A blog about business and economics.

May 4 2017 11:11 AM

The GOP Says AHCA Protects People With Pre-Existing Conditions. This Analysis Says It Falls Perilously Short.

House Republicans might not be waiting around for the Congressional Budget Office to tell them what the latest version of the American Health Care Act will actually do, but that hasn't stopped outside experts from trying to illustrate what an unruly mess the legislation will be. (Update, 2:35 p.m.: The bill passed the House on a 217–213 vote.) The health industry consultants at Avalere estimated how many Americans with pre-existing conditions could be covered by the $130 billion GOP lawmakers initially set aside to potentially fund high-risk pools, which would provide subsidized coverage for sick people priced out of the normal private market. The answer: about 600,000 Americans, out of 2.2 million people currently in the individual market with pre-existing conditions. Here's the key bit:

New research from Avalere finds that the funding ($23 billion) specifically allocated in the American Health Care Act (AHCA) to assist individuals with pre-existing conditions will only cover approximately 110,000 individuals with a pre-existing chronic condition. If states were to allocate all the other funds in the Patient and State Stability Fund ($100 billion) toward providing insurance to people with pre-existing conditions, in addition to the funding described above (total of $123 billion), 600,000 individuals with pre-existing chronic conditions could be covered.
Approximately 2.2 million enrollees in the individual market today have some form of pre-existing chronic condition.

Some might object that not every state will need to establish high-risk pools, because liberal lawmakers in places like California and New York aren't likely to waive Obamacare's protections for pre-existing conditions. But blue states will still get their shares of the $100 billion patient stability fund, which provides the bulk of potential high-risk pool funding (it can be used for other purposes as well, like keeping the wider individual market steady through reinsurance and such). That means conservative states will still likely face big funding shortfalls in their high-risk pools.

But hey, that extra $8 billion from the Upton amendment should fix everything, right?

May 4 2017 10:41 AM

The Republican Health Care Bill Might Ruin Employer-Based Health Coverage, Too

You knew that the American Health Care Act would turn the individual insurance market back into a bombed-out hellscape for the sick and old. But did you realize it could also ruin employer-based health insurance, at least for people whose companies worry more about cutting costs than attracting top-notch talent?

So reports the Wall Street Journal. The House GOP's legislation—which seems likely to pass Wednesday (Update, 2:25 p.m.: The bill passed on a 217–213 vote)—would allow states to opt out from many of Obamacare's insurance market regulations, such as those requiring carriers to cover a set of essential services or banning lifetime and annual caps on coverage. But even if states like New York and California don't waive those rules, businesses operating in them effectively could for their own workers. That's because the Obama administration released guidance in 2011 saying that employers could choose which state's law they wanted to operate under when it came to required benefits packages. At the time, it didn't matter much, since the Affordable Care Act created a single set of national standards. But now, per the WSJ:

Under the House bill, large employers could choose the benefit requirements from any state—including those that are allowed to lower their benchmarks under a waiver, health analysts said. By choosing a waiver state, employers looking to lower their costs could impose lifetime limits and eliminate the out-of-pocket cost cap from their plans under the GOP legislation.

The Journal cautions that some companies may be hesitant to slash their employees' benefits, since they use them to recruit talent, and notes that most big employers didn't impose coverage caps prior to Obamacare. “Even if self-insured health plans are no longer banned from imposing annual or lifetime limits, they’re unlikely to attempt to squeeze the toothpaste back into the tube,” one industry expert told the paper. “The benefits of reimposing limits are questionable.”

But if you haven't noticed, companies are doing everything in their power these days to shave health care costs (how are you doing on your employee wellness goals?). It seems perfectly reasonable to worry that, without the ACA's protections, employer-based coverage will revert to something worse than the old status quo.

Ideally, we wouldn't be talking about this for the first time just hours before a congressional vote. But public debate is apparently only for Democrats, these days.

May 4 2017 8:00 AM

How Can We Make College Affordable? Some States Have It Down Better Than Others.

The crisis of college affordability is in the air. The agony of the 2017 college admissions cycle just came to an end; many students and families just spent a harrowing weekend figuring out how they will afford the bills. And New York State’s recently passed Excelsior Scholarship, which provides free in-state tuition at public universities to those with family incomes under $125,000, has received considerable attention and criticism. It’s an imperfect plan because it doesn’t help students with costs beyond tuition—but what would a perfect plan to reduce the cost of college even look like? Good models are out there that can help—with a little work.

