The Future of Advertising?

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Is there an Arbitrage Opportunity by Combining ZipCar and Lyft?

ZipCars rent for less than $10/ hour after tax. The Lyft FB ad says drivers make up to $23. That’s a max spread of $13. You probably can’t work 8 hours a day so it would have to be part-time “employment.” There is also the opportunity cost of forgoing the salary of a “real” job, but the search and transaction costs may be significantly lower using this arbitrage scheme, at least in the short term. Plus, the schedule is pretty flexible. Opportunity cost diminishes as one’s potential productivity declines, so for some relatively low-skilled workers with clean driving records this may be a viable part-time job. It may require a small bribe to get Lyft to approve of ZipCar use, however.

Tax Havens Aren’t So Havenous After All

I was surprised to find out the following requirement regarding tax havens after NPR’s Planet Money incorporated two companies in locations traditionally anointed that status: Belize and Delaware. You can learn more here and here.

“It turns out that despite all the big red letters advertising absolute confidentiality, I am legally required to declare these companies to the IRS. Even if, as is true in my case, the company has done absolutely nothing — just exists in some papers.”

You hear about the Cayman Islands, Bermuda and British Virgin Islands being called tax havens. That term makes it sound like if you can figure out how to get your money there, you suddenly don’t have to pay taxes. But of course that is not true. If you are an American earning income, you do have to pay taxes. And in fact the IRS wants you to report a lot about what exactly it is you are doing offshore.

In fact the required paperwork can take something on the order of 150 hours to fill out and file according to the story. There are, of course, still benefits to incorporating offshore:

So what’s the benefit of doing things offshore? Well, if you are determined to evade taxes, if that’s your goal, then creating a complex financial structure in a tax haven will certainly make it harder for the government to catch you.

Harder, but not, according to Buckley and Gottfried, impossible. An audit could trip you up, they say, and then of course there are the IRS’s usual informants.

And US corporations including Google, Facebook, Oracle, and Microsoft have setup overseas offices in order to “save” billions. I use quotation marks around the word save because, as mentioned, US citizens/corporations have to pay US taxes. What’s really going on is a deferral of taxes until the income is brought back to the US, if it is brought back. Though sometimes so-called “tax holidays” are lobbied for by these corporations. Here is a preview:

In October, Drucker reported that Google had saved $3.1 billion in taxes in the past three years by shifting the majority of its foreign profits into accounts in Ireland, the Netherlands and Bermuda using financial techniques called “the Dutch Sandwich” and “the Double Irish” arrangement. Basically, he says, Google credited its Irish office with the majority of its non-U.S. sales revenue — and then shuttled that money through various subsidiaries located in Ireland and other countries to save billions in taxes.

There is more here.

Finally, the United States is itself a type of tax haven. From Investopedia:

In terms of capital gains, non-resident aliens are subject to no U.S. capital gains tax, and no money will be withheld by the brokerage firm. This does not mean, however, that you can trade tax free – you will likely need to pay capital gains tax in your country of origin. In terms of dividends, non-resident aliens face a dividend tax rate of 30% on dividends paid out by U.S. companies. However, they are excluded from this tax if the dividends are paid by foreign companies or are interest-related dividends or short-term capital gain dividends. This 30% rate can also be lower depending on the treaty between your home country and the U.S., so it is important that you contact your brokerage firm to verify the rate.

The Chick-fil-A Situation and an Economics Lesson

The economics lesson will come in a moment, but first I want to talk about the situation more generally. But before doing so let me quickly reveal my biases. I am decidedly in favor of same-sex marriage. I have a lot of gay friends. I walked in Seattle’s Gay Pride parade this year. I follow George Takei on Facebook. It’s pretty much the only issue that informs my vote — not the economy, or healthcare reform, or foreign policy. I’ve never heard an argument anywhere near cogent for denying this right to same-sex couples. I also don’t remember having ever eaten at Chick-fil-A — I don’t even know where one is if I wanted to. I will certainly not be eating there in the future.

