A blog about business and economics.

July 17 2015 2:56 PM

Europe’s Economic Misery Has Worked Out Pretty Well for Germany

With the finalization of a potential Greek debt deal drawing closer, former Federal Reserve chairman turned blogger Ben Bernanke has a post Friday morning excoriating Europe's past five years of economic policy in which he chides Germany for more or less sucking the life out of its neighbors. In it, he includes this vivid chart, which should put Southern Europe's resentments toward Berlin into a bit of perspective. The green line shows us German unemployment sliding below 5 percent. The blue line shows us unemployment in the rest of the eurozone combined, which is stuck above 13 percent.


So the past several years of misery haven't been so miserable for the Germans. Why criticize them for it? It's all about the euro and trade.

If Germany still had to rely on its own currency, it would be far more expensive than the euro. That would hurt its ability to export Volkswagens, prescription drugs, and Becks around the world. But, instead, it shares a currency with the eurozone's many weaker members. That has two big effects. First, it lets German companies sell their products in countries like France, Italy, and Greece, where otherwise consumers might not be able to afford them. Second, it keeps German wares relatively cheap outside of Europe, most importantly in crucial markets like the United States and China.

While Germany has reaped the benefits of euro membership, it hasn't returned the favor by buying more goods from, say Southern Europe. Instead, by keeping government spending in its neighbors tight, it has basically put a lid on imports. The end result is a massive trade surplus that has left its economy in decent shape while leaving its eurozone compatriots hanging out to dry. Worse yet, it has demanded harsh austerity measures in return for bailouts, which have murdered domestic demand in countries including Greece, making it difficult for them to recover.

So Germany has managed to turn the euro into a mechanism for transferring wealth into its own coffers. As Bernanke notes, it could fix this situation at virtually no cost to itself by borrowing at historically low rates to invest in infrastructure and perhaps by shifting policy to increase worker pay. But, instead, it has obsessively clung to its idea of fiscal prudence—for itself and for the rest Europe. And you can see the results very clearly in the disparate unemployment stats.

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July 16 2015 6:29 PM

The Downside of Hillary Clinton’s Plan to Give Workers a Share of Corporate Profits

Wages are stagnating while corporate profits are hovering around record highs. So it's easy to see the logic behind Hillary Clinton's latest economic proposal, which she unveiled Thursday in New Hampshire: a tax cut for companies that share their profits with their employees. It is also easy to see reasons one might be wary of the idea.

As the Clinton campaign puts it, corporate profit-sharing is supposed to be a "win-win" for employees and businesses. When workers have a vested interest in whether their company earns money, they should theoretically work harder and become more productive. And, in fact, there's apparently some evidence this happens. Clinton's proposal is meant to get this virtuous cycle started; she would offer companies with profit-sharing programs a two-year tax break to help them "overcome any initial costs of setting up" the plan. After that, hopefully, the benefits would be so obvious that companies would make the distributions permanent. The total cost of the initiative would be $10 billion to $20 billion over a decade.  

It's feel-good capitalism. But it's also not hard to imagine unintended consequences. What happens, for instance, if companies see a tax break, and decide to try to replace some of their wage bill with profit-sharing? As Allison Schrager noted earlier this week at Quartz, that would be a raw deal for many middle-class workers who rely on the consistency of a regular paycheck, since corporate profits are often erratic. Wealthy executives can weather the ups and downs of performance pay, but your typical employee isn't prepared for the risk that their income will shrink if Q4 sales come in a little bit weaker than expected. Take the thought experiment a little further, and it's also easy to see how truly widespread profit-sharing could intensify a recession by exposing workers to the whims of the economy.

There are ways to get around these issues. One is to give employees an equity stake in their company, either by encouraging more worker cooperatives or employee stock-ownership plans, which can hand them more direct control over management and pay policies. Clinton's plan doesn't contemplate those ideas, however—it's purely about prodding corporations to spread the wealth around, rather than giving workers more power as shareholders. To head off any nasty side effects, Clinton would tell the Treasury Department to come up with "protections against abuses—such as stopping any firms from limiting or gaming wages and benefits to get the credit." Maybe the government would come up with surefire regulations to stop cheating, maybe not.  