I’ll start out with a simple premise—those with very low incomes should pay low amounts, those with high incomes should pay more, and those in between should pay according to their greater ability to pay. It seems reasonable to me that all pricing systems should be held to that standard. It’s called equity. Yet this simple premise isn’t always satisfied.

Let’s start with the University of Virginia. UVA is said to “meet full need” of its students. For Virginia residents, the school lists a price of $30,000 including room and board to attend, but discounts that amount based on its determination of the amount a student’s family can “afford,” which comes from a formula created by the College Board.  The school’s approach is consistent with this standard (recognizing that calculating how much a family can afford is not an exact science). Other public institutions, like the University of North Carolina, the University of Michigan, and the College of William and Mary, use a similar approach.

In contrast to UVA, Ohio State University lists a price of $26,000. It does not meet full need. Instead, it has a series of ad-hoc programs that offer set dollar amounts to students based on their financial situation (and SAT Scores, in some cases). They do not abide by a determination of what a family can afford. Most public universities use similar systems; it is inconsistent with the standard I laid out.

To demonstrate the difference, look at this chart showing the relationship between price and family income at the two schools. For these calculations, I used Ohio State’s net price calculator, making several plausible assumptions along the way (family of four, married parents, one child in college, federal income taxes paid equal to the average of those at that income level, SAT score of 1300, and so on.) It was not a simple process. For UVA, I used MyinTuition, a simple cost calculator I created for it and 14 other schools. MyinTuition is designed to simply estimate college costs after factoring in financial aid, based on family income, home value, mortgage balance, cash in the bank, and retirement, and nonretirement savings. It is based on the principle that greater price transparency is a virtue in and of itself—and may point the way toward a better system of communicating to students the availability of financial aid and whether they can afford college.


Phillip B. Levine

At UVA, families with incomes of $25,000 are expected to come up with around $6,100. Of this amount, the student is expected to earn $1,600 from a summer job and take out a loan of $4,500—the parents aren’t expected to pay anything. The same student at Ohio State is expected to pay more than twice this amount: $13,500. That family would need to come up with an additional $7,400, a very difficult hurdle for them.

As incomes rise, costs rise at both institutions, albeit somewhat more steeply at UVA and to a higher level. But students at UVA continue to pay less than at Ohio State until around $75,000 in family income. At both institutions, families don’t have to pay maximum tuition until they are earning $100,000. And on that score, it is useful to recognize that the maximum tuition at both institutions is far below what states spend on educating, housing, and feeding their students. That amount surpasses $50,000 at these two schools. Even at full price, students are receiving a sizable subsidy.

One critical difference between UVA’s policy of meeting full need and Ohio State’s hodge-podge of grants is the impact of tuition increases. To be extreme, suppose both states increased their list prices by $10,000. Everyone in Ohio would have to pay that increase—the entire line would simply shift up by that amount. In Virginia, only those with incomes above $125,000 would pay the full amount—the upward sloping portion of the line would simply extend to the right.

This chart also shows the impact that free tuition would have in Ohio if it adopted a policy like the Excelsior Plan. Lower-income households would not be helped at all. Mainly those between $75,000 and $125,000 would be helped. That certainly violates principles of equity.

There are downsides to Virginia’s approach, mostly associated with communicating the school’s pricing strategy. The process of applying for financial aid and of forecasting an aid award is a nightmare. If students don’t know what college is going to cost, how can they incorporate it effectively into their decision-making? The work that is left to be done should focus on addressing these problems—simplifying the financial aid system and helping students do a better job of anticipating the true cost of attendance. Clarifying college costs through simple-to-use tools is a first step in that direction, but more work needs to be done.

The free tuition movement signals that there is at least some public support for devoting greater resources towards lowering the cost of college. Those resources would be better spent on a pricing policy that adopts basic principles of equity, instead of a flawed approach that focuses only on tuition. Meeting the full demonstrated need of students needing financial aid would provide more help to those who need it the most.

