A blog about business and economics.

Aug. 4 2015 6:17 PM

Hedge Funds Think Puerto Rico Should Shut Down Schools to Pay Its Debts. Is That So Wrong?

A few days before Puerto Rico defaulted on a smallish portion of its debt this weekend, a group of hedge funds holding its bonds issued a report arguing that the island could pay back its obligations in full by simply slashing spending and increasing tax collections. That wasn’t hard to ridicule, especially given the havoc that austerity programs have unleashed of late in, for instance, Greece. But there was one particular recommendation that seemed ripe to be pilloried.

"Hedge funds tell Puerto Rico: lay off teachers and close schools to pay us back," the Guardian blared


"Why U.S. Hedge Funds are attacking struggling Puerto Rican schools," Global Post offered to explain.

"Hedge Fund Economists Want Puerto Rico to Lay Off Teachers to Fix Debt Crisis," Time informed its readers.

These headlines were perfectly accurate. The hedge fund report, authored by a trio of former International Monetary Fund economists, noted that Puerto Rico’s education spending had risen 39 percent in a decade during which school enrollment actually fell by a quarter. Surely, there must have been some unnecessary fat in the system to cut. “The real expense per student has increased enormously without increasing the quality of education," Jose Fajgenbaum, one of the document's authors, told the Guardian. "It’s for the government to decide [how much to cut spending by], but you don’t want to waste government resources. There has to be efficiencies. It is more important to establish a position for growth.”

It's easy to understand why this might seem outrageous. Firing teachers in the middle of what's essentially a nine-year depression seems like a good way to further exacerbate Puerto Rican unemployment, possibly while sacrificing some childrens' educations. Luis Gallardo, a Puerto Rican legislator, noted that the territory’s government had already shut down 100 schools this year and “reconfigured” another 500. “They are proposing teacher layoffs, cuts in higher education, and health benefits, as well as increased taxes. These proposals have been a disaster for Latin America and would be so for Puerto Rico. Sure, Puerto Rico could pay its debt, but at what cost? We are literally cutting off our own limbs just to stay afloat,” Gallardo said, figuratively.

Here is a detail that got much less attention. In June, a group of economists commissioned by Puerto Rico’s governor, including former chief World Bank economist and IMF official Anne Krueger, released its own report arguing that the government’s debt load would be unsustainable without some significant relief (or "restructuring"). At the same time, the authors concluded, the island also needed to pass serious economic reforms, including spending cuts and tax hikes, to help balance its future budgets and set the stage for growth. One of their suggestions? Cut teachers.

“Puerto Rico currently has 40% fewer students but 10% more teachers than a decade ago,” the report states. “Teacher-student ratios are high, higher than in the mainland and many of its wealthiest and best-performing counties. A gradual cut in the number of teachers saves $400 million per year by FY2020 – more if sparsely attended schools are also consolidated.”

Why point this out? Because it illustrates what the conflict between Puerto Rico and its creditors will actually look like. The question isn’t whether the territory will have to deal with painful cuts. The question is whether its creditors are willing to respond to a good-faith attempt to rein in deficits by giving the island a break on its loans in order to make them payable. Notably, when the governor's chief of staff was asked about the education cuts, he responded: “The simple fact remains that extreme austerity [alone] is not a viable solution for an economy already on its knees.” The fact that he didn't reject the idea entirely, only the idea of austerity alone, speaks volumes. Asking Puerto Rico to shutter some schools might not be off base. Asking it to do so for nothing in return, though, is an idea worth ridiculing.

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Aug. 4 2015 5:55 PM

Obama’s Climate Plan Is Basically Cap and Trade

Five years ago, the U.S. Senate killed a major climate change bill that would have created a national cap-and-trade system for carbon emissions.

The bill’s defeat set back climate policy for years. Eventually, the Obama administration regrouped and pursued a new avenue: Environmental Protection Agency regulations on carbon emissions from the nation’s power plants. To many economists, this was an unfortunate fallback plan. Direct, administrative regulations can be more costly than market-based systems like cap and trade, which allow polluters to distribute the burden of cutting emissions more efficiently while achieving the same overall reductions.


