Derek Thompson is a senior editor at The Atlantic, where he oversees business coverage for TheAtlantic.com. More
Thompson has written for Slate, BusinessWeek, and the Daily Beast. He has also appeared as a guest on radio and television networks, including NPR, the BBC, CNBC, and MSNBC.
When US Airways and American Airlines announced their mega-merger last week, it was greeted with the sort of shrieking with which coach passengers are all too familiar. Flyers already hate the fees, delays, cramped quarters, and "meat specials" they're subjected to on America's legacy carriers. And make no mistake, more mergers might mean worse service, higher prices and equally "special" meat dinners. But look on the bright side: It has been an astonishingly good 30 years for American flyers.
Competition and price strategy has pushed down real airfare prices "by half since 1978 to about 4.16 cents per passenger per mile, before taxes," Eduardo Porter reported in his book The Price of Everything. And here's the graph for that:
In his interview with Ezra Klein, Erskine Bowles suggested that the plan was designed to carve out a middle-ground between Republicans and Democrats. You can see what he means from the graph above, and it sounds reasonable.
It's the end of office-supply shopping as we know it. And you should feel fine.
Office Depot has reportedly agreed to buy OfficeMax to form a super-office-retailing juggernaut that ... well, is still 25 percent smaller than Staples and is probably doomed, anyway.
For those of us on the end of retail beat, like Matt Yglesias and myself, the news might be a surprise but the story's shape is familiar. For the last two decades, Walmart and e-commerce, led by Amazon, have eaten retail with a blend of supply-chain mastery, digital savvy, and ginormous scale.
Long story short: For most of the 20th century, retail work grew in line with the population. Below is a look at retail employment as a share of the labor force since 1950. What you're looking at is the perfect "cyclical" industry. When the economy shrank (gray bars), retail pulled back. When the economy grew (white columns), retail charged ahead. Then something happened in the 1990s ... retail seemed to get a case of the productivity bug. It's not like Americans suddenly decided to stop buying computers and clothes and toilet paper in 2000. We just bought more of those things at labor-saving supercenters like Walmart -- or super-labor-super-savings-supercenters like Amazon.com. Retail became more productive, which means they could sell more with less costs -- those costs being people and stores.
Cool news for consumers. Bad news for an industry that employs one out of ten American workers.
Still, retail is too big and varied to die in unison. Our "end of retail" story won't sell as well at clothing accessory stores, where employment is up more than 50 percent since 2001. People still like touching the clothes they wear (even if young shoppers are more comfortable than their parents ordering shirts in boxes for home delivery).
But office and supply stores aren't so lucky. Not only are their shelves being replaced by digital shelves, but also their products -- paper and office supplies -- are being replaced by digital products. A real double-whammy. The few retail categories more doomed than office stores are music stores, camera stores, computer stores, book stores ... essentially, the guys who are really and truly hosed. [This data shared exclusively with The Atlantic by our friends from EMSI]
Please see update at bottom.
The new deficit reduction plan from Alan Simpson and Erskine Bowles calls for $5 trillion in savings this decade -- $6 trillion including interest -- roughly the same as their outline in December 2010. So it's basically the same plan, right?
Wrong. Look at where the cuts come from this time. Whereas the first plan was a roughly even mix of higher taxes and lower spending, the new plan calls for 44 percent* less revenue. When you count the interest payments saved by running smaller deficits, both plans would cut around $4 trillion within a decade.
The swing toward spending cuts is pretty shocking to me, and I have emailed some budget analysts to make sure I'm fairly comparing the plans.
Why might Bowles and Simpson have proposed such a radically different mix of new taxes and spending cuts? Two reasons.
First, there aren't enough people in Washington who want to raise taxes on anybody making less than $250,000 to make the original $2.6 billion figure work. Second, Congress has demonstrated a fairly strong appetite for scheduling budget cuts. This plan -- which builds on the spending cuts under the Budget Control Act and the new higher tax rates on income over $450,000 -- shifts the weight of deficit reduction toward spending cuts. As a result, it's even more cut-happy than John Boehner's plan from December (broken down by Matthew O'Brien).
Here is where the $2.4 trillion in new savings (beyond the BCA and tax increases already passed) come from:
Reduce Medicare and Medicaid spending by improving provider and beneficiary incentives throughout the health care system, reducing provider payments, reforming cost-sharing, increasing premiums for higher earners, adjusting benefits to account for population aging, reducing drug costs, and getting better value for our health care dollars (Feb-‐Dec 2013)
Enact comprehensive, pro-growth tax reform that eliminates or scales back most tax expenditures, with a portion of savings from tax expenditures dedicated to deficit reduction and the additional savings used to reduce rates and simplify the tax code (Feb-‐Dec 2013)
Strengthen limits on discretionary spending (Feb-‐Dec 2013)
Reduce non-health mandatory spending by reforming farm subsidies, modernizing civilian and military health and retirement programs, imposing various user fees, reforming higher
education spending, and making other changes (Feb-‐Dec 2013)
Adopt chained CPI for indexing and achieve savings from program integrity (Feb-‐Dec 2013)
"Strengthen limits on discretionary spending" sounds like awfully good Washingtonese for "cut more discretionary spending." Sounds easy. Could be dangerous. Discretionary spending (education, R&D, infrastructure, and other stuff people generally like to have from a government) is already on track to fall well below its 1970 levels as a share of GDP. This plan would cut -- I mean, strengthen? -- the core of government even deeper.