May 3 2017 5:18 PM

iPhone Sales Hit a Big Roadblock in China Because of an App That Does Just About Everything

Shares in Apple convulsed earlier this week when the technology behemoth posted lower-than-anticipated iPhone sales in the second quarter. Revenue for Apple’s marquee product is expected to pick up once its newest version, the iPhone 8, debuts in September. But until then, and maybe beyond, there’s something standing in the path of Apple’s ongoing quest for smartphone supremacy. It’s called WeChat, it renders indefensible the high cost of buying an iPhone, and Chinese consumers love it.

Hailed by the Economist as “social media’s future,” WeChat is a messaging app-cum-mobile operating system developed in 2011 by the China-based Tencent Holdings Ltd. As a Chinese product, the app enjoys a home-field advantage (courtesy, in part, of the Chinese government). It also boasts a bazaar of services few competitors can match. As Ben Thompson writes on Stratechery Wednesday, “every aspect of a typical Chinese person’s life, not just online but also offline, is conducted through a single app (and, to the extent other apps are used, they are often games promoted through WeChat).” The app’s perks include cashless and credit-card-free payments made through WeChat Wallet; one-stop shopping for taxis, takeout, tickets, vacations, and even doctor’s visits; a business-oriented chat feature similar to Slack; and a peer-to-peer one similar to WhatsApp. Each user receives a WeChat QR code that can be scanned through a smartphone camera, which has increasingly supplanted business cards as a way to exchange contact information. That makes WeChat something of Frankenstein, a hybrid service cobbling together components from apps like Uber, Slack, Venmo, and WhatsApp, and more. By April 2016, it had rocketed past 700 million monthly active users.

Those numbers present a problem for Apple. The company has long been able to tout the technical quality of its proprietary iOS operating system. But WeChat has become something of a gatekeeper for China’s mobile communications market, the barrier to entry for any smartphone looking to make its mark. Although iPhones support WeChat—indeed, it’s become one of its most popular third-party apps and has even begun to challenge the Apple App Store for supremacy—they do so no better than Google’s Android, the iPhone’s chief rival, which generally runs on cheaper devices. As a result, Chinese consumers have little incentive not to switch to a less expensive option.

That dynamic has taken a real bite out of Apple’s bottom line. As Thompson observed, Apple’s share of the Chinese market has declined precipitously over the past year. The company saw 26 percent of its revenues in the second quarter of 2016 evaporate, and it posted a 14 percent loss this year despite a strong showing in the rest of the Asia Pacific. And while most iPhone users tend to stick with the smartphone as newer versions get released, Apple has found it harder to retain customers and stave off the competition, with only half of iPhone users in 2015 choosing to purchase a new one in 2016.

How worried should Apple be about WeChat cutting into its sales? It depends. The app has failed to gain much purchase outside China, and its GPS features have raised concerns among dissidents that a censorious Chinese government may be watching both its domestic and international users. Nevertheless, Tencent’s brainchild still holds the keys to China’s smartphone market, and Apple has taken notice. As Thompson points out, iOS and Apple’s signature design aesthetic remains a luxury-branded lure for many smartphone users, including in China. As Thompson wrote in 2013, “in China it’s Apple’s brand that is, by far, the biggest allure of the iPhone. Apps are free (piracy is mainstream), larger screens are preferred, and specs and customization move the needle with the mainstream far more than they do in the U.S.”

Nevertheless, WeChat is creating headaches in other ways. Even if Apple successfully courts its legions of users, the app’s soaring popularity has given Chinese competitors including Oppo, Huawei, and Vivo the courage to challenge it. As a result, Apple’s total share of the Chinese smartphone market amounted to less than 10 percent last year. Moreover, WeChat’s virtual stranglehold on messaging and other service apps in China is reportedly making other Silicon Valley firms wary. Facebook’s Messenger has long been a leader, boasting more than 1 billion active users every month. WeChat broke 889 million in April.

May 3 2017 2:00 PM

Moderate Republicans Just Struck a Really Cynical Deal to Support Trumpcare

Trumpcare II seemed to be spiraling toward its demise on Tuesday, after Rep. Fred Upton announced his opposition to the legislation on the grounds that it didn't do enough to protect Americans with pre-existing conditions. As a former chairman of the House Energy and Commerce Committee, the relatively moderate congressman from Michigan (emphasis on relatively) is considered a key voice on health care issues—in fact, he’s written a number of Obamacare repeal bills himself. If Upton were a no, it would seem unlikely that Republican leaders would be able to find 216 votes for their unloved Frankenlaw.

