Tuesday, June 30, 2015

Deadline Day

Today is June 30 and is an arbitrarily chosen deadline in a wide range of contexts. A few deadlines to be met or missed:

  • The authorization for the Export-Import Bank expires (budget hawks expect to bring it back to life within a few weeks)
  • Greece is not expected to make a loan payment due today
  • Talks on the nuclear program in Iran were set to expire, but have been extended to July 7
  • It is the end of the fiscal year in many U.S. states (so that new budget is ready, right?)

Monday, June 29, 2015

Looking for Signs in Currency Turmoil

It was a shocking series of events that brought Greece to where it is today. It was literally the last chance for the EU and IMF to mess up the Greek economy, and they seized the moment. They withdrew the agreement in principle that seemed to have been reached on Tuesday and threw a grenade into negotiations on Thursday in the form of a new demand for economic restructuring that would have cost an already depressed Greece two or three million more jobs. Thursday, of course, was too late to allow any chance for Greece to make a meaningful response to a negotiation reset.

Why did they do it? It is pretty clear that European negotiators were playing for a respectable profit on their dealings with Greece in a situation that called for them to minimize their losses instead. When investors press for gains that aren’t there, they take risks that a sensible person would never consider. They take these risks because they can’t believe how much the investment climate has declined. It is easy to see how large the risks are on Monday morning with the euro down 0.5 percent and the largest European bank stocks down 4 percent, losses in either case many times the total amount directly at stake in the Greece talks. So is this irrational risk-taking at the highest levels a sign that the recent boom times in Europe are over?

It is easy to be pessimistic with a run on the banks, a stock market rout (especially in China, down 20 percent in three weeks), and the endless speculation about the euro falling apart. I worry somewhat about the paucity of news coverage for what could easily turn into the biggest currency crisis ever. Much of the commentary seems to be pointed toward getting the parties involved to return to the negotiating table, and that is a mistake at this point with the effective deadlines having already gone by. The next talks may involve different parties and will have to address a very different situation.

In retrospect, the last two months of European talks were a costly distraction for top officials in Greece. This week Greece has to proceed as well as it can with the reforms it has been talking about in May and June. It must also prepare to issue some form of quasi-currency so that the Greek economy can continue to function with so little real money inside the country. The EU will be preparing to prop up major banks in Germany, Italy, and Spain with the quarter trillion euros in emergency liquidity it is said to have at the ready, but it must also look for new approaches to solve problems in what is now shown to be an exceedingly fragile currency union. Halfway around the world, there is a crisis of sorts in export-dependent China, which may face some adjustments of its own if its customers across Europe are forced into new spending cuts. It is uncharted territory and there is a lot to watch out for, so it won’t be a surprise if the news media struggles to keep up with the story.

Friday, June 26, 2015

This Week in Bank Failures

That Friday has come and gone and the talks over Greece are still going on, with creditors disowning proposals they had agreed to just two days before, is not a hopeful sign for the future of the euro. Banks with a major international presence in the euro zone will have to be working on their survival strategies. Within Greece, capital control rules could follow as soon as Monday. The effective deadline for the Greece talks is said to be late Saturday night, but possibly that could stretch into Sunday. Sunday night would risk being too late for all the procedural steps that have to follow by Tuesday. It may be too late already. If the latter deadline is missed, there is no turning back.

Thursday, June 25, 2015

Supreme Court Decision: Still Covered

The Supreme Court upheld income-based federal health care subsidies today. In doing so, it showed a certain impatience with the far-fetched constructions that were the basis for the challenge to the law. Chief Justice John Roberts, in writing the majority opinion, seemed worried about future activist courts seizing on small contradictions as an excuse to overturn acts of Congress.

The immediate practical consequence of the decision falls to those who have individual or family health insurance policies. You are still covered. The plaintiffs in this case had asked the Supreme Court to cancel your insurance, depending on the way you purchased your policy, and the court chose not to do so.

Wednesday, June 24, 2015

Taking Down the Confederate Flag

Since a mass murderer used a flag as an emblem of white supremacy last week, people have been talking about the flag. It was the Confederate flag, specifically the 20th century version of the battle flag, and in the discussion historians have highlighted this flag’s origins and design. The use of white as the unifying background color was intended by the original designers as a symbol of white supremacy, and this aspect of the design was key to its eventual political acceptance in the Confederacy. But wait: if a flag was originally designed as a symbol of the white supremacist movement and is most prominently used in that way today, wouldn’t that mean it would violate policies against racist merchandise in place at many retailers?

