Moneybox
A blog about business and economics.

July 29 2015 6:22 PM

Whole Foods Needs Some Good News After Its Pricing Scandal. It's Still Waiting.

Whole Foods wants its grip on the organic food industry back. The grocery chain used to dominate the market, but it has steadily been losing its lead to supermarket chains and other grocery stores that offer organics at lower prices—and it’s well aware. To strike back, the company laid out ambitious plans this year to open new stores aimed specifically at millennials, and it responded to growing competition by providing more store-branded food items and launching a national rebranding campaign. But its reputation was badly damaged this summer by a New York investigation that revealed what many customers have long make grumbling jokes about: The store routinely overpriced some of its products.

“Straight up, we made some mistakes,” Whole Foods co-CEO Walter Robb confessed in early July. Though his candor was appreciated, it wasn’t enough to reverse the outrage sparked by the investigation’s findings. In the wake of the overpricing scandal, Whole Foods on Wednesday reported disappointing results for its third quarter, which ended July 5. Though its total sales for the 12-week period rose to $3.6 billion, its diluted earnings per share fell short of analysts’ expectations and growth slowed sharply in the last few weeks of the quarter. The company also issued predictions for its fourth quarter that are short of previous expectations.

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Whole Foods seems to be relying on the launch of its new millennial-themed stores, called 365 by Whole Foods Market, for salvation. On Tuesday, Robb emphasized the upcoming roll-out of the new stores next year, as did company president Jeff Turnas, who said Whole Foods is “really excited” for the launch of the new chain. Robb admitted that there is "no magic bullet for restoring whatever trust was lost" after its pricing scandal. Well, there could be one: even lower prices.

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July 29 2015 5:51 PM

The Economy Keeps Getting Better, But Young Adults Keep Living With Mom and Dad

Earlier this spring, there seemed to be signs that young adults were finally shaking off the effects of our long-ago recession and moving out from their parents' basements. Namely, the pace of U.S. household formation was speeding up, which is generally a sign that twenty-somethings are setting off on their own.

But maybe not so much. Today, the Pew Research Center is out with a new analysis of Census data suggesting that young adults haven't really changed their ways. The job market might be getting better by the month, but millennials are still very much living at home.

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First, the very big picture. Since 2010, unemployment among 18-to-34-year-olds has fallen significantly. And yet the fraction of that group living independently, meaning not with a parent or relative, has also declined. 

Now let's drill down a little more. Pew was kind enough to send me its numbers broken down into smaller age groups—18-to-24-year-olds (with full-time college students excluded) and 25-to-34-year-olds. In the first three months of 2015, it seems, the percentage of younger millennials living at home shrank a bit. For older millennials, it rose. Pew cautions that, because of seasonal issues, numbers from this past winter might not be 100 percent comparable with full-year data from 2014. But still, there's no real sign that the 25-to-34 group is leaving the nest.

millennials_fixed

Jordan Weissmann*

And honestly, nobody is entirely sure why they haven't yet. There are theories, of course. Some studies have blamed student debt, though that doesn't really explain why non-college-goers are also living at home at higher rates. Others suggest the fact that young people now get married later than they used to may be responsible. To me, it seems blindingly obvious that the fact that rents are rising faster than wages in much of the country has something to do with it, though I haven't seen a rigorous analysis testing that theory. (But, seriously, 46 percent of 25-to-34-year-olds were rent-burdened in 2013, up from 40 percent in 2003. If it is less affordable to get an apartment, it seems unsurprising that fewer people will do it.)

Really, though, it's kind of silly to try and single out a single overriding reason why millennials are still fulfilling our stereotype as the boomerang generation. The labor market might not be a raging dumpster fire anymore. But over the last 15 years, the economy (and culture) has evolved in ways that make living solo less appealing. The rent is high. We have education loans to pay off. We're not in a rush to get hitched. So long as all that stays true, America's basements are probably going to stay pretty full.

Correction, Wednesday, July 29: About a minute after publishing, I noticed a spreadsheet error that inflated the percentage of 25-to-34-year-olds living at home. Thankfully, it did not change the underlying trend or analysis at all, but I deeply regret my Reinhart-Rogoff moment. I've swapped in a corrected graph.

