A blog about business and economics.

Jan. 20 2015 8:53 AM

Obama’s State of the Union Agenda: Progressivism on the Cheap

First it was free community college. Then came paid sick leave. This weekend, we finally got higher taxes on the wealthy. Like a movie studio dribbling out teaser trailers for a new, and possibly very dull, feature, President Barack Obama has been trying to drum up excitement for tonight’s State of the Union address by previewing some of the juicier policy tidbits he’ll promote during the speech. The plans may not have a chance of passing our Republican-controlled Congress, but that’s neither here nor there. Obama seems to be thinking about the 2016 elections, and teeing up an economic agenda for the Democratic Party after he leaves office. 

And how does that agenda look? In a word, frugal. Call it dollar-store progressivism.

In 2014, Obama plunked down an uncompromising budget that would have increased spending and raised about $1 trillion in new taxes over a decade. The document served as a liberal retort to the Ryan budget, with its trillions in tax cuts and slash-and-burn approach to government programs. For all I know, the White House could go the same route it did last year. But if you look at them one by one, many of Obama’s marquee proposals are starting to look like big ideas with relatively small price tags.

Take the three main tax increases the White House unveiled on Saturday. Obama would like to slightly raise the top capital gains rate, from 23.8 percent to 28 percent, for couples earning around $500,000 or more a year; kill a major capital gains tax break for heirs of large inheritances; and levy a fee on big financial firms based on how much they borrow, partly so they’ll take on less risk.*

These are forceful philosophical gestures. Matt O’Brien of the Washington Post pithily sums them up as “Piketty in an American accent,” because they largely tax wealth and inheritance, rather than labor income. Including the bank tax shows that the White House realizes there’s more work to be done reining in Wall Street. Meanwhile, a little more than half of the new revenue would be spent on tax breaks for the middle class, as well as an expansion of the Earned Income Tax Credit, which essentially boosts pay for low-wage workers. Obama still wants to spread the wealth around, just like he told Joe Wurzelbacher all the way back in 2008.

We are not, however, talking about especially large sums of money. Combined, Obama’s hikes would raise $320 billion over a decade, or $32 billion per year. That’s just a smidge more than 1 percent of last year’s federal tax revenue—more than a rounding error, but not much more. Obama isn’t looking to soak the rich at this point so much as lightly spritz them. 

Now, consider Obama’s education platform, which he has touted as a way to encourage economic mobility. Thanks in part to the president’s nudging, universal pre-K and free higher-ed are now considered serious policy ideas in Democratic circles. But they are also fairly small line items. The White House’s plan to expand preschool to all 4-year-olds—one of the big ideas from the 2013 State of the Union—weighed in at just $75 billion over a decade, and would have been funded merely with an increase on cigarette taxes. Obama’s newer proposal to eliminate community college tuition for many students would cost the federal government an estimated $60 billion over 10 years. Wrap them together, and you get just $13.5 billion per year. America spends more than that exploring space. It’s a fairly low price to pay for expanding the meaning of a basic education in this country.

Cheap is good, of course, but free is even better. Requiring that all workers receive paid sick days, as Obama is suggesting, wouldn’t cost the government a dime but would bring the U.S. into line with the rest of the developed world. Raising the minimum wage to $10.10 and indexing it to increase with inflation, as he’s previously backed, would be popular, and probably wouldn’t cost taxpayers much beyond slightly higher McDonald’s prices.  

This sort of low-budget economic populism may not sound especially enthralling—especially in a seventh-year State of the Union address, where presidents can pretty much let their imaginations run wild. But it may be the most the left can realistically hope for in the near future. As long as today’s GOP hangs on to at least one chamber of Congress, major progressive reforms to the tax code will remain DOA on Capitol Hill. The same goes for any expensive or especially far-reaching government programs. Whenever a Democratic president does finally luck into a sympathetic Congress, he or she may well have to spend political goodwill passing climate change legislation, at least if we don’t want to fry the planet. Or, it may well fall on the next president to fix Medicare’s troubled finances.

That leaves room for small-budget, high-impact ideas, like moderate tax hikes that affect a small slice of the rich or cuts that benefit a broad swath of the middle class. Or programs, like free college tuition, that might punch above their budget cost. This stuff won’t necessarily even be easy to pass—just imagine the lobbying battle that would ensue if Congress considered taxing bank leverage—but the modest price tag at least means it’s an economic agenda you can believe in.

*Correction, Jan. 27, 2015: This post originally misstated the current top capital gains rate.