For another perspective, I called up Joseph Blasi, a sociologist at Rutgers University's School of Management and Labor Relations, who's written extensively on profit-sharing and employee ownership plans. He was a bit more excited about Clinton's announcement, in part because it will at least give the idea some time in the public spotlight, and because he thinks the tax credit will force more companies to at least consider the concept, and compare their performance with that of competitors that use it. He told me that while it's possible that companies would game the system to get a tax credit, employers that have already adopted profit sharing typically use it as a bonus on top of base wages, not as a substitute. "If a company does profit sharing and reduces their employees’ wages, they’re not going to have any incentive to improve the company, they’re going to find it unfair, they’re going to be upset with their company, and word is going to get out,” he said.

That may be true. But it's easy to imagine companies introducing profit sharing with the help of a tax credit, then holding back on raises, or hiring new workers for lower pay. Though he doesn't think it would be a large problem, Blasi told me he that we'd still have to think of ways to stop companies from essentially replacing wages with a bonus structure. “If we have [profit sharing] economy wide, it’s an important issue to raise and have a policy solution to.”

Of course, all of this is assuming that companies will care much about what, in the end, is a fairly modest, two-year tax-break, that should theoretically require them to redirect profits from shareholders to employees. The bigger problem with Clinton's idea might not be that it will have unintended consequences, but that it won't have any consequences at all.

July 16 2015 10:02 AM

The Goldilocks Theory of Marriage

Conventional wisdom, and many years of social science, have long said that the longer people wait to get married, the less likely they are to get divorced. There are obvious reasons why. With age, people mature, finish school, and settle into careers, which gives them the emotional and financial wherewithal to manage lifelong romantic commitments. The more we settle into ourselves, the theory goes, the better we are at settling down with others.

A new analysis by Nicholas Wolfinger, a sociologist at the University of Utah, challenges that idea a bit. Using data from the National Survey of Family Growth, he finds that today, divorce risk declines for people who wait until their late 20s and early 30s to get married. But it rises again for those who delay walking down the aisle until their late 30s.

Again, this seems to be a new phenomenon. Wolfinger finds that during the mid-1990s, the odds of getting divorced continued declining the longer individuals held off on their first marriage. (For our purposes, just pay attention to the blue trend line. The gray shaded areas represent what are known as confidence intervals.)


But now, the trend is u-shaped. “My data analysis shows that prior to age 32 or so, each additional year of age at marriage reduces the odds of divorce by 11 percent,” he writes. “However, after that the odds of divorce increase by 5 percent per year.” Call it the Goldilocks theory of marriage: Getting married too early is risky, but so is getting married too late. Your late 20s and early 30s are just right.


How come? Wolfinger isn't sure. But controlling the data for demographic and personal characteristics such as race, education, religion, sexual history, family background, or the size of the cities survey takers lived in didn't change the results, suggesting none of those factors could explain it. Ultimately, the professor suspects that there's a lot of self-selection at play: The sorts of people who wait a very long time to say "I do" just might not really be the marrying types, whether they realize it or not. Or, even if they are, their dating pool might have been whittled down to people who aren't.

But that would explain today's pattern, not the change we've seen since the turn of the century. And the reason behind that shift is also mysterious. "This is the $64,000 question," he told me. "I honestly don’t have a great explanation. What I know for certain is it has happened."

July 16 2015 9:34 AM

McDonald’s Franchise Owners Think the Company Is Doing Worse Than Ever

McDonald’s franchisees have the dimmest outlook for their company in 12 years. According to the July edition of a franchisee survey conducted by analyst Mark Kalinowski, franchisees gave McDonald’s an average rating of 1.69 out of 5 for its six-month business prospects in the U.S. That’s well below the survey’s historical average of 2.7 and also decently lower than the previous worst of 1.81.

The survey, which included 29 domestic respondents who own and operate more than 200 restaurants, also predicts that McDonald’s same-store sales for the U.S. will fall another 2.3 percent in June. That would mark the fifth consecutive month of domestic sales decline for the Golden Arches, as well as nearly two years that sales in the U.S. had either decreased or remained essentially flat. McDonald’s is due to report same-store sales for June—the last time it will provide those figures on a monthly basis—later this month.


Data from McDonald’s and survey. Chart by Alison Griswold.

Not surprisingly, the franchisees surveyed didn’t have much positive to say about the company’s recent performance. “There is nothing on the menu that excites our customers,” says one. “Corporate has no answers. They are throwing ideas at the wall hoping something will stick,” responds another.