I wonder too if retailers happened to see comedian John Oliver’s show on Sunday. Oliver not only mocked the political dysfunction in South Carolina that had the Confederate battle flag flying at full staff in the wake of the mass deaths a few blocks away and suggested that the state take the flag down, “put it in a box, label it ‘bad flag,’ and put it somewhere no one can see it.” He also noted that “The Confederate flag is one of those symbols that should really only be seen on T-shirts, belt buckles, and bumper stickers to help the rest of us identify the worst people in the world.”

Oliver’s statements, once you get past the comedic exaggeration, reflect the views of most Americans, who give the Confederate flag an approval rating slightly lower than that of the Republican party. Still, the statements might have been shocking for some to hear. There is a political taboo surrounding the Confederate flag in the South and little reason for anyone anywhere else who is not a white supremacist to think about it. For it to suddenly become an active political issue must be a surprise to more people than just me. Somehow I imagine that a Walmart executive saw the John Oliver segment and responded with, “Really? Are our customers ‘the worst people in the world’?” Then, in a Monday meeting, the question was, “Is this bad for our image? It is??” By Tuesday, it was a parade of retailers pulling Confederate flag merchandise from their shelves and catalogs. The sudden prominence of the Confederate flag made it impossible for retailers to let it slip by quietly or grant it a special exception.

Pulling the Confederate flag from stores has helped make the flag a national issue. It will be a slower process to remove it from its places of public prominence, but yesterday the South Carolina legislature started working through the byzantine process of reconsidering its use of the Confederate flag and five other states ordered the removal of the Confederate flag from license plates. A symbol of white supremacy that has been broadly used across the South for 70 years will not go away in a day, but the business world moves faster, and a day was all it took for the flag to disappear from more than a dozen retail sites.

Tuesday, June 23, 2015

If There Were No Taylor Swift

What if there were no Taylor Swift and no one to watch out for the integrity of the music business?

Okay, quit laughing. It really is possible to put integrity, music, and business in the same sentence. Let me show you what I mean.

Suppose Apple Music had gone ahead with its original plan not to pay recording artists for its initial 13-week free trial period. Thirteen weeks is a long time in popular music, as Swift noted, and if she wouldn’t really notice the loss of one season of income, a new band having its first big hit during this period would be ruined. Thirteen weeks is long enough for a single like “I Want It That Way” or “We Will Rock You” to capture the public’s imagination, sell a million copies, then fade from attention. Not many singles, even among the most successful, stay on the record charts for as long as 13 weeks.

So what happens to a band that has the misfortune of having its breakthrough hit during the free trial period, so that instead of making half a million dollars from its hit, enough to pay back the money borrowed to record the album and promote the single, the band earns almost nothing? The band could literally be bankrupt as a result.

Of course, it’s possible that such a band could get a second chance after the trial period is over, but history doesn’t speak kindly about their prospects. Statistically, the unpaid Apple Music trial period would have brutally cut short the music careers of half a dozen promising recording artists.

The damage wouldn’t stop there. People in the record business don’t really want to see the careers of the musicians in their charge wiped out, so they would have withheld a wide range of new records during this period, saving them for later release dates. Record companies would go ahead with releases meant to build the careers of multimillionaires, but they would tend to hold back on releases from the vast majority of recording artists who need to keep making money in order to make their next records. The result would be an entire season with little to no interesting new music. That, in turn, could have killed Apple Music. If music listeners came away from the free trial period feeling that they hadn’t heard anything new and different on Apple Music, if they saw it as the new BMG Music Service, they would be excused for deciding it was a service they could do without.

In this roundabout way, Apple Music very nearly killed its own chances of finding a place in the music business. By creating a quiet period in which there was no compelling new music to listen to, Apple Music might have had people singing, “Rock and Roll is Dead.” Yes, that’s a 1995 Lenny Kravitz single, but what else are you going to sing when there isn’t any new music in 2015? In a funny way, then, Swift just saved Apple Music from itself.

In this limited sense at least, then, there is such as thing as integrity in the music business. The structural incentives in the business can lead to the ongoing creation and distribution of music, or it can work against it. It is a tough challenge for any subscription service to do its part to keep content creation going, but at least with its U-turn on trial period royalties, Apple Music has a chance to show that it belongs, that it is not just another corporation looking for a way to suck the life out of the music business.