July 29 2015 5:09 PM

The EU Says Disneyland Paris Isn’t Giving Everyone a Magical Deal

Twenty miles outside Paris lies a 4,800-acre stretch of sparkling castles and magnificent roller coasters. They belong to Disneyland Paris, the massive, sprawling entertainment resort comprising multiple theme parks and hotels, as well as a golf course, a shopping complex, and dozens of other colorful attractions. The park’s fantastical appearance might not be the only thing that’s mirage-like about it, however. Disney’s French outpost, which is already struggling to remain profitable, has just been hit with allegations that it is illegally overcharging visitors from abroad.

The European Commission announced Tuesday that it’s probing the park’s price differences for visitors who come from certain areas of Europe. It asked the French government to investigate whether Disneyland Paris is unfairly rigging prices for British and German customers, who claim that some park packages are more expensive when ordered from their countries than from France. In some cases, British and German customers allegedly pay €1,970 ($2,176) and €2,447 ($2,703) for the same premium package that costs a substantially smaller sum of €1,346 ($1,487) for French customers. EU rules prohibit companies from making customers pay different prices because of their nationality or residence, unless significantly different market conditions or holiday seasons are at play.

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Though the park claims it’s simply offering promotions for different markets based on seasonality and booking patterns, an initial EU assessment found that French customers also benefit over non-French customers by receiving large family discounts, special rates, monthly payment options, and annual packages. British customers also pay 15 percent more for one-day tickets. European Commissioner Elżbieta Bieńkowska said the discrepancies are significant, adding, “It is time to get to the bottom of this… I struggle to see what objective justification there could be for these practices.” If the allegations are true, the park is in some major trouble according European law. If the French government doesn’t decide to take action against the theme park, the European Commission could take France to court, the FT reports

But in a way, trouble is nothing new for the park: It’s been in turmoil, at least financially, since the very first day it opened. Disneyland Paris was built 20 years ago by the Walt Disney Company on the heels of its blazing success in Florida and Japan—at the time, Disney World was wildly popular, Tokyo Disneyland emerged an instant hit, and the company’s new venture in France was expected to be just as prosperous, if not more so. It wasn’t. The park lost $1 billion in its first two years of operation. It’s continued to flounder ever since, steadily hemorrhaging money and requiring several bailouts from its parent company just to stay afloat.

The main reason for the park’s lack of success would be comical, if it weren’t deeply sad: Disneyland Paris has simply never been widely accepted in its homeland of France. It banked on the majority of its profits coming from French visitors, but only around half its yearly visitors have actually been from France. This probably shouldn’t have shocked Disney. The park proudly flaunted itself as an American product in a country that notoriously dislikes American culture and scorns most American exports. Originally called Euro Disney, the whole theatrical production was famously deemed a “cultural Chernobyl” during its construction in 1992. And over the years, it’s lived up to the unfortunate name.

After the park’s opening day, which was expected to draw half a million visitors but pulled in a meager 25,000, Disney quickly realized it had overshot with its $5 billion project. Attempting to stem its stream of debt and win some more love from the French, the park changed its name to Disneyland Paris, threw in some French-sounding attractions, added alcohol to its menus, and shuffled out more outdoor restaurant space to appeal to French dining habits. But its problems ran deeper than an aesthetic offense to French people: The park also misunderstood French leisure habits, assuming that the French were willing to spend just as much money on lavish vacation activities as Americans, when in reality they were much stingier with their wallets and much less willing to take their children out of school for non-summer vacations.

Given all this, it makes sense that Disneyland Paris would try to make yet another knees-on-the-ground plea for French people to love it—this time not by donning French dining practices, but by offering special ticket prices and promotional deals to appeal more to French spending habits. The park (whose chairman, in 1991, made the unfortunate boast, “My biggest fear is that we will be too successful”) has clearly not lived up to the tastes of its audience. Its special promotions for French customers may have softened this disgruntled market a bit. But if an investigation finds that the allegations of unfair pricing for non-French countries are true, Disneyland Paris’s plan has backfired. Even at the happiest place on Earth, everyone wants a square deal.