I always thought that the most admirable element of the first Bowles-Simpson plan -- whether or not you consider yourself a deficit hawk -- was the brutal honesty that fulfilling our promise to medically insure the poor and old, while protecting the working poor, while building better roads and broadband, while paying for a military, while doing everything else we've come to expect from the government would require tax increases beyond the top two percent. This plan all but gives up on the idea that balancing the budget requires a roughly equal mix of tax hikes and spending cuts.
*Update: My initial calculations were off by a few decimals, and when you count decimals in hundreds of billions of dollars, it's probably worth a correction. Marc Goldwein writes:
"The original Simpson Bowles was more like $6.5 trillion, not $5 trillion, with about $2.5 from revenue, $3 from spending, and $1 from interest. We've enacted about $700 billion in revenue, $1,550 in spending cuts, and $450 in interest savings. (see Figure 1 for more precise numbers)."
He also points out that chained CPI and anti-fraud measures would both raise tax revenue.
Here's a graph of federal government spending on the low-income since 1972. It's one of those Rorschach graphs I pass along every so often. We call it a Rorschach because whether the graph makes you happy, sad, angry, or confused is mostly a measure of the opinions you bring to it.
Specifically, the programs counted include Medicaid, Medicare D, food stamps, Pell grants, and tax credits like the refundable portion of the earned income tax credit and the child tax credit. In 40 years, they've grown by a factor of ten. In another ten years, they are projected to grow by another 50 percent.
Where is all of this spending growth coming from? Three places, mostly: New programs, new people, and health care. First new programs: Half of the ten federal programs studied by the CBO for this report, such as the EITC and the child tax credit, didn't exist in 1972. Second, new people: the U.S. population has grown 50 percent since 1972 and lawmakers have expanded eligibility over that time to cover a higher share of the population. Since middle-class wages have been been so stagnant since the late 1970s, this is probably appropriate. Third health care: Half of the increase since 1972 has come from Medicaid and Medicare D.
Practically all of the increase in low-income spending until 2023 will come from Medicaid, Medicare, and new insurance exchange subsidies established under the Affordable Care Act.
And that's where the Rorschach factor comes in. Somebody (a conservative, perhaps) might look at these numbers and point out that the U.S. government is diverting far too many tax dollars toward the poor and that this money would be better spent in the private sector or on "more productive" things like infrastructure or R&D. That might be right. But somebody else might look at these numbers and say that the government is merely helping low-income families who are missing out from growth.
Here's a prequel for that second story. This chart of income growth in America -- from the poorest 20% to the
richest 5% between 1979 and 2007 -- shows how the poor would fare without government assistance. Market wages have declined for the poorest 40 percent of the country and more than 33% for the bottom fifth. Without means-tested government transfers, income inequality would be much, much worse. With means-tested government transfers (particularly for health care) income inequality is at least somewhat mitigated.
If the debt debate still seems too abstract to follow, maybe that's because it's two sides fighting over the one thing we know least about the economy -- its future
The showdown between Joe Scarborough and Paul Krugman over our debt is interesting and important, not merely as a media skirmish, but also as a keyhole into the way deficit "hawks" and deficit "doves" misunderstand and talk past each other. A great deal of the animosity and confusion between both sides of the debate would be improved with an honest assessment today's economy and tomorrow's debt.
Basically, this is a discussion about (a) what we know about the economy and (b) what we think we know about the economy.
WHAT WE KNOW
Here are six things we know about the economy. We know that unemployment is still high. We know that inflation is low. We know that 4 million people have been out of work, and looking, for more than a year. We know that GDP growth has been fine for normal times, but awfully weak for a recovery following a steep recession. We know that cutting government spending takes money out of an economy. We know that government spending cuts in the last few years have coincided with hundreds of thousands of lost government jobs, which has kept our unemployment rate from falling further.
And here are four things we know about our debt. We know that government borrowing rates are low. We know that global appetite for our debt is high. We know we borrow in our own currency, and not, like Europe, in a common currency that we don't control. And we know that makes us less vulnerable (but not invincible) from a debt crisis.
Out of these ten things we know, how many of them suggest that we should cut our deficits today? Basically, zero. And that's Paul Krugman's point. Everything we know about the economy today provides a clear argument for elevated deficits.
