A blog about business and economics.

Aug. 20 2014 3:39 PM

Bank of America Is Handing Over a Record Sum to the Justice Department, and Investors Don’t Care

It's been a boring day for Bank of America's stock. Shares dipped a bit after the Fed released minutes from its latest policy meeting but have basically stayed flat (up less than 1 percent) through the afternoon. In fact, if you glanced at Bank of America's stock, you'd have no idea that the company just agreed to a record $17 billion settlement with the U.S. government over sales of mortgage-backed securities.

How could an agreement like this barely budge the stock? For starters, investors had probably already priced it in. Rumors have been circulating for some time that Bank of America and the Justice Department were in talks to settle for many billions of dollars. A $13 billion figure was tossed around in July and was followed by reports of a $16 billion or $17 billion deal. Now that the settlement has finally become official, it already feels like old news.

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The other reason the market probably isn't balking is that huge settlements from banks over mortgage-backed securities probes and other financial-crisis-related issues have become the status quo. Just one month ago, Citigroup agreed to turn over $7 billion to the Justice Department to settle claims that it deliberately misled investors with its mortgage packaging and repackaging processes. JPMorgan sealed a $13 billion dollar deal earlier this year.

And here's one last point to keep in mind about that big headliner figure: The settlement might be for $17 billion, but only $10 billion will be paid out in cash, and the rest in "consumer relief" valued at $7 billion. When potential tax deductions and clever bookkeeping is taken into account, a $17 billion settlement might end up costing Bank of America a whole lot less than that.

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Aug. 20 2014 1:54 PM

Starbucks and McDonald’s Raise the Heat on the Coffee Wars

Competition for coffee drinkers is heating up as bean supplies dwindle and prices everywhere increase. Now two big players in the industry are testing new strategies to peddle their caffeinated wares.

Starbucks is focusing its efforts on some of the biggest caffeine-guzzlers of all: college students. The company plans to introduce coffee-carrying food trucks on three campuses this fall: Arizona State University, James Madison University, and Coastal Carolina University. (ASU has also partnered with Starbucks on a plan to bring affordable college education to the coffee giant's employees.) Starbucks has a surprisingly small presence in colleges at the moment, with only 300 of 11,500 stores on U.S. campuses, according to Businessweek.

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McDonald's, the other company to recently announce a new development in coffee strategy, has decided to start selling its McCafe brand as packaged coffee in U.S. grocery stores next year. No prices have been announced yet, but presumably they'll reflect the increases that just about every other major brand has announced this summer. But McDonald's will have the benefit of following those price hikes without having to formally announce one of its own.

Aug. 20 2014 1:22 PM

Contraception Is Saving the U.S. Billions of Dollars on Teen Pregnancy

The sharp decline of teen pregnancy in the U.S. isn’t just one of the great (and underappreciated) public health victories of the past few decades—it’s also a budget victory.

As the Centers for Disease Control and Prevention explains in a report this week, the teen birth rate has nosedived 57 percent since 1991. The total number of children born to adolescent mothers is lower today than it was in 1950, when the country was a bit less than half the size it is today.

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CDC

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Teen mothers are especially likely to use safety-net programs like Medicaid and WIC (which provides food for new moms and their infants), so as their numbers have shrunk, taxpayers have saved money. The CDC cites survey research by the National Campaign to Prevent Teen and Unplanned Pregnancy, which estimated that federal, state, and local governments avoided spending $12 billion in 2010, thanks to the post-1991 drop.

But why are teens having fewer children? That's a complex social and economic question that academics are still trying to break down. (Sometimes the research leads to surprising results: One study suggested MTV shows such as 16 and Pregnant and Teen Mom may have played a role in declining rates.) Since the early 1990s, when births began their drop after rising for several years, the fraction of teens having sex has fallen while contraception use has become more common. That’s given ammo to fans of abstinence-only education and safe-sex-education advocates alike. It’s also possible that the recession helped hasten the fall of teen births after 2007. (Fertility fell pretty much across the board after the meltdown, just like employment.)