July 28 2015 6:13 PM

No, This Graph Does Not Prove That Everything Is Fine With American Capitalism

If you keep up with the debate about inequality, at some point you've probably read that pay for middle-class Americans has failed to keep up with their productivity. Workers are creating more value for companies than they used to, but aren't being compensated for it. Maybe you've even seen a graph like this one, from the Economic Policy Institute. The dark blue line shooting up at 45 degrees? That's productivity—or economic output per hour of labor. The light blue line that nearly plateaus around the late 1970s? That's compensation for production and nonsupervisory employees—wages and salary plus benefits for people who basically aren't in management. The bigger the wedge between those two lines, the more it seems like something has been fundamentally wrong with capitalism for the past 30 or so years. It may have been working, but not for workers.

But is this picture misleading? Is your average employee still reaping the gains of the economy? Clive Crook at Bloomberg View seems to think so. In a post headlined “American Capitalism Isn’t Broken After All,” he points to a set of graphs from Harvard Economist Robert Lawrence that adjusts the typical productivity-pay comparisons in a number of ways. It's a bit involved, but in brief:

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  1. Instead of tracking wages, he tracks compensation. (EPI does the same, but some writers and economists just look at cash income.) This is important, because lots of worker pay might be getting eaten up by the cost of health insurance and other benefits.
  2. Instead of calculating pay for nonmanagement workers—or for the median worker—he looks at average compensation for all workers.
  3. He subtracts capital depreciation—the cost of replacing worn-out equipment, from giant auto-factory robots to the laptops in your office—from economic output. Why do that? Because neither workers nor company shareholders really get to pocket the money that's eaten up by depreciation. It's basically part of our national cost of doing business.
  4. He adjusts everything for inflation based on the cost of products workers produce, rather than the cost of living.

Ultimately, you get a graph that looks like this. Average wages don't really fall behind productivity until about 2000.

Why the relationship breaks down after that point is still a subject for debate. (Lawrence, to radically simplify, argues that companies essentially haven't been investing enough.) "The main point to grasp, though, is simpler," Crook writes. "For decades after 1970—contrary to one popular account—labor incomes grew roughly in line with productivity. Over the long haul, far from being irrelevant to well-being, growth in productivity goes far to deciding how poor or prosperous ordinary Americans will be."

That is not, in fact, what Lawrence's graph tells us at all. Again, Lawrence is looking specifically at average pay for all workers. That includes everyone from Tim Cook on down to your office cleaning crew. Odd as that sounds, it makes perfect sense for Lawrence's purposes: He is basically in a fight with Thomas Piketty and his academic fans about the relationship between capital and labor, and wants to precisely measure how much workers' overall share of national income has declined in recent years, while suggesting some theories as to why the change has occurred. His math tells us absolutely nothing, however, about whether compensation gains have been distributed evenly among workers. And guess what? They haven't been, even when you include things like health insurance, in the equation. Pay for the imaginary "average worker" has tracked productivity. For the typical worker, it hasn't.

This is not a new point. You can find liberal economists like Jared Bernstein making it back in 2013. And for its part, EPI illustrates it in the graph below. It adjusts productivity and compensation data somewhat similarly to Lawrence's approach, except it still looks only at production and nonsupervisory employees, who make up about 80 percent of the workforce. As you can see, there is still a big gap between the country's productivity and compensation growth.

Now, some might argue that this makes total sense, at least if you assume that most of our productivity improvements in recent years have been due to highly educated Americans making good use of computers to automate things like factory production. But that is a) debatable and b) a separate issue from whether all of the economy's gains in recent years are filtering down to your typical worker. They're not. It's been a long time since we've been able to count on a rising tide lifting all boats.

July 28 2015 3:46 PM

The Rise of the Gig Economy Is a Giant Myth

It's certainly possible that, one day, Silicon Valley darlings like Uber that rely on massive numbers of independent contractors who work as they please will revolutionize the American labor market such that we'll all end up freelancers patching together a living working gig to gig. But that day hasn't arrived yet—not even close. As Josh Zumbrun and Anna Louie Sussman recently noted in the Wall Street Journal, American workers are now less likely to be self-employed or hold multiple jobs than they were a decade ago, even in industries, like transportation, where you might already expect to see the Uber effect taking shape.

gig_economy_fixed

Jordan Weissmann, adapted from the Wall Street Journal

So, from all available evidence, the rise of the gig economy still seems to be a figment of the Internet's imagination. That doesn't make it any less important to discuss the issues raised by companies like Uber or Instacart, which have amassed massive valuations based on their novel labor models. But it does complicate the conversation. On the one hand, everyone can figure out why these startups might be a little problematic. They may only be a small piece of the economy now. But if they show the world that it's more profitable to use workers on a contract basis, rather than hire them as full employees with all the benefits and protections that entails, other businesses are going imitate them. At that point, fewer Americans will enjoy the stability of a full-time job. On the other hand, it's possible these companies will turn out to be a net plus as they expand the market for some services, like taxis, and make work more flexible.