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Jan. 16 2015 5:03 PM

More Than Half of U.S. Public School Students Now Have Low-Income Families

You can argue whether poverty is the single biggest problem facing America's public schools. But it is an undeniably enormous, and growing, challenge. This week, the Southern Education Foundation reported that 51 percent of students in grades K through 12 received a free or reduced-price school lunch in 2013, meaning that their families lived on less than 185 percent of the poverty line. According to the Washington Post, it is "the first time in at least 50 years" that more than half of the country's public school kids have qualified as low income. In 1989, the figure was under 32 percent. In 2006, it hit 42 percent, and by 2011, it had ratcheted up to 48 percent.

The point being, this is not just a temporary matter of the recession setting back American families. It's a long-term trend that educators will be forced to grapple with for years to come. Over time, the rise of single-mother households and the growing share of immigrants among public school students has reshaped the socio-economic profile of our schools, creating challenges for teaching and learning that weren't so severe 25 or 30 years ago.

The prevalence of low-income students varies across the country. More than half of students qualify for free lunch in 21 states now, largely in the South and West. The problem is most severe in Mississippi, where 71 percent of students are low-income, and least severe in New Hampshire, where the number is just 27 percent. But ultimately, in all but two states, at least one-third of school children are now qualified for the free lunch program.

In light of those facts, it's somewhat remarkable that U.S. students have been moderately improving their overall performance on national standardized tests in recent years. Low-income students start off less prepared for school and have difficulty catching up as they age. So it's a credit to our education system that kids are making even slight progress, despite their declining circumstances.  

Jan. 15 2015 5:27 PM

Target Is Closing All of Its Stores in Canada. These Pictures Show Why They Were Such a Failure.

Target is giving up on Canada. The retailer announced today that it would close all 133 of its stores north of the border, which have been losing money since it arrived in the country less than two years ago, boldly venturing into its first international expansion.

By all accounts, the adventure has been an unmitigated disaster—a story of a company trying to accomplish too much, too fast, with too little thought. Target opened 124 stores at once in 2013. Rather than build its own real estate, it purchased leases on buildings that had belonged to Zellers, a "dying low-end retailer," as Fortune puts it, whose locations were "dumpy, poorly configured for Target’s big-box layout, and were in areas not frequented by the middle class customers Target covets."

But that wasn't the real killer. Because it revved up so quickly, the company never had time to develop a working supply chain in Canada, which left its stores short on merchandise and full of empty shelves. After the market researchers Belus Capital Advisors published pictures of the barren aisles, it led to headlines like this from DailyMail.com:

daily_mail

Here's a taste of what Target's Canada stores looked like. Notice something missing?

No, they probably didn't have your size.

You probably get the idea.

But seriously.

It was bad.

Nobody likes shopping in a picked-over retail ruin. But, there wasn't much individual stores could do to improve their appearances. As a former Target employee explained in an email to Gawker, there was no way for the Canadian stores to tell distribution centers what items they needed each day. If they were out of eggs, or milk, or shirts, they had to hope those things would show up on a truck full of mystery merchandise that arrived each morning. Meanwhile, the company's rulebook prevented employees from filling the barren shelves with whatever else they had on hand. The end result: understocked, uninviting stores that couldn't even compete on price with Walmart, which began offering discounts to undercut its rival. Target seems to have realized that with all the damage already done, it wasn't going to recover.

Jan. 15 2015 2:12 PM

Investors Put More Than $100 Million Into the Marijuana Industry Over the Past Two Years

This post originally appeared in Inc.

It looks like investors have gotten a serious case of the munchies.

During the past two fiscal years, investors spent $104.5 million to gobble up stakes in cannabis and cannabis-related companies, according to research firm CB Insights. In 2014, funding in the industry grew a whopping 941.5 percent.

The biggest news in the space hit last week, when Peter Thiel's Founders Fund took part in the $75 million Series B round of Privateer Holdings, a private equity company that owns two marijuana companies and a website. With the deal, Founders Fund became the first brand-name venture capital firm to get involved in the pot industry. 

Surprisingly, relatively few of the 60 deals recorded by CB Insights were for companies in marijuana hubs such as Colorado and California. Instead, a majority of the deals involved companies in Canada and the Midwestern states.

CB Insights found that the $75 million Privateer Holdings raised was the largest round, followed by the $20 million raised by PharmaCann, a Chicago-based group of medical marijuana cultivation centers. Leafline Labs, a Minnesota-based medical marijuana company, was third, with $12.4 million. 

Steve DeAngelo, the co-founder of marijuana angel network The ArcView Group, says his organization has brokered a total of $17 million in deals with 34 companies since it launched in 2010. All those deals go to show how robust the cannabis industry is, he tells Inc.

