Derek Thompson

Ten years ago, Americans drank enough soda every year to fill a small aquarium. Fifty-three gallons of the stuff per person. That's half a liter of Diet Coke on an average day. Compare that to our other favorite liquid-caffeine companion. For every cup of coffee we consumed in 2003, we drank two cups of soft drink. For $1 we spent on joe, we spent $4 on soda.

Now look where we are: Soda is in a free fall, with domestic revenue down 40%. Coffee culture is ascendant, up 50% in ten years. In another decade, the United States could easily spend more on coffee than soda -- something utterly unthinkable at the turn of the century (industry data via IBISWorld)

Tea production and coffee shop revenue not included; soda data includes major industry players, including revenue from Coca Cola and Pepsico, who together make up 78 percent of the market; excludes still beverage):

Four factors behind this remarkable caffeinated convergence:

(1) The health thing. This hardly requires summary. Soda ain't cigarettes, but sugary soft drinks have faced a similar cultural and political backlash in the last decade. As obsessively healthy attitudes have osmosed from yoga yuppies to the general population, local governments have turned on soda, pressing school bans and cup-volume limits. Fading consumer sentiment has had twin impacts: pushing soda drinkers to switch to cheaper brands and encouraging soda companies to shift toward diet drinks, smaller bottles, and alternative drinks, according to IBISWorld.

(2) The water and energy-drink craze. Americans drink about 180 gallons of liquid every year. That number is practically carved in stone. It's zero-sum. When a soda drinker decides she wants to drink iced tea with lunch from now on, she's won't order a Diet Coke and an iced tea. She'll just switch. (The economic term for swapping one product for another is called, simply, substitution.)

When we drink more of one kind of beverage -- bottled water sales are up 50 percent in the last decade; sports and energy drink sales are up 100 percent -- those gains have been soda's pains. The rise of energy drinks is especially important because energy drinks directly replace (substitute) soft drinks among customers who buy Diet Coke and its ilk for an afternoon pick-up. Americans still drink more soda than any other "category" of drink, like milk or juice. But the gap is fading quickly.

(3) Ascendant coffee culture. Coffee consumption in the U.S. is basically flat, after two decades when Starbucks and other national coffee shops sprouted like a steroidal ragweed along urban and suburban sidewalks. But young consumers haven't yet had their fix, and as this demographic trades up for more expensive coffee when the economy recovers, IBISWorld projects the overall industry to continue buzzing. Just as studies showing the ill effects of sugary drinks have hurt soda, studies showing we can basically drink as much coffee as we want permit young people to go back for refills. Consumption has increased the most for consumers between 18 and 24, IBISWorld finds, and "younger consumers are more likely to drink coffee on a daily basis today than five years ago" and the most likely to drink espresso drinks.

(4) Rising coffee prices. Coffee's growth isn't just a matter of trading up to more expensive lattes, it's also a case of paying more each year for the same cup. "Much of the revenue growth in the past five years was stimulated by a 14.1% annualized increase in the world price of coffee," which were mostly passed on to customers, IBISWorld found.

More »

A new paper reviews how psychology, biology, and neurology are ganging up on economics to prove that, when it comes to making decisions, people are anything but rational

Daniel McFadden is an economist. But his new paper, "The New Science of Pleasure," shows the many ways economics fails to explain how we make decisions -- and what it can learn from psychology, anthropology, biology, and neurology.

The old economic theory of consumers says that "people should relish choice." And we do. Shopping can be fun, democracy is better than its alternatives, and a diverse and fully stocked grocery store ice cream freezer is quite nearly the closest thing to heaven on earth. But other fields of science tell a more complicated story. First, making a choice is physically exhausting, literally, so that somebody forced to make a number of decisions in a row is likely to get lazy and dumb. (That's one reason why stores place candy near the check-out aisle: They suspect your brain is too zonked to resist.) Second, having too many choices can make us less likely to come to a conclusion. In a famous study of the so-called "paradox of choice", psychologists Mark Lepper and Sheena Iyengar found that customers presented with six jam varieties were more likely to buy one than customers offered a choice of 24.

If you've read the work of Dan Ariely or Daniel Kahneman, you know exactly how far from perfectly rational we are when faced with a decision. Many of our mistakes stem from a central "availability bias." Our brains are computers, and we like to access recently opened files, even though many decisions require a deep body of information that might require some searching. Cheap example: We remember the first, last, and peak moments of certain experiences. So when we make a choice about how to spend a certain amount of time -- say, by going to Six Flags -- we forget that most of the time at an amusement park is spent waiting around doing nothing. Instead, we remember the thrill of the roller coaster. (This has been previously used to explain why people sometimes go back to disappointing old romantic partners, but that might be for another article.)

The third check against the theory of the rational consumer is the fact that we're social animals. We let our friends and family and tribes do our thinking for us. In a fascinating example, McFadden presents a study that shows Korean peasant women within the same village tend to use the same contraception -- even though there is "substantial, persistent diversity across villages." This pattern could not be explained by income, education, or price. Word-of-mouth explained practically all the difference.

In another corner of the ivory tower (or, more likely, across campus in a glassy lab), neurologists are finding that many of the biases behavioral economists perceive in decision-making start in our brains. "Brain studies indicate that organisms seem to be on a hedonic treadmill, quickly habituating to homeostasis," McFadden writes. In other words, perhaps our preference for the status quo isn't just figuratively our heads, but also literally sculpted by the hand of evolution inside of our brains.