But for Obama, the EPA rules had one decisive advantage over cap and trade: He could implement them via executive order, and Congress couldn’t stop him.

On Monday, Obama announced the new regulations, and policy wonks got to work reviewing the language of the 1,560-page Clean Power Plan. They found something surprising. Not only do the EPA regulations allow states to set up carbon trading markets, as many analysts had anticipated. They essentially make cap and trade the default mechanism for states that don’t want to comply.

The overriding theme of the Clean Power Plan is state-level flexibility. The EPA is telling every state how much it needs to cut its carbon emissions from power plants, but it isn’t telling them exactly how to do it. Rather, each state will be required to come up with its own plan, which could include anything from shuttering coal plants to subsidizing renewables to imposing “fees” on polluters. (As the National Journal’s Ben Geman points out, that’s a more delicate way of saying a carbon tax.)

You can see the various state requirements in this helpful infographic from Climate Central:

One of the options that gets the most attention in the rules is emissions trading. Pundits had originally anticipated that cap and trade might play a prominent part in the EPA regulations. But the 2014 draft proposal didn’t seem to push trading as a favored option, and the talk died down. The final rule, however, actively promotes it as an especially cost-effective way for states to meet the mandate and provides several suggestions for how to go about it. States can join existing regional carbon markets, like the ones in California and the Northeast. They can create new ones. Or they can set up their own in-state trading schemes.

In explaining the newfound emphasis on trading, the EPA cited “multiple stakeholders” asking for trading mechanisms in the public comment period for the draft proposal.

Republicans were, of course, lined up to oppose Obama’s plan even before he announced it. Jeb Bush on Sunday called it “unconstitutional” and said he expects the courts to overturn it. And as early as March, Sen. Mitch McConnell called on governors to refuse to comply. No doubt many will do just that.

And what happens when they do? According to the rule, states that fail to submit their own plans to meet the EPA requirements will be subject to a federally imposed plan instead. That plan amounts to—you guessed it—a version of cap and trade.

The federal plan is a little different from the national cap-and-trade system that the Senate shot down in 2010, as Bloomberg Business explains. In short, the EPA would restrict emissions from the state’s power plants but allow them to trade credits with power plants both in their own state and elsewhere in the country. The effect would be to create a national emissions trading market among power plants without any new interstate agreements, circumventing the need for buy-in from noncompliant state governments. From the Bloomberg Business article:

“It’s clear that what they’re trying to do—without establishing a federal cap-and-trade program—is set up a plan that has a very strong likelihood of becoming a de facto federal cap-and-trade program,” said Andre Templeman, managing director of the carbon-markets consultancy Alpha Inception LLC.

Republican leaders may well bridle at an executive action that results in an emissions scheme not so different from the one they defeated in 2010. Then again, if Republican leaders hated the idea of cap and trade so much, maybe they shouldn’t have come up with it in the first place.

Aug. 3 2015 6:35 PM

Millennials Aren’t Quite As Poor As You Think

Sooooooo, I need to nitpick. Over the weekend, Steven Rattner wrote a more or less reasonable op-ed in the New York Times arguing that today’s young adults have been dealt a crappy economic hand and that aging baby boomers ought to do more in order to help them out a bit. How? By accepting higher taxes in order to fund spending that might help the economy. (Less stellar: Rattner would also like to cut Social Security benefits on our account. Please don't). Unfortunately, the piece recycles a misconception I've seen elsewhere—that millennials earn vastly less than the past couple of generations did at the same age.

“Americans between 18 and 34 are earning less today (after adjustment for inflation) than the same age group did in the past,” he writes. “A typical millennial averaged earnings of $33,883 (in 2013 dollars) between 2009 and 2013. That was down 9.3 percent (after adjustment for inflation) in just a decade and is the lowest since 1980.”


This isn't wrong so much as it’s oversimplified. Men really do make less than in 1980. But women earn far more. And in the end, young adult incomes are basically right inside the range they've been in past decades. In other words, the story isn’t about decline but about stagnation.

One important note: In general, it's sort of useless to talk about 18-to-34-year-olds as a single group. I mean, just think about the 18-year-olds you've met. Now consider the 30-year-olds you know. What do they have in common? Hopefully, very little.