On Wednesday, however, Trumpcare got a fresh jolt of life. Both Upton and Missouri Rep. Billy Long, a Trump ally who surprised many when he voiced his own opposition on Monday, announced that they now supported the bill thanks to an amendment Upton negotiated that will provide $8 billion over five years to help those with pre-existing health problems afford insurance.

While House leaders have not released any legislative text for the Upton amendment, all signs suggest that it is just the latest in the long line of cynical, nonsensical policy compromises that have shaped Trumpcare—a bill that would ultimately cut about $1 trillion from health spending in order to finance tax cuts for the wealthy. The $8 billion is an essentially insignificant sum of money that would do little to help sick Americans afford coverage, yet could still destabilize the individual insurance market. It's a political fig leaf for nervous Republicans worried about angry constituents, and not much more.

GOP moderates have been balking at Trumpcare because it would allow states to opt out of the rules that currently prevent insurers from discriminating against customers with pre-existing medical conditions. Carriers would not be allowed to deny customers coverage outright based on their health status. But companies could charge sick Americans more if they failed to stay continuously enrolled in a health plan. So, for instance, if someone with a heart condition lost their job and had to go uninsured for a while, they'd risk being completely priced out of the individual market going forward. Trumpcare would require states to create high risk pools of subsidized insurance for the sick before they could obtain an opt-out waiver. But the bill only provides $130 billion for the pools over 10 years, which is probably not enough money to adequately fund them. Years ago, conservative wonks suggested that a national high risk pool would require $15 billion to $20 billion annually to function; the Center for American Progress says it would take another $200 billion on top of what the GOP has offered up.

Into this gap steps Fred Upton. According to Axios, his $8 billion amendment would create “a fund to pay the penalty for not being previously insured for those who get priced out from the market based on health status.” So apparently it's not more money for high risk pools, but rather a separate jar of cash to pay insurance premiums on the individual market.

The first, most obvious problem with this plan is it entails a pitifully small sum of money that would run out quickly. Nobody who thought that $130 billion was insufficient to help people with pre-existing conditions could seriously believe that adding another $8 billion over half a decade would solve the problem. It's an empty gesture, a way for Republicans to claim they aren't just tossing sick people into something ominously called a “high risk pool.”

While it might not help the sick, the Upton amendment could still create some nasty distortions in the insurance market. Again, reports so far suggest that the money would somehow be used to pay the extra premiums insurers charge people with pre-existing conditions who don't stay continuously enrolled in coverage. As Democratic Sen. Ron Wyden quickly pointed out on Twitter, that just invites carriers to charge sky-high prices for the customers, knowing the government will pick up the tab. It would give Aetna a license to fleece taxpayers.

Meanwhile, conservative health care writer and Reason editor Peter Suderman suggests the Upton amendment could also discourage people from buying insurance until they get sick, since the government would supposedly have a fund waiting around to pay for the extra cost of their coverage. That would likely keep some healthy Americans out of the individual market—setting insurers up for a destabilizing adverse selection issue.

Again, we have yet to see any legislative text yet. But at this point, the Upton amendment mostly appears to be a hollow political prop with little policy rationale or chance of doing much good for the vulnerable Americans who could be priced out of health insurance under Trumpcare. The change is useful in only one respect: It shows how little it takes to get some “moderate” Republicans to vote for an absolutely vicious bill.

May 2 2017 1:01 PM

Donald Trump Still Has No Idea What’s in His Own Health Care Bill

One very important reason that the first Republican effort to repeal and replace Obamacare failed so spectacularly was that President Donald Trump appeared to have no idea what was actually in his party's bill. Lacking any evident command of policy detail, he was unable to negotiate a compromise that would satisfy the various House GOP factions. That may have been an impossible task for any leader, but Trump—who dismissed fundamental issues dividing lawmakers as “little shit”—was entirely unequipped to even truly try.

This week, Republicans leaders are again struggling to pass health care legislation in the House. With the defection of former Energy and Commerce Committee Chair Fred Upton this morning, the effort may well be dead. And while there are of course fundamental, ideological reasons why Republicans are having continued difficulty reaching an agreement, I'm guessing one problem is that the president still has absolutely no clue what's in the legislation.