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Which will it be? At this point, these companies don't make up enough of the economy for us to really know. Rather, it seems like they're mostly offering an outlet to people who already would have been self-employed or holding down multiple gigs. It's still entirely possible to look at the potential trade-offs and decide we need to start safeguarding against the possible downsides now, which is why the U.S. Department of Labor already seems to be looking to crack down on companies that abuse contract labor. But the harms that might emerge if massive swaths of the American labor force are reduced to contingent status are still basically hypothetical. 

July 28 2015 2:07 PM

Those New Bag Fees Are Working Out Great for JetBlue

Airlines have been getting stingy about even the simplest of flight amenities lately. It costs money to stretch your legs in roomier seats; meals are no longer free; even requesting a pillow can come at a cost. While the industry’s biggest airlines haven’t yet stooped to the low of charging for boarding passes and drinking water, they are instituting new fees for one crucial component of air travel—luggage. JetBlue was one of the last airlines to hold out on revoking the traditional airline courtesy of allowing at least one checked bag for free, until it too started charging for bags this summer.

And how is that working out for JetBlue? Pretty well, apparently. At a time when the aviation industry as a whole has weak revenues, JetBlue had a profit of $152 million in the second quarter of the year, the company announced Tuesday. Its shares are up more than 40 percent this year, and its stock has climbed 96 percent in the past 12 months. CEO Robin Hayes said that the airline has seen “solid demand across our network.”

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Still, steady earnings don’t necessary mean that customers are very happy with JetBlue’s new bag policies. It’s more that they just don’t have much of a choice. According to the Bureau of Transportation Statistics, U.S. airlines raked in more than $864 million from baggage fees in the first quarter of 2015—a whopping sum that the companies are unlikely to want to let go of anytime soon. With the exception of those who are able to take bare-bones flights with minimal luggage, passengers are often stuck with the additional flying fees these days. Southwest Airlines is now the only large airline that offers free checked bags.

But don’t worry: JetBlue still claims to offer the most legroom in coach of any U.S. airline. The company also promises to continue providing free snacks, soda, and television on its flights—at least for now.

July 28 2015 1:34 PM

Why You Should Root for China’s Stock Market to Keep Crashing

After a few weeks of relative peace and quiet, China’s stock market is careening downhill again, and the government is trying to stop the landslide. On Monday, shares saw their biggest one-day drop since 2007. Tuesday, they dipped a bit more, capping three straight days of losses that have cut 11 percent off the Shanghai Composite Index. In response, the country's regulators have promised to continue pouring money into equities to pump prices back up.

Is the rescue attempt good for China? I’m starting to think that it’s not—and that the country would be better off if the government failed and this crash continued.

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Mind you, the current leadership of China’s government wouldn't be better off, seeing how it has staked a not insignificant bit of its reputation on a promise to salvage what very much looks like an unsalvageable situation. Urged on by a cheerleading state-backed media, millions of first-time Chinese investors piled into stocks just as the bubble was getting ready to blow. They got creamed when the market fell by about a third between June and early July. And since then, the government has taken extraordinary rescue steps: Regulators have stepped in to essentially buy shares, suspended new IPOs, allowed massive swaths of the market to stop trading, and loosened monetary policy and rules on lending. If the kitchen-sink approach falls flat, a lot of people are going to lose confidence in the Communist Party's ability to stabilize the markets.

But that wouldn't necessarily be the worst thing, long term. The government shouldn’t be stabilizing stocks, and if its current scheme works, it would set a terrible precedent for the future.

