crisis in a way that probably won't cause any lasting harm? Investors make far more money betting on the misfortune of others all the time—think about the hedge funders who made bank shorting the housing market before its collapse. But Schultz isn't his own best advocate. When asked how he felt profiting off a disease that had already killed thousands, he offered up this dazzling analogy:
But you could say the same thing about doctors. ...They can become very well-off treating very sick patients. Besides we have sacrificed a couple of thousands in parking page income to put up links about Ebola on the site. And people can also donate to Doctors Without Borders at the site.
Yes, Mr. Schultz, you are just like a doctor.
The Nobel Economist Knew About “Too Big to Fail” 10 Years Before the Rest of Us
There’s something a bit ironic about the work of Jean Tirole, the French economist who won the Nobel Prize today for his influential research on how to regulate large and powerful corporations. Even in papers published decades ago, the subjects of his work feel ripped from today’s headlines—he was writing about the threat of too-big-to-fail banks and the hazards of bailouts all the way back in 1996. Want to talk about how to prevent another financial crisis, deal with Comcast, or think about the meaning of a monopoly in the era of free Internet services such as Google and Facebook? Triole’s your man, and has been for a long time. Yet he’s not a name you’re likely to see all the time in the New York Times or Wall Street Journal.
“Many of his papers show ‘it’s complicated,’ rather than presenting easily summarizable, intuitive solutions which make for good blog posts,” economist Tyler Cowen wrote in a summary of Tirole’s work. “That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession.”
And “it’s complicated” is hardly a bad message for the Nobel Committee to be sending. “In the 1980s, before Tirole published his first work, research into regulation was relatively sparse, mostly dealing with how the government can intervene and control pricing in the two extremes of monopoly and perfect competition,” the committee wrote in its announcement. The problem is that perfect competition and total monopolies for the most part only live in econ textbooks. Instead, many markets are often dominated by a small group of very large companies—or oligopolies. To get the picture, think about today’s increasingly concentrated airline, music, or beer industries. Or the smartphone wars between Apple and Samsung. Or your local cable market, which probably has no more than two (deeply unsatisfactory) providers.
In the 1980s, Tirole and his late colleague, Jean-Jacques Laffont, started using game theory and other rigorous mathematical approaches to begin modeling these oligopolistic markets, and figuring out how regulators ought to deal with them to serve the consumer’s best interest. The answers tended to change according to the industry. This was a rebuff to the old idea that regulators should apply a few simple rules that applied broadly across the entire economy. Many of his ideas have been picked up by governments, but not all. As Joshua Gans wrote today at Digitopoly, “Want to know why there is so little competition in telecommunications and broadband service in the US? go open one of Tirole’s books; it is time you listened.”
As the Nobel Committee put it, “The best regulation or competition policy should therefore be carefully adapted to every industry’s specific conditions.” Another way to frame it: It’s not about light regulation, or heavy regulation, but smart regulation. Which is complicated.
Wayward Olive Garden Might Start Salting Its Pasta Water Again
About a month ago, it came out that Olive Garden had been committing a culinary crime against humanity: The Italian chain was not salting its pasta water.
The scandal was first revealed in a 294-page slide presentation compiled by Starboard Value, a hedge fund and activist investor that holds an 8.8 percent stake in Darden and had been engaged in a lengthy proxy fight for control of Darden's board. Whether the pasta water or something else was the final straw we may never know. But on Friday, Starboard emerged from the battle victorious, ousting the entire Darden board and electing all 12 of its nominated directors.
As Reuters notes, Starboard's win was an unusually large one for activist investors, who typically lock up no more than a few spots on a company's board. Starboard and another activist investor, the Barington Capital Group, had spent months lobbying for Darden to spin off Olive Garden, Red Lobster, and LongHorn Steakhouse from higher-growth chains in Darden's portfolio. Then in May, Darden abruptly decided to sell Red Lobster alone for $2.1 billion over strong shareholder objections. Tensions increased even further and pushed more investors to Starboard's side.