That's why I prefer to look at the 25-to-34-year-old contingent, who as a group have largely finished their educations and gotten a professional start in life. What do we find? Well, if you use 2000 as your benchmark, everybody looks like they're doing terribly. And even over a longer time frame, the median young man is indeed earning 18.5 percent less than he did in 1980, adjusted for inflation, thanks to the not-so-slow erosion of high-paying blue-collar jobs. The median young woman, however, is earning 40.5 percent more. For both sexes combined, the median income is right about where it was in 1996. If you look at young adult households—that includes couples that are married or just live together—they're in line with incomes circa 1995.


Jordan Weissmann

You see a similar pattern when you break wages down by education. For both young high school graduates and young college graduates just entering the workforce, hourly wages are roughly on par with 1998, according to an analysis by the Economic Policy Institute.


Of course, stagnation isn't exactly something to celebrate, especially when the cost of rent and education are anything but static. Thanks largely to student debt, even middle class young adults have lower net worths than they did in 1989. Housing costs have almost certainly contributed to the historically large number of 25-to-34-year-olds living at home. And while median incomes haven't necessarily fallen through the floor, Gen Y has had to deal with a longer period of high unemployment than anything the boomers or Gen X encountered. The kids aren't exactly all right. But they're not quite the lost causes Rattner might have you think.

Aug. 3 2015 3:36 PM

This Map Shows Why a National $15 Minimum Wage Is a Terrible Idea

Progressive favorite Bernie Sanders has proposed raising the federal minimum wage to $15 an hour. If you want a simple illustration of why that's such a staggeringly misplaced idea, look no further than this map from the Pew Research Center. It shows the actual purchasing power of $15 across the country's major metropolitan areas, using the Bureau of Economic Analysis' Regional Price Parities. In New York and San Francisco, $15 really translates to $12 and change, once you take cost of living into account. In Beckley, West Virginia, where cash stretches furthest, it's worth $19.64.


The point here is that most of the country is not New York or San Francisco. (There's a lot more blue and teal on the map than mustard brown.) Even in expensive coastal cities, $15 is high enough compared with typical wage levels that we should at least be concerned about the possibility of significant job losses as McDonald's and Popeyes franchises cut back on hiring. But at the very least, you can make a moral argument that the cost of paying rent and putting food on the table is so high in those metros that it's immoral to let businesses pay their workers any less. Not so in Beckley, or for that matter, Dallas or Atlanta. There are vast swaths of the United States where the cost of getting by is relatively reasonable, and where the risk of job losses posed by more than doubling the federal minimum may well outweigh the benefits of giving the remaining workers raises.


Or, to put it another way: Even if you think a $15 minimum makes sense as a way to combat the ungodly cost of life in the Bay Area, there's no reason to impose it on Appalachia.

That said, the BEA's price parities also reveal another reason why, even in the places that have or might pass it, a $15 minimum may not fix the problems it's meant to solve. Namely, their high costs of living are driven overwhelmingly by affordable housing shortages. In the San Francisco metro area, prices are about 20 percent higher overall compared with the national average. But for goods, it's just under an 8 percent premium. Rent, on the other hand, is 81 percent more expensive.

San Francisco Metro Area


You can see the same pattern in Los Angeles, Seattle, and New York, where the whole state may adopt a $15 minimum for fast-food workers.

Seattle Metro Area


Los Angeles Metro Area


New York Metro Area


The problem with using the minimum wage to address an affordable housing shortage is that it does not, in fact, address an affordable housing shortage. It puts more money in people's pockets to pay rent. But, so long as the real estate market remains constrained, it's easy to imagine pay hikes getting absorbed into rent increases, as landlords realize that the whole metro area just got a raise. 

To sum up: In most of the country, the cost of living isn't so high that the moral case for $15 an hour comes close to outweighing the economic concerns. And on our unaffordable coasts, well, the higher minimum just might leave them unaffordable.

Aug. 3 2015 11:46 AM

Greece’s Stock Market Crashed 16 Percent Today. Actually, That’s Good News.