A final example to show how other fields of science are ganging up on classical economics: The popular psychological theory of "hyperbolic discounting" says people don't properly evaluate rewards over time. The theory seeks to explain why many groups -- nappers, procrastinators, Congress -- take rewards now and pain later, over and over again. But neurology suggests that it hardly makes sense to speak of "the brain," in the singular, because it's two very different parts of the brain that process choices for now and later. The choice to delay gratification is mostly processed in the frontal system. But studies show that the choice to do something immediately gratifying is processed in a different system, the limbic system, which is more viscerally connected to our behavior, our "reward pathways," and our feelings of pain and pleasure.

And there's much more. To explain it, here's Daniel McFadden himself. The following transcript of our email conversation has been very lightly edited for clarity.

Let me try to sum up your paper for readers, because it covers a lot of ground. Classical economists used to posit that, since consumers are rational, we make decisions to maximize our pleasure, end of story. But your paper reviews all the ways we know that consumers aren't in fact rational but prone to all sorts of biases and habits that pull us from any strictly rational view of the consumer. Is that alright?

This is a good summary, but I think the final message is that neither the physiology of pleasure nor the methods we use to make choices are as simple or as single-minded as the classical economists thought. A lot of behavior is consistent with pursuit of self-interest, but in novel or ambiguous decision-making environments there is a good chance that our habits will fail us and inconsistencies in the way we process information will undo us.

Choices are good. Trade is good. That's the view of neoclassical consumer theory. But it turns out that people don't really like making decisions. We have habits, we like thinking automatically. So sometimes we avoid making choices altogether because it stresses us out. Why is that? And how might, say, a company use that superior understanding of consumer theory to make consumers behave a certain way?

Trade is a contest, with a chance of coming out on the short end. Animals in "fight or flee" situations often find it safer to flee. Similarly, people in situations where trade is possible, or even promising, may find it safer to turn away. It takes trust to trade. McDonald's is successful because it has created a brand people trust - they know what to expect. A "30-day free trial" or "satisfaction or your money back" or "bring us a better price and we will refund the difference" are offers by merchants intended to promote the idea that they can be trusted, and that the risk of an unsatisfactory trade is low.

Real estate agents take advantage of people's discomfort with decision-making. Since buying a house is highly consequential and difficult to reverse, rational people should look at a great many options and think them through very carefully. A good agent will show you a few houses that are expensive and not very nice, and then one at almost the same price and far nicer. Many buyers will respond by stopping their search and jumping on this bargain. Our susceptibility to "bargains" is one of the cognitive devices we use to simplify choice situations, and one that companies are conscious of when they position their products.

One of the observations that most struck me was "economic choices can make us uncomfortable." That seems like a very powerful idea. How might I see it in my life?

If two "rational" people meet and disagree on the probability of an event (e.g., the AFC team wins the super bowl, the price of Google stock goes up), then both can gain by wagering on the event. In the real world, however, wagering is the exception, not the rule. On the one hand, you could say that getting someone to bet on an event, pay attention to the outcome, and finally make the payoff, is too much work. But actually, if you ask people why they don't bet often with their friends, they will simply say that it would make them uncomfortable to do so.

I'm a big procrastinator. Why does that fall under the category of "hyperbolic discounting" rather than "rational way to spend a Sunday afternoon"?

Procrastination is a way of avoiding uncomfortable choices. Hyperbolic discounting seems to be related to our subjective perception of time, and to the way the brain parses current and future pleasure-seeking - waiting for an hour right now is more painful than our perception of waiting for an hour in the future.

Here is an example of how hyperbolic discounting works: You go to your car dealer seeking a model that has a sound system you want. He says it will take 3 days to get that exact model, but you can drive away right now with one that has a better sound system and costs $300 more. Most buyers will choose to pay a little more and take their new car now. However, if the dealer said that no car is available right now, and he can get the model you want in 33 days, but a model costing $300 more with a better sound system in 30 days, most buyers will choose to wait the 33 days and get the exact model they want. This is hyperbolic discounting at work. Rational consumers with consistent intertemporal evaluation should treat the trade "$300 for an attractive but unneeded accessory versus 3 days" the same whether it is executed right now or executed in 30 days.

I felt like this sentence at the end of your paper was really important -- "Specialized brain circuitry processes experience in ways that are not necessarily consistent with relentless maximization of hedonic experience" - but I didn't really understand what it meant.

Our brains seem to operate like committees, assigning some tasks to the limbic system, others to the frontal system. The "switchboard" does not seem to achieve complete, consistent communication between different parts of the brain. Pleasure and pain are experienced in the limbic system, but not on one fixed "utility" or "self-interest" scale. Pleasure and pain have distinct neural pathways, and these pathways adapt quickly to homeostasis, with sensation coming from changes rather than levels. Overall, presumably as a product of evolution, our brains are organized well enough to keep us alive, fed, reproducing, and responsive to but not overwhelmed by sensation, but they are not hedinometers.

You make the case that humans are social animals more than economic machines, which sounds right to me. So do social network like Facebook and Twitter help us make better choices?

This is complicated. Social networks are sources of information, on what products are available, what their features are, and how your friends like them. If the information is accurate, this should help you make better choices. On the other hand, it also makes it easier for you to follow the crowd rather than engaging in the due diligence of collecting and evaluating your own information and playing it against your own preferences. In net, the information provided by social networks probably improves choices. The down side is that it may make you a lazy decision-maker. There is also a problem that if social networks encourage herd behavior, then they increase the risk of panics and stampedes that lead to market bubbles and instability.

More »

Apple might not be as extraordinary as it once was. But it's still extraordinarily rich.