WHAT WE DON'T KNOW
Joe Scarborough understands this. He says he wants higher deficits and a game-plan for cutting our long-term debt (which is the accumulation of our deficits). But he doesn't fully understand -- or properly communicate -- how the argument for long-term debt reduction rests on assumptions about the future that are exquisitely sensitive to change. The precise dimensions of our 2020 debt are calculated from a matrix of variables (e.g. immigration, productivity growth, hospital construction growth, MRI inflation rates) whose very nature is to fluctuate, sometimes dramatically, on a quarterly or annual basis.
Here are four things we think we know about our future debt -- which is almost entirely a health care spending problem. We think we know that the cost of caring for Americans will continue to grow faster than the economy. We think we know that demand for this increasingly expensive care will grow along with our aging boomer population. We think we know that tax revenue will grow about in line with the economy. Thus, we think we know what the gap between future taxes and future spending will be, and how much we have to start saving today to cover it.
It's possible that the deficit hawks have it 100 percent right. But it would also take a rather astonishing clairvoyance for anybody to foresee the next ten years with even slightly useful clarity. Scarborough and Mika Brzezinski often talk about "math" when they talk about debt ...
Childish insults and skewed graphs liberals make up on their mom's PowerPoint does not change reality. Facts-and math-are stubborn things.-- Joe Scarborough (@JoeNBC) February 11, 2013
... and our debt projections look like math, what with all of those numbers. But math is a
law. Actuarial projections are not. They are smart guesswork facilitated by multiplying current trends over many years. There's an important difference.*
For example, what if health care inflation slows down?
Actually, that's not a "what-if." Two weeks ago, CBO revealed that health care spending has "grown much more slowly than historical rates would have predicted." It cut estimates of federal spending on Medicaid and Medicare in 2020 by "about $200 billion." That's a lot of money. It is much more than Washington would save by raising the Medicare eligibility age from 65 to 67. If you thought raising the retirement age was enough to calm the market's appetite for debt reduction, then guess what? We just got those 2X those savings by doing nothing.It's generally considered goofy for somebody to pretend he can see the next 75 years in robotics, or software, or bio-sciences. But somehow it's not goofy for Joe Scarborough, Steven Rattner and other serious, well-intentioned media people point out that we have $60+ trillion in "unfunded liabilities" to Social Security, Medicare, and federal pensions in the next seven decades. That statistic isn't wrong. It's just kinda ... goofy. Medicare actuaries are legally obligated to predict the future of their program past 2070. But the press is not legally obligated to pretend that our actuaries are oracles.
Paul Krugman isn't an oracle either. He's just a very smart economist with an astonishingly good track record. And even he isn't saying that debts don't matter. In fact, he's saying almost exactly what Alan Blinder -- an economist Scarborough cites approvingly -- wrote in The Atlantic: Don't worry too much about deficits now, and put aside some worry about the future total cost of health care.
Deficit reduction is sometimes framed as stimulus. It's not. It's insurance -- insurance against the possibility that the market will turn against U.S. debt and drive up interest rates and badly hurt the country. Insurance isn't bad. But it's expensive. And money taken out of the economy too soon could prolong an unemployment crisis that is creating structural deficiencies in our atrophying workforce. Deficit doves should concede that there is a risk to doing nothing for too long. But deficit hawks must concede that there is also a risk to taking out that insurance policy too soon -- or distracting attention from everything we know about the economy.
Please don't say that our debt is exactly like global warming. It is true that both global warming and debt are arguably subtle and gathering forces whose impact on the world could surprise us somewhere down the line. But unlike our 2020 debt, global
warming isn't just an actuarial projection. It's a scientific finding about the world right now. And whereas even deficit hawks allow that there is good debt (right now) and bad debt (in ten years), there is no analogous argument I'm aware of that says global warming is great for the world today -- or that we actually we need more of it! -- but bad for the world tomorrow.
In the midst of researching and writing a longer explanation of the amazing media slugfest that is Joe Scarborough & Responsible Television Media vs. Paul Krugman, I had a thought that's too long to tweet and too tangential to shoehorn into a debt explainer, so I'll leave it here.
Backstory: Paul Krugman went on Morning Joe a few weeks ago and said, basically: I'm not scared about our long term debt, because it's long-term, but I am scared of our short-term jobs crisis, because it's short-term.
Joe's response was essentially: We can worry about both. It's like walking and chewing gum.
Krugman's reply was essentially: Actually, we can't worry about both, and it's not like walking and chewing gum, because our federal government and our media luminaries are really only capable of worrying about one thing at a time. That makes the debt a distraction from the jobs crisis.
Joe disagreed, arguing that he can worry about jobs and debt simultaneously.
But here's the rich irony. In order to prove Krugman wrong, Joe Scarborough has spent the last two weeks talking obsessively about ... the debt. And attacking Paul Krugman about ... the debt. And asking Steve Rattner to emphasize, not why Krugman is right about jobs, but why he's wrong about ... the debt. In the two weeks after saying he could focus on jobs and debt at the same time, Scarborough has tweeted a lot. Five tweets mentioned debt. Zero mentioned jobs. Since January 27, he has written three columns for Politico that contain ten mentions of the word debt (including two headlines) and zero mentions of the word jobs.