It’s easy to see how they would think that. Since McDonald’s kicked off another round of turnaround efforts under the leadership of chief executive Steve Easterbrook earlier this year, the chain has announced a hodge-podge of initiatives for bringing customers back to stores. McDonald’s is testing all-day breakfast, customized burgers, and an artisan chicken sandwich. It has also increased hourly pay for U.S. employees at company-owned stores (so, not franchises), and of course plans to focus on longer-term financials with the elimination of its monthly same-store sales reporting practices.

But the real cornerstone of the turnaround plan Easterbrook laid out in May—if you can call it that—was actually the franchisees themselves. “We’re a franchiser, and that has always been part of the essence of what’s made McDonald’s successful,” Easterbrook said at the time. “I’ve a strong philosophical commitment behind franchising, I think it’s incredibly important to our business.” The hope is that handing more control to franchises will spark new enthusiasm and energy in McDonald’s stores. It’s a nice idea in theory. If the Kalinowski survey is any indication, though, McDonald’s has a long way to go before franchisees are ready to trust it again.

July 15 2015 7:41 PM

Greece’s Parliament Unhappily Approves Its Bailout

Greece just came a little bit closer to possibly getting a bailout package that will keep it in the eurozone. Following an emotional debate and early-morning vote, the country's parliament approved a raft of austerity measures that its international creditors had demanded as a first step before negotiating a final rescue deal. While Prime Minister Alexis Tsipras faced a a number of defections from his own left-wing party, Syriza—most notably, from former finance minister Yanis Varoufakis—the package ultimately passed easily, 229 to 64, with six abstentions, thanks to yes votes from opposition members.* The rebellion within Tsipras' ranks may force him to lead going forward with the help of a unity government. But he seems to have survived the vote in charge.

So Greece has officially capitulated to Europe's demands. But it remains unclear whether its creditors will be able to come to an accord on the bailout. The International Monetary Fund has said it won't participate in a rescue unless the deal offers enough debt relief to make Greece's obligations sustainable long term, something that Germany and other Northern European hard-liners seem loath to do. Meanwhile, Greece's financial condition is deteriorating pretty much by the minute thanks to the capital controls that have put its economy on lockdown, and Europe's powers are still squabbling over how to provide a large bridge loan to keep the country afloat until a final deal can be reached. (Long story short: Officials want to tap a resource that the United Kingdom helps fund, but the British don't want their money on the line.)

Still, the vote was a crucial, if painful, first step. Throughout the night, Greek leaders, including Tsipras and his finance minister Euclid Tsakalotos, emphasized that the bailout was a bitter pill they they had little choice but to swallow. If there was any silver lining, it lay in the hope that Greece might get additional debt restructuring, perhaps along the lines of what the IMF has proposed.

Saying yes to the bailout “was a decision which will be a burden for me for the rest of my life,”  Tsakalotos said. “I don’t know if we did the right thing. But I know we did something to which there was no alternative."

*Correction, July 16, 2015: The post originally misstated that 228 members voted in favor of the package. 

July 15 2015 6:16 PM

Even Netflix Is Surprised by How Much Netflix Is Growing

Netflix, the streaming giant responsible for millions of unhealthy binge-watching addictions, has made some fairly daring decisions lately. In early June, it began testing advertisements for its own shows to play before and after videos, despite insisting just two months earlier that it wouldn't air commercials on its site. Later that month, the company announced an audacious seven-to-one stock split. Whatever Netflix is up to, it’s apparently doing something very right: The company announced its second-quarter earnings Wednesday, and they exceeded expectations—by a lot.

In the quarter ending June 30, the company added nearly 30 percent more subscribers to its user base than expected, drawing in 3.3 million new subscribers, a number well above the 2.5 million that it had predicted. This puts Netflix’s total user base at 65 million. Its shares in the second quarter of 2015 also went up 9.4 percent—an uptick that Netflix partially attributed to its exponential addition of original television shows and films this year. Though the company’s net income has dipped this year due to the costs of overseas expansion, its revenue for the second quarter, compared with the same quarter in 2014, is higher by $300 million.

Netflix no longer monopolizes the video-streaming industry the way that it used to. It’s facing heightened competition from Amazon, which has upped its game by producing its own original content. Other industry players such as Comcast have also announced new video-streaming services. Nevertheless, for the current quarter Netflix is predicting the addition of another 3.6 million subscribers globally. It’s also planning on broadening service to 200 countries by the end of next year.