Since tipping $700 after the iPhone 5's debut last year, Apple shares plummeted to $500 this week, erasing a year's worth of gains, and it all comes down to three interconnected factors, which are as familiar to Wall St. investors as a Bloomberg Terminal screenshot: margins, market share, and moods.

Less alliteratively: As the untapped market for expensive smartphones gets smaller and more crowded with rivals, investors are concerned that Apple won't be able to grow its profit at the same rate it has during its tremendous race to $700.

"The biggest factor is that the margin profile of their business is under pressure, so they can't expect to make the same amount of money from their current product line" said Peter Misek, an analyst with Jefferies & Company. The iPhone isn't a high-margin phone. It's a ultra-super-premium-high-margin phone. In late 2011, Apple made up 75 percent of smartphone profits despite selling only 9 percent of the world's mobile units. That, friends, is margin.

But it's not 2011, anymore. Samsung has overtaken all rivals as the world's smartphone leader and Apple faces pressure to lower its prices to attract the next generation of buyers, rather than ask the same families to buy a new screen every year. You could say the world is eating into Apple's markets faster than Apple is growing new markets. Or you could argue that Apple has simply reached the natural bounds of growth. "The smartphone market in the developed world has basically hit 50 percent," Misek told me, "and once you've hit 50 percent penetration, you then have incremental growth, by definition."

Finally, moods. Apple is a victim of its own success. Of course it's unfair to point out that Apple hasn't invented the next Most Amazing Thing Ever™ in the last 12 months, but well, it hasn't, and the company's biggest moves have followed rather than led the market. The iPhone 5 got taller and thinner and faster to chase taller, thinner, faster mobile phones. The iPad got smaller and cheaper to chase smaller, cheaper tablets. Apple, which cultivated an aura of offensive innovation under Steve Jobs, has been put in the position of playing smart defense.

The worry that Apple has lost its magic touch hasn't been placated by the news trickling out of Cupertino. "There's a fear that sales [from last quarter] are going to be a little disappointing," Misek said. The Wall Street Journal recently reported that Apple orders for iPhone 5 screens were cut to about half what the company initially expected. Reports conflict on the exact figure, and Apple has been predictably reticent. Now there is a broad expectation that Apple will announce a year-over-year decline in earnings "for the first time in a decade" when it releases its earnings on January 23.

And yet, it's still Apple. The last decade's most impressive tech company still employs the vast, vast majority of the executive staff responsible for its recent successes (with at least one notable exception) and yet the stock's price-earnings ratio has fallen to 11, the lowest since late 2008. Retail investors worried that Apple is no longer an historically extraordinary company might not realize how extraordinarily rich it still is.

More »

The University of Chicago asked 38 economists whether they thought the debt ceiling was foolish and dangerous. Only one said no. Here's the official wording and the response breakdown.



Some top-flight economists didn't hold back their criticism of the debt limit. MIT's David Autor remarked, "The question contains its own answer." Chicago's Anil Kashyap pithily summed up the absurd redundancy: "Deciding whether or not to pay the debts incurred to fund the previously approved tax and spending is nuts."

The award for Most Definitive Response goes to the often-definitive Richard Thaler: "The debt ceiling is a dumb idea with no benefits and potentially catestrophic [sic] costs if ever used."

Most Jaunty Response goes to Chicago's Austan Goolsbee, former chairman of the Council of Economic Advisers under Obama who replied with one mostly-caps-locked word: "OBVIOUSly."

The lone dissenter was Chicago's Luigi Zingales, who responded somewhat mischievously that the debt ceiling "can also lead to potential better outcomes," which sounds to me more like a probability-based quibble with the question's wording rather than an endorsement of the debt limit.

Nine out of ten economists can be wrong. But they probably aren't, this time. The debt ceiling is absurd. The only thing that need to be said about it has already been said by Jim Fallows: "For Congress to 'decide whether' to raise the debt ceiling, for programs and tax rates it has already voted into law, makes exactly as much sense as it would for a family to 'decide whether' to pay a credit-card bill for goods it has already bought."

[via Binyamin Appelbaum]

It's not the end of soda -- yet. But soft drinks have peaked, while bottled water, energy drinks, and a considerable amount of premium alcohol are taking their place in our liquid diet.

One hundred and eighty gallons. It's enough to fill 11 kegs, four bath tubs, or just one big aquarium. It's also how much liquid you drink ever year.

The question is: 180 gallons of what?

American drinking habits have undergone a major shift in the last decade. Throughout the 1990s, soft drinks made up nearly a third of the typical Americans' liquid diet. But in the last ten years, we've cut our soda consumption by 16 percent. Meanwhile, we now drink more than 50 percent more bottled water than we did in 2001 -- and twice as many energy drinks. 

"Soft drinks peaked around 1998," said Thomas Mullarkey, an analyst from Morningstar. The big winners in the last decade have been bottled waters, sports drinks, wines, and then spirits, "which have picked up a quarter of a gallon per person in the last decade," Mullarkey said, before adding, "that is a lot of extra alcohol."

THIS IS WHAT YOU DRINK (IN 2 GRAPHS)

Here's a glimpse of American drinking habits between 2001 and 2011. The data from the Beverage Information Group, via MarketWatch, does not include some miscellaneous categories, which include tap water, sports drinks, and energy drinks.

And here is another look at the same data -- this time showing percent growth or decline in each category over the last decade.