This was evident at several points during his interview with Bloomberg News published Monday. When a reporter brought up the make-or-break issue of how Americans with pre-existing conditions would be protected under Trumpcare, he muttered the following:

TRUMP: Yeah, we’re having pre-existing conditions. That’s it. Plus, we’re having the pool, we’re doing a lot of things.
And the best thing that is happening with the health care is premiums will come down. We’ll have tremendous competition; you know, we’re getting rid of the border state lines, and we’re going to have tremendous competition.

This is surreal. Having muttered a nonanswer about pre-existing condition protections—the GOP bill would in fact gut them by letting states opt out of Obamacare's rules—Trump suggests that the American Health Care Act will bring down health insurance prices by allowing carriers to sell across state lines. As Bloomerg's Sahil Kapur noted, the legislation does no such thing. It's not part of the bill. In fact, the entire deal hinges on the idea that states will be allowed to pick and choose which Obamacare regulations they want to keep within their borders. That compromise would be fatally undermined by letting people shop for coverage in any part of the country they wanted.

Having demonstrated that he still has no concept of how his own health care bill works, Trump continued emitting garbled noise about protecting Americans with pre-existing conditions. “Well, I want it to be good for sick people, Jen. Well, you know it’s not in its final form right now,” he said. Pressed a bit more, he added: “I’ll be looking into that.”

For what it's worth, Trump may experiencing some of his own doubts about the effects of his legislation. Axios reports Tuesday that, “During a recent phone conversation about the evolving health-reform bill, President Trump asked a simplistic but apparently sincere question: ‘Is what we are going to do going to take care of people?’” The House member he was speaking with apparently said that, yes, the bill would take care of folks.

This is not typically a question a president would have to ask a member of Congress—about a bill, by the way, that’s been on his radar for months. Instead, his own staffers would have looked into the legislation, analyzed it, and briefed him about its likely effects. A particularly ambitious chief executive might even have read parts of the bill himself, or consulted with outside experts about the subject. Trump, instead, is asking a House GOP member a pointless and vague question. What supporter of this bill would ever say: “No, Mr. President, this bill we're actively trying to pass does not take care of people, whatever you mean by that.”

Not only does Trump know nothing, he has no idea how to learn.

May 1 2017 5:41 PM

A “Tiny Fraction” of New York Times Readers Have Canceled Their Subscriptions Over Bret Stephens

A flurry of environmentalists, climate scientists, and other disgruntled readers announced on social media this weekend that they were canceling their New York Times subscriptions over a column by the paper's newest op-ed columnist, Bret Stephens. On Monday, however, the Times told me the backlash does not appear to have had a substantial impact on its business so far.

"Those canceling remain a tiny fraction of Times subscribers," spokeswoman Danielle Rhoades Ha told me via email. She declined to give absolute numbers. But in the three weeks since Stephens' hire was announced, she said, just 6 percent of all those who have canceled their subscriptions have cited him or his first column as their reason.

That figure may understate the trend, since the cancellations appeared to gain steam after the column was published on Friday afternoon—almost two-and-a-half weeks into the three-week period in question. The percentage also doesn’t count people who may have canceled because of Stephens but didn’t explicitly say so. That said, it suggests that the wave of discontent has, at least to this point, not been so extraordinary as to make a big dent in the Times’ overall paid readership. In other words, the blow to environmentalists’ perceptions of the Times is probably greater than the blow to its actual bottom line.

Rhoades Ha added this statement, signaling that the Times stands by Stephens and does not expect readers to leave the paper en masse:

One of the things that sets Times subscribers apart, which we’ve learned from reader surveys, is that they want their views to be challenged.  Our editorial page editor is committed to bringing in new voices, on all sides. Bret Stephens is the first of several new hires planned for the Opinion section.  We strongly believe The Times’s role is to be a destination for intelligent conversation and debate.

May 1 2017 4:32 PM

Mark Zuckerberg May Not Be Running for President. CNN Is Making Campaign Ads for Him Anyway.

For a while now, Mark Zuckerberg has been acting a little bit less like one of the most powerful tech CEOs on the planet and more like, well, a politician, visiting Americans in their homes and workplaces and penning jargon-y treatises. This, of course, doesn’t necessarily mean that Zuckerberg is imminently running for office. As Slate’s Will Oremus noted in January, the task of making Facebook as universally palatable as possible is reason enough to do some retail politicking.