But as always our discussion of the situation lacks the clarity and precision I prefer. First, let’s state what is obviously true. Chick-fil-A did not donate money to anti-LGBT organizations. “Chick-fil-A” is an abstract human conception. It cannot donate money, just as the table in my dinning room cannot. The idea of Chick-fil-A is useful as a shorthand in many discussions and analysis, and, indeed, has specific meaning and importance in the area of law. But let’s not kid ourselves by conjuring up imagines of everyone at Chick-fil-A gathered around a drumstick shaped conference table one Monday afternoon to determine where this year’s donations would be sent. Undoubtedly, a very small group of people somewhere relatively high up, if not at the very top, made the decision about how to distribute these funds.

I say this only because I fear a certain amount of persecution for those individuals unfortunate enough to be on the front lines of the company’s franchises. I know from first hand experience that many of us know relatively little about the companies for which we work. I would not be surprised if the fry guy, or the checkout guy, or the chicken girl knew nothing of these donations before the recent brouhaha. I say this realizing that the company is outwardly religious in its mission statement. But even if employees were aware of the donations perhaps we should still cut them some slack. I doubt they were attracted to low-level positions at Chick-fil-A because of the company’s questionable values. More probably these employees have relatively few options for employment and are doing the best they can to carve out a living. Sometimes people make tough choices when their livelihood is on the line, and I for one am not going to blame them for that. Sure, some employees share the views put forward by the company’s mission statement, but I’m keeping an open mind as to which employees these might be.

On the other hand, it does seem fairly clear that these donations went to organizations that are openly hostile to same-sex marriage. You can view a complete list of Chick-fil-A recipients here. With a little poking around it seems that promoting traditional family structures is one of the core missions of these organizations. And it is troubling that their budgets are now thousands or, in one case, a million dollars richer.

Opponents have reacted just as they should — protesting, sure, but more importantly not purchasing Chick-fil-A food products. People purchase items when the price of the product is less than the expected value (or utility) they receive. But value is not utilitarian in the strict sense. Embedded in value are all kinds of non-traditional forms of utility like aesthetics, the importance of the brand, and the moral principles of the company compared to the those of the purchaser. (That’s why Apple products can garner a premium despite having nearly identical hardware components). So clearly, using this all-encompassing definition, Chick-fil-A products have lost value in light of recent events. Some have pointed out that Chick-fil-A’s values have not changed for years; but, again, what has changed is the information available in the public forum about these values. Behavior, aptly, responds to new information.

Social movements are an underappreciated aspect of capitalism, but just as surely are part of the modern capitalist system. What is unrecognized by most participants in social movements, however, is that these movements can be very good for the corporations at which they take aim. I don’t mean in some vague sense relating to free publicity and so on, I mean in a real economic sense.

Remember that $5 ATM fee Bank of America proposed charging late in 2011? An online petition against the fee was started by Molly Katchpole, a part-time nanny, and quickly gained over 300,000 signatures, causing BofA to cancel the planned increase. This seems like a victory for consumers, and in some sense it is, but it’s also a victory for BofA because they learned something about the elasticity of their ATM services. The term “elasticity” is used by economists to denote the relationship between quantity and price. If the price increases do consumers cut back a lot, a medium amount, or not at all? A high elasticity means consumers cut back a lot when price goes up. I suppose something like chocolate would be a good example because there are so many substitutes for those who have a sweet tooth. A low elasticity implies the opposite. We might think of cancer drugs as falling into this category. You’re likely to make sacrifices in other areas of your life in order to continue purchasing your cancer medication even if the price, say, doubles. In this second case, there really are no substitutes.

Firms want to charge the highest price possible without losing customers — the price that maximizes profit. But figuring out what that prices is isn’t so easy. Sure, you could do focus groups, but nothing beats 300,000 consumers collectively screaming out, “That’s too much!” “No problem,” says the bank, “we won’t charge that much.” The information embedded in these social movements is extremely valuable. Now there’s a bigger question about why a company is raising prices in the first place — maybe they are losing money or have a poor business model more generally — but elasticity information about particular services can help steer structural reforms in the business and guide executives’ decisions about the best overall method to reduce costs.