For its part, the CDC cites one telling paper from the American Journal of Public Health. Using government survey data on adolescent sexual behavior, it concluded that 86 percent of the decline in teen pregnancy between 1995 and 2002 could be chalked up to increased contraception use; the other 14 percent was due to abstinence. “The decline in U.S. adolescent pregnancy rates appears to be following the patterns observed in other developed countries, where improved contraceptive use has been the primary determinant of declining rates,” the researchers wrote.

Aug. 20 2014 11:22 AM

How an Executive Order on Immigration Could Help Startups

This article originally appeared in Inc.

One of the great failings of Congress this year has been its inability to do anything with immigration reform. Hoping to remedy that, President Obama is reportedly on the verge of using his executive power to help businesses struggling with limits on green cards and work visas, as well as other issues related to immigration. The changes, which the Wall Street Journal reports are to be announced after Labor Day in an executive order, could be a potential boon to small businesses staffed or owned and operated by immigrant entrepreneurs, many of whom reside in Silicon Valley and drive much of the innovation happening there. 

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What's emerged from more than 20 closed door meetings this summer are two potentially significant tweaks to the green card granting process. An executive order might, for example, remove the dependents of green card holders from the official caps, which could increase worker green card numbers to nearly 300,000. Yet another proposal would recycle unused green cards from previous years, which could add 200,000 more green cards to the total number allotted annually.

"This [would be] a great step forward," Vishal Sankhla, co-founder of Viralheat, a social media analytics company based in Santa Clara, California, says. "This will help businesses and startups in the short term while we wait for a larger and more comprehensive immigration reform."

Sankhla is a perfect example of why immigration reform needs fixing. He's been in the U.S. for  more than 13 years, first attending university here on a student visa, and then graduating to a six-year work visa. During that time, he launched a highly successful company in Silicon Valley, which has attracted $4.5 million in venture capital funding from the Mayfield Fund, and which has created 17 high-paying jobs for engineers and other workers. But Sankhla only received his green card this year, after years of effort, including gathering thousands of pages of documentation about his various achievements. Among his employees are five people on H1-B visas, for whom he pays about $15,000 a year for legal bills related to their own immigration processes.

"The best part is to recapture the unused green cards, [as] this will help clear the [green card] backlog ..and make it possible for people to get a green card who are waiting for a very long time," Sankhla says.

Research bears out the need for comprehensive immigration action, as immigrants are among the country's most passionate and involved business creators. More than half of startups in Silicon Valley were founded by foreign-born entrepreneurs, according to Vivek Wadhwa, entrepreneur and researcher of public policy at Stanford Law School, and the Kauffman Foundation. Similarly, Kauffman's most recent index of entrepreneurial activity, released this spring, indicates that immigrant entrepreneurs are currently starting businesses at a rate roughly twice that of native-born business owners.

"This is something the President should have done years ago," Wadhwa says. "There is no reason that he could not have issued executive orders to streamline processing, reduce regulations, instruct immigration adjudicators to be sensitive to the needs of immigrants, rather than trying to lock them out."

More specifically, Wadhwa says he favors a visa for immigrant creators of startups, which is something the Obama administration supports as well. In a statement about its proposals for immigration reform, the White House says the startup visa would be for:

foreign entrepreneurs who attract financing from U.S. investors or revenue from U.S. customers to start and grow their businesses in the United States, and to remain permanently if their companies grow further, create jobs for American workers, and strengthen our economy.

For Sankhla and other immigrant entrepreneurs, an executive order authorizing such changes can't come soon enough.

"It will immediately add more skilled workers to the workforce, allowing businesses to hire them," Sankhla says. That would be a boon for both Sankhla's business and the economy.