In general, it’s reasonable for a government to step in and calm down markets when there’s a panic that threatens long-term economic stability. If there’s a run on the financial system, for instance, it’s probably time to act, since banking collapses have a way of leading to depressions. Thankfully, China’s fledgling equities market isn’t that important in the grand scheme of things. It’s relatively small compared with the overall size of the country’s economy, and Chinese households only keep about 9 percent of their wealth in stocks. Even if share prices fall through the floor, the damage shouldn’t have that much of an effect on how families and businesses decide to spend. So the current stock decline could be a chance for the country to learn a lesson about stock bubbles while the repercussions are still small and containable.  

If Beijing does manage to put a floor under stock prices, however, it will have bought itself a much bigger problem. Namely, it will be stuck supporting the market for the foreseeable future. After all, once the government promises to keep stock prices from falling, it can't suddenly turn around and say: “Sorry investors, you guys are on your own.” Otherwise, prices will just crash again.

Why would that be a drag for China? First, vowing to back a whole stock market is an expensive promise—especially when Beijing is essentially guaranteeing that a massive bubble will stay inflated in perpetuity. Remember, the government has been resorting to actual share purchases, as well as loosening the overall credit environment, which creates its own potential dangers for the economy. The bigger the bubble gets, the bigger the challenge of keeping it from one day popping. Longer term, the Communist Party would like its markets to attract international investors, which is hard to do when it looks like the government is essentially running the whole game from Beijing. Better that shares crash now, and the government learns there are some things it can't, and shouldn't, micromanage.  

July 24 2015 5:53 PM

Hillary Unveils Her Wonky Plan to Jack Up Taxes on Rich Investors

Hillary Clinton has unveiled what might be the first truly interesting economic proposal of her presidential campaign. During a speech in New York on Friday, she detailed a plan to hike taxes on income from investments that high-income Americans hold for less than six years. It is part of a broader platform designed to fight what she refers to as "quarterly capitalism"—corporate America's focus on maintaining short-term profits in order to appease shareholders. "American business needs to break free from the tyranny of today's earnings report," Clinton said. Frankly, a few of the ideas she brought up—such as more elaborate disclosure rules regarding executive pay and stronger disclosure rules on stock buybacks—seemed a bit limp. But the tax increase on investors could become a defining issue.

Most obviously, because it's a tax increase. Republican contenders like Marco Rubio and Rand Paul have argued for eliminating taxes on investment income altogether, a move that would overwhelmingly benefit wealthier households. (New York University economist Edward Wolff calculates that, in 2013, the top 10 percent of U.S. households owned 81.4 percent of all stocks.) Clinton is officially moving in the opposite direction.  

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Here's how it would work. Today, when Americans sell stocks or bonds that they have held for less than a year, it's taxed as normal income. If they hold it for more than a year, they pay the lower long-term capital gains rate, which technically maxes out at 20 percent. (However, high earners also pay an additional 3.8 percent surcharge under Obamacare, so the final number is really 23.8 percent.)

Clinton argues, very reasonably, that it's silly to consider everything a long-term investment after just a year. Instead, she wants the capital gains rate to decline gradually, so that the longer people hold their stocks, bonds, and mutual funds, the less they pay after cashing them in. For Americans in the top tax bracket, the government would tax investments sold after less than two years like ordinary income. Then, over the next four years, the rate would fall back down toward 20 percent (you have to add the 3.8 percent Obama surcharge onto each of these numbers to get the total tax amount). None of this would affect people outside the highest bracket.

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Screenshot via hillaryclinton.com

Again, Clinton is couching this change to the tax code as a way to prod investors into thinking long term, rather than push companies to cut investment and pay out dividends to enrich their shareholders at the expense of future growth. It might work. It might not. But, ultimately, it's a progressive tax increase on investment income, and that should make many progressives happy. Regardless of whether it changes investors' behavior, it will raise some money from the wealthy, especially given that the average stock is currently held for less than a year.

Inevitably, conservatives will argue that the plan is a job killer. In general, the right maintains that raising taxes on capital gains (or corporate dividends) is wrongheaded, because it will dissuade individuals people from investing in companies and saving, which will in turn cause companies to invest less on their operations. Suffice to say, it's far from clear that's true.

