Edward Hadas

Apple’s many magic tricks

Edward Hadas
Apr 30, 2014 15:22 UTC

Apple is in the news for borrowing $12 billion this week, even though it has $151 billion of cash on its balance sheet. The financial legerdemain will keep the technology giant’s tax bill down. It also is suitable for a company whose business model has long looked more like a magic act than a traditional corporate drama.

Of course, Apple has, or had, one of the necessary attributes of any successful enterprise: a strong competitive advantage. The California company’s edge comes from a synergistic mix of design expertise, marketing genius and supply chain mastery.

There is also a bit of technological expertise, but that’s where the magic starts. Apple is a tech star which skimps on the industry’s lifeblood, research and development. The 2.7 percent of revenue dedicated to R&D in the first half of the company’s current fiscal year is puny compared to phone rival Samsung Electronics’ 6 percent-plus and double-digit percentages at Google and Microsoft.

Apple’s trick is to rely on the research of others. Suppliers are crucial to its success. Also, as University of Sussex academic Mariana Mazzucato points out, it efficiently exploits the U.S. government’s valuable work. All tech companies both supply and buy, but Apple somehow manages to transmogrify relatively modest research contributions into relatively large sales and earnings.

Moreover, Chief Executive Tim Cook skips a large portion of the other hard stuff generally associated with industrial companies. Apple doesn’t bother with much manufacturing. It has around 40,000 employees compared with more than a million in its supply chain. It outsources inventory to suppliers too: Apple has only about three days’ worth on its own balance sheet.

Inheritance can be less unequal

Edward Hadas
Apr 23, 2014 14:39 UTC

The children of the poor tend to end up poor. The children of the elite seem pre-ordained to inherit a good part of their parents’ status and income. Is that just?

Things aren’t as bad as they were. In developed economies, social stratification has far less effect on children today than a century ago. The modern gulf is between developed and developing economies. In rich countries most people are middle class and the gap in lifestyle and education between poor and rich has narrowed.

Still, family remains a big part of destiny. That’s especially true in the United States, in spite of its claim to being a land of opportunity. A recent paper by Raj Chetty and other economists found a strong tendency for American children to end up in about the same position as their parents in the hierarchy of income. An international comparison by Jo Blanden of the University of Surrey concluded that the economic weight of inheritance in the United States is currently relatively high among affluent countries.

Don’t bother with share-based pay

Edward Hadas
Apr 16, 2014 12:13 UTC

Coca-Cola’s plan to give generous awards of shares to executives has angered some of its shareholders. They have good reason to complain about the potential transfer of about 15 percent of the company to the top 1 percent of its staff. But Coke is only pushing the already bad idea of share-based pay to a foolish extreme.

The justification for paying workers in their employer’s paper is simple and superficially appealing. Worker-owners might be more motivated to push for higher profit than if they just received salaries, even salaries which have bonuses in the millions tied to company performance.

The argument relies on a narrow view of corporate purpose: the sole goal is to maximise the share price, that is, the present value of future profit. Even if that doubtful assertion is accepted, the connection between an individual worker’s contribution and the movement of the share price is too weak for stock awards to motivate behaviour.

When credit is too much of a good thing

Edward Hadas
Apr 9, 2014 15:00 UTC

What does credit do after it has finished the job it was designed for? The supply of credit ought to stop at funding productive activity. But the reality is different. Surplus credit fuels dangerous asset price inflation and funds profligate governments. As leverage increases, so too does the risk of crisis and recession.

Credit, otherwise known as debt or loans, is not necessarily monstrous. It can be a most helpful economic beast of burden, carrying resources to the places where they can be best used. Loans from households to businesses fund helpful investments, and loans from rich older households to poor younger ones help spread property, especially houses and cars, more equitably. Even loans to governments can be a useful alternative to taxes.

However, credit too easily goes astray and there is no natural force to rein it in. Without firm regulatory guidance, credit seems to expand indefinitely, until the financial system explodes. That has been the pattern since the end of the Second World War.

Wealth buys less lifestyle, more power

Edward Hadas
Apr 2, 2014 14:39 UTC

Many serious people think economic inequality in the United States and other developed economies should be a hot political topic. But the general public hardly cares. There is a bad reason behind lack of public interest.

President Barack Obama said last December that a “dangerous and growing inequality” is “the defining issue of our time,” but the most recent Gallup poll suggests that view is not widely shared. Only 3 percent of Americans chose the “gap between rich and poor” as the country’s “most important problem” and 4 percent went for poverty. Unemployment scored 19 percent.

The American indifference is surprising because the measured increase in inequality there has been relatively large by international standards, to judge from the recent Chartbook of Economic Inequality from the Institute for New Economic Thinking at the Oxford Martin School. But the lack of concern is widespread. Neither help-the-poor nor soak-the-rich politicians have gained much traction in any rich country.