Monday, June 22, 2015

Breakthrough on Greece

There are reports of a breakthrough in Greece debt negotiations today, with both Greece officials and the head of a committee of eurozone finance ministers saying a deal was likely in a few more days. The substance of the breakthrough appears to involve Greece accepting an increase in VAT and the EU accepting that further budget changes in Greece will have to be implemented over time. The core of the deal seems to involve an increase in the retirement age, which is a reform economists (not just me) had been calling for for some time.

Why now? Part of the reason is that, as Donald Tusk put it, “Time’s running out.” But I have to imagine that part of the reason is that the EU just spent two days (and the ECB, a couple of weeks) making contingency plans for a Greek default and agreeing in principle to spend a trillion euros or more if necessary to limit the spread of the resulting damage. This is the only way to explain how the negotiators on the European side moved so quickly and emphatically from insisting on instant reforms to accepting a phase-in of budget reforms. Greece, in response, added a tax increase as a show of sincerity. I think it is that combination of sudden changes in position that led both sides to say, “Now we think we have something.”

Friday, June 19, 2015

This Week in Bank Failures

If you have a summer internship at Goldman Sachs, the bank wants you to go home, if not at the end of the day, then at least by the end of the evening. New work rules for interns are meant to strongly discourage work between midnight and 7 a.m., limiting interns to a maximum workday of 17 hours. Even that is too much work, and the new guidelines directly suggest that interns should get enough sleep and have activities besides work. The new guidelines come after the death of a summer intern at Bank of America last summer, the apparent result of overwork and sleep deprivation.

RBS has apologized for an server crash that resulted in dropping 600,000 incoming payments on Wednesday. Systems were working normally again by the time the bank opened on Thursday, but the missing transactions have not yet been restored. In the interim, the bank is improperly holding funds intended for its customers. The best estimate is that customers will see the money in their accounts sometime Sunday. Similar errors will occur in the future, the bank warns. RBS has been spending £1 billion per year to update its systems, but continues to be plagued with operational problems.

If you have read this far, you are surely looking for reassurance on Greece, or perhaps for speculation on the form of a deal that might be worked out between Greece and euro zone authorities. For a deal to be possible, the European Union must accept that further economic reforms from Greece will not happen instantly. I am strongly in favor of an increase in the retirement age in Greece, for example, but for it to happen responsibly, a four-year increase in the retirement age would have to be phased in over a period of at least six years starting no sooner than next year. If the EU continues to insist on immediate austerity measures that would put Greece into a new depression or throw a quarter of citizens into poverty, Greece could be better off working out its own plan by making late payments on the loans it already has.

No one knows at this point whether banks in Greece will be able to open next week, a question an ECB official was worrying about a little too openly at a meeting Thursday. Net outflows were estimated at €4 billion this week, not a huge sum in itself, but alarming when added to the large outflows of previous months. The size of the deposit flight makes some depositors worry about capital controls, and that in turn makes them want to be sure they have enough cash. Besides the net outflows from banks, Greek citizens are holding on to their cash by paying their taxes late. In a crisis, it is more important to have cash on hand than to be current on your tax bills. The strategy, however, adds to the financial pressure on the government. Greek banks hold government debt that they may not be able to count as current assets if the government stops paying its debts, so the solvency of the banking system is tied to the solvency of the government.

Outside of Greece, the bank that has a disproportionate exposure to the European credit market is Deutsche Bank. Analysts are trying to guess at the magnitude of the impact on Deutsche Bank and other banks of a potential Greek default at the end of June. It is a complicated question that can’t be answered just by looking at the financial statements.

I must emphasize again that putting the future of the euro at risk in this situation makes no sense at all. The €8 billion of incremental short-term financing at issue is tiny compared to the €40 billion stock market value of Deutsche Bank or the €6 billion per day that Europe would pay for currency conversion in the absence of the euro. Measuring it another way, Greece’s immediate financial hole is equivalent to three or four days of national GDP. Greece has offered all the reforms possible under the circumstances, but European authorities have rejected them, asking instead for the quick fix that isn’t possible within the constraints of Greece’s financial condition. I am hopeful that cooler heads prevail and some kind of resolution is written either this weekend or at the euro zone summit called for Monday.

There is a reason to think that might happen, as the European Union turns its attention today and tomorrow to the actions required to avert euro-wide disaster in the event of a Greek default. After the EU looks at the price tag for recapitalizing a few giant banks, last week’s quibbles over the precise timing of Greek budget reforms will surely seem petty.

Thursday, June 18, 2015

La Boulange: Taking Gluten Too Far?