Greece's stock market opened for business today after five weeks of suspended trading. As was to be expected, shares fell—a lot—because Greece's economy has been absolutely whomped by the recent fallout from its debt crisis, and it's still not 100 percent certain the country will strike a deal to stay in the eurozone. Initially, the Athens Stock General Index dropped 23 percent, which ... ouch.

But then it began to recover, and by the end of the day, it finished just 16 percent lower. Now, that's still an enormous decline—the Dow Jones has only fallen by that much once in its entire history, on the Black Monday crash of 1987.* But if you think about it, that might be a vote of confidence from investors. After all, that's five weeks of built-up angst released in one trading day. Given everything that transpired this past month, when the whole Greek economy was basically frozen stiff thanks to a combo of capital controls and bank shutdowns, a 16 percent drop isn't unreasonable (a major survey showed that Greek manufacturing output imploded in July, hitting its lowest level on record). At the same time, it doesn't seem like a situation where panicked investors are simply running for the doors because they're extremely worried a final deal to stay on the euro won't come through. So, weirdly, today might be a vote of confidence from the markets: Greece's economy is probably screwed, but it'll probably be screwed as a member of the euro.


*Correction August 3, 2015: This post initially misidentified Black Monday as Black Friday, because I've apparently been ruined by retail.

July 31 2015 7:07 PM

Here It Comes: Puerto Rico Is Headed for a Debt Default

So it looks like Puerto Rico has some fun weekend plans. After months of staggering under its $72 billion debt load, the island is expected to miss a bond payment due Saturday, which—despite what some government officials have claimed—means the island is probably heading for default. (We won't know for sure whether it happens until Monday, according to Reuters, since the cash isn't due until the next business day).

Think of this as a gentle warmup for a much bigger confrontation over Puerto Rico's debt that's still to come. The government is set to skip a relatively small $58 million payment on a set of bonds largely owned by Puerto Rican credit union members, who—unlike the many hedge funds among the island's creditors—aren't especially likely to sue for their money. Even if they did, not much would come of it, since the debts in question are "moral obligation" bonds—so-called because issuers only have a moral (ha), but not legal, obligation to pay them back.  


Still, as Bloomberg puts it, this is basically Puerto Rico's "warning shot to investors that officials aren’t afraid to default." The island says it simply doesn't have the cash flow to cover its obligations (which may well be true), and is working on a debt-restructuring plan it should have done by Sept. 1. But by skipping this weekend's payment, it's signaling to creditors that they should really consider making a deal or risk getting stiffed. Whether the act of defaulting on a group of credit-union members who lack much in the way of legal recourse will intimidate some steely hedge funders remains to be seen.

How'd we get to this point? To start, Puerto Rico has been in the midst of deep and painful economic slump since 2006, when Congress killed off a crucial tax break that encouraged manufacturing on the island. The problems were exacerbated by the financial crisis and global recession, which the island has never really recovered from. Unemployment currently stands at 12.4 percent, and the barren job market is helping to fuel a mass exodus of young people to the mainland, which, in turn, is further hampering Puerto Rico's economy. Despite all of its very glaring problems, however, Puerto Rico had a fairly easy time borrowing to paper over budget deficits, because its bonds were exempt from federal, state, or local taxes, which made them popular among investors.

Now Puerto Rico’s debts have become unsustainable. Probably. A report commissioned by a group of bond holders suggested the territory could meet its payments by doing a better job of collecting taxes that it's owed and cutting spending, especially on schools, since enrollment has plummeted in recent years (again, population decline is a killer). The government, obviously, feels quite differently. After all, as Greece has taught us, slashing government spending and services in order to pay off debt has a way of further beating down growth. The worse the economy gets, the more Puerto Ricans will likely leave the island, which will mean fewer tax revenues and even weaker potential for growth. Gov. García Padilla has called it a potential "death spiral."

Congress could possibly help here, but being Congress, it likely won't. Just like U.S. states, Puerto Rico itself can't file for bankruptcy. But unlike actual states, the territory's cities and public corporations can't file for it either. It would help if they could—roughly $20 billion of Puerto Rico's public debts belong to agencies such as its electric utility and highway and transportation authority. Treasury Secretary Jack Lew recently called for a bill that would let those entities file for Chapter 9 protection, just like Detroit did, but some hedge funds, which are hoping to get paid back on their bonds in full, have lobbied hard against it, and Republicans in control of the House have been opposed.