If you simply chart the top capital gains rate against economic growth, there isn't much of an obvious pattern. Given the vast number of factors at play in the economy at a given moment, it's extremely difficult for economists to design credible studies singling out the effects of the investment taxes, which, as the Congressional Research Service has noted, actually have a very small effect on how much it ultimately costs companies to fund themselves. However, a clever paper by University of California—Berkeley professor Danny Yagan found that the Bush administration's 2003 dividend tax cut had no effect on corporate investment. Yagan looked at the way companies organized as C-Corporations, which were affected by the changed, reacted compared with those organized as S-Corporations, which were not affected. Long story short: There wasn't much of a difference.

So here's the potential upside of Clinton's plan: It's a tax increase that will raise a bit of revenue and dampen some of the worst impulses of investors without risking much in the way of growth.

Economic merits aside, parts of Wall Street will obviously hate and oppose this idea. But maybe not all of it. As I wrote earlier this week, some major figures in finance, like BlackRock CEO Larry Fink, have argued that short-termism has become a crisis that threatens to undermine capitalism. It's possible that other money managers who subscribe to his buy-and-hold approach to investing might get behind Clinton's idea, if only because it would give them an advantage over competitors with a shorter horizon.

Ultimately, Clinton's proposal sets us up for a campaign-season debate about how the country should treat the money people earn from investing versus the money people earn from their work. Given the declining share of the nation's income that's going to labor, it's one of the most essential questions we could ask about inequality right now.

July 24 2015 4:54 PM

Can the Marijuana Industry Rebrand Itself as Health Food?

This post originally appeared in Inc.

Upon entering Dixie Elixirs' headquarters in Denver, you're greeted by a big sign that reads: "The Future of Cannabis." Since its 2009 founding, Dixie has updated its image from a "pot soda" company to a gourmet THC edibles manufacturer whose carbonated drinks and snacks, containing ingredients like pepita and sea salt, look like they could be found on a shelf at Whole Foods. It's just one example of how marijuana businesses are rebranding the plant to distance pot from its hippie-stoner-outlaw culture and show off its appeal to a health-conscious, kale chip–eating crowd.

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In April, during High Times' Cannabis Cup in Denver, Pete Williams, co-founder of cultivation center and dispensary Medicine Man, said the companies that will ultimately find success are those that develop a branding strategy that appeals to the mass market. "The game is about demographics, he said. "We need to make cannabis less looking-over-your-shoulder and more soccer mom."

Recent industry events such as the Marijuana Investor Summit in Denver and the Cannabis World Congress Business Expo in New York City showcased businesses aimed at maximizing the medicinal value of weed. New York City–based Potbotics is marketing the Brainbot, a helmet that reads patients' brain waves and gives a cannabis recommendation tailored to their specific ailments. Genifer Murray, co-founder of marijuana testing company CannLabs, says that five years ago no one thought testing weed was important. Now companies have started to put dietary information right on their packaging. "This is how we're going to legitimize the industry," she says. "We need to get rid of these images of Bob Marley and tie dye—no offense to Bob Marley—and smoking blunts."

Still, changing the view of the product that has been ingrained over decades remains a work in progress. "You see a lot of poorly engineered branding strategies being employed," Steve Angelo, founder of marketing company Cannabranders, tells DigiDay. "As this plays out over the next few years, branding will make or break these companies."

During the BevNet conference in New York City last month, Dixie Elixirs CEO Tripp Keber detailed how vital branding and packaging has been to the company's fortunes. During the early days of legalization in Colorado, packaging standards didn't exist. But after a college student ate a pot brownie (not a Dixie product) and committed suicide, a new law was passed forcing companies to lower THC content in single servings and make their packaging childproof and resealable. For Dixie, that meant pulling its line of sodas off the market, costing the company $300,000.

Dixie replaced its glass bottles with brush-aluminum bottles with a resealable and childproof cap that doubles as a single-dose cup. Now novice pot consumers can buy a bottle of the soda, which has 90 milligrams of THC, and measure a single dose of 10 milligrams. This small move fostered consumer trust in Dixie—instead of drinking the whole bottle and being zonked, they can use it responsibly and enjoy the buzz, Keber says. "A lot of the other brands were looking to set the maximum amount of THC in each of their products, but we decided to set the minimum," he says. "When I go out, I don't put a bottle of Jack Daniel's on the table and try to consume it all at one time."