In a statement released Friday, Starboard CEO Jeffrey Smith said that "Darden has all the right ingredients to regain the strength and prominence it once enjoyed. We look forward to continuing our hard work from inside the boardroom and working with management on a shared goal of excellence for Darden."
We can only assume those "right ingredients" will include a restored dose of salt to the Olive Garden pasta water.
Family Dollar’s New Strategy: “Magical” Price Points and Lots of Alcohol
It's been a rough few months for Family Dollar. The discount retailer is currently trying to ward off a hostile takeover from Dollar General, while sealing a merger deal with another dollar store chain, Dollar Tree. The mess has hardly done wonders for its business. On Thursday, Family Dollar reported that its profit tumbled 66 percent in the fourth quarter and same-store sales edged up a mere 0.3 percent. During that period, it shuttered 375 underperforming stores and lost money to inventory markdowns, restructuring fees, and merger expenses.
Sales at Family Dollar are growing in one area: tobacco and refrigerated/frozen foods. But the company's management isn't exactly pleased about this. Because those items have low profit margins, the sudden spike in purchases of them by consumers has actually put more pressure on Family Dollar's own margins. "What we are really focused on is keeping those businesses going strong, but also growing some of these margin areas to offset some of the impact there," Family Dollar CEO Howard Levine said on the quarterly earnings call. That might help explain why Levine said Family Dollar will speed up its rollout of beer and wine—high-margin items—in the coming year. Alcoholic beverages are currently sold in about 500 Family Dollar stores, and supposed to hit 1,500 more over the next 12 months.
Before that rollout happens, a big test for Family Dollar—not to mention every other retailer—will be the coming holidays. The previous year, holiday sales largely disappointed, and Family Dollar was no exception. But Levine spent a good portion of the call reassuring investors that this time around, the company is positioned to have a "very competitive holiday season." He added that the store is more focused on "everyday values" and the "magical $1 price point." (Family Dollar is not a "true" dollar store, but rather sells its inventory at a range of relatively cheap prices.) "Things are on track," Levine said. "We feel very good about the flow of our goods and are well-positioned for the holiday season."
That's all well and good, but even that "magical" price point and upcoming sales of alcohol can't necessarily make up for the bigger economic challenges facing the company. Dollar stores in general have been hard hit in recent years as the recovery has inched along and drained low-income consumers of their spending money. When things don't look great for the main Family Dollar consumer, they don't look great for Family Dollar either. Levine acknowledged as much with what is now a familiar refrain of his: "Our core customer is still struggling."
Amazon Is Opening an Actual Store
File this one under #innovation. Online retailing giant Amazon is planning its first brick-and-mortar store, the Wall Street Journal reports, and it's going to be a big deal. According to the Journal, the real-life Everything Store at 7 West 34th St. in Manhattan will push the boundaries of commerce with revolutionary in-store services that include:
- Receiving same-day delivery items
- Facilitating product returns and exchanges
- Allowing customers to pick up online orders
- Highlighting Amazon inventory
The ambitious project is also risky. The Journal notes that operating a physical store could force Amazon to take on retailing costs it thus far "has largely avoided." These include leasing a space for the store and paying employees to work there. The added expenses could prove dangerous to the thin profit margins that Amazon's Jeff Bezos is famous for maintaining.
Amazon has toyed with the idea of a physical store before. Last November, the company opened pop-up shops in U.S. malls to sell its Kindle tablets and e-readers. As it turns out, physical stores for online retailers is something of a trend—some call it trading "clicks for bricks." In 2013, Etsy opened a pop-up store in New York City and eBay teamed up with Kate Spade to create temporary storefronts. Online eyeglasses seller Warby Parker has also experimented with physical locations.
Other online retailers have tried to strike a balance between the physical and digital worlds. Companies like Trunk Club and Stitch Fix, which regularly send their subscribers a sampler of items, are built around the notion of trying to bring an in-store shopping experience to your living room. Either way, nothing says disruption quite like turning our online experiences into IRL ones.