"In the beginning of this industry, our biggest challenges were legal, but we solved many of those challenges. After we figured out the legal landscape, many of our challenges were financial to help scale up and professionalize the businesses," says DeAngelo, who is also the co-founder of Oakland, California–based Harborside Health Center, one of the largest medical marijuana dispensaries in the U.S. "Today, investment is not really a problem. If you have a good team and a good idea, you're in a good position. There is a phenomenal amount of investment interest."

Jan. 15 2015 11:55 AM

Why the World Is Freaking Out About Switzerland Today

It's a "currency tsunami!" It's #Francogeddon! It's ... a financial-world freakout about Switzerland?

Yep. Today, Switzerland's central bank shocked investors by abruptly abandoning its national currency cap of 1.20 francs per euro, which it put in place during Europe's rocky economic days of 2011. In the frantic moments afterward, the franc's value rose by almost a third, though it has since retreated a bit. The bank's move had economists throwing around words like "seismic," while the Wall Street Journal described the aftermath as "unprecedented turmoil in the currency market." Swiss stocks also plummeted, experiencing their biggest one-day fall in 26 years, according to Reuters. And of course, rich guys are now worrying about how much it will cost to attend Davos.

Why on earth did the ever-conflict-averse Swiss decide to unleash havoc on the markets? Well, you have to start with why they adopted the currency cap in the first place. Switzerland's economy is driven heavily by tourism and exports, 40 percent of which are shipped to the eurozone. Therefore, it needs to keep its exchange rate against the euro reasonably low. Otherwise, its valuable watches, machinery, pharmaceuticals, and jewelry would become too expensive abroad, and vacationers would stop showing up to gorge on chocolate. The problem is, when countries sell lots of exports and keep inflation low, like the Swiss, their currency starts to look like an attractive investment option. When the euro crises went into full swing during 2011, panicking money men saw the franc as a safe haven and started buying it en masse, pushing up its exchange rate with the euro, and pushing some exporters into bankruptcy.

Sensing an emergency, the Swiss National Bank declared that it would start buying euros in "unlimited quantities" to keep the franc's value down. Thus, we got the cap.

So what changed? Buying unlimited quantities of euros is about to get expensive. The European Central Bank is about to begin a round of quantitative easing to revive the region's economy—which, for all intents and purposes, means it will be printing lots of euros, which Switzerland would have to purchase in bulk to maintain its exchange rate. That's just not sustainable. So, instead, it's bidding goodbye to the cap, and riding out the nasty economic consequences.

For those who don't follow the movements of the global markets religiously, the basic lesson here is that, just as it can be dangerous when investors collectively decide to dump your currency (see Russia), it can also be problem if they bum rush your banks to buy it.

But anyway, that's why the hashtag #Francogeddon is on Twitter today and has nothing to do with this guy.

Jan. 14 2015 5:49 PM

Exactly How Much Would It Cost to Make Public Colleges Tuition-Free? (An Update.)

President Obama has proposed a plan to make community colleges tuition-free. And, as I wrote yesterday, it's a good plan! At $60 billion for the feds over 10 years, it's also a pretty cheap one. But this brings up a related question: What if we wanted to go whole hog and zero out tuition at all of our public colleges? How much would it cost?

It's tough to say exactly. But for a couple years now, I've been making the following point: With what it spends on its various financial aid programs today, including money that goes to private and for-profit schools, the feds could cover the cost of tuition for every single public college student in the country. According to the State Higher Education Executive Officers, four-year state schools and community colleges took in $61.8 billion worth of tuition dollars, including money from federal loans and grants, in fiscal year 2013. Meanwhile, according to the New America Foundation, Washington currently dedicates $67.7 billion to grants, tax breaks, and work-study money. If you took the money out of the private sector and put back it into the public sector, it could cover all of today's undergrads, and then some.

Or could it? In FY 2012, the Government Accountability Office released its own analysis of public college funding and revenue streams. It found that students were paying a total of $76.3 billion in tuition—more than the feds could theoretically cover with today's aid budget. Why the difference? According to State Higher Education Executive Officers senior policy analyst Andy Carlson, it seems the $8.6 billion gap has a lot to do with how the two reports categorized money from state scholarships, such as Georgia's HOPE program. SHEEO classifies that cash as state funding, since it's not really coming out of a student's pocket. The GAO calls it tuition revenue, since undergrads take the money, then pay the college. Personally, I think SHEEO's approach makes a bit more sense, since it's state money in the end. But the argument is basically semantic. Either way you look at it, the federal aid budget should be enough to cover whatever today's college kids are paying out of pocket.