Ultimately, says investor Leslie Bocskor, marijuana will follow a pattern similar to that in the tech industry. Computers used to be used mainly by scientists, giving rise to an intense culture surrounding them, but that changed as adoption increased. "The industry will evolve and stoner culture will be less and less prevalent," Bocskor said at the Marijuana Investor Summit. "Eventually, we won't think of Cheech and Chong when we think about cannabis, just like we don't think about geek culture when we think about Amazon."

July 24 2015 7:48 AM

Conservatives Think They Have a Magic Formula for Raising People Out of Poverty

I haven't yet read Ta-Nahesi Coates' new book, Between the World and Me. But I did find myself groaning while reading Rich Lowry's review of it at Politico. This was not due to anything Lowry wrote specifically about Coates' work—which, again, I haven't opened—but because he trots out a bit of received conservative wisdom about fighting poverty in a very irksome way. It's a canard I fear we'll hear a lot during the presidential election.

Lowry, who edits National Review, says he dislikes Between the World and Me because it is too nihilistic and doesn't offer a "positive program" to improve the lot of black America. However, he also dislikes Coates' suggestion, put forward in a widely read Atlantic essay, that the government start by considering paying black families reparations. Why? Social science, of course. 

... like all Americans, [blacks] are in a much better position to succeed if they honor certain basic norms: graduate from high school; get a full-time job; don’t have a child before age 21 and get married before childbearing. Among the people who do these things, according to the research of Ron Haskins and Isabel Sawhill of the Brookings Institution, about 75 percent attain the middle class, broadly defined.
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In policy circles, this idea is often referred to as the "success sequence." Conservatives —including presidential contender Marco Rubio and sorta-kinda-contender Rick Santorum—are quite fond of it, because in their eyes it shows that personal responsibility is essential to conquering need. Certainly, Lowry seems to think so. Would reparations "be transformative for any individual?" he asks in his review. "No. For poor blacks to escape poverty, it would still require all the personal attributes that contribute to success. So Coates is selling snake oil. Even if he got his fantastical reparations that he has poured such literary energy into advocating, real improvement in the condition of black people would still require the moral effort that he won’t advocate for."

This is, in fact, a statement about much more than reparations, or Coates. Implicitly, it's an argument that unless the poor embrace middle-class "norms"—that all-important three-part code that unlocks membership to the middle class—money is useless.

Which is just sort of silly.

In the end, the "success sequence" is a mildly catchy way of stating the obvious. It is not a magic formula—though people who follow it rarely end up poor, by Sawhill and Haskins' own admission, a good number of people take all of the right steps and still don't make it to the solid middle class. But yes, you are more likely to get there if you both graduate from high school and promptly find full-time work. That's sort of like saying it's easier to go bear hunting with a gun than it is to wrestle a grizzly into submission—nobody would think otherwise. You are also more likely to be middle class if you get married before having children, in part because wedded couples have been found to be more stable, and two incomes are typically better than one, especially when there is a baby to raise.

I somehow doubt that there are many people who need to be told that graduating high school, finding a job, and settling down before starting a family are ideal things to do. Achieving all of these personal milestones is easier, however, if your family happens to have money, or can at least afford to put food on the table. Wealthier children do better in school. Moving poor kids to nicer neighborhoods while they're young improves their future earnings. The more money men make as adults, the more likely they are to get married. "Moral effort," whatever that means, might be useful when it comes to making your way through the world. But cash definitely is.

It is also entirely possible to end up in the middle class while violating the success sequence, which is not, in fact, some sort inviolable law of nature. As Sawhill and Haskins show, a quarter of Americans who miss one or two items on their to-do list end up earning above 300 percent of the poverty line. Many of those individuals were probably born middle class or wealthy. But that only goes to show how, with a little help, people can find a decent lot for themselves, even if their lives don't conform to Rich Lowry's strict standards.

And that's why, as I said, I'm not looking forward to conservative politicians picking up the "success sequence" as a theme. If you treat it as a list of things that we should probably help people do, it's fine. But, again, it's not magic. And it shouldn't be treated as an excuse to cut off people from help if they don't live their lives by a very specific set of rules. This country really doesn't need yet another flimsy excuse to let people fend for themselves.

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