Still, it’s worth noting the particularly politician-like moment Zuckerberg had on Friday, when he had dinner with a Trump-supporting family. The surprise visit was part of Zuckerberg’s 30-state listening tour he announced in a Facebook post in January to “get out and talk to more people about how they're living, working and thinking about the future.”

The Vindicator of Youngstown reported that the family had been selected for being Democrats who voted for Trump, and that during the dinner, they talked about the Moore family’s work at an orphanage, as well as politics. Ohio, the homeland of J.D. Vance’s Hillbilly Elegy and countless empathetic, soul-searching post-election helicopter reports in the national media, has been a frequent destination for journalists trying to understand the white working class that swung for Trump in 2016. And as a politically crucial state, it has been a highly necessary pit stop for presidential candidates. So it might be Zuckerberg is trying to understand middle America, but this week, anyway, he chose quite the opportune place to understand it.

If it turns out he is eyeing politics, CNN already has his back. In a minute-long video posted Monday, the network offered an unabashedly enthusiastic story on the Facebook CEO brightening the lives of a regular family with his surprise stop. “The more he talked, the more I liked him, and the more I was inspired by him,” Dan Moore, a member of the family, said. The segment ended with Moore, a dazzled Regular Joe who eats with plastic forks, saying, “We toasted to his initiatives, and we did give him crystal wine glasses.”

The video, which also explained the listening tour, included photos of Zuckerberg in a red tractor, as well as in a Ford assembly plant in Michigan, and with a group of Muslim students at the University of Michigan–Dearborn, where he had been earlier that week. You wouldn’t have to edit this much for it to serve as a perfectly usable campaign ad.

As Oremus noted in his post, Zuckerberg might be attempting “a pre-emptive strike against any effort to start a ‘conservative Facebook,’” and so reaching out to Trump supporters fits neatly with the goal. With its trending news controversy, Facebook provoked ire among many conservatives, and that was mostly a case of bungled perception. A dinner with Trump supporters, however intentioned, may simply be good brand management for Zuckerberg.

There’s one other possible consequence, or perhaps benefit, to all of this: that everyone could simply conclude that Zuckerberg—who spent Saturday visiting Daytonites getting opioid treatment before touring a fire department in South Bend and posing with a brat and cheese curds in Madison—stands for absolutely nothing at all.

May 1 2017 1:41 PM

Rex Tillerson Wants to Trim the State Department Like It’s Exxon in a Bad Year. That’s a Terrible Idea.

The Trump administration is serving as a grueling case study of how an administration—even one stocked with CEOs—can’t run the government “like a business,” no matter how many efficiencies it promises to find. The latest example comes from the State Department.

Secretary of State Rex Tillerson, the former chief executive officer of ExxonMobil, is trying to cope with falling top-line revenues through the easiest tool known to managers—taking it out of payroll. Reports are circulating that the State Department, through attrition and some layoffs, wants to reduce its staff by 2,300 as part of the Trump administration’s budget proposal (which boosts defense spending at the expense of just about everything else, and which Congress is unlikely to adopt).

One of the ways big multinational corporations slash labor costs—aside from just firing people—is to replace expensive American workers with cheaper foreign ones. And the secretary of state does indeed seem vexed at the high cost of employing diplomats. As Bloomberg reported, “Tillerson was taken aback when he arrived on the job to see how much money the State Department was spending on housing and schooling for the families of diplomats living overseas, according to one person familiar with his thinking.”

Now, large companies are, in fact, similar to the State Department. Steve Coll has noted that ExxonMobil effectively has its own foreign policy. Its operations, customers, and stakeholders are more likely to be overseas than at home. For large U.S. companies like Coke, Intel, IBM, and McDonald’s, the U.S. is increasingly a rump operation. And so they maintain operations of various size and scope all over the world, depending on how that geographic area fits into their overall strategy. In some countries, the presence is a small, token one. In others, the companies maintain a massive footprint.

That’s the similarity. But there’s a huge difference. The State Department’s operations have to be staffed by American citizens—from the top regional bosses (ambassadors) to the middle managers (attaches, consular officers, program managers) to the service staff (security). Which is decidedly not how American companies do it.