So, assuming Congress stays logjammed as usual, Puerto Rico and its debtors will have to sort out a deal on their own or take their conflict to court—where, frankly, it's hard to say exactly what would happen.  For the time being, though, Puerto Rico is showing that it won't just roll over. Or it's trying to, anyway.

July 31 2015 4:54 PM

Pinterest Just Unveiled an Ambitious Plan to Tackle Silicon Valley’s Diversity Problem

This post originally appeared on Inc.

Pinterest, the online scrapbooking site, has set some aggressive new hiring goals where diversity and inclusion are concerned. Co-founder and CEO Evan Sharp outlined Pinterest's initiative to include more women and minorities by 2016, in a blog post published Thursday. He shared details on goals to increase the company's full-time engineering hiring rate to 30 percent female and 8 percent minorities.


A "Rooney Rule"-type requirement will be implemented, where at least one person from an underrepresented background and one female candidate is interviewed for any executive position. To reach those goals, Pinterest is partnering with consulting startup Paradigm.  

The announcement is a first for any major Silicon Valley tech company, which—until last year, and only at the Rev. Jesse Jackson's urging—had remained mum on its (dismal) diversity statistics. At large, the tech industry in 2014 was 64 percent white and 72 percent male. LinkedIn was the most racially diverse tech company, with 34 percent white workers, and eBay was the most gender diverse, with 76 percent male workers.

Jackson, for his part, is pleased with what Pinterest is doing. "Pinterest is putting a huge stake in the ground by setting specific, measurable goals, targets and a 2016 timetable to achieve its diversity and inclusion goals," he said in a press release. 

Still, it's clear that the company is far from gender or ethnic parity. While it employs more women compared with most tech companies (42 percent), men still represent the majority gender when it comes to other workforce sectors. Male employees make up 79 percent of tech jobs, 81 percent of engineering, and 84 percent of leadership positions. At large, black Americans are just one percent of the workforce, with Hispanics accounting for two percent. That's a pretty disappointing snapshot.

Pinterest's new partnership will allow a closer look into more "granular" data, said Paradigm's CEO and founder, Joelle Emerson, in an interview with USA Today. In addition to launching a mentorship program for black software engineers, Pinterest will also create "Inclusion Labs," where workers will be encouraged to experiment with different diversity initiatives.

It's no question that tech has a diversity problem, but Pinterest's bold plan will certainly motivate the industry to up its ante.

July 31 2015 3:42 PM

It Took Facebook Seven Years to Be Worth $50 Billion. Uber Needed Just Five.

Though it’s still a young company, Uber has long been a powerful magnet for investors. As Slate’s Alison Griswold explained in May, the company had previously been valued at more than $40 billion. At the time, the company was still looking to raise more capital, seemingly on the principle that there was no reason not to. The results of that funding round are now coming in, and they’ve left the company more ludicrously well off than ever.

According to the Wall Street Journal, Uber Technologies Inc. is now valued at close to an astonishing $51 billion. Putting this number in perspective, the Journal’s Douglas MacMillan and Telis Demos note that it took Facebook two more years to reach a similar valuation.


This latest figure purportedly comes on the back of close to $1 billion in new investment. New investors include Microsoft and Bennett Coleman & Co., an Indian company primarily involved in media endeavors. As MacMillan and Demos observe, Uber has faced difficulties in India after one of its drivers allegedly raped a female passenger. The company has since engaged in a concerted effort to convince India that its services are safe.

The Wall Street Journal notes that Uber “hasn't publicly discussed plans for an initial public offering,” though it has taken other steps that suggest it may be preparing to do so. In the meantime, it’ll probably keep raking in money the way it knows best: sure-to-enrage surge pricing.

July 30 2015 4:08 PM

SoulCycle Is Going Public. How Did It Get So Big?