The same holds true for Chick-fil-A and the information they were able to garner. The company now has all kinds of demographic data by region (based on franchise location) showing customer loyalty and political beliefs, and can adjust local marketing campaigns accordingly if they so choose. The company also now knows roughly what percentage of total product value is due to their corporate values.Turning to the macro scale, Chick-fil-A now knows how consumers at large will respond to future charitable giving.

Overall technological improvements have caused collective action to work more quickly. Now social movements can easily garner support in days and weeks instead of months and year. But increased technology has also sped up the response time of businesses and likewise increased the sophistication with which firms can analyze the inevitable stream of data that occurs when masses of consumers willingly reveal their preferences and elasticities for particular services.

On net it’s unclear whether the companies or consumers benefit. Perhaps the loss in customers more than offsets the value of the information firms collect. Or perhaps the lost revenue from not being able to implement a $5 ATM fee will lead to more devastating cuts in other areas. Because of technology customers were able to come together and quickly bridge the information gap. Within days, millions of BofA customers knew about the proposed fees and had their outrage validated by strangers across the country. On the other hand, perhaps in the absence of a social movement there would have been a steady leakage of BofA customers away from the bank, with a policy reversal coming only after many more customers had left. The quick response from customers allowed BofA to respond equally quickly, perhaps keeping many customers that would have otherwise left.

But even if particular businesses don’t benefit the industry as a whole surely does since, for example, other major banks can us the BofA experiment to infer information about the elasticity of their own ATM services. In the case of Chick-fil-A, consumers gave a signal to businesses throughout America about the consequences of certain types of corporate giving. BofA and Chick-fil-A were “first movers” in their respective business policies. The widespread response of consumers articulated all kinds of important information to firms throughout America. This information may even counteract the reasons behind the social movements in the first place.

What’s the Big Deal with Media Consolidation?

You may have seen this Frugal Dad infographic floating around on the web in the past few months:

Media Consolidation Infographic

Source: Frugal dad

I know I’m going to be called naive, stupid, blind, or, worst of all, a Republican for saying this, but I don’t see what the big deal is. I think fear of media consolidation comes from a general fear of business mixed with a quirky phobia of media in particular. I have not, for instance, heard anyone complain about the limited number of American automakers. (Although, undoubtedly someone has).

I see a close analogy in politics. Take health care reform, for example. If I was in favor of the Patient Protection and Affordable Care Act (aka Obamacare, I term I hate), I probably praised its passage because of its increased coverage and lowering of prices. But be careful, what passed was not lower prices, but rather a piece of legislation. What the effects of that legislation are remain to be seen. But if I’m an average citizen I don’t really care. I conflate the two and if, in the future, prices don’t decrease or coverage doesn’t increase I don’t blame PPACA. Instead, I assume we forgot to add something to the bill or that the evil insurance companies are trying to screw us over again and I call for further legislation. The inverse example holds if I was initially against PPACA. I see an extraordinarily small number of people robustly examining the economic and policy literature. Instead, they wait for “their side” to tell them whether the bill is good or bad. They work off of emotions rather than logic. This can be useful, but also malicious.

Similarly, media consolidation does not imply an effect, at least it shouldn’t without examining the evidence. It is an “event” or a phenomenon, and its effects are quite distinct from its occurrence in the sense that just because we distrust corporations a priori does not imply negative consequences from corporate mergers without some empirical basis.

The same fears were present recently during the preposed merger of AT&T and T-Mobile. But take a look at the history of telecom mergers since 2000:

Now, I have no idea if the price reductions were a result of these mergers—economies of scale might suggest that they were—but really it doesn’t matter. You have to prove the negative counterfactual, that is, without these mergers telecom prices would have dropped even lower. Otherwise we should conclude that telecom mergers benefited customers.

Similarly, in the case of media consolidation you need to prove that all the things commonly kvetched about are a result of media consolidation itself—that there is something unique about having six media companies that isn’t present when there are, say, fifteen (or twenty or fifty). That seems like a tall task as far as I can see.