Something seemed slightly off from the beginning with Starbucks’ conversion to La Boulange pastries. Starbucks has been trying to position itself as a leader in food quality, so it made sense that it was dropping artificial colors and trans fats from its pastry case. In contrast, with some of the La Boulange pastries, especially the croissants, Starbucks was taking on what seemed to be the highest gluten levels in desserts among all major U.S. restaurant chains. (Analytic gluten levels of food products aren’t normally disclosed and are hard to come by, so that is only a guess based on the physical qualities of the final products.) U.S. consumers have become at least suspicious of gluten over the last 20 years, so for Starbucks to boldly position itself as the go-to place for gluten seemed like a mistake.

Gluten is essentially a junk protein with no nutritional significance, but it is valued for the way it adds stickiness and elasticity to food. Think of gluten as the glue in wheat flour. Anything made from wheat contains gluten. People who are highly gluten-sensitive can’t eat anything made from wheat at all. However, some flour has more gluten than others, and even people who wouldn’t think of themselves as gluten-sensitive can have a discernible reaction to the super-high gluten levels in something like a croissant. (Other food with weirdly high levels of gluten can include pizza and certain imitation meats.) Starbucks’ sales experience bears this out. Wherever they are introduced, the La Boulange croissants are a hot item at first, selling twice as fast as anything else, but that lasts only for a couple of months. By the end of the first year, the croissants are reliably the one pastry left unsold at the end of the night. There aren’t any complaints and croissants contain no more food energy than Starbucks’ other desserts, but there is something about them that doesn’t sit right, so that customers are subconsciously driven to try something different next time.

Food scientists swear that 2015 gluten is the same as 1990 gluten, but the new reactions to high-gluten foods hint that something may have changed. At any rate, Starbucks has collected its sales data and has apparently concluded it can’t buck the anti-gluten trend. It is keeping the La Boulange name and many of the desserts, but in its statement it specifically mentions only the low-gluten and gluten-free items such as the lemon loaf and marshmallow bar. The separate La Boulange pastry shops, an experiment in California, will close by September, along with three La Boulange factories (some sources say two) in California. The executive in charge of La Boulange is out. It is as close to a U-turn as a national restaurant chain can make without directly admitting it made a mistake.

I see the La Boulange experiment as a turning point for the food sector as a whole. I can’t imagine any more large-scale experiments with new high-gluten foods from any major restaurant chain, aside from the pizza restaurants, as long as the anti-gluten trend continues. Rather, the big-money interests in food will be looking for ways they can reduce their reliance on gluten.

Wednesday, June 17, 2015

U.S. Trans Fat Ban Is Official

The ban on trans fats in the U.S. food supply is official now. It is nothing to get excited about yet. There is a three-year transition period, and trans fat-based processed foods manufactured before the deadline could remain on store shelves for perhaps three years after that. I am sure we will still be seeing fortune cookies made with trans fats in 2025. The FDA has hinted that it will issue a series of exceptions, so you will still have to read ingredient labels. Nevertheless, from here forward, every time a food factory changes a recipe, they will remove the trans fats as part of that change, so the volume of trans fats U.S. consumers eat will decline.

The clout that the food sector has over news agencies is evident when you look at the reporting on the trans fat ban, much of which leans on falsehoods and fabrications. Many of the stories say that the FDA created a special rule for trans fats, and that is not really true. The essence of what happened is that the FDA withdrew its earlier rule that exempted trans fats from normal food safety procedures. Some stories say the FDA action was prompted by a lawsuit by an unnamed consumer group. I haven’t found any evidence of that either. Rather, it looks like the FDA was responding to a citizen complaint, which may more accurately be thought of a note from the suggestion box than a summons to appear in court. The most appalling distortion comes from Al-Jazeera, whose subhead claims, “Decision to ban partially hydrogenated oils is aimed at curbing obesity.” Obesity? Where did that come from? Did the staff of Al Jazeera English make that up just because it sounded good? Were they recycling a headline from a different story? Did an advertiser order them to distort the story in this manner to make the regulatory move seem sinister?

Watching food factories gyrate over this issue shows that they think they can turn back the clock, but everything else says otherwise. Trans fats have been banned in other countries for decades, and U.S. medical groups have been petitioning to have them eliminated in the U.S. for at least that long. With government agencies on the hook for half of medical costs, there is a strong disincentive to allow novel food contaminants that cause unnecessary heart attacks. U.S. consumers are on an inexorable trend toward being more food-aware, and that includes being aware of ingredients like trans fats that try to pass for natural but that are in fact artificial and potentially harmful.