In fact, the best practices of corporate management often dictate that CEOs of large global organizations do precisely the opposite. Yes, American companies send their own managers and staffers abroad. But it doesn’t always make sense, from a business perspective and an economic one. When it operates overseas, the State Department is effectively operating on American territory*. When a Fortune 500 company operates overseas, it is operating within the local economy. It may have to hire thousands of locals to staff its operations, negotiate the local culture and bureaucracy, and deal with the arcana of government. You need people who understand the nuances of how to market fast food in India, pitch professional services in Germany, and negotiate the regulated telecommunications regime of Indonesia. It is in your interest to make it seem as if you are part of the local scenery.

That’s not the only reason you might use locals. This is a generalization, but Americans don’t make very good expatriates. We’re generally quite provincial and bad at mastering foreign languages (which can be a prerequisite for working in many places). We find it difficult to assimilate into other cultures. We are used to high living standards, which makes it expensive to maintain us when we are planted overseas. It’s not just wages. When you ship an American to work for you abroad, particularly in an emerging market, you pay a significant premium. They can only live in certain type of housing and certain types of neighborhoods. They might require extra security or a driver. They expect to travel back to the United States, and their kids will likely need to attend a specialized and expensive private school. And dealing with their taxes and benefits is more complicated.

Which is why U.S. companies increasingly put their foreign operations in the hands of foreigners, and not necessarily ones from the countries in question. They have the experience, temperament, and ability to navigate foreign markets better than Americans do. The CEO of Yum China Holdings, the spun-off China operations of KFC and Pizza Hut, is Indian. The head of Starbucks’ European, Middle East, and Africa unit, which is based in London, is Dutch. The person who runs IBM’s Philippines division is a Filipino who was raised and educated in the U.S.

And increasingly, the path to the top of American multinationals comes through these rapidly growing international operations. McDonald’s CEO Steve Easterbrook joined the company in his native England in the 1990s. Or take Coca-Cola, perhaps the most iconic American company. The current CEO, James Quincey, is of British origin, and worked his way up through the company’s Latin American and European operations. He replaced Muhtar Kent, who started with the company in Turkey and spent most of his career in Turkey and Europe. Kent replaced E. Neville Isdell, a native of Ireland who had joined Coca-Cola in Zambia and worked his way up through the European and British operations.

So here’s an instance where the norm in corporate America simply can’t be the norm in government. You can’t hire foreign nationals to be the public face of your foreign operations, or to run them. As a matter of policy, you literally have to be a U.S. citizen to work in the foreign service. It’s possible to outsource the conduct of foreign policy to the military. But it’s impossible to outsource the business of the State Department to cheaper foreign workers. If Tillerson is seeking to save money on his payroll, the only think he can do is simply fire people and reduce staffing levels sharply across the board.

Which leaves the final, telling difference between business and government. When companies reduce staff sharply, they often reduce operations by a commensurate amount, closing stores or restaurants or factories. But Tillerson is also constrained in this regard, too. As much as members of the Trump administration might like it to do it, the State Department simply can’t pull out of anywhere.

*Correction, May 1: This post originally described American embassies as “literally operating on American soil.” While embassies have full control over the land on which they sit, the sites are not sovereign territory.

April 30 2017 1:14 PM

How America’s Luxury-Obsessed Festival Industry Made the Fyre Festival Debacle Possible

The Fyre Festival may go down as the biggest disaster for a large-scale concert since Altamont—or at least since the widespread rioting and sexual assaults of Woodstock ’99. When attendees arrived on the Bahamas’ Great Exuma Island this past Thursday, they found not an opulent getaway but something closer to a disaster site. Instead of the luxurious weekend promoted by supermodels and set to feature Blink-182, Pusha T, and others, they found sparse food and water, accommodations that were basically waterlogged relief tents, and a distinct Hunger Games vibe. For the privilege of all of this, some groups of attendees paid anywhere from a grand to $125,000. Before a single note was played, the event was canceled.