Two mega-trends that jump out from the data: (1) the swap between soft drinks and healthier alternatives like bottled water; and (2) the swap between beer and wine/spirits. Since total liquid consumed is a fairly zero-sum number, Mullarkey said, one sector's gain must be another sector's pain. "You're seeing that the consumer is taking a healthier look and having more alternatives [than soda], such as tea, and coconut water," he said, "but also, Americans have aged, and soft drinks are most popular among teenagers and twentysomethings."

Older women in particular have led the increase in wine consumption, he said.

Something beyond demographics is pushing down beer sales and lifting spirits, and it looks a lot like what's happening to the broader economy. The middle-class brands are getting crushed, and the high-end is running away with all the income.

Cheap beers have lost market share to craft beers, Mullarkey said, since young lower-middle-class men have had the worst time during the Great Recession. Craft beer sales grew 15% last year, but the volume of mass-produced beer has declined in every year since the downturn. Light beers are still the most popular in the country, but the shift toward craft means less beer volume consumed overall. "With cheap light beer, you might have four, five or six in a seating. But with the higher-end and more flavorful beers, one or two might do," Mullarkey said.

GOOD TIME FOR A STIFF DRINK

It's the same story for liquor, where you don't need a spreadsheet to know how well a spirit is selling. Just go to a bar and see for yourself: the higher the shelf, the faster the growth. A 2012 Morningstar analysis of bourbon and whiskey found sales had tripled among super-premium brands in the 2000s, despite outright decline in "value" (i.e.: cheap) liquor. "U.S. consumers are increasingly purchasing pricier whiskey and bourbon," Morningstar reported, "and super- premium products, including Crown Royal and Woodford Reserve have grown volumes at a 13% [adjusted annually] since 2002."

Seventeen years ago, liquor consumption hit a 40-year low, so the industry tried something new. They advertised. Before 1996, spirit companies had a self-imposed advertising ban on radio and television. "Drunkards were a horrible disgrace before Prohibition and hard-alcohol companies wanted to stay in the good graces of government by not advertising," Mullarkey said. But companies lifted their ban in 1996, and per capita liquor consumption has been growing since.

WORLDWIDE BEER FEST

Don't cry for the soda and beer companies just yet. Not only are the largest beverage makers adapting to America's new tastes by offering new products aimed at upper-middle-class customers, but also the overseas market provides a nice cushion for falling market share in the U.S.

Some of the same trends Americans are running away from -- an unhealthy obsession with soda and cheap beer, for example -- the rest of the world is running toward. Coca-Cola's sales in India and China are growing faster than their respective GDPs. As developing economies like the BRICs and Turkey get more pocket money, their demand for beer and spirits continues to grow, and spirit-heavy countries like Russia and India will probably start drinking more beer.

For the U.S., it might be the beginning of the end of an era of syrupy soda and cheap light beer. But for billions of families getting a first taste of middle-class life this decade, it's something more like the beginning.

More »

No, the U.S. is not a high-tax country. But saying exactly how not-high-tax we are gets a little tricky.

The graph at the top of this article comes from a KPMG report excavated by Henry Blodget. It shows personal tax rates on $100,000 around the world. The U.S. comes in at 55th out of 114.

As for the richest one or two percentiles of earners, we come in at practically the same place: 53rd-highest. Reminder: The fiscal-cliff tax hike kicks in about $100,000 above this level.

But these numbers might understate how low taxes have been in the U.S. Unlike most advanced economies, the U.S. don't supplement personal income taxes with a national sales tax, or value-added tax (VAT). Consumption taxes accounted for about a fifth of total U.S. revenue in 2008 (mostly at the state and local level) compared to an OECD average of 32 percent. In other words, the U.S. relies uniquely on personal tax rates to raise revenue -- and we have relatively low personal tax rates.

The best way to answer the question "Are U.S. taxes high or low compared to other countries?" is to look at taxes as a share of the economy. Here's how the U.S. stacks up to other OECD countries in a graph from the Tax Policy Center. (We're at the bottom of the stack, 25 percent below the average.)

For the next few years, there's no particular reason to expect there will be another major tax increase, but after 2020 the government's health care bill will start to make our spending levels look, for lack of a better term, European. There are any number of ways to stop the trend, from the extreme -- turning Medicare into a voucher-support program -- to the incremental -- tweaking Medicare and hoping that medical inflation slows down on its own. But either way, the U.S. won't have historically low interest rates forever, and it's probable that the third-lowest tax/GDP ratio in the developed world is a good deal for now, but not a sustainable deal for the long run.

More »

For a long time, we knew that there was a happiness plateau, a point where more money basically stopped buying greater satisfaction. Maybe we were wrong.

Fittingly or ironically, the dismal science has a lot to say about happiness.

The classic economic story about money and well-being goes something like this. Money buys happiness, sure, but only up to a point. Once basic needs are taken care of, extra money has diminishing (or non-existent) returns. Perhaps richer people use their money to move to richer areas, where they no longer feel rich. Perhaps relative income -- how much you have compared to your friends -- is matters much more than absolute income -- how much money you have, period.

Economists call it the "Easterlin Paradox." You call it the "Keeping Up With the Jones' Principle."

And a new research paper calls it total bunk. Or, in the economists' parlance, "based on empirical claims which are simply false." People with more money have higher reported well-being, they say, all the way up to the top 10 percent of earners. Here are the 6 most interesting observations from "The New Stylized Facts about Income and Subjective Well-Being," a discussion paper by Daniel W. Sacks, Betsey Stevenson, and Justin Wolfers.

(1) Richer countries are happier. Here's a simple graph to make a simple point. The researchers plotted 122 countries' responses to a Gallup World Poll on well-being against each nation's real GDP per capita (adjusted for purchasing power) and found a strong correlation.

