Felix Salmon

from Ben Walsh:

The opportunity cost of buying iPhones and Cronuts

Ben Walsh
Sep 20, 2013 22:33 UTC

Quartz’s Ritchie King did some excellent reporting this morning, producing the infographic of the day: “The line for new iPhones vs the line for cronuts”. The line for new iPhones is 250 meters, or 92% longer than the line for the iPhone.

What this analysis fails to capture is the opportunity cost of waiting in line for the iPhone compared to The Cronut™. Here’s a back of the envelope calculation:

Conclusion: The Cronut™ has lower opportunity costs in absolute dollar terms, but far higher relative opportunity costs. Also, if you going to wait in line for an iPhone, buy a 5S. Interestingly, while Dominique Ansel is selling a baked good, the cost to his customers almost entirely consists of waiting in line.

To complete these calculations, you have to make a slew of assumptions (always a sign you are doing serious economic analysis). And each assumption has caveats.

Assumption 1: Line length in yards can be reliably converted into line length in minutes, and that this conversion rate is reasonably constant for both lines.

For the Cronut™, this relatively easy. The Cronut™ can sell out, so the only way to ensure you will get one is to arrive at Dominique Ansel Bakery early. Really, really early. Like 5:45 am, two hours and 15 minutes ahead of the bakery’s 8:00 opening. Anything else, and you expose yourself to waiting in line, and not getting the Cronut™. This isn’t the venue to put a cost on that type of moral failure.

For the new iPhones, people began lining up two weeks ago (albeit at not at the Soho store). Again, putting aside the almost moral failure to secure a gold 5S, you need several hours of early morning waiting to ensure you get an iPhone.

  • Caveat 1: Imprecision and variability. I tried to be conservative in my estimation of wait times, erring on the shorter side, but a conservative estimate is still an estimate. Nothing comparable to  Dan Nguyen’s tracking of the wait times to get into MoMa’s Rain Room has been done for Apple lines. It’s very hard to know precisely how long the line at either store will take. For instance, when I called Dominique Ansel Bakery to ask how long the wait generally was based on how long the line was, an employee told me that it’s basically impossible to know. Some transactions, he explained, were very brief and involved a single Cronut™. Others took as long as ten minutes, involving multiple Cronut™s and lots of souvenirs, which he described as “the sort of things you could take on planes”. (Out-of-towners add a further layer of complexity: see caveat 2.)

Assumption 2: The salaries of the people waiting in both lines are uniform and equal, and equal to the average of the median individual incomes in New York and Kings County in 2011: $80,326 per year, which works out at $40.16 an hour using the standard 50 week, 40 hours per week, 2000 hours per year work year.

  • Caveat 2: Imprecision and variability again. There’s no good way of knowing precisely how much people’s time waiting in line is worth. Obviously, they make different amounts of money doing different things. Some of those things are the type of job (e.g. hourly-pay based job that they missing work hours at to wait in line) where waiting in line has a clear cost. But what about a salary worker who doesn’t need to be at work during the hours they are waiting in line? Does the lost sleep count as a monetary cost? If so, is it offset by the status signalling benefits of waiting in line? (See caveat 3)

Assumption 3: Waiting in line is a has a cost associated with it.

  • Caveat 3: Maybe the opposite is true! People line up for all sorts of nutty, yet identifiably human, reasons: They want to be part of something; they want to spend time with friends; they want to the chance to be venerated as a deity; or they are being paid to be there by other people who don’t have the time to read this post but have enough money to pay someone else to wait in line for them. For the people standing in line, these are all, to answer Paul Vigna’s question, good or mediocre reasons to be there. Which means, if there is an Apple-store-line-length arbitrage to be had (and there is! The line at the Meatpacking store is measurably shorter than the line on Fifth Avenue!), there’s a mediocre argument that you get the most return by going to the store with the longest lines.

Assumption 4: After waiting in line, customers buy one product.

  • Caveat 4: Maybe. After waiting in line and sensing that they just burned through a bunch of opportunity cost, some customers buy more than one iPhone or a bunch of Cronut™s. This is smart: after waiting in line for a fixed amount of time, buying more products reduces the opportunity cost as a percentage of the full cost.

Talk about opportunity costs!

I just wasted three minutes I’ll never get back reading this poppycock.

Posted by Lilguy | Report as abusive

Jobs: The summer’s over

Felix Salmon
Sep 6, 2013 13:39 UTC

If you wanted to engineer the strongest possible recovery in the US economy, you would try to create two things. First, and most important, you would want robust jobs growth, with employers adding positions, the unemployed — and especially the long-term unemployed — finding new jobs, and the proportion of Americans with jobs rising steadily. Secondly, you would want to introduce errors into the monthly jobs report. You would try to make jobs growth seem weaker than it really was, and unemployment higher. By doing that, you would keep monetary policy — and market expectations for future monetary policy — as accommodative as possible. That in turn would keep both short-term and long-term rates low, which would provide extra fuel for the recovery.