Aug. 19 2014 6:08 PM

The NFL Wants Musicians to Pay for the Honor of Playing the Super Bowl

The Super Bowl is the greatest advertising event of the year, and we should fully expect the National Football League to wring every bit of cash from it possible. That said, news that its officials have  asked at least some of the musical acts under consideration for this year's halftime show to pay for the privilege of playing the big game is a bit irksome. Citing "people familiar with the matter," the Wall Street Journal reports that NFL has narrowed down its choices to three contenders: Coldplay, Rihanna, and Katy Perry. However:

While notifying the artists' camps of their candidacy, league representatives also asked at least some of the acts if they would be willing to contribute a portion of their post-Super Bowl tour income to the league, or if they would make some other type of financial contribution, in exchange for the halftime gig.
The pay-to-play suggestion got a chilly reception from the candidates' representatives, these people said.
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The NFL's logic, as the WSJ explains, isn't anything surprising. When artists play the Super Bowl, their music sales often get a short-lived pop. Some, like Beyoncé, have used the appearance to promote a new concert tour. Since the NFL already doesn't pay halftime acts, there's already a tradition of playing for exposure. Now, the league is simply saying that exposure is worth paying for, which—considering we're talking about fabulously successful and wealthy pop stars—isn't exactly a crime. While I'm sure some might look at this as payola on a grand scale, I don't think the comparison really holds. Radio stations may be businesses, but they use the public airwaves and are still the way plenty of Americans discover music—which creates a need for trust. Most viewers tuning into the Super Bowl, on the other hand, aren't there to learn about cool new bands.

So no, I'm not offended on behalf of Coldplay, Rihanna, Katy Perry, or the TV-watching public. What bugs me is that, if the NFL really does make this a policy, it's going to end up with acts that need the advertising, as opposed to the kinds of stars who've actually made the whole production watchable (or at least memorable) in recent years. Would Destiny's Child have ever reunited for a live audience if Beyoncé had to pay for the privilege? Would middle America have ever gotten to watch Madonna, dressed as a Roman goddess, paraded out by a retinue of muscle-y legionnaires? Would Janet Jackson and Justin Timberlake have conspired to give us the phrase "wardrobe malfunction"? I'm not confident the answer is yes. And at some point, culture ought to come before commerce. Even on Super Bowl Sunday. 

Aug. 19 2014 9:51 AM

Steve Ballmer Turns It Up to 11 for Clippers Fans

In his days as Microsoft CEO, Steve Ballmer probably became better known for his public speaking style than his business vision. Booming, peripatetic, a bit rambly—when the man gets in front of a crowd, it's like watching a crazed Little League coach rev up a locker room after one too many Red Bulls. Except that coach is actually an eccentric billionaire. Doesn't matter if he's talking to a bunch of programmers or at a college commencement, the man always takes it to 11.

Which is why he'll probably make a sort of delightful owner for the Los Angeles Clippers. Yesterday, Ballmer delivered one of his trademark performances while officially introducing himself to fans during a pep rally at the Staples Center. It was everything you hoped. Business Insider pulls a particularly great line:

We're going to be hardcore. HARDcore. HARDCORE! We're going to get better everyday. We're going to be tenacious. Something knocks us down and we're going to get back and keep coming and coming and coming and coming. Did you watch these guys? That was hardcore! Hardcore baby! Nothing gets in our way, BOOM! Keep coming. HARDcore. The HARDCORE Clippers, that's us.
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Watch for the baffled and amused look on Blake Griffin's face. Watch because the world is awful right now, and Steve Ballmer will cheer you up. Really, the guy needs to give a pep rally for America.

Aug. 18 2014 6:36 PM

It Now Costs $245,000 to Raise a Child, Before College

Kids. They’re expensive. The Department of Agriculture has released its latest report on what families spend raising their children, and it’s full of all sorts of statistics to make you think long and hard about adopting a dog instead. The headline figure: A middle-income married couple can now expect to spend $245,000 on their precious one from birth through age 17 (in other words: pregnancy and college not included). As a point of reference, the median new home sells for about $273,000. Meanwhile, in 1960, the inflation-adjusted price tag for a child was about $198,000. So in half a century, the expense has jumped about 24 percent.

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One big culprit here is the ever-growing cost of child care and education, which has expanded from 2 percent of the typical family's budget to 18 percent, even as total spending has shot up. However, those averages mask some pretty big differences between families: 45 percent of middle-income couples spent nothing at all on this category. That means some families really are draining their bank accounts dry on day care and private school, while others manage cheaply with stay-at-home parents and public school.