Upshot: Well-being rises with income at all levels of income, across countries.

(2) ... But every next dollar won't buy the same amount of happiness. The straight line can be deceptive at first blush. The graph is *not* telling you that every next $1,000 on your paycheck is worth the same gains in satisfaction. Instead, the relationship is logarithmic. That means doubling your income from $1000 to $2000 raises satisfaction by the same amount as doubling your income from $10,000 to $20,000. Not that these findings are as binding as the law of gravity, but this would suggest that, to equal the happiness boost you felt from getting raise from $30,000 to $60,000, another $30,000 wouldn't do the trick: You would have to double your income again, to $120,000.

(3) Richer countries get happier as they get richer. That first graph answers the question: Do countries with more income report more happiness? The answer seems to be yes. But what about a different question: Do individual countries report more happiness as their incomes rise? Also, yes. The next graph looks the 25 biggest countries in the world and shows the linear relationship between well-being and household income.

(4) There is no "happiness plateau" (or it's much higher than we thought). Those lines tell us three important things. First, the lines go up. More money, more happiness. Second, the lines go up in parallel, more or less. Across language, culture, religion, ethnic background, the same amount of extra money seems to buy the similar amount of extra happiness. Third, the lines go up in parallel and they don't flatten out. There is no "Easterlin plateau", no satiation point, no bright line where money suddenly loses the ability to improve well-being.

(5) Europe's lesson: A steadily rising level of satisfaction from a steadily rising level of income. The graphs below are a bit more pointilist and messy, but they make a similarly compelling point. The Eurobarometer survey, which has measured life satisfaction across the continent since 1973, clearly shows that in eight of the nine countries for which the researchers have the most data, well-being has increased through time with economic growth. Except for Belgium. You're weird, Belgium.

(6) The American exception is also a lesson: Income inequality is a tax on happiness. The U.S economy has doubled in size since the early 1970s. But self-reported well-being has declined. Huh?

The authors make two reasonable excuses. First, economic growth correlates with improved happiness in most countries, but that doesn't mean GDP is the overwhelming determinant of happiness. Social changes, such as the increase in single-family households, could play an equally powerful role in moving self-reported satisfaction in America. Second, it's well known the U.S. is a world leader in economic inequality and that the fruits of a doubling GDP have hardly been shared equally.  "In European countries, inequality has increased by half" the amount it has in the U.S., the authors find.

***

According to the modern godfather of income and well-being research, Richard Easterlin, it is better to be rich than poor, but rich countries don't get any happier as they got richer. They hit a happiness ceiling, essentially. This idea matters a great deal, because in a world where only relative income matters, there might be less need to care about growth or pursue policies that maximized lower-income families' post-tax incomes. The work by Sacks, Stevenson, and Wolfers suggests Easterlin was simply wrong. Absolute income matters absolutely, and voters, economists, and policy-makers have everything to gain by putting the spotlight on income gains for the average family.

More »

What's the true price of flying? It's much more than the price of a ticket. And it has been for a long time.

Last year, Americans likely spent more than $6 billion in baggage, cancellation, and change fees, on top of their ticket price, in 2012. The Bureau of Transportation only has data through the first nine months of last year, but total fees are up about 4 percent over previous years.

Here's a look at total fees by airline:

And here's the baggage fee data as a pie chart, if you prefer that sort of thing. Delta, United, and American account for about 60 percent of total baggage fees.

And finally, here are those fees graphed against each airline's market share in domestic and international passenger miles, also according to the Bureau of Transportation. This is really the key look.

What conclusions can we draw from these graphs, in particular the last one?

(1) Delta and US Airways are the worst. Maybe you knew that already.

(2) But don't be too hard on them. Generally speaking, the airlines that fly the furthest have the most fees, since people are much more likely to check bags and pay more per ticket for international flights.

(3) Airlines with mostly domestic routes have the fewest fees, for the same reason.

Fees annoy customers for the perfectly sensible reason that they seem like surprising tricks, since the true cost of flying isn't shown on their ticket. But the "true cost of flying," if such a thing were measurable, could scarcely be represented on a uniform ticket because it costs varying amounts to fly various passengers on the same plane.

Imagine if there were no baggage fees and everybody's ticket were the same price. A child that weighs 40 pounds without bags would be considerably quicker to load, cheaper to accommodate, and easier to transport than a larger fellow with three checked bags that require sorting, tagging, and carrying, plus two carry-ons that add to the boarding time. As you can see, a little price discrimination through fees is sensible and defensible.

But why stop at sensible? Airlines are the economy's most notorious wizards of price discrimination. Ticket prices do roller-coaster loop-de-loops in the weeks before the flight to tease discriminating buyers. Then prices rise dramatically at the end to take advantage of desperate flyers, who are often business travelers who are less price sensitive since they can pass along the cost of their ticket to the company.

The industry's reliance on absurd fees makes it a target of loud customer service complaints -- like, carry-on fees, really? -- but the bottom line for casual passengers isn't as bad as it seems. A mix of competition and price management have pushed down airfares by half since 1978, according to Eduardo Porter's book The Price of Everything. The more airlines can rely on fees and hold down the price of a simple ticket, the better things get for savvy carry-on-only customers.

Under Steve Jobs, Apple became the biggest company in the world by tweaking existing technologies to build magical new products. Then Tim Cook tweaked Apple.

The rumors are in agreement: Apple is releasing a cheaper version of the iPhone. Maybe that news feels like a small retail announcement. If true, it's more like a keyhole into Apple's grand strategy since the death of its founder CEO.