What we saw this summer was the exact opposite of that scenario. The monthly payrolls reports were positive, which seemed like good news — except we learned today that the jobs gains they reported were overstated. Meanwhile, the Fed started talking explicitly about tightening monetary policy (the so-called taper), which resulted in a massive spike in long-term interest rates: the 10-year Treasury bond hit 3% yesterday. That move was also, partially, fueled by talk of Larry Summers becoming the next Fed chairman rather than the more dovish Janet Yellen.

On top of that, to make things even worse, the Fed started targeting unemployment at exactly the point at which the headline unemployment rate has never conveyed less information. With today’s employment report, I hope we just stop taking it seriously: the small drop, to 7.3%, came entirely for the wrong reasons. This is the chart we should all be looking at instead:

This is, literally, the very picture of a jobless recovery: the recession ended at the end of the last light-blue column, but the participation rate just kept on falling, while the overall employment-to-population ratio stubbornly refuses to rise from its current miserable levels. Both of them are lower than at any point before women had finished their big move into the jobs market, and the Fed must surely take its “full employment” mandate to refer as much to this number as it does to the unemployment figures. (The unemployment statistics in general, and the headline unemployment rate in particular, are misleading mainly because they don’t include discouraged workers who have given up looking for work.)

Today’s jobs report was bad, no two ways about it: no matter how far you reached into the data, there was very little in the way of silver linings. That said, however, the market can look at the data too — with the result that long rates are on their way back down: traders no longer expect tapering to start imminently. On top of that, the most prominent skeptic of quantitative easing, Larry Summers, might not be the lock that we thought he was for Fed chair.

To put it another way: this report is something of an unwind of what we saw this summer. It shows that the reality of the economy was not as good as we thought it was, and that the market probably got ahead of itself in anticipating a taper beginning very soon. We can’t take any solace in the mediocre economy. But if you’re desperate for good news, here it is: at least we know, now, how mediocre the recovery is, especially on the jobs front. And we’re going to stop hobbling ourselves by pushing long-term interest rates inexorably upwards, thereby making that recovery even harder.


Foppe –

No, BLS revisions tend to be pretty noisy, and they go upward as well as downward. Stats here:

http://www.bls.gov/web/empsit/cesnaicsre v.htm

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Why the internet is perfect for price discrimination

Felix Salmon
Sep 3, 2013 22:22 UTC

Price discrimination is one of those concepts that only an economist could love. But the theory is clear: the more that a vendor can discriminate according to willingness to pay, the more value that vendor can add. Rory Sutherland uses air travel as an example: having a mix of classes allows price-sensitive people to pay low fares, while the rich have a large number of flights to choose from. On top of that, he could have added, airlines are extremely good at exercising price discrimination within classes, so that two people receiving identical service might be thousands of dollars apart in the amount they paid for their tickets.

Airlines have always used a multitude of proxies to determine customers’ willingness to pay: how far in advance people are booking, whether they’re going one-way or return, whether they’re staying a Saturday night, and so on and so forth. But nowadays, online, the amount of information that companies have about their customers has never been higher. And the obvious way to monetize that information is through price discrimination: charge the people with high willingness to pay more money than those who will only buy if the price is low. Adam Ozimek explains:

The more information we have, the more profitable first degree price discrimination will be. As big data and online buying increases the information that business have on us, the ease and profitability of first degree price discrimination will become difficult to resist.

Ozimek says that this kind of price discrimination will be “creepy, invasive, and unfair” — but it will at the same time result in superior products. He doesn’t mention this, but the obvious place for this kind of price discrimination is newspaper paywalls. The FT already does it: there’s no real list price for an FT subscription, and the paper basically just charges whatever it thinks it can get away with, given what it knows about you.

For newspapers with more price-sensitive readers, smart price discrimination is even more important. Ideally, you’d charge every reader just a little bit less than they were willing to pay — and you’d give your content away to the people who were willing to pay nothing. And here’s the thing: newspapers know a lot about their readers — and especially the regular readers who come back often enough to hit paywalls. To take a simple example, they know if those readers are looking at local sports reports, or whether they’re looking at general entertainment news. The former group will be much more willing to pay than the latter. But they’re also quite likely to know a lot more about you than that, including — if you’re someone who’s ever had a print subscription — exactly where you live.

The NYT will shortly roll out a new, lower-priced product, giving some subset of its news to people who don’t want to pay for the whole thing. But that’s just going further in the wrong direction. Already the pricing is sending all manner of bad messages: access to nytimes.com plus a phone app is $15 every four weeks, access to the website plus the tablet app is $20, and access to the website plus both phone and tablet apps is $35. Which logically means that access to the website itself is worthless. (If A+B=15, and A+C=20, and A+B+C=35, then A=0.)

The NYT is in the process of building new products, for which it can then charge varying amounts of money. This is a lot of work, and has reportedly created tensions between the CEO and the editor when some of the new products report up to the former rather than the latter, even when they’re being built by journalists. Instead of thinking in terms of creating a wide range of different products, then, maybe the NYT should just try to do the best journalism it can, and then sell that journalism at a wide range of different prices.