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There are also big class differences. As shown on the graph below, richer families tend to spend more overall on their children, but they devote less of their income to it. “On average,” the USDA reports, “households in the lowest income group spent 25 percent of their before-tax income on a child; those in the middle-income group, 16 percent; and those in the highest group, 12 percent.” In any event, it’s almost never too late to opt for the beagle.

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Aug. 18 2014 3:00 PM

How Ferguson Highlights the Dangers of For-Profit Policing

Jeff Smith, a New School professor and former Missouri state senator, had a sensational op-ed in this weekend’s New York Times that dived into the economic forces that have helped shape the strife in Ferguson. His big point is that the local police have a strong financial incentive to arrest, ticket, and otherwise harass the city’s black residents for minor offenses, because that’s how the department funds its budget.

How so? From Smith:

St. Louis County contains 90 municipalities, most with their own city hall and police force. Many rely on revenue generated from traffic tickets and related fines. According to a study by the St. Louis nonprofit Better Together, Ferguson receives nearly one-quarter of its revenue from court fees; for some surrounding towns it approaches 50 percent.
Municipal reliance on revenue generated from traffic stops adds pressure to make more of them. One town, Sycamore Hills, has stationed a radar-gun-wielding police officer on its 250-foot northbound stretch of Interstate.
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When you split a metro area into dozens of tiny local governments (St. Louis County, to be clear, doesn’t include the actual city of St. Louis, which spun off from it in the 19th century), they tend to duplicate each others’ services, which is of course extremely expensive. But raising taxes so that each tiny borough can afford its own police and fire department is a nonstarter, since wealthy residents can always just move one town over. End result: You have police departments that self-fund by handing out tickets. And thanks to the delightful racial dynamics of U.S. law enforcement, black residents are disproportionately stopped and accosted, even though police in Ferguson are less likely to find contraband when they search black drivers than when they search whites.

Michael Brown wasn't being pulled over for speeding when he was shot. But we're talking about the broader issues that poison the relationship between a community and the cops who are, theoretically, paid to protect them.

In a way, you can think of it as a small-bore version of the problem with civil forfeiture laws, which allow state and federal governments to confiscate property allegedly involved in crimes and which are often accused of encouraging “for-profit policing.” The same way the Justice Department puts the heat on its lawyers to increase forfeiture claims in drug cases—because that’s where they can skim money—local police have every incentive to crank up their traffic stops.  

Smith’s solution to the problem is to remerge St. Louis and its nearby suburbs, which will help the metro area feel less fragmented and help give the black community of Ferguson more political power to demand better treatment from police. As I wrote last week, while the city is two-thirds black, its government is mostly white, because the young, poor, and often transient black community has trouble mobilizing votes. In St. Louis, by comparison, the black population has been able to establish stronger civic institutions and exerted more influence. Of the many formidable problems that Ferguson has come to symbolize, we can add for-profit law enforcement to the list.  

Aug. 15 2014 5:03 PM

Why the Future of Work Is Doomed, in One Video

This past January, the Economist set off alarm bells when it noted in a story on the future of work that 47 percent of jobs were at risk of becoming automated in the next two decades. Telemarketers. Retail salespeople. Commercial pilots. Economists. Even actors and editors. Like it or not, the robots are coming, and sooner or later they'll probably come for your job.

"Humans Need Not Apply," a new mini-documentary from C.G.P. Grey, tackles just how wide-ranging the repercussions of automation could be in the labor market going forward. "This stuff isn't science fiction," the narrator explains in a staccato, robot-esque tone. "The robots are here right now. There is a terrifying amount of working automation in labs and warehouses around the world." That includes Google's self-driving cars and bots trading on the New York Stock Exchange, as well as computers writing fan fiction and composing classical music.

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The automation of the workforce isn't going to happen overnight and it might still be a long time before your favorite radio tunes are composed by a bot. But if you want a dark take on what the labor market could look like several years or decades down the line, just check out the video.