It’s easy to dismiss the people tweeting and snapping their Fyre Festival misery as wealthy idiots who got their just desserts (or, specifically, their cheese and dry bread). If you took a little bit of joy in their plight, you’re certainly not alone. But these particular rich kids of Instagram aren’t actually to blame, nor really are rapper Ja Rule and the other organizers of the Fyre Festival nightmare (one of whom is also the founder of a “social club” for moneyed millennials that’s been unenthusiastically described as being like OpenTable, but for $250 a year). Festival culture has been careening toward a debacle like this for a while now—and along the way it’s done wrong by music lovers and musicians alike.

The culture and economics of the American music-festival circuit have created an environment in which the exorbitantly priced Fyre Festival is an acceptable concept. It’s taken a decade of steadily rising ticket costs and the advent of lavish VIP packages at most every major American festival to get to this point, where people are now willing to shell out thousands of dollars on an unproven, first-time festival—never mind its plainly illogical mix of luxury perks, complex logistics, and its owners’ now-admitted utter lack of experience in putting on a major music festival.

By my count, high-end tickets to at least a dozen major U.S. music festivals cost close to $1,000 or more—a marked increase from even just two years ago. The price to attend music festivals has gradually climbed out of the grasp of your average music fan for years, to the extent that now the cheapest possible weekend at Coachella costs more than $600, and that’s if you already live in the desert and bring your own dry bread and cheese from home. The VIP version of that same Coachella experience costs almost $8,500, including flights and hotel. It’s a lot of money. Bonnaroo, now owned by the concert behemoth Live Nation, sells its VIP tickets for $1,648.50 and you have to buy two at a time. And that’s just the mid-range VIP price! You want that real VIP experience, with the up-close seating and the Le Bon cabana? That costs $7,000 for two people. And you still have to get there.

So if you’re one of the post-election DSA card holders chuckling at the deserved plight of the wealthy trapped on Great Exuma, you haven’t flipped over the price tag on a regular, non-exotic-island festival recently. While these costs are disappointing for music fans, they’re no longer surprising. Live Nation and entertainment company AEG own almost every major festival in America. When two companies control a multibillion-dollar industry and set prices against one another, it’s logical to expect ticket costs to go up until those companies hit the ceiling where literally no one will pay what they’re asking. This year, 125,000 people attended Coachella, leading to long waits for water and mild claustrophobia. Festival owner AEG hasn’t found its maximum price yet.

So long as enough people pay whatever Live Nation and AEG charge to attend top-tier festivals like Coachella, Firefly, and others, the festivals themselves slip out of the reach of most music fans. And since most artists not named Beyoncé, Adele, or Kendrick struggle to make money selling records, the paydays and exposure associated with the festival economy have made festival invites hard for bands and their managers to turn down. That’s true even with anti-competitive radius clauses that prevent bands from performing in nearby venues around the tour. Why would Major Lazer play just, like, a regular show, when instead it could get paid a kajillion dollars to perform a short set at a living Puff Daddy video in front of a several thousand well-off weekend warriors?

None of this is to say that the concept of a massive music festival can’t be a useful consumer product. Some folks make music festivals their annual vacations, their big weekend away from their jobs and children. If you’re a 30- or 40-something with money to spend and nostalgia pangs to see Radiohead and whatever acts the kids are digging these days, that’s fine.

But every time someone says “yes” to the price of a festival VIP package, they pay no subsidy for the rest of us—they simply drive costs up for everyone the following year, and price out music fans without extensive disposable income. For some bands, the gambit probably pays off. After all, who doesn’t want to do less work for more money and reap the kind of exposure festivals can provide? But the tradeoff can be steep. Not every band is comfortable with the questionable politics of the festival duopolists. And for fans, the ever-rising cost of festivals (and many big-ticket concerts) perform the same filtering act as an unpaid internship: Only people of a certain means can be involved at all.

There are lots of exceptions in the festival world—punk-plus-more festivals Riot Fest and the Fest stand out as good values for the cost, as does Portland’s Pickathon. Indeed, if you can afford it, the festival experience delivers more value for your concert-going dollar than seeing the bands in separate arenas, theaters, and bars whenever they happen to come through your city next. But perpetually testing the upper limits of pricing can lead to a precarious and exclusive economy, one in which fan value and experience tilts against the monopoly-driven economics of the modern music industry. If the festival economy is a bubble, which it well may be, Fyre Festival could mark the tipping point where even VIP festival attendees scratch their heads at the rising cost of admission and ask: For what?