That would be a very tough decision to make: consumers, as a rule, viscerally dislike price discrimination. If you know that your friends and neighbors are getting exactly the same product that you are, but are paying a different price for it, then someone is going to feel ripped off. Still, at the margin, the NYT can start to implement something like this without having to charge different prices. For instance, it can hold off on the paywall for certain readers — the ones with the lowest willingness to pay — while putting it up quite aggressively for others, such as perhaps the ones who spend a lot of time on the business pages. And if you price discriminate by giving away discount codes, few people object at all.

For companies which aren’t as high-profile as the NYT, price discrimination is a no-brainer. Amazon was doing it as long ago as 2000, and Uber does it every day, by charging extremely high headline fees, and then giving away various discount coupons like confetti, to carefully-targeted audiences.

The internet is a zone where companies sell products with zero marginal cost, and with a lot of information about exactly who their audiences are. In that world, it would be weird if they didn’t try to charge different prices to different customers. We’re used to the freemium model, which is very basic price discrimination. In future, expect that model to become a lot more sophisticated.


You forget to mention that McKinsey is advising NYT on the new products. So it is McKinsey which is valuing NYT at zero and access to different devices as valuable.

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In praise of across-the-board bonuses

Felix Salmon
Aug 18, 2013 22:16 UTC

Quentin Fottrell has a great headline today: “25% of firms give bonuses for incompetence”. Which is shocking — but not in the way that Fottrell intends. Because it’s not really incompetence which is being rewarded here. Instead, it’s simply employees getting a bonus when their employer does well enough to be able to afford to give out such a thing.

Obviously, if you give out a bonus to all your employees, then you’re going to be giving a bonus to your lowest-performing employees. But that’s probably as it should be, since trying to measure individual performance is a mug’s game, and the performance review is something which deserves to die. Performance-related pay is a nasty, invidious thing, and I’m very glad that an increasing number of companies are doing away with it.

The problem is that people like Fottrell tend to think that bonuses, by their nature, must be performance-related, and that if you’re not going to be paying out bigger bonuses to your best performers, then that defeats the purpose of having a bonus system in the first place. And he’s completely wrong about that. The reason is that bonuses are a great way of tackling the serious problem of sticky wages — a problem which causes a significant amount of unemployment in the economy. It shouldn’t be 25% of firms giving out what Fottrell calls “bonuses for incompetence”: it should be 100%. If that were the case, the unemployment rate would be significantly lower than it is today.

It’s basic economics that sticky wages cause unemployment. In any economy, there will be some firms which become less competitive over time; in order to restore their competitiveness, they will need to cut their wages. If they can’t do that, they will simply go bust. But cutting nominal wages is very hard. The result is that firms go bust unneccessarily, and their employees get laid off unneccessarily. On top of that, thanks to wage stickiness, there are many firms paying above-market wages to their employees — that is, wages which are above what an equally-qualified person would require to do the same job. That too causes unemployment: if a firm would like to be able to hire 20 people at $15 per hour but instead can hire only 15 people at $20 per hour, that reduces the firm’s overall productivity and also means five fewer jobs in total.

When economists talk about the necessity of implementing “structural reforms” in an economy, one of the key reforms they generally have in mind is making it easier for companies to hire, to fire, and to reduce wages for workers when times are tough — those reforms are generally understood to be helpful in reducing unemployment, and countries where doing such things is difficult do indeed, as a rule, have higher unemployment rates than countries where doing such things is easier.

Structural reforms don’t need to be handed down from above, by legislatures — in fact, they’re often more effective if they’re not. And if you want a structural reform which makes wages less sticky, especially when inflation is very low and you can’t count on inflation to do your dirty work for you, then the first place you should look is bonuses.

Think of three people. Anna, who was being paid a salary of $60,000, is told that this year she will be paid only $57,000 — she’s being given a $3,000 pay cut. She gets very angry. Betty, in the country next door, was also being paid a salary of $60,000, and gets no pay rise, despite the fact that there’s 5% inflation. She’s not happy, but she’s not as angry as Anna. Finally there’s Carly, who is being paid a salary of $50,000, and who got a $10,000 bonus last year; this year, she’s told, she’ll get a $7,000 bonus. She’s pretty happy.

All three women, of course, end up with effectively the same amount of money both last year and this year. But because of social norms, Carly accepts her 5% pay cut with much more equanimity than Betty, who in turn is significantly happier than Anna. An economy with more Carlys and fewer Annas is going to have less sticky wages — and, as a result, lower unemployment.

There’s something quite fair about paying your employees a decent base wage and then giving them a bonus on top which is dependent on how well your company does over the course of the year. It helps align incentives; it also means that when the company makes lots of money, its employees share in the good fortune to a greater degree than they would otherwise. Conversely, it gives the company a certain amount of flexibility to cut annual payroll costs when things get tough. None of this has anything to do with performance reviews; it’s just a way to make a large part of a company’s expenses a bit more efficient.