Paul Krugman might be wrong about the future of our debt. But he's right about one thing. Walking and chewing gum is much harder than it sounds when it comes to jobs and debt.
This is the story of a little candy heart -- born in a mixer, mushed by a roller, tattooed, stamped, fed through an oven, and stuffed in a huge sack for months. Don't worry, it has a happy ending.
Since the turn of the 20th century, more than 300 billion Sweethearts
have rolled off the conveyer belts of the New England Confectionery Company near Boston. Today the company makes 4 million pounds of Sweethearts in the six weeks before Valentine's Day, with phrases like UR HOT and TEXT ME (but no longer FAX ME or LET'S READ).
Here's the ten-part journey of a candy heart from the mixer to the candy box, as told by Hugh B. Albert, production manager at NECCO (all photos courtesy of the company).
(1) GET THE INGREDIENTS: "The ingredients are sugar, corn syrup, cornstarch, flavors, gums, and colors. The sugar and the corn syrup are piped in, because they are an extremely large volumes. We've got large sugar silos that hold up to 200,000 pounds of sugar, which is piped throughout the building for all of our products. The corn starch, flavors, and colors are added by hand."
(2) MIX THE 'PLAY-DOH': "What you're looking at is the mixer. We have three of these mixers. They each make 900-pound batches. The consistency I would describe as Play-Doh. It looks and feels like Play-Doh, except it tastes a heck of a lot better. And, yes, having two kids, I've tasted both."
(3) CHUNK THE DOUGH: "Now you're looking at our orange "Play-Doh" in a 900-pound batch. An employee will chunk the dough into 50-lb blocks and they throw the paste up into a tall stainless steel hopper. That's essentially the job all day. They throw paste into hoppers."
(4) FLATTEN THE DOUGH: "This is the sheeting machine. One person stands at the top of a ladder (just to the left of this picture) and pushes the dough down through a roller. This roller flattens the dough out into a sheet."
(5) PRINT THE CUTE MESSAGES. "You can see words written on the yellow sheet of dough (it's a banana flavor). That's because we actually print the words before we cut the hearts. We paint a piece of cloth with red food dye and stamp the sheet of dough with a metal print plate with all of the sayings."
BRIEF ASIDE: MOTHER I'D LIKE TO APOLOGIZE TO. "The misprints can lead to some pretty funny stories. Our Ps sometimes look like Fs, so we can't say anything like "Pucker Up" for reasons you understand. Last year, we received a letter from a parent with a picture of a heart that was supposed to say "Smile." But because of the way the print came out -- no S, a messy E -- it ended up looking more like "MILF." Her son had no clue what that was about, so he asked his mom. She said, "I don't know what you people are doing." Anyway, we do our best to avoid things that have the Ps in them. This is the human element."
"As you can see in the picture [ABOVE], there is excess dough. The stamped hearts drop onto another belt which goes into our huge dryer. The excess dough does not drop. It goes onto a conveyer that takes it across and back onto an inclined conveyer that drops back into the hopper at the top, and so it's essentially recycled. We try to reduce the amount of scrap. Basically, it's all used."
"I love the way they taste right when they come out. They're not 100% dry yet. They're dry enough to be stacked. But if you were to bite into them, there is a definite skin around it. If I were to go directly to packaging, they would squish.
"The hearts are put in a hot room overnight to remove the moisture. Next morning, they're left out for an hour in ambient room temperature. Then they're dry."
(8) MIX 'EM AND SACK 'EM. "At this point the hearts are in bunches with the same colors and flavors. They're mixed in a machine we call the "rocket launcher" that blends the hearts. The mixed hearts will go into either a giant supersack or into big metal bins as we get closer to packaging time."
"Since have to produce 7 million pounds of hearts annually, we have to make hearts all year. We're making hearts right now for next year. We hold most of the hearts in these supersacks, which are marked and stored in our warehouse."
(9) 'THE MOST PAINFUL STEP': PACKAGING. "The final step is the most painful step. And that's the packaging step. Our customers all have their own marketing and design departments, and it's very important to them to have the colors that they want. Some are very simple, we just run them through our baggers, and they throw the bags of tiny hearts on the shelves. Other larger stores the bigger names, they want more extravagant display type cases.
"You're looking at a picture of our one-ounce boxes, which are our biggest seller. We have two machines that bump those out. The machines open the box, fill it with candy falling through a shoot from the ceiling, seal the box by glue on the bottom, glue the top flaps, close the flaps, and spray a code date. All this is done at roughly 500 boxes per minute."
(10) EAT. "That's basically it! We've remained true to our heritage. We're using a lot of the same equipment that was used 70 or 80 years ago. Small parts are replaced regularly, but the general framework, recipe, and process hasn't changed for decades. We don't automate everything. We have people painting and chunking and working. There is a lot of love put into the manufacturing of this candy."