At the same time, that doesn't necessarily mean Washington would be able to make college free long term without spending more. For starters, college costs rise (and rise, and rise). Meanwhile, if you really did abolish tuition at public institutions, they would almost certainly attract more students, thus putting the feds on the hook for more money. You could cap admissions at the schools that don't already, but there'd probably be some strain on the system.

But in a sense, the exact dollar figures aren't important here. The idea that we already spend enough on higher ed to make public colleges tuition-free, at least for today's undergrads, is a fun policy talking point. (ThinkProgress certainly loves it.) But it's mostly just an illustration of how wildly inefficient our current system of funding higher education already is. Even if the arithmetic changes a bit, that basic reality won't.

Jan. 14 2015 5:26 PM

The Founder of ShipYourEnemiesGlitter.Com Wants the Rest of the World to Feel His Pain

Yesterday, a Reddit post about an Australian website that allows customers to send envelopes full of glitter to their adversaries went viral. The site, ShipYourEnemiesGlitter.Com, quickly earned praise for tapping into something many of us probably feel but had never articulated: Glitter is kind of the worst. Or, as the site puts it succinctly, it’s "the herpes of the craft world.”

Perhaps predictably, the site crashed as it was bombarded by people looking to see what the fuss is about. (And, if they were lucky, pay $10 to glitterbomb their foes.) Luckily, Slate spoke with ShipYourEnemiesGlitter.Com’s founder, 22-year-old Australian Mathew Carpenter, to satisfy our curiosity.

Slate: So, why do you hate glitter?

Carpenter: I've received Christmas and birthday cards over the years from family and friends who put glitter in the cards. I hated it, and I wanted the rest of the world to feel my pain. So that's how the website was born.

Have you done this kind of thing before?

I'm 22 and have never been to university, but I am in Internet marketing and have worked on other sites before. The one I'll show you now is www.dickpicoftheweek.com. That said, I apparently have too much free time on my hands because now my plans for the next few weeks consist of sending stupid fucking glitter to terrible people.

Even though it seems obvious, run me through how this whole thing works. Do you have a glitter distributor or do you just walk down to your local craft store and buy a few hundred pounds of it?

Actually, I do have an Australian glitter supplier. People decide they want to waste money on sending someone glitter in an envelope, I get their recipient's information, hand-fill envelopes, and ship that stuff out.

Are you on your own or is anyone helping you with this crazy plan?

The website is 24 hours old and despite my cries for help I stand alone.

What happened yesterday?

A couple of hours after launching, the website was getting pounded with too much traffic for the server to handle so it crapped itself. We had people buying every minute until I took the ability to purchase down.

In this case I think [traffic exploded] due to the combination of a unique idea, creative copywriting, and evoking an emotion in the user.

How many orders have been placed so far?

Over 2,000 of the world’s brightest people have spent money on this service. It's good for business, but bad for society.

Who, would you say, is your target consumer?

People with too much disposable income.

This might be a dumb question, but do you see this a long-term viable business plan?

God I hope not.

Jan. 14 2015 3:39 PM

Michael Lewis’ The Big Short Is Being Made Into a Movie With Brad Pitt, Ryan Gosling, and Christian Bale

The Big Short: Inside the Doomsday Machine, Michael Lewis’ nonfiction thriller and tell-all about the financial crisis, is reportedly being made into a star-studded film. According to Variety, Brad Pitt, Christian Bale, and Ryan Gosling have all signed on for the big-screen adaptation by Paramount and Plan B Entertainment, Pitt’s film production company. Adam McKay, the longtime Will Ferrell collaborator known for Anchorman and Talladega Nights, will write and direct.

The Big Short tells the story of the housing bubble through the eyes of Michael Burry, a 32-year-old neurologist-turned-investor and one-eyed eccentric who spotted the subprime-mortgage crisis early and made a huge bet against it. While Wall Street sliced, diced, and bundled rotten assets, Burry pored over hundreds of prospectuses for questionable bonds. The big reveal at the end (spoiler alert!): Burry had Asperger’s syndrome and for a long time was totally unaware of it. “Only someone who has Asperger’s would read a subprime-mortgage-bond prospectus,” he tells Lewis.

Pitt also starred in and, through Plan B, produced the film adaptation of Moneyball, another nonfiction work by Lewis that chronicles the metrics-based efforts of Oakland Athletics General Manager Billy Beane to assemble a competitive team on a limited budget. The production timeline for The Big Short remains unknown, but Variety reports that Pitt has been “very passionate” about making it happen. In the meantime, we’ll wait to see which actor gets to play the half-blind hedge funder who took down Wall Street.