Tuesday, June 16, 2015

Gap Store Closings and Clothing Style in the Personal Branding Era

If Gap is closing 20 percent of its North American stores this year, it shows that times really are tough in the clothing business. I’m sure I speak for more than a few in Gap’s potential market when I say I like Gap’s stuff but I can’t afford it. A decade ago when I was a regular mall shopper I would sometimes buy things from Gap’s sales, or more often from the clearance rack. I remember admiring how well Gap could label a stack of blue jeans and how precisely the jeans were constructed, so that if you wore one of the 45 common sizes you could find jeans that fit you in a minute. It is a moot point for most shoppers, though, if the tag reads $69.95. Obviously there is a place in the mall for high-priced, highly competent basics, but it is a smaller place than it used to be.

I still have one Gap store purchase in my closet, an olive drab sleeveless zip front hoodie from around 2003. All the other Gap items in my wardrobe, though, I purchased at thrift shops. That, I think, is emblematic of the challenge Gap faces. Shoppers, particularly those under 30 years of age, complain that Gap designs are so predictable and so anonymous that you almost have to give up your identity to wear them. In the age of personal branding, people no longer want to look exactly like everyone else. I gain an advantage in that respect when I wear designs that were in the store five or ten years ago. At least these aren’t the designs you would see everywhere you turn this year, or worse, last year.

Thrift shops with their endless variety are stiff competition when everyone is trying to create an individual look, but so is H&M, which seems to pop up in every news article about Gap’s woes. The clothing at H&M might not be so well-made or durable, but it also costs a lot less, and you have the implicit guarantee that it won’t be in the store for longer than a few weeks. With more variety and more turnover on the racks at H&M, you don’t run the risk that you will look just like half of your friends. Instead, the risk is that the item you are looking at is sold out in your size, never to return.

Clothing is more durable all around, and part of the challenge facing clothing stores is that people don’t need to buy so much clothing. With personal branding, people buy even less. Earlier this month I went to some trouble to create a summer office look for myself. This summer you will only see me wearing a narrow range of colors, in solid colors or narrow vertical stripes of white and one other color. It is all somewhat predictable, but that’s one of the objectives of personal branding: you want to make it easy for people to recognize you when they see you. Now that I have worked that out, it will be hard for anyone to sell me clothing for the next three months. For me to buy it, it has to fit my look exactly and cost hardly anything. If many other people are doing the same thing, where is the profit opportunity for a store like Gap?

Sunday, June 14, 2015

Health Benefits of Nuts Confirmed

Another study has found that nuts contribute to health, and it doesn’t necessarily take a lot of them. A Dutch study reported in BBC News found that people who ate 10 grams of nuts per day were less likely to die early from a range of major diseases. The benefits extended to peanuts. There was no benefit found for peanut butter, but that was probably just because of the other ingredients in most commercial peanut butter, which can include artificial fat. Ten grams is just a few nuts. Diet experts caution against eating nuts in large amounts because of the high levels of fat.

Friday, June 12, 2015

This Week in Bank Failures

Deutsche Bank has a new CEO after a board meeting last weekend. The two co-CEOs of the past few years had lost the confidence of workers and were seen by the board as indifferent to the bank’s parade of legal troubles. The new CEO, a caretaker in that post, is charged with speeding up the bank’s restructuring, which may ultimately involve laying off half of the bank’s workers in Germany.

HSBC is cutting its staffing by 50,000, half by selling off operations in Brazil and Turkey and the other half by scaling back everywhere else except East Asia. The bank says it can make the 25,000 staffing cuts in its remaining operations through attrition, but that process would take four or five years. It can move so slowly with cuts only if it can somehow stabilize its operations and avoid any further crises.

It is not exactly chaos at Standard Chartered Bank, but the bank is losing top talent and observers agree the new CEO will have to move quickly to cut costs and raise capital.

Greece is resigned to making some of its debt payments late after negotiations with the IMF and European authorities broke off yesterday. The German government in particular has demanded that Greece scrap its national pension system, while the Greek government has not been willing to make any pension cuts at all. If there is a compromise to be found, it will likely involve raising the retirement age by four years, from the current 61–63 to a U.S.-like 65–67. In the interim, there are delays of several years in processing pension applications because of a gap in pension legislation and a large number of applicants.

Some of the deposits taken out of Greek banks in recent months landed in Italy, temporarily taking some of the pressure off the troubled banks in that country. Expect to see a small flurry of bank rescues and failures in Italy after Greece’s situation is resolved.