Valentine's Day is a time to spoil our beloveds, woo our secret lovers, and remember to call our mothers. It is also, to put things slightly less tenderly, a $20 billion macroeconomic stimulus aimed straight at the heart of the American chocolate-floral-lingerie industrial hydra.
Here's how America's receipt for Valentine's Day might look, if receipts looked like pie charts. (Data from IBISWorld; numbers in billions of dollars).
If Hallmark "invented" Valentine's Day, Hershey's won it. About two-thirds of the money spent for today is on food, and an astonishing amount of that food is straight up candy. In fact, we spend more on candy than flowers and cards combined.
Generally speaking, it's the lager categories that have grown the fastest in the last five years, since the economy was deep in recession. The slow growth in greeting card spending reflects competition from digital cards.
Exactly who is on the receiving end of that $20 billion?
Only about half of Valentine's spending goes to our romantic partners, exclusively. Family and friends will receive a little more than a quarter of today's gifts. Pets will receive a healthy 4% (or unhealthy, depending on your attitude toward animal presents). We'll spend about $722 million on our animals this Valentine's Day -- more than 80 percent as much as we'll spend on greeting cards. (This data from the National Retail Federation.)
Why should a piece of paper with a slogan cost $5? The answer starts with classical economics, takes a world tour to China, and ends with you.
This week, I was in a Barnes & Noble shopping for Valentine's Day cards, when I came across this beguiling photo of a cat watching heart-shaped confetti fall around its cross-eyed face.
I turned the page to discover the punchline.
The price tag? $3.29. I'm a reasonable man, but that seemed rather high for a stock photo on a mass-produced paper followed by eight words, at least three of which require no thinking at all. Other greeting cards in the turnstile were selling for closer to $5. It made me wonder: If so many greeting cards are just cheesy photos and easy quips on tradable pulp, why do they cost so much?
The answer starts with classical economics, takes a world tour to China, and ends with you.
Consumers are expected to spend $860 million on about 150 million Valentine's Day cards this year. That suggests an average price of more than $5 per card. One Lincoln greenback won't relegate any loving couple to bankruptcy. But as people move to e-cards, the industry is sensitive to concerns that their product is not sensibly priced.
"Even my own mother sometimes says to me, 'Why have cards gotten so expensive?'" said Kathy Krassner, director of communications at the Greeting Card Association. "But the fact is that they have more bells and whistles, and I don't think that a plain printed card is usually very expensive unless it's a larger size."
PAPER, PEOPLE, AND V-DAY MONOPOLIES
To understand a greeting card's price, start with its most important costs: Paper and people. High-grade paper is necessary to distinguish greeting cards from something you could print from a home computer, and it's getting more expensive. So are people. In China, where greeting cards with "special treatments" (e.g. sound chips) are often produced, wages are rising quickly. In the United States, where Hallmark makes most of its cards, workers are already expensive, creating tension in an industry facing a slow decline in the face of a cultural shift toward paperless greetings. In October last year, Hallmark closed a Kansas City plant and let go of 300 workers. The company declined to comment for this story.
But costs are not the same as prices, and there might a sophisticated psychology lurking in greeting card price tags.
"A higher price for simpler [cards] encourages consumers to substitute up" for more expensive cards, said Agata Kaczanowska, a senior analyst at IBISWorld. To see what she means, imagine a world with two varieties of Hallmark card. A cheap card for $0.99 and a premium card for $7.99. That's a big difference, enough to shock you into rejecting the expensive card as a rip-off. But pricing the typical Hallmark card near $3.99 or $4.99 softens the difference. It makes $7.99 seem relatively affordable.
For decades, greeting card companies haven't seen much downward pressure on prices because there hasn't been much competition. Today, IBISWorld estimates that the two largest greeting card companies, Hallmark and American
Greetings, control more than 90 percent of the market. Their deep relationships with major paper companies and distributors (book stores, drug stores, and the like) ward off start-ups who might compete down the price over time.
Greeting cards "require a fairly high expenditure in advertising and
marketing to acquire clients, " said Mark Deo, author of The Rules of Attraction and CEO of Torrance (Calif.)-based consulting firm SBANetwork.org. "One would need to sell many greeting cards
in order to absorb the required initial marketing, packaging, and
HOW TO MAKE A GREAT VALENTINE'S DAY CARD: IN 11 SIMPLE STEPS
The rise of e-cards has perhaps wreaked most havoc in the middle of the market, forcing card companies to add options at the super-low and super-high end. Hallmark sells a $0.99 "value card" now. Another recent offering from American Greetings had an LCD screen, which could play a 50-photo musical slideshow, The Economist reported. The price was $20.
"Premium brands have fared a little better," said Kaczanowska. I asked the chief executive at Up With Paper, the world's original pop-up card, which sells at Barnes & Noble, World Market, and Papyrus (and not Walmart) what exactly goes into making a premium greeting card? Here is that story.