Nor are the statistics in the infographic all that alarming in their own right. Let me quickly dismiss any negative affect of consolidation on entertainment (I think that’s just silly, I mean, hello, Game of Thrones) and instead focus on news outlets as I perceive this to be the real area of concern. I am not, for instance, nervous that “232 media executives control the information diet of 277 million Americans,” since those 232 media executives are themselves controlled by the millions of Americans who own stock in their companies. Besides that, it is far more likely it is the media desires of those 277 million consumers who control the news and entertainment programing decisions of these 232 media executives.

Let’s consider another: three times more people read Time Warner news (a media conglomerate) every month than read Google News (the anti-establishment upstart). I suppose I am meant to find this alarming. Instead, I find it quite remarkable. You’re telling me that in a mere six years since officially launching, Google News has grown to a readership one-third the size of one of the most established print media companies in the history of the world? A company that publishes the likes of—year of first issue in parenthesis—Time (1923), Sports Illustrated (1954), Fortune (1930), People (1974), InStyle (1994), CNN.com (1995), and The Huffington Post (2005). That Google could do that in six years is literally amazing. With the “Big Six” that vulnerable, how can you possibly fear them?

You may be quick to point out that Google News is a news aggregator and many of their links simply redirect to one of the established media companies. True, but as long as people use Google News as their portal, it is Google News that controls what news people see, not the big media companies. Google could, at any time, simply switch providers and link to sources not owned by the Big Six, to the Associated Press, for instance. If you think Google would be foolish to do so because it would quickly lose readership then you admit it is consumers, not companies, who are in control.

And the word “control” implies a conspiracy of enormous proportions. To what ends are media giants “controlling” what news I read and watch? So I will vote Republican or Democrat? I think there is enough regulatory capture to go around regardless of what party holds office. If they are so good at making me “buy” things (read: browse their content to push up advertising revenues), how do they ever go out of business? Why do they need to merge at all? If you’re in financial straights just “control” the public into using your content. Wikipedia lists 47 CNN programs that have been cancelled over the years. Why were they cancelled? If the media companies are in control why couldn’t they just make me watch those shows? Certainly it wasn’t low ratings, that would imply it is consumer demand, not executives, that dictates programing.

Perhaps you think I have perverted the concept of “control.” Instead, by “control” you mean that the Big Six can choose to show me certain pieces of news and not others. Fine, I agree. But implicit in that statement is that, far from showing us what we want to watch, they are showing us some alternative set of programing. Again, to what ends? Do media executives have a strong interest in showing me two straight days of the royal wedding instead of revolutions in the Middle East? Seems strange. More likely they anticipate making more advertising revenue because we would rather watch such silliness. Or maybe you think their motives are something more sinister, but what? I truley have no idea. What about the realities of expensive overseas bureaus, which must be shut down because we do not demand enough international news? Are the many thousands of employees who work for these corporations complicit in the process of them choosing what we watch? And what does all of this have to do with consolidation? You mean Glenn Beck wouldn’t be inspiring Tea Partiers if there was less consolidation? If, say, NewsCorp owned Fox News, but The Wall Street Journal was still independent? I literally don’t get it.

By the way, the latter type of weak control implies the former type of strong control. For if it is media corporations—and not the media tastes of consumers—that drives programing, it must also be the case that these same corporations have the power to dictate our preferences. And dictating our preferences is akin to making us watch and read whatever they desire. In this model they could get by with a single low-cost show, make us watch it, and save much more money than they currently spend. Reality seems like evidence that the model is wrong.

But maybe I’m wrong. I’m open to the idea. But I need evidence that somehow the overall quality of media across the board has been diminished specifically due to consolidation. I need proof of the effect, not proof of a neutral phenomenon occurring. Maybe I’ll skim through some academic media journals, surely someone has written something on the subject. But will it be compelling enough to instill fear in me? For it is truly fear and alarm that infographics like the one above are meant to encourage.

I just don’t see what you see. I see an incredibly robust set of media institutions, some owned by the Big Six and some smaller and independent. I see an improved technological infrastructure that allows me to stream non-US programing such as the BCC or Al Jazeera any time of day or night. I see fantastic investigative journalism going strong. I see thousands of blogs sprouting up, many of them outside the US, that give me unique perspectives on the world that I didn’t have access to even ten years ago. I see Twitter becoming so powerful that it helped to fuel revolutions in Iran and Egypt. This is the media environment that I’m familiar with. I am not afraid of consolidation by the biggest media companies because they are not in control. Instead, I control them every time I choose to go to a competitor to get the kind of news I want and trust. And these days are very good for that kind of consumer choice.