The biggest technology company in the world is in a position it rarely found itself in the last ten years under Steve Jobs -- playing catch-up in the race for market share.

"Steve Jobs didn't care about market share," Silicon Valley investor Marc Andreessen said at a Quartz event in New York City last year. He wanted to invent amazing new products and sell them for a fat profit. In the 2000s, Apple didn't need to obsess over market share because it invented its own markets -- particularly with the iPod/iTunes store, with the iPhone, and with the iPad. None of these products sprung fully formed, and without precedent, from Jobs' brain. Apple didn't build the first mp3 player, or the first smart phone, or the first tablet. But what it built became the industry leader, the standard that all other companies had to speed up to meet -- in digital music, smartphones, and tablets. "The Apple playbook under Steve Jobs was a single playbook," Andreessen said. "He would invent a new product category, start with 100% market share, and then every day that goes by, lose market share until some terminal outcome."

We're approaching such a terminal outcome. Samsung phones are poised to open a ten-percentage-point advantage over iPhone in global market share -- 33 percent share to 21 percent. Google Android software now runs the plurality of the world's smartphones. Apple's portion of the worldwide tablet market fell from two-thirds to half in the last six months of 2012.

The world is eating into Apple's markets faster than Apple is building new markets.

The company's response under Tim Cook has been to play smart defense -- it hasn't created new market categories, so much as played carefully within them. Popular phones were getting taller and thinner, and the iPhone 5 got taller and thinner. Popular tablets were getting smaller, and the next iPad fit in one hand. Even subtler moves, like leaving old iPhones on the market for longer periods of time at a discount, could be seen as an attempt to win undecided buyers who might pick a cheaper rival. If these moves seem un-Jobsian to observers, they're also quite clearly necessary to Apple defending its slice of the mobile market.

Something else is happening. The appetite for Apple's products is going global very quickly. Today, the company makes about two out of every ten dollars in revenue from Asia -- which doesn't have the same carrier subsidies as American families. It is only slightly hyperbolic to say the future of Apple is as a Chinese and Indian phone-retail company. If it doesn't meet the so-called "Chindia price," it has no chance to stop the march of Samsung and other phone makers.

Steve Jobs, in Malcolm Gladwell's eloquent characterization, was not a soup-to-nuts inventor, but an ingenious tweaker. He assembled pieces of technology that already existed into beautiful, and beautifully functioning, machines. So far, under Cook, Apple isn't tweaking other technologies to invent new things so much as it is tweaking its own inventions. Six months from now, Tim Cook could unveil a new Apple TV that creates yet another must-have screen and another Apple-dominated market. But so far, that's behind the curtain.

The Apple of the last decade was a non-stop invention factory, truly an extraordinary company. The Apple in front of the curtain today looks more like an extraordinarily rich, ordinary company.

President Obama is expected to pick Jack Lew to be the next Treasury Secretary. If confirmed by Congress, that makes him the guy autographing your dollar bills.

And, as Kevin Roose points out, his autograph is insane.

It is also not, strictly speaking, an autograph. It is a doodle. Or series of cursive O's (or, equally, of upside-down cursive E's) or "a Slinky that has lost its spring," or a visual expression of the weary hollowness of identity.

Fortunately, for the aesthetic integrity of our currency, the GOP's aversion to Jack Lew (and Congress' aversion to speedy confirmations) suggests he'll have many weeks to learn to sign his name using more than one letter.

What do petroleum engineers, detective supervisors, and animal breeders have in common? They're extremely employable.

Along with dentists and nuclear engineers, they're among the occupations with the lowest jobless rates over the last two years, according to the Wall Street Journal's fascinating study of data from the Bureau of Labor Statistics. BLS measures the unemployment rate for more than 500 job categories, but there's some wild variation from year to year for some of them, due to (probably) small sample sizes.* So to build a list of the jobs with the lowest and highest unemployment rates, I focused on occupations that didn't see implausibly wild swings between 2011 and 2012.

These are the 13 jobs with measured unemployment rates under 2.0% in both 2011 and 2012, listed by their '12 rate. Three are types of doctors, and three are types of engineers.

And here are the eight jobs with unemployment rates over 20% in both 2011 and 2012, listed by their '12 rate. Five are in, or related to, home construction.

_______

*For example, in 2011 "furniture finishers" reported an unemployment rate under 1.0%, but in 2012, 27% suddenly didn't have a job. Meanwhile, 25% of "woodworking machine setters" were looking for a job in 2011, but in 2012, the occupation's unemployment rate plummeted to 3%. It is possible that 2012 saw a miraculous boom in specifically **unfinished** woodcraft that explains both numbers, but it's more plausible that, since there aren't many woodworking machine setters or furniture finishers in the United States, a few respondents' answers swung the results.

More »

Unpaid internships: Good for the economy, bad for low-wage workers, and a wonderful gift to students at a terrible price

Are the vast majority of unpaid internships illegal? A raft of lawsuits brought by unpaid interns claiming minimum-wage violations against big media companies this year might answer the question. In the first settlement among these cases, Charlie Rose's production company agreed to pay back wages of $110-per-week to nearly 200 former interns.

The ethics of unpaid internships are as murky as the economics are clear. Hundreds of thousands of young (and not so young) Americans are willing to work for nothing in exchange for the experience to take part in the daily thrum of a company. And I trust you'll conceal your shock to learn that some businesses will not refuse young workers at the price of $0.00 per hour.