Jan. 14 2015 11:58 AM

Chipotle Just Stopped Serving Carnitas at a Third of Its Restaurants

Chipotle is in the throes of a carnitas crisis. America’s favorite burrito chain has reportedly stopped serving pork at one-third of its more than 1,700 restaurants after suspending a supplier that violated its standards. Chris Arnold, a spokesman for Chipotle, told the Associated Press that the halt on carnitas marks the first time that Chipotle has stopped serving any topping for its burritos and bowls.

Arnold told the AP that Chipotle discovered the violation on Friday through a routine audit and that “it’s hard to say” how long carnitas will be absent from affected locations. While Chipotle has not disclosed the exact nature of the violation, Arnold told Reuters that the company has strict animal-welfare expectations for its suppliers and does not allow them to use antibiotics. He added that although Chipotle could fill its pork shortfall with so-called conventionally raised pork, the company is unwilling to compromise its standards in that way.

It’s quite possible that Chipotle’s decision to pull pork from its menu—while disruptive in the short term—could end up being a smart decision. Much of Chipotle’s success to date has come from its ability to distance itself from the consumer skepticism plaguing fast-food chains like McDonald’s and Taco Bell. To that end, Chipotle has embraced its “fast casual” dining label and marketed itself as a higher quality alternative to fast-food restaurants; promoting its “sustainable design” and “food with integrity” have been a key part of that. And as Business Insider CEO Henry Blodget told Yahoo! Finance, “if it had been discovered that [Chipotle] ignored an audit or some journalist did a story where they followed it and said it’s all a big sham and the pigs were being treated horrible, that would have been catastrophic.”

As devastating as this news might be to pork fans, carnitas actually make up a surprisingly small portion of Chipotle’s entree orders: 6 to 7 percent, according to the company. Chicken is the most popular order. People seemed much more upset back in March of 2014 when an annual report from Chipotle appeared to indicate that the chain would stop selling guacamole and some salsas if certain ingredients became too expensive. (Fortunately, that didn’t happen.) And anyway, while Chipotle sorts out its pork problems, it's all the more reason to try its tofu Sofritas option and earn a free burrito for when the carnitas are (hopefully) back on the menu.

Jan. 14 2015 11:47 AM

Even the Ruble Is a Better Investment Than Bitcoin These Days

In December, when the ruble crisis was really revving up, a small number of panicked Russians appeared to start moving their money into bitcoin. Even though the cryptocurrency was technically banned in the country, the volume of ruble-denominated trades shot up 250 percent, CNBC reported.

Bad call. While the ruble has had a wild ride lately, it's down just 3 percent against the dollar over the past month. Bitcoin, meanwhile, is in the midst of an epic collapse, having lost 44 percent of its value since Dec. 14, according to Coindesk. Russia might be in the midst of the crisis, but its currency has still been a safer bet than everyone's favorite online currency/speculative investment opportunity/digital fetish object for techno-liberterians.

What, exactly, is causing the plunge? Earlier in January, some people were blaming short-sellers. But now, the consensus seems to be that bitcoin is, as Business Insider's Rob Wile puts it, "stuck in a self-fulfilling downward spiral." The problem has to do with bitcoin miners—companies whose computers unlock new batches of the currency by solving complicated math problems. Mining takes money—computing power and electricity aren't free, you know—and because bitcoin's price has fallen so low, it may no longer be profitable. So miners are now selling off bitcoins in order to cover their dollar costs. But the further bitcoin's price falls, the more they need to sell in order to pay the bills.

Now, with a real national currency, this might be the point at which a central bank swooped in to the rescue. Russia, for instance, has tried to prop up the ruble by buying it with dollars (I don't think that's a permanent solution, thanks to falling oil prices, but that's neither here nor there for the moment). Bitcoin has a slightly different safety mechanism. Essentially, the network can make it easier to mine bitcoin, which should also bring down the cost of doing so. The problem is, as Coindesk notes, the adjustment doesn't happen immediately. And the fewer people mining, the longer it will take. Meanwhile, once the difficulty level does drop, more miners could come back online. That should push the difficulty level up again and make mining unprofitable again. Wash, rinse, repeat.

A lot of bitcoin's fans like to argue that these day-to-day price movements aren't particularly important, because the real appeal of the cryptocurrency is its underlying technology. But having people willing to mine bitcoin is essential to the entire system; it basically powers the giant online ledger that tracks bitcoin trades. If mining becomes financially unappealing, it would undermine the whole project. But we're getting ahead of ourselves at the moment. Today's main lesson is really just that some Russians apparently can't catch a break.

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