This season's new Valentine's Day cards began with a brainstorm 11 months ago.
The month after last year's Valentine's Day, a clutch of designers, engineers and executives from Up With Paper gathered in a room in the company's Creative office in Connecticut to game plan. Whereas some card companies, like American Greetings, often begin by brainstorming clever slogans inside the turn, Up With Paper begins with a concept, said George White, the company's President & COO.
"Is it a cat?" he said, mimicking the conversation for the card shown below. "Okay, what's he doing? Is he coming out of the back wall of the pop-up or is he part of the pop-up?"
That's step one. There are at least 10 more before the card hits the shelves of specialty stores.
(2) Once they've settled on a concept, an artist renders the cat -- and the tree, the hearts, the birds, the house, the flowers.
(3) When the art work is completed, it comes to the office for approval--and any needed adjustments.
(4) The art goes out to a paper engineer, who builds a model of the card on cheap white paper, and sends it back into the office for review (tweaking to fit the artwork) and approval.
(5) The model card is printed along with the art work on a plotter, and the pieces are assembled by hand in the Connecticut.
(6) For mass production, the whole set is sent to factories in China to be hand-made in assembly.
(7) The Chinese factory makes a pre-production sample and sends it to to the office for final approval.
(8) If White and his team give the okay, thousands of cards are assembled on long tables back in China with 30 Chinese workers attending to every fold, insertion, and pop-up feature. "Some of our cards require more than 50 hand operations," White said. "That means one person doing one thing by hand on a card to make it work," whether it's adding glitter, or gluing a spot, or adding a ribbon, and passing the card along to the next person for the next operation. "There has to be a sequence on it. Otherwise the pop-up doesn't work."
(9) The finished cards are shipped to Up With Paper's warehouse in Ohio.
(10) The cards are shipped out to shops, like Papyrus, Barnes & Noble, and independent specialty stores around the world.
The final price? "5.99 for our square pop-ups" like the one pictured above, White said. But once you add in extra features -- a sound chip that plays cat sounds, for example -- the price goes up to $8.99.
"People complain about the cost," White said. "I think people would be shocked to learn how long it takes to make a
card, how many different people are touching it, how long it takes to
assemble these things. I'm the president of the company and the first
time I went to China I was amazed."
THE LOVE MARGIN
For all the grief you might give greeting cards for conveying saccharine messages at relatively high prices, the fact is that they can fetch higher prices *precisely* because they convey saccharine messages. Consumers are least sensitive to prices on dates and special occasions when we're trying to send an emotional message.
This Valentine's Day, Americans will spend $20 billion on jewelry, clothes, flowers, and candy (not to mention restaurants and trips). Only about 4% of that money will go to the greeting cards that adorn those gifts. Compared to composing a four-line poem on printer paper from your office, greeting cards might be pricey. But the more relevant comparison might be to the other $120 the typical American will spend on loved ones this season. That makes a $5 embellishment feel like an incidental fee.
So yes, you can blame the cost of paper and the cost of people. You can cite lack of industry competition, the games of price discrimination, and the complex assembly of increasingly complex cards. Don't don't forget, it all starts with you and the spirit of romance. You are paying $5 for a piece of paper because you want to.
"Love Me." "Marry Me." "Dig Me"? Sorry, not anymore.
The Sweetheart is 147 years old. But not all of its cute little sayings have enjoyed quite the same sesquicentennial longevity. The folks from NECCO, the confectionery company that sells 4 million pounds of their traditional heart-shaped candies in the 6 weeks before Valentine's Day, sent me the full list of their most notable retired sayings.
This year's batch includes: UR HOT, TEXT ME, and LOML [that's: Love of My Life].
Amazingly, NECCO told me that they once toyed with a saying like PUCKER UP. But the industrial machine had a habit of printing Ps that looked a little to much like Fs. So, yeah. That was one Sweetheart that didn't make it to market.
Check back tomorrow for The Atlantic's blowout special feature on the business, economics, and technology of Valentine's Day ... including a look at the industrial technology behind each little Sweetheart candy.
First the gold rush. Then the slowdown.
"The luckiest place on earth" is how Chip Brown characterized today's North Dakota, flush in its energy frenzy. His article in the New York Times Magazine showed chief execs and miners both giddy about their topographical luck and only slightly nervous that this boom would end as the last ones have -- in a bust.
To borrow a line you'll hear tonight, let me be clear: North Dakota is not busting. It led the 2012 national job creation index -- with both the highest hiring rate and the lowest firing rate of any state in the country, for the fourth straight year. Here are the top five states for hiring, according to that Gallup poll, with their indexed 2012 growth from BLS figures.
This chart tells two stories about America's little petro state. First story: At the beginning of 2012 (much like in 2011 and 2010), North Dakota's stratospheric job creation numbers made even the next frothiest states look like they're were suffering a post-Soviet-breakup depression. Second story: Something happened in the second half of 2012. North Dakota's economy fell back to earth.