Shrinking Carry-On Bags

There has long been a problem with carry-on bags on airplane flights. Carry-on bags are so large that only about two thirds of passengers can find a place to put their bags after they board a sold-out flight. Of course, lots of passengers fly without the big carry-on bags, so the system almost works, but on almost every flight I’ve been on, a few passengers have to have their carry-on articles taken away and put somewhere else, usually in checked baggage. It’s an inefficient and unfair system. Now the International Air Transport Association says they can solve this problem by making carry-on bags a little smaller. Compared to what U.S. air passengers have come to expect, the new carry-on bags will be 0.5 inch smaller in the two larger dimensions and 1.5 inches thinner.

Since I am a fan of incremental change, I feel I need to point out that this is not the incremental change that it might appear to me. There is no machine that can take the quarter billion bags that were made to fit the old U.S. carry-on size and shrink them by 0.5 inch. If you are an air traveler, you won’t want to take the risk of keeping your old carry-on bag, lest you mistakenly show up for a flight carrying it. As the Guardian story suggests, you will have to actually throw away the old bag and replace it with a new one made to the new size.

It is still probably the right answer, but there is no getting around the one-time expense involved. When you add up the cost of the replacement bags, perhaps around $10 billion, it sounds like a lot, but it is not so large when you compare it to the total cost of traveling by air. In the United States alone, airline passengers pay more than $1 billion every day to cover the cost of travel. For the average passenger, the cost of the airline ticket for a single flight is greater than the cost of the luggage. Looking at it that way, the cost of the new-size bags might be a nuisance, but if it allows you to actually take your bag on board the plane, it’s probably worth it.

Thursday, June 11, 2015

U.S. Government Creates Critical Mass for HTTPS

The U.S. government is adopting HTTPS for all of its web sites. Government web pages will be secure web pages, so that intervening servers cannot track the specific data being exchanged between the web server and the web browser. A White House directive from last week says all federal government pages must convert to HTTPS by the end of this year. That degree of urgency says there is a security concern. The concern might be about the risk of someone spoofing a government agency web site in order to give out false information (such as a hurricane warning when there is no hurricane), or it could be a reaction to efforts by foreign governments to track the pages that citizens are reading. Regardless of the rationale, this widespread adoption will give HTTPS a new boost.

Twitter, Wikipedia, and Google Mail (among many others) switched to HTTPS two years ago because of security concerns, and those transitions had surprisingly little impact on users. Government sites that handle personal data, such as Social Security, have long used HTTPS to protect user privacy. The addition of all other government web sites to the HTTPS camp may create a critical mass that makes HTTPS seem just as normal as the more familiar HTTP.

It was uneven browser support that made the Web prefer HTTP to HTTPS a decade ago, but now fewer than 1 percent of Internet users are using the old browser software that does not consistently support HTTPS. Balancing security against inclusiveness, it may make sense for the whole Internet to switch to HTTPS soon. If that happens, whole categories of criminal endeavors will fall by the wayside.

Wednesday, June 10, 2015

Music Subscriptions: Perverse Incentives and Mediocrity

The Apple Music announcement briefly turned the spotlight again on the subscription model for delivering music, but as with Tidal earlier in the season, there does not seem to be anything new. Music subscriptions work only because so many subscribers don’t understand how much they’re paying. They think it’s the price they see, $9.99 or $18.99 or whatever. Notice that no subscription promotional materials tell you directly how much you pay in a year when you multiply the monthly subscription fee by 12, then add in taxes, data charges, and whatever else you end up paying. They don’t show the bottom line because they don’t want to hasten the day you figure out how much the subscription is really costing you.

But that day will come eventually whether consumers do the math or not. It takes no more than a vague feeling, “I feel like I’m paying too much and getting too little,” to get consumers to break a habit, though it won’t necessarily happen quickly. The same phenomenon makes people move their money out of Bank of America and Wells Fargo, stop going to McDonald’s and Olive Garden, let magazine subscriptions lapse, cancel cable, and delete their FaceBook accounts. Satellite radio continues to lose subscribers because the cost of providing the service is more than the core customers are ultimately willing to pay. It tells you something that most new Sirius XM subscribers are people who accidentally bought a used car that came with a satellite radio receiver. Don’t believe me? Try visiting the Sirius XM web site and see if you can go a full minute before one of the web pages asks you what kind of satellite radio is in the car you bought. Obviously, that’s a business model that won’t last for more than a few more years. But if satellite radio strikes most people as a bad deal, Internet-based music subscriptions charge more and offer less.