July 15 2015 2:20 PM

China’s Stock Market Is Falling Again. This Was Entirely Predictable.

For a little while, China's stock market seemed to be rallying from the nausea-inducing crash that wiped out a third of its value in a month. Now, it's back to falling, albeit a little more slowly. Over the past two days, the Shanghai Composite Index is down 4 percent. Tally the ups and downs, and it's off about 26 percent from its June heights.

There are a few reasons why shares are dipping again. But one of the biggest, as the Wall Street Journal notes, is simply that investors are finally free to buy and sell stocks like normal again. Most of them, anyway. At one point last week, trading had been suspended for more than half of all listed corporations on China's markets. Currently, only about a quarter are still sidelined. As more companies have resumed trading, “they've pulled money away from other stocks ... causing the overall market to go down,” as one source told the Journal.

This speaks to the bigger flaw inherent in China's attempts to keep its stock market afloat. In the last couple of weeks the government tried just about every intervention imaginable to support prices. It more or less ordered brokerages to buy. It loosened rules about borrowing in order to purchase shares. And, yes, it let half the market go idle. (Chinese stocks automatically stop trading once they fall 10 percent, but investors seemed to think the number of companies asking for pauses was "unusually large.") The problem is that all of these approaches were more or less temporary fixes and did nothing about the fact that Chinese investors are deeply overleveraged, which has been one of the main forces driving stocks down. It was predictable that as the government loosened its grip, the fall would start again.

July 15 2015 2:11 PM

Amazon’s Prime Day Sale Is Awesome If You Need to Clean Your House

To celebrate its 20th birthday, Amazon has really been hyping its Prime Day sale. "Prime members can shop thousands of exclusive lightning deals with new deals added as often as every ten minutes," a press release bragged. So far, though, the deals are leaving something to be desired.

You might associate Black Friday with a decline in moral values and people getting trampled. Or maybe you think about deals on premium electronics like TVs, laptops, and audio equipment. While Prime Day has the advantage of containing our consumerist rot to our homes, it isn't really delivering in the second category. The entry-level Kindle and Fire HD 6 tablet are both good deals today. The Fire TV Stick is $24 ($15 off), which is useful for stocking up if you have multiple TVs in your house. There are some decently priced Bose headphones, and the Lord of the Rings extended editions Blu-ray box set (a Black Friday staple) is $28, which is quite cheap. That's kind of it for the fun stuff, though.

"I was not prepared to wade through the underwhelming nature of Amazon Prime shit today," one friend told me. "I kind of bought a lot of stuff on Prime," another said. "Just like the most boring [things] like electronic toothbrush replacement heads." I am currently contemplating this Dustbuster.

There are some overarching money-savers, like an offer for $20 off an $100 order (with promo code "PRI20ARC") if you have an Amazon Rewards Visa. There are also some deals in which you get bonus credit when you buy Amazon gift cards. But yeah. Lysol disinfecting wipes are 20 percent off!

If you're patient enough to wait through the waves of lightning sales, you can probably get some good deals on things that are actually useful. That's one positive quality of the Prime Day sale compared with most large-retailer sales. But Amazon is the one that brought up the Black Friday comparison, and this is nowhere close.

The real winner of Prime Day, though, is Slate staff writer Mark Joseph Stern, who purchased a Bio Bidet "for no reason other than its discount." At $36.89 ($162.11 off the list price!), that's how you celebrate Amazon's birthday in style.

July 15 2015 12:22 PM

Is Greece’s Bailout Deal Already in Trouble?

Depending on how you look at things, Greece either just picked up a powerful new ally in its bailout saga—or just had its hopes of staying on the euro unexpectedly undermined. The International Monetary Fund said Tuesday night that it would not back a new rescue package for the beleaguered country unless the deal included “debt relief measures that go far beyond what Europe has been willing to consider so far.” This is fairly powerful threat, since eurozone leaders are counting on the fund both to help finance and monitor the estimated €86 billion aid agreement they struck with Greece on Monday. It's a bit like your head coach threatening to walk out one week before the season starts.