Aug. 15 2014 2:17 PM

The Transcripts From Market Basket Board Meetings Read Like Outtakes From The Godfather

Boston's ongoing Market Basket saga has all the elements of a Hollywood drama: A beloved but ousted CEO, decades of family infighting, and of course billions of dollars at stake. The affordable-grocery chain has faced strikes and demonstrations ever since former chief executive Arthur T. Demoulas was forced out in June by a board controlled by his rival and almost identically named cousin, Arthur S. Demoulas. Earlier this week, the company issued a final warning to protesting employees that they had until Friday to return to work or would lose their jobs.

In case the Market Basket story needed to get any more cinematic, the Boston Globe has unearthed transcripts of Market Basket board meetings held over the past decade that highlight the tensions within the company and between its warring family members—and at times sound like a real-life enactment of scenes from The Godfather. The heated exchanges get off to a good start in June 2003 as the board quibbles over how to improve the contentious tone of board meetings. This back-and-forth is between former chairman Bill Shea (a representative of Arthur T. Demoulas) and Arthur S. Demoulas:

Mr. Shea: Then I'm going to challenge you not to interrupt other people.
Mr. Demoulas: Oh, well, you do that.
Mr. Shea: How about that?
Mr. Demoulas: You do that. That's very nice of you.
Mr. Shea: Huh?
Mr. Demoulas: Yes.
Mr. Shea: The first time you interrupted today—
Mr. Demoulas: I'm so threatened by you, pointing your finger at me.
Mr. Shea: The first time you interrupt today—
Mr. Demoulas: What are you going to do?
Mr. Shea: —you're going to hear the same thing.
Mr. Demoulas: Oh, is that right?
Mr. Shea: That's right.
Mr. Demoulas: Oh, well—
Mr. Shea: Or we'll adjoin the meeting.
Mr. Demoulas: See, you're already threatening me.
Mr. Shea: I'm not threatening you. You threatened me.
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In October 2011, a debate about shareholder distributions prompts this exchange between then-independent director Nabil El-Hage, Shea, and Arthur T. Demoulas:

Mr. Demoulas: Now, to a restriction on how we wheel and deal out there, I do not know of any restriction that’s out there; and I do not care to have any restrictions, quite frankly.
Mr. El-Hage: You're not Catholic, are you, Arthur?
Chairman Shea: No. Is anybody anymore?
Mr. El-Hage: That's a serious question. You're Greek, so you practice Greek Orthodox.
Mr. Demoulas: Right.
Mr. El-Hage: That explains it, because in my religion only the Pope is infallible. So I really think as a matter of prudent business practices, anybody, no matter how good you are—and you are good—wouldn't be hurt by consulting with your board when it comes to that kind of money. That's a lot of money.

And finally in August 2012, a discussion of placing spending limits on "godfather" Arthur T. Demoulas yielded these comments from the former chief executive. For the best effect, we suggest replacing the words "company" and "management" with "family" as you go:

Mr. Demoulas: I'm here as a business person, trying to run a business, and do it as simply, as efficiently, and as sensibly as possible. If I wanted to be a director, I'd be sitting in one of those B director seats. It doesn't excite me. I enjoy what I'm doing. What I do is I run a business, and I've been doing it for a long time. We've got a family operation here. And you want to move things along without going through a lot of unnecessary discussions and opinions and viewpoints when at the end of the day, at the end of the day, I'm going to make the decision. Now, if you're telling me you want to come down here—if you're telling me you want to come down here to inform you of what has been done or what we have committed to, I've been doing that right along.
Mr. El-Hage: Understood.
Mr. Demoulas: If you're telling me that you want me or Don or the other members of management to come down here to indicate to you at some midstream place to look for your approval on either structure or whether it's a go or a no-go, I think that is a problem. I think it's a problem for the company. I think it is not in the best interests of Demoulas Super Markets, Inc. I think it's not in the best interests of Arthur T. negotiating. And I don't think that's where the responsibility should lie.

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