Bonuses even make it that much easier to hand out pay rises: if Anna asks for a pay rise she won’t like the answer, but if Carly asks for a pay rise, it might be possible to work something out. And of course pay rises in general are cheaper when they’re being applied to a lower base salary.

Finally, bonuses help to encourage saving. Employees tend to spend whatever is in their regular paychecks; if you get a lump-sum windfall, on the other hand, you’re more likely to save it. Bonuses are bad for people living paycheck-to-paycheck, but hourly workers don’t tend to get bonuses anyway. So let’s hope they catch on. Maybe one day, the minimum size of the company-wide bonus would be a direct function of the size of the bonus given to the CEO. But I’m not going to hold my breath on that one.


What Felix calls “across the board bonuses” are more commonly (and correctly) referred to as “profit sharing payments.” They make sense as a component of compensation, but they are compatible with also offering bonuses based on individual performance.

As for “trying to measure individual performance is a mug’s game”, I can’t believe that Felix truly thinks that. Is he really saying that he’s never found some colleagues – whether supervisors, peers, or subordinates – to be clearly better at their jobs than others? How does he think that people should be promoted or terminated? Drawing names out of a hat?

And, if some people are better performers than others, then it makes sense to reward those good performers disproportionately, for all the reasons of retention (and motivation) that Staberinde. I’ll certainly agree that evaluating individual performance is tough, but I don’t see that as a reason to throw one’s arms in the air and not even try.

I’ll also point out that it’s easy to criticize any particular system of compensation, because they are invariably imperfect, but the onus falls on someone to suggest a better one. As an example – paying salespeople commission solely on their own sales is easy to criticize when they won’t help each other and act like competitors rather than people working for the same company. Until that is, you therefore decide to pay salespeople commission based on group sales, and then have high performers leave because they don’t like sharing equally with their colleague who surfs the ‘net all day. Even Felix’s proposal here isn’t really a system of compensation, because someone, somehow, still has to decide if Carly stays in her job (or gets promoted, or gets fired) and whether she’s paid $50k plus a $7k bonus or $60k plus a $10k bonus.

On the plus side, I hope that Felix’s stated enthusiasm for the benefits of wage flexibility means that he’s realized the flaws in his arguments for a $15 per hour minimum wage.

Posted by realist50 | Report as abusive

The minimum-wage stimulus

Felix Salmon
Jun 20, 2013 13:50 UTC

Nick Hanauer has a good idea today: raise the minimum wage to $15 per hour.

The minimum-wage intervention would kill a lot of birds with one stone: it’s a win-win-win-win-win-win.

First of all, most simply and most cleanly, it would immediately raise the incomes of millions of cash-strapped Americans — precisely the people who most need to be earning more than they’re making right now. A whopping 51 million people would benefit directly, along with 30 million who would benefit indirectly: these are enormous numbers.

Secondly, the cost to the government of putting billions of extra dollars into these workers’ hands would in fact be substantially negative: there’s a strong fiscal case for a $15 minimum wage. We currently spend $316 billion per year on programs designed to help the poor, with the lowest-income households receiving about $8,800 per year. Billions of those dollars would be saved as the workers in question saw their wages rise. And no longer would the likes of Walmart be able to take advantage of implicit government wage subsidies, whereby low-paid workers receive substantial top-up checks from Uncle Sam to supplement their direct income.

Thirdly, the move would constitute a huge economic stimulus program: Hanauer says that it would inject about $450 billion annually into the US economy every year. If you like massive stimulus but you don’t like the idea of the government paying for it, then a higher minimum wage is the program for you.

Fourthly, and crucially, a higher minimum wage would be good for employment. A $450 billion stimulus, delivered directly into the hands of the Americans most likely to spend it, can’t help but create jobs across the economy. Of course, as in any healthy economy, there will be a birth/death model: some employers will see demand soar, while others will see their costs rise and their margins shrink. But there’s empirical evidence to suggest that states which raise the minimum wage when unemployment is high — when there’s a lot of slack in the labor force — then you get faster job growth than in the country as a whole.

This is the particular genius of Hanauer’s suggestion: it’s especially effective right now, and we’re at the perfect point in the economic cycle to implement it. At the depths of a recession, a disruptive move like this can have unintended consequences. But the economy is growing now, albeit not as fast as anybody would like, which means the wind is behind our backs to a certain degree. The bigger economic problem is that employment hasn’t kept pace with economic growth: most of the gains in GDP have gone to capital, rather than to labor. A higher minimum wage would redress the balance somewhat.

Fifthly, insofar as a one-off hike in the minimum wage would be inflationary, that’s a good thing, and exactly what the economy needs. We’re well below the Fed’s target inflation rate right now, and the inflation which might result from this policy would give us a healthy short-term boost in the inflation rate, bringing down real interest rates in a world where the Fed is constrained by the zero lower bound. If you’re worried about the unintended consequences of heterodox monetary policy, then again, a rise in the minimum wage might be very helpful indeed in terms of weaning the Fed off QE.