We might conclude our analysis right there -- indeed, some people do -- but the morality of unpaid internships is not as pat as that evergreen excuse, "... but we can pay you with experience!" There is a law in this country that says that internships must resemble an education and that interns cannot work in the place of paid employees, nor be of "immediate benefit" to an employer. If you have ever held an unpaid internship, you know just how routinely flouted that rule is.

Last year, we hosted a reader-editor debate about the morality and economics of unpaid internships. The upshot of our drawn-out back-and-forth polemic: It's complicated!

Is it true that unpaid internships offer invaluable experience that can be worth more than a college education? Yes.

Is it true that unpaid internships offer advantages to higher-income students who can afford to work for free, implicitly locking out low-income youths from important opportunities? Yes.

Is it true that life is unfair and low-income people are priced out of all sorts of educational opportunities, like tutors and expensive private schools, which are perfectly legal? Yes.

Is it true that interns are doing the work of low-wage workers? Yes.

Is it true that the Labor Department has the power to enforce laws that would find hundreds of thousands of unpaid internships to be illegal because interns are doing the work of low-wage workers? Yes.

Is it true that if the Labor Department cracked down on these internships and forced companies to pay the minimum wage, there would be fewer unpaid internships and students would be deprived of an invaluable experience that, as we established, can be worth more than a college education? Yes.

So, as you can see, the answer is fairly straightforward. Unpaid internships: Good for many students, but bad for some students, good for the economy, but bad for low-wage workers, but good for early-career mobility, but bad for social equality, and illegal, but widely accepted, so practically legal.

I hope the next class action lawsuit goes to trial. It'll take a judge to sort this stuff out.

More »

It's not Notre Dame, either. Or Michigan. Or USC.

It's Texas. (Wikimedia Commons)

Alabama won college football's national championship last night, their third title in four years. But in a parallel competition for most valuable football program in college sports, Alabama is a distant eighth. The repeat champions in the money race? The Texas Longhorns.

That's according to Ryan Brewer, an assistant professor of finance at Indiana University-Purdue University Columbus, who has calculated the market value of more than 100 college football teams as if they were for-profit entities. He estimates that the University of Texas and the University of Michigan field teams whose values could rival even some NFL franchises. Here are the top 20 by his count:

Brewer based his calculations on expenses, cash-flow, risk, and revenue from ticket sales, TV deals, and royalties.

What makes Texas and Michigan so much more valuable than other schools that would appear to have similar reach, like the University of Southern California, which comes in at number 28 in Brewer's analysis? "In the southeastern United States and in the breadbasket, we have a tremendous demand for U.S. football, especially where there isn't a professional analog, and the main sports story in town is college football," Brewer told me. "Texas brings in $123 million a year in revenue, and Michigan about $110 million from tickets, TV rights, sponsorships, and royalties." If you go back through the top 20 schools, you'll see that hardly any of those cities have NFL teams -- only a handful are within a short commute to a professional sports team.

In the new economics of college sports, income is determined not only by the size of your stadium but also by the size of your most recent TV contract. The controversial expansion of the Big Ten points to a future where mid-sized schools scramble to join conferences with sports networks that they can sell to cable providers.

What impact could this have on the "value" of college football teams? Brewer said it depends. If schools aren't careful, they might chase the short-term gain of a lucrative TV contract and lose their long-term fan support by joining a league that doesn't fulfill classic rivalries. "The entire league is at risk somewhat because of the unprecedented number of teams jockeying around," he said. "When schools west of the Mississippi River are competing in east coast conferences, it's bizarre and there's a threat to the loyalties of the fan base."

More »

The consequences of default are so awful, it's impossible to imagine Washington not raising the debt limit by March. And yet, here we are again, waiting and debating the un-debatable.

On December 31, the United States hit the debt ceiling. What, you didn't feel it? Well, no, you didn't, and neither did I. For that, we can thank "extraordinary measures," the extraordinarily vague term Washington uses to describe the various way the Treasury department can move around money to keep us from straight-up defaulting on our promised payments. But extraordinary only lasts so long. These measures buy us about six weeks -- basically until Valentine's Day. After six weeks, the United States government will be living hand to mouth on cash and daily revenue, and it's hours or days before ... DEFAULT.

What happens then? The only honest answer is: Nobody has any idea. It is the moment the Bipartisan Policy Center calls the X Date: The first day the U.S. government doesn't have the money it needs to pay all of its bills. The United States has never hit the X Date. Hopefully, we never will. But here's what we know about what would happen on day one in Default America.

On a typical day in late February 2013, the government can expect to take in about $9 billion and spend about $15 billion. In Default America, however, we wouldn't have the authority to spend that extra $6 billion. So those payments would simply go unpaid. Somebody in Washington would have to decide who gets the money they were promised and who doesn't. Every day. As long as the debt ceiling isn't raised. Basically, we'd default on 40 percent of our obligations, over and over again.

What would we pay and not pay? We'd have to make a list. (And that assumes the government's computers can even process this sort of prioritization, which is unprecedented.) At the very top might be interest on our debt to keep buyers trusting in the full faith and credit of the U.S. Then maybe Medicare, Medicaid, Social Security, and tax benefits. That means we wouldn't have enough money for ... basically anything else. Here's an illustrative example from BPC:

The consequences of an immediate 40 percent cut to government services would be dire. Practically all federal employees would suddenly see their paychecks go to zero. Some days, the government would get enough money to pay Social Security checks and Medicaid providers. Other days it wouldn't. Our defense budget would collapse. It would be pandemonium.

