A blog about business and economics.

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.

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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 Reverend 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 to 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, African 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 African American software engineers creating, 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.

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.


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 rollout of the new stores next year, as did the new chain's president Jeff Turnas, who said Whole Foods is “really excited” for the launch. Meanwhile, 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.

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 twentysomethings 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.


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.


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 past 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, July 29, 2015: 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 miragelike 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.


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 Elzbieta Bienkowska 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 to 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 Financial Times 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 23 years ago by the Walt Disney Co. 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 nonsummer 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’ plan has backfired. Even at the happiest place on Earth, everyone wants a square deal.

*Correction, July 30, 2015: This post originally misstated that Disneyland Paris opened 20 years ago. It was 23 years ago.

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:

  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.


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.


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.