Finally, there’s the global context. There are surely some US jobs which simply aren’t economic at $15 per hour, and those jobs will end up being lost. (In aggregate, as I say, raising the minimum wage is probably good for employment, but the extra jobs at employers taking advantage of all that extra spending aren’t going to be in the same places as the jobs lost at employers who can’t afford to pay that much.) But the point here is that the US has already done a spectacularly good job of exporting most of its exportable low-wage work. As Hanauer says, “virtually all of these low-wage jobs are service jobs that can neither be outsourced nor automated”. As a result, raising the minimum wage will result in many fewer job losses now than it would have done a couple of decades ago.

Of course, given Congressional dysfunction, there’s zero chance that this will happen. But I can easily imagine someone like Ben Bernanke reading Hanauer’s column and dreaming wistfully about how great it would be if we lived in a country where such things were possible. If we want economic stimulus, higher growth, higher employment, and higher inflation — which we do — then raising the minimum wage is exactly the kind of thing we should be doing.


The problem is that Felix, like a lot of people, are ivory tower folks on this. A $15 min MIGHT work in the Northeast and West Coast, but would cause catastrophic destruction in the rural Midwest and South. And, I wish anybody else who “expertly” comments on this issue would not do so until having lived in said areas themselves. (I’m assuming Felix hasn’t.)

This lack of informedness then carries elsewhere. I’ve had an Australian comment on my blog who simply doesn’t understand why this won’t work.

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Understanding the painfully slow jobs recovery

Felix Salmon
May 3, 2013 18:29 UTC

Today’s jobs report was a solid one, and shows that the recovery, while not exactly strong, is at least not slowing down: Neil Irwin calls it “amazingly consistent”. Whether you look at the past 1 month, 12 months, 24 months, or 36 months, you’ll see the same thing: average payrolls growth of roughly 170,000 jobs per month. That’s not enough to bring unemployment down very quickly, given the natural growth in the workforce. But unemployment is coming down slowly. And at the rate we’re going, at some point in the second half of 2014 we should see total payrolls reach their pre-crisis levels, and the headline unemployment rate hit the key 6.5% level.

There’s a real human cost to the fact that unemployment is coming down so slowly, but there are lots of reasons why it’s very hard to bring it down more quickly. First and foremost, of course, is the fact that US GDP growth is mediocre, coming in at less than 2% per year over the past few years. That’s not the kind of V-shaped recovery which creates jobs. Calculated Risk’s justly-famous jobs chart shows just how bad the recession was for employment, and just how painfully slowly we’re scratching our way back: we’re more than five years into this jobs recession, and we’re still at the worst levels seen in the wake of the dot-com bust.

One of the reasons is the undisputed conclusion of Reinhart and Rogoff: that recoveries from financial crises are much slower than recoveries from other crises. But there’s something bigger going on, too, which Joe Stiglitz writes about today in a very wonky blog post for the IMF.

This is more than just a balance sheet crisis. There is a deeper cause: The United States and Europe are going through a structural transformation. There is a structural transformation associated with the move from manufacturing to a service sector economy. Additionally, changing comparative advantages requires massive adjustments in the structure of the North Atlantic countries.

To put it another way: what looks like a broad economic recovery is actually a combination of many trends, including the end of what turned out to be a very short and weak recovery in manufacturing employment. Here’s Irwin:

The fact that the overall job growth numbers have been extraordinarily stable does not mean there isn’t some real churn going on in the U.S. workforce. In the earliest phase of the recovery, manufacturing jobs was a major driver of job creation, but that turned out to be not a longer-term trend but a partial reversal of the steep declines of the recession. Now, job creation is entirely confined to the services sector: Manufacturing had no net change in employment, construction lost 6,000 jobs, and even mining and logging was a net negative.

Government employment, meanwhile, continued its long swoon… That leaves one sector to drive the train of job creation: private sector services. This particular month, there were strong gains in leisure and hospitality, retail jobs, and professional and business services, and health care has been a mainstay of the expansion.

Stiglitz makes the case that in a recovery with so many moving parts, the single blunt instrument of setting short-term interest rates at the Fed will never be enough, and that “there needs to be close coordination between monetary and fiscal policy.”

What’s more, as Mohamed El-Erian says, policymakers should ideally be able to use job growth not just as a goal, but also as a tool for achieving other ends.

Robust employment growth would – and, let us hope, will – play a critical role in helping the US pivot to a better place… It would do this by maintaining consumption and allowing for a more sustainable savings rate; by countering an excessive upfront fall in public spending that increases the risk of a recession; by enabling the Fed to slowly and gradually normalise monetary policy before it breaks too many things; and by reducing the risk of financial bubbles.

The US economy is a highly complex machine, with many moving parts which ought to be working with each other rather than against each other. Stiglitz makes a strong case that the financial sector broadly is right now part of the problem rather than part of the solution: it’s not directing funding to help the economy grow and create jobs, even as it continues to represent a serious systemic risk. It should go without saying at this point that fiscal policy broadly is part of the problem as well: you don’t create jobs by firing people, and the government should be borrowing if and when the private sector won’t. And as for monetary policy — well, it’s probably too early to tell. It’s done a great job of making people with money richer, but it has had a much less obvious effect on creating jobs for those who want them and don’t have them.