Brand-name exercise classes are all the rage these days, but SoulCycle, the indoor cycling chain, has garnered a particularly intense following—one that’s been frequently observed to border on the cultlike. Celebrities like Lena Dunham, David Beckham, and Oprah swear by it. The company is nearly a household name by now, with its reputation widely known both inside and outside fitness circles. And on Thursday, SoulCycle announced that it’s going public

The cycling chain—which describes its grueling spin class as a “party on a bike”—attracts about 50,000 people each week. The New York–based chain has almost 40 locations in the U.S., and it plans to open dozens more across the world. Its revenue went from $75 million in 2013 to $112 million in 2014. In a filing with the Securities and Exchanges Commission, the company noted that it was rated the sixth most influential brand on Twitter at the most recent Consumer Electronics Show.


But how did SoulCycle go from a tiny one-studio joint in Manhattan, as it was in 2006, to a massive chain and national fitness craze? The answer is that SoulCycle’s appeal to customers runs deeper than a high-energy workout—the company also markets itself as something of a spiritual experience. It’s even saying as much to investors, writing the following in its IPO filing:

Our mission is to bring Soul to the people. SoulCycle instructors guide riders through an inspirational, meditative fitness experience designed to benefit the body, mind and soul. Set in a dark, candlelit room to high-energy music, our riders move in unison as a pack to the beat, and follow the cues and choreography of the instructor. The experience is tribal. It is primal. And it is fun...
We believe SoulCycle is more than a business, it’s a movement.

SoulCycle’s almost devotional style of indoor cycling has brought it a massive following, which might explain why other fitness companies are latching onto the trend of spiritual branding: Lululemon, for example, launched a movement in 2012 called the “Gospel of Sweat,” in which it encouraged people to “pray through [their] pores.”

In any case, SoulCycle’s aggressive self-branding has earned it a loyal fan base—one that seems very promising for its IPO. The company’s filing included a nominal fundraising target of $100 million, though the final size of the IPO has not yet been determined. SoulCycle hasn’t released the expected price for its shares.

July 30 2015 12:56 PM

T-Mobile Is Catching Up With Verizon, AT&T, and Sprint. That’s Great for Everybody. 

America’s major wireless carriers are at war with each other. A few years ago, consumers had no choice but to grudgingly turn out their pockets for mobile service that was often expensive yet mediocre—but recent industrywide network improvements have allowed wireless service to get better, cheaper, and much more competitive. Carriers are fighting one another to offer the best deals and most discounted plans. Though Verizon and AT&T are holding steady as the country’s largest carriers by subscriber numbers, they’re feeling some heat from other competitors in the market.

On Thursday, T-Mobile announced that its revenue rose an impressive 14 percent in the second quarter of this year, thanks in part to the addition of 2 million new subscribers. The company reported revenue of $8.2 billion, well over analysts’ expectations of $7.94 billion, and it also posted a profit of $361 million. It’s now added more than 1 million net total subscribers per quarter for nine quarters in a row. Many analysts predict that T-Mobile could very well surpass Sprint as the nation’s third-largest carrier, though we won’t know that for sure until Sprint reports its earnings next week.


What is sure, though, is that T-Mobile’s earnings and growth aren’t accidental. In the last two years, the company has slashed prices and rolled out a campaign specifically targeting the weaknesses of its competitors. Earlier this summer, the company announced an enticing new program that allows customers to upgrade their smartphones multiple times a year. Then, it started letting customers use their phones in Canada and Mexico without incurring roaming fees. It introduced a family plan that gives each member 10 gigabytes of data. Just this week, it guaranteed a $15 monthly fee for iPhone 6 buyers who want to upgrade to a newer iPhone next year—and though this last announcement comes after the close of the company’s second quarter, it helps show just how much pressure T-Mobile is putting on its peers. And it might be working: Verizon’s customer growth, for example, is slowing.

But bad news for Verizon might be extremely good news for consumers. That’s because T-Mobile’s growth might spur the other three big players on the field—Verizon, AT&T, and Sprint—to offer even better plans to lure customers back. On Wednesday, T-Mobile CEO John Legere boasted that his company “continues to listen to customers and respond with moves that blow them away.” The question now is whether other carriers will seek to do the same.