The core idea of having a market in music is that music listeners should have some influence on what kind of music gets made. If you buy music, listen to it, tell other people about it, that helps to encourage musicians to make more music like that. Music subscription services turn that idea on its head. It’s true that some fraction of the money you pay goes into a pool to pay for music content, but the way that money is paid out has hardly anything to do with your music preferences, and a great deal to do with which recording artists are the most heavily promoted. You might listen to music because you like Sigur Rós and Bonnie Raitt, but when you pay for a music subscription, what your money says on your behalf is that you like Wall Street banks, giant technology companies, and the latest boy band. Meanwhile, the musicians who do the best with subscription services are the ones whose music is just intriguing enough to get you to listen once. Why go to the enormous effort of creating music with artistic merit if the only statistic that is being measured is how many people listened?

The perverse economic incentives of music subscriptions, which reward mediocrity while penalizing excellence, are the main reason I think the subscription model can’t survive. The inevitable end-game of a system based on mediocrity is that the good months aren’t good enough to forgive the bad months. No matter how dazzling a subscription service might be in the first two years, after the novelty wears off and the cost-cutting sets in you can count on it being just barely tolerable, and as soon as the customer base starts to decline, it will be something a little lower than that.

Tuesday, June 9, 2015

Apple Streamlines Transit Mapping

Among Apple’s announcements yesterday, it may be the invisible computer efficiencies that make the biggest difference in the world, but I would pick out the transit map features as being a sign of the times. In the new OS X this fall, you will be able to research transit options from the desktop and send your selected route to your phone. This will go a lot faster than poring over a series of maps on the phone. After we get used to using transit route handoffs, we’ll wonder how we ever got anywhere without them.

Sunday, June 7, 2015

Vigilance and Shopping Fatigue

The idea that sellers may go to extraordinary lengths to get you to turn over your money is not new. The mere fact that the phrase caveat emptor (“buyer beware”) is written in Latin, a language that has been extinct for centuries, tells you that the risk inherent in buying things goes back to ancient times. A modern (well, nineteenth century) phrase is “Hold on to your wallet” — someone may persuade you, just for a moment, that a purchase is a good idea, but if you turn over your money, you may regret it within minutes.

Shopping has been a minefield since before minefields existed, but something has changed within the last year. Anecdotes and U.S. economic aggregates point to a new kind of shopping fatigue. In spite of improving consumer finances, it seems impossible to have two strong months at retail in a row. After people get out and do their shopping, they need a break, several weeks off before they are ready to do it again.

This past winter, we saw aggregate consumer spending go down in bad weather and recover when the weather improved, as you would expect. But shopping then fell off again, for no apparent reason other than that people had just been shopping and had had enough of it for the moment.

The aggregates can mislead because they disproportionately represent the activity of the top 10 percent of households by wealth and income, who own most of the country and provide more than half of consumer spending. In this case, this emphasis of the aggregates might be telling us something. Perhaps the people who are doing the most shopping are feeling the greatest shopping fatigue. But it is obviously not just them.

I became acutely aware of shopping fatigue in myself earlier this year after I bought a car. Having spent more than a month’s income all at once it is understandable that I would not be in a hurry to go out and spend more. My financial statements tell the tale: I spent just four days of income over the six weeks that followed. But it is not just a wealth effect. Now that I am looking for it, I see the same effect when much smaller amounts of money are involved. Yesterday I spent an hour shopping at one store and brought home a bag of clothing that cost less than $100. Once home, I wasn’t willing to go out again for groceries. That could wait a week. It is just this kind of decision, when a consumer is willing to risk eating dull food for a week to avoid having to face another shopping experience so soon, that makes the aggregate consumer mood look worse than it is. This is just my own story, but I am hearing similar stories from all sides.

Assuming that this newfound shopping fatigue is a real phenomenon, where might it come from? I can’t talk about fatigue of any kind without mentioning the sleep problem, and consumer time pressure and the resulting sleep deprivation are surely part of the story. At the same time, I can think of two known structural changes that might have the effect of making consumers more wary of shopping.

First, there is Apple Pay along with similar initiatives that aim to make in-person electronic payments more effortless and frictionless. Consumers benefit from the time savings, but the new ease and invisibility of payments also means that you can spend money faster than you might expect. A consumer might look at balances at the end of the day, see for the first time how much money has been spent, and feel that something went wrong. It is that feeling that something went wrong that translates to a wariness the next time. Apple Pay hasn’t reached so many shoppers in its early test phase, but it is disproportionately represented among the wealthiest shoppers so its effects already matter when you add up the money. Meanwhile, the shoppers who have to be on guard to avoid overspending will find shopping more wearying than before, not less.