And yet there’s real room for optimism in today’s jobs report. Look at the revised numbers for February: an incredibly heartening 332,000 jobs created, in one short month. Look at the number of people unemployed for 27 weeks or more: that unhappy cohort shrank by 5.6% in April alone, to 4.3 million people. It’s still far too high, but this time last year it was over 5 million, so we’re making a significant dent in what has been the toughest nut to crack.

We can — and should, and could, and must — do better than this. But doing so will require a thaw in the Washington gridlock. When Jack Lew became Treasury secretary, it was understood that the most crucial thing he could deliver would be greater cooperation between the White House, Treasury, and Capitol Hill. That hasn’t happened yet. I hope and trust that he’s been working very hard behind the scenes to make it happen — partly because he doesn’t seem to have achieved anything else, but mainly because it’s by far the most important thing that he could be doing right now. Behind the jobs numbers there are some powerful forces driving real recovery in large parts of the US economy. It’s Lew’s job to work with Congress to identify those forces, and to give them all the support the government can muster.


It is really disappointing to see all this commentary and no mention of 1) China and 2) predatory capitalism. There are two causes of the declining role of employment in our economy: outsourcing to lower wage geographies and a persistent culture of cutting all FTEs from corporations. The Great Recession merely accelerated these trends and legitimated massive cost cutting across all corporations in the US.

There really is no end to these trends. We would need a complete reengineering of the motivations of businesses and governmental policies to even slow down these trends. And note that not a single politician is wlling to tackle either one of these monsters.

Posted by Dollared | Report as abusive

The systemic plight of labor

Felix Salmon
May 1, 2013 19:32 UTC


It’s May Day, and Henry Blodget is celebrating — if that’s the right word — with three charts, of which the most germane is the one above. It shows total US wages as a proportion of total US GDP — a number which continues to hit all-time lows. Blodget also puts up the converse chart — corporate profits as a percentage of GDP. That line, you won’t be surprised to hear, is hitting new all-time highs. He’s clear about how destructive these trends are:

Low employee wages are one reason the economy is so weak: Those “wages” are represent spending power for consumers. And consumer spending is “revenue” for other companies. So the short-term corporate profit obsession is actually starving the rest of the economy of revenue growth.

In other words, we’re in a vicious cycle, where low incomes create low demand which in turn means that there’s no appetite to hire workers, who in turn become discouraged and drop out of the labor force. Blodget’s third chart is one we’re all familiar with: the employment-to-population ratio, which fell off a cliff during the Great Recession and which will probably never recover. The current “recovery” is not actually a recovery for the bottom 99%, for real people who need to live on paychecks. And today is exactly the right day to point that out.

Conversely, today is exactly the wrong day to declare that these broad and inexorable trends are not really big top-down trends at all, and in fact merely reflect the inability of individual workers to “access learning, retrain, engage in commerce, seek or advertise a job, invent, invest and crowd source”. And yet that’s Tom Friedman’s column this May Day:

If you are self-motivated, wow, this world is tailored for you. The boundaries are all gone. But if you’re not self-motivated, this world will be a challenge because the walls, ceilings and floors that protected people are also disappearing. That is what I mean when I say “it is a 401(k) world.”

This manages to be both incomprehensible and incredibly offensive at the same time. I have no idea what Friedman thinks he’s talking about when he blathers on about disappearing protective floors; I can only hope that he isn’t making a super-tasteless reference to the recent disaster in Bangladesh. But it’s simply wrong that today’s world is “tailored” for anybody who happens to be “self-motivated”. Both the self and the motivation are components of labor, not capital, and as such they’re on the losing side of the global economy, not the winning side.

Friedman is a billionaire* (by marriage) who — like all billionaires these days — is convinced that he achieved his current prominent position by merit alone, rather than through luck and through the diligent application of cultural and financial capital. His paean to self-motivation recalls nothing so much as Margaret Thatcher’s “there is no such thing as society” quote: “parenting, teaching or leadership that ‘inspires’ individuals to act on their own will be the most valued of all,” he writes, bizarrely choosing to wrap his scare quotes around the word “inspires” rather than around the word “leadership”, where they belong.

True leadership, in a society where the workers are failing to be paid even half the fruits of their labor, would involve attempting to turn the red line in Blodget’s chart around, and to spread the nation’s prosperity among all its citizens. Rather than telling everybody that they’re “on their own” and that if they’re not a success then hey, they’re probably just not “self-motivated” enough.

The ultimate Friedman kick in the balls, however, doesn’t come from his lazily meritocratic priors. Rather, it comes from his overarching metaphor: the idea that if you have a 401(k) plan, then you’re somehow in charge of your own destiny. Friedman might be right that we’re living in a 401(k) world, but if he is then he’s right for the wrong reason. In Friedman’s mind, a 401(k) plan is an icon of self-determination: you get out what you put in. “Your specific contribution,” he writes, italics and all, “will define your specific benefits.”