In a short memo it made public Monday, the IMF called Greece's debts “highly unsustainable.” That's a problem, because the fund's in-house rules more or less bar it from lending to countries that it does not think can realistically pay back its loans. Worse yet, it notes that Greece's economy and financial system are further deteriorating by the day thanks to the bank shutdowns and capital controls that have ground commerce to a halt. It also points out that Europe's entire aid plan relies on some heroic assumptions about Greece's future, such as the idea that the government can maintain unusually large budget surpluses for decades to come. "Few countries have managed to do so," it notes wryly.

In the IMF's view, Europe has a few options to make the math on Greece's debts work. It can simply send more money to Athens each year to fund its budget. It could also offer Greece "deep upfront haircuts," which is just technocrat speak for writing off a big chunk of the debt's face value outright. If neither of those options is pallatable—and Monday's agreement explicitly rules out a haircut—Europe might be able to accomplish the same ends by giving Greece more time to pay down its loans. How much more? The IMF suggests a grace period of 30 years. Since some of Greece's loans already aren't scheduled to mature for three decades, that's akin to admitting that many of them will never be repaid in your or my lifetime, if at all. “The choice between the various options is for Greece and its European partners to decide,” the IMF writes.

This is all a somewhat ironic turn of events. Germany, along with its fellow Northern European hardliners, has adamantly opposed a write-down of Greece's loans, arguing that it would violate eurozone rules. At the same time, Germany has adamantly insisted that the IMF take part in a new bailout, to the point where Chancellor Angela Merkel threatened to kill the deal entirely if Greece continued objecting to the fund's involvement. Now, Berlin and the IMF are at odds. While the Monday accord specifically lays out the possibility that Europe will restructure Greece's debts to make paying them back a bit easier, nobody seemed to be contemplating the sort of drastic measures the fund is demanding. Indeed, according to Reuters, a German spokesman said that while "extending debt maturities is an option ... there must not be a haircut via the backdoor.” That's essentially what the fund is calling for.

All of this may also make life a bit harder for Greek Prime Minister Alexis Tsipras, who is attempting to push a set of austerity measures through his parliament that Europe’s leaders have demanded as a prerequisite for further bailout discussions. The vote is scheduled for later tonight. And with the IMF injecting new uncertainty into what seemed like an almost done-deal, it may be even harder to round up support for what was already a deeply divisive proposal.

Could all of this cause the bailout bargain to unravel entirely? If the IMF and Berlin can't resolve their differences, it's possible. That said, some of Greece's creditors have already embraced the fund's memo—particularly France, which has basically played good cop to Germany's bad throughout these talks. And sources involved with the talks seem to believe the parties will be able to reach some sort of compromise. Negotiators already knew about the memo during this weekend's talks and relied partly on its financial estimates to determine the size of the loans Greece would need. Unless they were trying to sabotage the bailout altogether, it seems unlikely they would have crafted an agreement knowing a crucial player like the IMF could never accept it.  

But, given how convoluted this saga already has been, maybe it's best not to assume anything.

July 15 2015 11:17 AM

Wow Air Will Fly You From the U.S. to Paris for Just $99

Wow Air, the ultra-low-cost Icelandic air carrier that last year brought you $99 flights from Boston to Reykjavik, is at it again. Now, Wow is offering service from Baltimore-Washington International Airport and Boston’s Logan Airport to Paris and Amsterdam this October for as little as $99 in one direction. The flights will head through Reykjavik, then connect to their destinations. Wow?


Screenshots from Wow Air

Well, mostly wow. As with most awesome-sounding deals, lots of restrictions apply. Carry-ons can’t be bigger than 22 by 17.7 by 9.8 inches (though that’s actually larger than what’s allowed by many airlines). The first one is free, but the fees add up after that. The first checked bag is $48 online, $67 at the airport. An extra-heavy carry-on will run you $29 (online) or $48 (at the airport). There are also extra costs for any sort of sporting equipment or musical instruments, for flight changes, for name changes, for pre-booked seats, and for pre-booked seats with extra legroom. The $99 deal is really only a deal as long as you don’t add on any of the toppings.

While the offer just rolled out, the flights are already filling up. According to Wow’s website, there are currently four $99 trips departing BWI to Paris in October, and the same in November, all on Sundays. Interestingly, there also don’t seem to be many if any return flights for $99—for the months of October and November, the best prices on those are between $224 and $262 before tax. So Wow might get you over to Europe for cheap. But no promises on the way back.