Let's dig deeper. Here's the graph of 2011 job creation across North Dakota industries versus the last six months of 2012.
You might say, don't be unfair, North Dakota never could have kept up its 2011 rate!, and I might respond, you're right. If the U.S. had experienced Dakotan growth across 2011, we would have added about 400,000 jobs per month, and that's just absurd.
Still. The drop-off is striking, and it's not without explanation.
Let's begin at the left, with mining. The rig count across North Dakota, and particularly in the rich Bakken shale, dropped sharply in September and hiring has slowed since the summer, as drilling companies have turned their focus to efficiency as capital costs (and concerns of regulation) rise in the Bakken. That's probably had spill-over effects in transportation hiring. The story in construction is a story about migration. The state's population grew by four percent according to Census figures between mid-2010 and mid-2012. That would be like the entire U.S. adding an extra Pennsylvania in two years. As a result, new houses blossomed in the late 2011 and 2012, but that ridiculous bump (see below) has returned to trend-line growth, which has slowed down construction hires.
The only large private sector category that is growing faster now than
in 2011 is hotel and food services jobs, at the far right of the second graph.
These jobs are lagging indicators of population growth because they
respond to growing cities.
This is how an energy boom should go, you could argue. First come the core mining jobs and manufacturing jobs. Then you build the houses and roads to accommodate the miners and factory workers. Then you open restaurants to feed their families. And you build hotels to room their visitors and petro-tourists. That's not a bust story. It's a modern growth story.
Okay, fine. Perhaps that's all the North Dakota slowdown is. Chapter Two in North Dakota's modern gold rush. The state's job creation isn't weak, after all, it's just, well, average. But that's just the problem. When you're girded for a historic gold rush, average growth isn't average news. It's bad news.
It's a historic day for one of America's most confounding companies.
AOL ended an eight-year money-losing slump in 2012, the company announced this morning, as all of its divisions ended the year "quasi-profitable" for the first time under Tim Armstrong's reign as CEO.
AOL was dubbed by some the "hottest tech stock of 2012." You might question the use of the word "hottest" in that label, but it's kind of true. Here's a 12-month look at AOL shares (in light blue, at the top) followed by Netflix (dark blue), Yahoo (red), Google (green), Apple (yellow), and Microsoft (purple). Tim Armstrong is doing something right ...
... but what is that, exactly?
The common refrain this morning on AOL's good day was that advertising is leading the company back. This is true, kind of. It is true that revenue at AOL sites (like HuffPo, AOL.com, and Moviefone) is up, but profit for AOL's online brands is actually down for the year by 34 percent. The new profit engine, not only for the quarter but also the year, has been advertising on AOL's third-party network, the company's ad market for other online publishers.But it's the old profit engine that is still driving the company. AOL's subscription business (the evolution of that gargling symphony of squeaks and whistles from the 1990s) is still more profitable than AOL as a company.
This is good news and bad news, as Henry Blodget observes. It's good news because the profits from subscription services can be used to smooth AOL's transition to a modern media and advertising company, and subscription cancellations are slowing down. But it's also bad news because any company that relies on the inertia of septuagenarians who haven't figured out how to get Internet without paying AOL for the privilege does not sound like a magnet for the sort of talent that drives long-term growth.
"What exactly is AOL?" you might ask yourself. As a consumer product, it's a bunch of websites. As a business strategy, it's an ad company. As a growth business, it's a third-party digital advertising network. And as a profitable business, it's mostly none of those things but rather, overwhelmingly, an anachronistic online membership service. Great stock. Weird company.
TV is replacing movies as elite entertainment, because players like Netflix, HBO, and AMC are in an arms race for lush, high-quality shows
"The goal is to become HBO faster than HBO can become us."
And there was Netflix's strategy, in one sentence, as revealed to GQ by Ted Sarandos, chief content officer, on the eve of the company's new exclusive series, House of Cards. It sounds like a straightforward threat to the entire pay-TV model: The streaming upstart taking on the premium cable darling in the hopes of convincing millions of subscribers that you don't need a set-top box to get great original television; you just need an Internet connection and a few bucks a month for Netflix.
Netflix's original-programming move is competition for cable. Our attention is finite, as is time. The more time we spend with Netflix, the less time we spend on cable, the less valuable cable is, blah blah blah, this argument is familiar to all of you. But for now, don't consider the Netflix Effect -- and, in particular, its foray into exclusive shows -- a turning point in cord-cutting wars. Consider it instead simply a great moment for great television. The market for super-deluxe-high-quality TV programming is getting deeper.*
WELCOME TO THE GOLDEN AGE (OF TV. NOT FILM.)
To explain why Netflix's new obsession with original programming is great for lovers of great TV, we have to go on a brief detour. In 2010, when Netflix streaming was still in its infancy, Edward Jay Epstein, the excellent chronicler of the business of Hollywood, wrote a little column answering a big question: Why is TV replacing movies as elite entertainment?