In reality, however, a 401(k) plan is an icon of futility and the way in which the owners of capital extract rents from the owners of labor. Yves Smith is good on this, as is Matt Yglesias, although the real expert is Helaine Olen: the 401(k) is a way for both your government and your employer to disown you, and to leave your life savings to be raided by the financial-services industry and its plethora of hidden and invidious fees. The well-kept secret about old-fashioned pension funds is that, for the most part, they’re actually very good at generating decent returns for their beneficiaries. They tend to have extremely long time horizons, and are run by professionals who know what they’re doing and who have a fair amount of negotiating leverage when they deal with Wall Street. Savers are always strengthened by being united: disaggregating them and forcing them to take matters into their own hands is tantamount to feeding them directly to the Wall Street sharks.

Yglesias says that in a 401(k) world, “you’ve got to save a lot of money for retirement. More than you think.” This is true for five big reasons. Firstly, because wages are shrinking, any given level of savings will constitute a steadily-increasing proportion of any given worker’s GDP-adjusted paycheck. Secondly, because the employment-to-population ratio is shrinking, all workers need to save to support not only themselves in retirement, but also a number of dependents which is also growing over time. Thirdly, because 401(k) plans have lower returns than traditional pension plans, you need to save more in order to make up the difference. Fourthly, life happens: while the money in your 401(k) is nominally there for your retirement, in practice there’s a good chance that you’re going to tap it, at some point, to pay some kind of large and unexpected bill, whether that comes from unemployment or divorce or ill health. And finally, 401(k) plans don’t have the clever cross-subsidy that traditional pension plans have, where people who die early cross-subsidize people who live for a long time. With a pension plan, you get income when you need it — when you’re alive — and you don’t get money when you’re dead, and don’t need it any more. With a 401(k), by contrast, you have to save more than you really need, because there’s always a chance that you’re going to live to 102.

Add them all together, and to a first approximation you arrive at our current world, where pretty much no one relying on their 401(k) is actually saving enough for retirement. If you’re rich today, you’ll probably be fine when you retire. But if you’re someone who (in contrast to Tom Friedman) actually lives on your paycheck, then there’s almost no chance that your retirement savings will be enough, when the time comes. That’s not your fault: the reasons are deeply systemic. And as a result, the solutions cannot possibly be the kind of bottom-up schemes that Friedman is extolling. They have to come from the top: from real leaders, rather than jumped-up “thought leaders“.

*Or was, anyway. Maybe he isn’t any more.


What vjvalk wrote above is spot-on, and the comment above it gets to what a 401(k) society is really all about: INCREASING vulnerability and risk for those not in a great position to handle it (most of the working class in this country is a single missed paycheck away from financial disaster), and then allowing the overclass to blame the victims for a plight forced upon them by marketplace conditions created by said overclass.

Posted by Strych09 | Report as abusive

Chart of the day, reverse-causality edition

Felix Salmon
Apr 18, 2013 03:22 UTC

This chart comes from Arindrajit Dube, who has a fantastic post chez Rortybomb on whether high debt causes lower growth or whether it’s the other way around. What you’re looking at is the famous Reinhart-Rogoff dataset, as made available by their critics (and Dube’s colleagues), Herndon, Ash and Pollin. Reinhart and Rogoff are the poster children for the statement that high debt loads cause lower growth, especially once those debt loads exceed 90%. But do they?

There does seem to be an inverse correlation between debt and growth, but Dube shows that the correlation is strongest at low levels of debt, below 30% of GDP, rather than at high levels of debt. Countries with debt of 30% of GDP have a significantly lower growth rate, on average, than countries with debt of 10% of GDP, while the numbers at debt ratios above 90% have much wider error bars and are much less useful.

But let’s grand the correlation, for the sake of argument: the next question is whether the correlation implies causation, and if so, which way the causation flows. Here’s Dube:

Here is a simple question: does a high debt-to-GDP ratio better predict future growth rates, or past ones? If the former is true, it would be consistent with the argument that higher debt levels cause growth to fall. On the other hand, if higher debt “predicts” past growth, that is a signature of reverse causality.

That’s what you’re seeing in the charts. Both of them have the same axes: GDP growth on the y-axis, and debt/GDP on the x-axis. Both of them plot the correlations in the dataset, with the dark line being the signal and the dotted lines showing the 95% confidence interval. And just as in the main dataset, the correlations are much clearer at low levels of debt/GDP than they are at higher levels.

But the two charts are different, all the same, especially at levels of debt/GDP above that 90% level. If you look at the left-hand chart, it shows that it really doesn’t matter how much debt you have: you’re likely to average about 3% GDP growth a year over the next three years. On the other hand, if you look at the right-hand chart, it shows that the more debt you have, you’re significantly more likely to have experienced low growth in the past three years.

In other words, the causation here seems about as clear as causal analysis can ever be: low growth causes high debt, rather than high debt causing low growth. Indeed, once you get past 90% of GDP, your debt load doesn’t seem to have any significant effect on future growth at all!