Second, retailers have more skill than ever at collecting useful information on consumers, using a technology often categorized as data mining. Retailers use this information to tune their operations and promotions to boost revenue. I worked in this field in the 1990s, but what we did then was nothing compared to what is going on now. It is the shoppers, though, who are being optimized against, and when you take on a shopper’s point of view, it appears that retailers have more skill than ever at catching you in an unguarded moment and separating you from your money. This experience too can make people less eager to go shopping the next time. Again, as retailers follow the money they tend to tune their pitches mainly to millionaire shoppers, so those are the shoppers who may be feeling the greatest fatigue at the end of the day. Any shopper may be affected, though. Facing a barrage of messages tuned to millionaires, some of them will resonate with you just by chance regardless of your personal wealth. Having to cut through the pro-spending impulses that come from a finely tuned retail environment takes energy and takes away the sense of ease that otherwise might go with shopping.

I am not asking for sympathy for millionaire shoppers, but their experience may be taken as a warning of what is ahead. If millionaires are facing the cutting edge of shopping optimization, the same tricks will reach the rest of us in just two or three more years as the technology advances. For a short time, retailers’ new technology might squeeze more cash out of shoppers than they meant to spend. That pattern obviously can’t be carried forward. The U.S. consumer economy is overreaching and will have to scale back slightly. As that happens, I expect to see the retailers that optimized the best fall the hardest.

Friday, June 5, 2015

This Week in Bank Failures

The indictment of former Speaker of the House Dennis Hastert highlights the way money laundering rules can affect anyone who deals in under-the-table cash transactions. Hastert was withdrawing millions of dollars in cash, which is exactly the kind of pattern that makes law enforcement officials ask questions. It was surely not money laundering, but Hastert was systematically taking the money out in small amounts that he apparently combined to form larger cash payments. If any of the combined cash payments exceeded $10,000, and if Hastert then failed to report the nature of the cash transactions to bank regulators, that is a violation known (informally) as structuring. The indictment of Hastert says he subsequently made false statements to investigators about the money, which would be a second crime. A retired politician ordinarily would not be indicted just for moving money around, so the indictment is not really just about the money. Wording in the indictment suggests that investigators think Hastert was paying hush money to victims of his earlier misconduct. The episode provides an example of the way investigators try to uncover crime by following the movement of money.

Metropolitan Savings Bank in Pittsburgh failed almost immediately after the real estate boom began to falter in 2005, and the main reason was that a bank executive was secretly taking out loans for houses his construction business was renovating. At the time of the bank failure in February 2007, loans to the executive equaled more than half of the bank’s capital, but bank directors didn’t know because of false accounting records for most of the loans. The executive was sentenced to 12 years for his part in the bank failure. Another officer pleaded guilty and is serving a 6 year sentence for her role in the false accounting. The two were ordered to pay nearly $10 million in restitution.

Thursday, June 4, 2015

Two More Brands Join Ingredients Trend

There are two additions to the ingredients trend that I wrote about last week.

Subway is planning to drop all preservatives and artificial colors and flavors from its menu within two years. The change will start with roast beef — the restaurant chain says roast beef really doesn‘t require chemicals. Subway had already been systematically reviewing its ingredients since dropping the bubble chemical azodicarbonamide from its bread a year ago, and more recently it started to phase out caramel color.

Kellogg’s plans to dabble in products that aren’t based on chemicals. If the first four semi-natural cereals are a success, I’m sure more will follow. In addition, Kellogg’s says it will make its ingredient panels easier to read so consumers won’t have to guess about the ingredients in the products.

Monday, June 1, 2015

Beijing Smoking Ban

A new ban on smoking in most public places in Beijing went into effect today, and while it will be difficult to enforce, it will change public perceptions in the city that probably has the second greatest number of smokers in the world, after Shanghai. The new law bans smoking in commercial buildings and almost anywhere a smoker might be seen. Violators are subject to a $32 fine, with much higher fines for businesses that permit smoking inside a building. It is the latter measure that may ultimately be effective in ending the practice of smoking in schools and restaurants.

The new smoking ban could change the cultural view of smoking just enough to allow the further measures that could be broadly effective at getting people to smoke less. One reform that is desperately needed is an increase in the cigarette tax. A pack of cigarettes can cost about $1 in China, and a tax increase that sent the price up to $2 would make an obvious difference. However, tax increases cannot be enforced without a crackdown on counterfeiting and smuggling, and that degree of reform will be possible in China only after a change in smoking culture.