Isn’t Life Grand?

Here is a letter to Don Boudreaux:

Professor Boudreaux,

Your post from last year on the improvements in the American standard of living told through the 1975 Sears catalogue is one of my favorites. I didn’t need that post to understand how much has changed, however, because I experience these changes everyday.

Today for example, I needed to shave after I took a shower. I used a razor from a new service, Dollar Shave Club, that sends high-quality razors to your door every month for as little as $1 (though I choose the $6 a month option). Later, I checked my e-mail to find that my new shirt and slacks were on their way from IndoChino, a Hong Kong-based business that makes bespoke suits, shirts, and pants. A new custom-made suit costs just a few hundred dollars. I was able to enter my measurements online using their tutorial. In all, the process takes less than 3 weeks. This afternoon I’m planning on swinging by Costco (an amazing monument to capitalism) to restock on food. I learned (via the NY Times) that a company, Cuisine Solutions, which provides sous-vide products to some of the best chefs in the world now has a consumer line that promises to be of restaurant quality, with many items priced around $10. I don’t have a car to get there, but I can drive a ZipCar, which I can rent for about $9 an hour. The nearest lot is just two blocks from my house. Or I might take the bus. I can use an app on my iPhone (immeasurably more awesome than my previous phone) called OneBusAway that gives me real-time bus arrival information. I’m currently single and might feel like going on a date this weekend. Not a problem since I can go on OKCupid, an online dating service, which makes the process much easier if you’re a shy guy (a service certainly unimaginable in every way to previous generations). Today my roommate brought home his new car. He purchased a 2012 that is noticeably better along a number of dimensions than an equally priced new car I bought back in 2003. I could go on.

There are many clever economists working at the BLS, but I don’t know how the CPI can possibly account for the improvements in the quality and convenience of the myriad of new products and services available IN MY LIFETIME (and I am only 31). Every year my material life is noticeably better than the year before. Most amazingly, these products are largely aimed at low-income consumers, such as myself, a graduate student at the University of Washington.
Thanks,
James

NOTE: There is an ongoing debate about how accurate the CPI (a nationwide price index) is and how the index can accurately account for the rapidly changing features of current product lineups and the addition of the multitude of new products (its not just the price of products that changes over time, but their features and quality). I won’t go into that literature here, but I simply want to point out that the items I mentioned above have made a noticeable impact on my life and are extremely difficult to incorporate into a price index. The index may account for quality improvements in my iPhone over, say, the Nokia phone I had 5 years ago, but accounting for the widely expanding series of apps that are available, like OneBusAway, is another matter. Likewise, the introduction of online dating has drastically altered the social relations and habits of those seeking love and these changes are probably not picked up at all in the CPI.

This sounds arcane, but is incredibly important because when we compare material standards of living across time we have to take into account price changes. This means using the CPI, or a similar measure. But as I have hopefully demonstrated, there is a lot it leaves out and so we are never really comparing apples with apples. Yes, I may be spending $25 on a pizza-dinner for me and my date and we can explore how the price of that pizza dinner has changed over time. But how I came to be on that date (via online dating) is remarkably different than even 10 years ago, and so my quality of life (in pizza-dollars) is thusly greatly different than initial CPI calculations would suggest. Like GDP, the CPI has a useful place as a simple and straightforward indicator. Also like GDP, it is often misused and misunderstood.

30-Story Building Erected in 360 Hours

Via CNNGo, Chinese construction firm Broad Sustainable Building (BSB) is set to build the tallest building in the world in just 90 days at the end of this year. The company previously embarked on a 360-hour effort to construct T30, a 30-story hotel near Changsha in China’s Xiangyin County. The company builds prefabricated sections of its buildings offsite and then transports them via flatbed trucks. This technique allows for over 90% of its designs to be constructed before ever reaching the building site.