It makes perfect sense that higher debt would cause slower growth. It also makes sense that slower growth causes higher debt. The data bear both out to be true. The idea that only one can be true is a false paradigm.

Your analysis shows that “>90% debt level hardy effects growth”. A ridiculous result should cause you to take a more careful look.

I suspect that the analysis is flawed because nations whoutout a strong economic base and tradition tend to not be able to extend their borrowing much beyond 90%. For example, the US may be able to achieve a 200% debt level, while Greece has a crisis at 125%. Data from Greece will thus never be represented on the right side of those graphs.

It is also likely that the majority of the astronomical debt levels on the right side of those graphs represented debt accumulated during each world war. Reinhart-Rogoff concluded that war debt did not have as strong negative effect on growth. That makes your left graph consistant with their findings.

Posted by Kennen | Report as abusive

Why poor people pay more bribes than rich people

Felix Salmon
Feb 18, 2013 20:05 UTC

Azam Ahmed has a report from Kabul’s ‘Car Guantánamo’ today:

Behind these walls are thousands of cars, trucks, vans, motorcycles and even bicycles, lined up in vehicular purgatory after falling afoul of the Kabul traffic police. Things that have landed cars in the slammer: illegal left turns, parking violations, involvement in fender-benders and, perhaps most egregious, failure to pay a bribe.

“I’ve been waiting two months to get my van back,” said Sayed Wahid, whose quest to reclaim it, after it was impounded for an expired international permit, propelled him on an exhausting odyssey through no fewer than six different government agencies…

In November, Mr. Wahid had driven his van from Kunduz down to Kabul when he was pulled over at a checkpoint in the capital. His license and car tags were clean, but a permit to cross international borders, though not needed for that specific trip, had expired.

For a moment, he said, he considered bribing the officer. He has regretted every day for the past two months his decision not to.

Ahmed explains that when it comes to Kabul’s traffic police, “the rules are unevenly applied, punitive to those who can least afford it, and mostly irrelevant to those with money and power.”

The point here is that it’s the poor, like Sayed Wahid, who are hit hardest by Kabul’s endemic corruption. Either they do the sensible thing, and pay a bribe they can ill afford, or else they’re at real risk of losing their livelihood. Meanwhile, the rich and powerful aren’t even asked to pay bribes: the police know better than to try this stunt on someone who could easily get them fired. It’s safe to solicit a bribe from a guy from Kunduz in a van; you’d have to be much braver to try it with a man in a suit driving a Mercedes.

It’s not that the rich don’t pay bribes at all; of course they do. But in general when the rich pay bribes, they tend to get even richer. That’s the deal: that’s business. When the poor pay bribes, by contrast, it’s a deadweight loss: it’s just money disappearing into the pockets of a corrupt official, never to be seen again.

A new paper by Shahe Emran, Asadul Islam, and Forhad Shilpi is instructive and sobering in this respect. Entitled “Admission is Free Only If Your Dad is Rich! Distributional Effects of Corruption in Schools in Developing Countries”, it looks at the cost, in bribes, of sending your kid to “free” school in Bangladesh. Exactly the same pattern is seen there as the one that Ahmed found in Kabul:

The results reported above in Tables 3 and 4 show that the poor are more likely to pay bribes. The estimates of Table 3 imply that a one percent lower income leads to a 0.73 percent increase in the propensity to pay bribes. The negative effect of income of propensity to pay bribe points to important role of a household’s “bargaining strength”. The richer households – with better bargaining power – are less likely to pay bribes than the poorer households. This is a depressingly perverse outcome given that the goal of free public schooling is to help the poor households, not to provide free schooling for the children of rich and influential only!!

Overall, households which paid a bribe to educate their children earned Taka 1930 per month, on average, while households which didn’t pay a bribe earned an average of Taka 2560 per month. And the bribes were large, too.

Among the households who reported positive amount of bribe payment, on average a household paid about Taka 241 during the survey year. To get a better sense of the financial burden imposed on the poor, it is instructive to look at the average bribe paid as a proportion of the household savings. The average bribes paid in schools is 9 percent of average annual household savings, while for the first and second quintile it amounts to 61 percent and 27 percent of annual household savings respectively.

The most famous line in Withnail and I is the point at which Withnail procures the key to his rich uncle’s cottage, explaining: “Free to those that can afford it, very expensive to those that can’t.” That phenomenon is well known: the richer you are, the more likely you are to be invited out to lunch, or dinner, or the Hamptons. But as we can see in Afghanistan and Bangladesh, the phenomenon doesn’t just apply to desirable luxuries such as the swag bags given out to celebrities at the Oscars. In the developing world, it applies to much more basic things, too, like the right to drive your car around Kabul, or the right to send your kid to a free school. And it’s not at all clear what if anything can be done about it.


“a one percent lower income leads to a 0.73 percent increase in the propensity to pay bribes”

I’ve not actually looked at the data, but the assumed linearity sounds wrong to me. I would think it is more like a step function: above a certain income level, you have the kind of power that can get a bribe-taker fired. Below it, you don’t.

Posted by samadamsthedog | Report as abusive