His old-school answer: Follow the money.
Hollywood is technically in the story-telling business. But it's really in the franchise-building business. The top 40 movies of all time are practically all sequels, adaptations, and reboots. Most of them have fight scenes and explosions. In a global industry where the top-grossing films make about two-thirds of their revenue outside of the U.S., and marketing budgets stretch into the tens of millions, the surest way to build profit for a studio is to make or buy a franchise. Then you sell sequels and merchandise and TV rights and never ever stop until you can go home after watching Fast and the Furious 6 at the multiplex to lay on your Fast and the Furious bed sheets, and play with your 2 Fast 2 Furious action figures while watching Five Fast on TNT ... in Beijing.
As Hollywood has gone global and mass-mass-market, different incentives for select television networks have helped to fill the void in quality entertainment. Here is Epstein explaining the rise of HBO as an original programming powerhouse:
HBO executives [created their] own original programming designed to appeal to the head of the house. Here it had several advantages over Hollywood. It did not need to produce a huge audience since it carries no advertising and gets paid the same fee whether or not subscribers tune in. Nor did it have to restrict edgier content to get films approved by a ratings board (there is no censorship of Pay-TV). And it did not have to structure the movie to maximize foreign sales since, unlike Hollywood, its earnings come mainly from America. As a result, HBO and the two other pay-channels, Showtime and Starz, were able to create sophisticated character-driven series such as The Wire, Sex and the City, The L Word, and The Sopranos. As this only succeeded in retaining subscribers and also achieved critical acclaim, advertising-supported cable and over-the-air network had little choice but to follow suit to avoid losing market share. The result of this competitive race to the top is the elevation of television.Now consider "Mad Men" and "Breaking Bad." Neither is making AMC a billion dollars in Asia, but both helped the network find an even more dependable money-hose: cable. AMC used these shows with small but clingy followings to demand that cable providers carry their network and pay 40 cents a month for each subscriber. Today, both have audiences in the low single-digit millions. If they were movies, they would be flops. Instead, they make AMC a cable staple for tens of millions of pay-TV households who indirectly pay AMC more than $360 million a year in cable fees.
I want to believe this is true as an economic argument -- that the salary cap makes basketball, and in particular its stars, more valuable in the aggregate. But, as an NBA fan, it's a harder case to make. The small number of players on the court leads to a handful of superstars dominating the game anyway. In the 1990s, Chicago and Houston won eight out of ten titles; in the 2000s, LA and San Antonio represented the West in nine out of ten championships. Individuals can dominate a five-on-five game, and a savvy owner in a big market without a salary cap would be crazy to not pay James something like $50 million a year, which is already about as much as he makes in salary and endorsements combined. Any team comprised of professional basketball players that includes LeBron is going to compete for a championship every year, so a rule allowing owners to pay him whatever they want wouldn't change the competitive landscape of the NBA, but it would make James much richer.
The salary cap makes it impossible for rich teams to hire all the superstars. That means even teams in smaller markets have a shot at greatness, which draws more fans to support those teams. More fans means more revenue for the league as a whole -- and that means bigger paychecks for the players.
And this, Grier says, is why Lebron James has a reason to support the system. Playing in a more competitive league helps him make more money in other ways.
Medicaid and Medicare. "In recent years, health care spending has grown much more slowly both nationally and for federal programs than historical rates would have indicated. (For example, in 2012, federal spending for Medicare and Medicaid was about 5 percent below the amount that CBO had projected in March 2010.) In response to that slowdown, over the past several years, CBO has made a series of downward technical adjustments to projections of spending for Medicaid and Medicare. From the March 2010 baseline to the current baseline, such technical revisions have lowered estimates of federal spending for the two programs in 2020 by about $200 billion--by $126 billion for Medicare and by $78 billion for Medicaid, or by roughly 15 percent for each program."In other words: Whoops!
Chief executives with bigger signatures make more money ... but only for themselves.
That's the conclusion from a new study on executive narcissism from UNC, which used the size of personal signatures in SEC filings as a proxy for self-importance. Since the 1970s, psychological studies have tied signature size to narcissistic characteristics.
Narcissistic CEOs spend more on capital -- offices, robots, software -- and acquisitions and also perform most poorly in competitive industries during uncertain times. From the report:
We find that CEO signature size is positively associated with a number of proxies for overinvestment, and that abnormal investment by narcissists destroys firm value via reduced sales growth and future revenues. Signature size is also negatively associated with current return on assets, especially for firms in early life-cycle stages (i.e. smaller, younger, more R&D intensive firms) where a CEO's strategic decisions are most likely to impact the firm's future value. Despite the negative relationship between CEO narcissism and firm performance, narcissistic CEOs enjoy higher absolute and relative compensation.
So, executive narcissism is positively related to over-investment in the short-term. Feel free to speculate in the comment section what that means in Washington.
[via The Awl]
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