Everything else is informed speculation, but you don't need a creative mind to guess that a stock market that loathes surprises would positively freak at the first-ever default of the United States government. Trouble on Wall Street would trickle down to rates that affect every participant in the economy.  "A spike in the Treasury rate would mean a spike in credit card rates and mortgage rates, not to mention all manner of more esoteric financial derivatives," Ezra Klein explains. And yet, we don't even know that Treasury interest rates would even spike. A global stock market collapse might, weirdly, raise demand for U.S. debt, a classic safe-haven, which might still be seen as more reliable than equities in a Default-America World.

Predictions are hard. Especially about the future. And especially about a future after the United States blows through the debt ceiling. That's precisely why, for all the posturing and pyrotechnics in Washington, there's no conceivable way that the U.S. doesn't make a deal to raise the debt limit by mid-February.

And yet...

More »

You don't hear much from Europe these days, now that the continent's debt crisis is more or less under control. But the jobs crisis has never been more dire. Unemployment in the euro zone hit a record high of 11.8 percent in November, according to a new Eurostat report. In Spain, Greece, and Portugal, joblessness has never been higher during this crisis.

The problem gets worse for the young. Unemployment for workers under 25 is now closer to 60 percent than 50 percent in Spain and Greece, and youth joblessness is rising in France, Italy, and Portugal. (Note: the red bar for Greece shows unemployment from September 2012, not November)

The last time I passed along a euro zone update, I recalled a saying among start-ups companies: The metrics you pay attention to are most likely to move in the direction you'd like. So, you'd better pick the right metrics.

Compared to most countries and international organizations, the EU is something of a start-up, itself -- a brave currency experiment. For most of this crisis, its central bankers have picked low inflation and low government spending as their key metrics. Lo and behold, inflation across the EU is low and government spending has plunged. The result has been good  for banks, depositors, bondholders and lenders. It has been disastrous for two other metrics that you might consider equally important: jobs and growth.

History will almost certainly show that Europe did the wrong thing. In fact, we hardly have to wait for history's judgment. In a remarkable letter, chief IMF economic Olivier Blanchard recently acknowledged that the IMF's diagnosis of austerity for Europe was based on a math error. The error comes down to a number called the "fiscal multiplier," which tells us how much economic activity comes from one dollar (or euro) of government spending. The IMF assumed a small multiplier, about 0.5, meaning that each euro cut from government spending would do very little damage to the overall economy. Instead, the multiplier was high, greater than 1.0, so as the cuts mounted, austerity crashed the European economy.

And so, here's where we are today with the EU: Optimistically, Europe will grow about 0.0% this year. The last time Spanish growth was this weak was during the Spanish Civil War. Greece's GDP decline is the worst of any peaceful, non-communist post-WWII economy. Both countries have youth unemployment kissing 60 percent and still rising. And, remarkably, this is what an improving EU looks like.

In TV Land, the dinosaurs still rule the world


Surely, you've heard the news: The cable business is broken, the end of TV is nigh, and it's only a matter of time before the Internet does to television what it's done to music and newspapers -- obliterate the old business models and leave something shiny and new in their place.

Maybe. Some day. For now, the dinosaurs still rule the world.

As David Carr explained today in the New York Times, the two industries that make up what most people think of as the TV business -- content companies (who own the shows and the channels) and cable companies (who own the infrastructure that transports the shows and channels to your TV box) -- had a smashing year in 2012. Many of them outperformed the newer and nimbler companies, such as Apple, Netflix, and Google, that are supposedly destined to displace them. They owe much of their success to the very thing that was supposed to kill them -- the Internet.

First, the numbers. The TV business had a spectacular year. Cable's heavy hitters crushed the S&P 500 average in 2012: Comcast led the pack, up 57 percent, followed Time Warner Cable (up 53 percent), and Charter (up 34 percent). Among the big media companies, News Corp, CBS, and Disney, and Time Warner all finished up over 30 percent. (Those four conglomerates account for just about all of the television I watch, since they respectively own Fox, CBS, Showtime, ABC, ESPN, and TNT.)

What's going on? The Internet was supposed to make these companies poor. Instead, the Internet is making them rich.

"We heard stories about how cable was doomed by the Internet as early as 2003," says Craig Moffett, an analyst with Sanford C. Bernstein. "It has finally dawned on investors that, not only was that never a realistic concern, but also, the Internet has turned out to be a boon for both distributors and content companies."

To understand why the Internet hasn't destroyed cable, ask yourself: Where do you get your Internet? It's probably from the same people selling you TV. Since 2005, total cable industry revenue is up 50% -- and two-thirds of that increase came from selling something that wasn't television. For the most part, it was Internet. Cable companies like Comcast and Time Warner Cable sell broadband at ridiculously high margins. When you compare the total cost and profit of selling TV versus selling Internet, it's clear to Moffett that pay TV "has represented less than half of [cable's] business for more than a year."
 
While cable has made Internet a second business, content companies have treated the Internet as a second window. Even as they demand more money from cable operators for the right to carry their channels to households, media companies have also made a killing selling their shows to companies like Amazon, Netflix, Hulu, and Apple. One paradox of online entertainment is that more Reach isn't necessarily more Revenue. Today we have access to more music and news that ever, but since we're only paying for access, the difference between listening to 10 songs and 10,000 songs (or reading 10 articles versus 10,000 articles) is often zero. But the TV industry is getting more reach and more revenue, together.

This would be a good time for me to say that just because traditional media has fended off disruptive innovation in January 2013 doesn't mean there won't be a different story to write in January 2014. Programming costs, especially for live sports, are just insane. Attention is slowly but surely flitting away from prime-time TV and some large cable networks. Cable's high-margin Internet business could get it in trouble with regulators if somebody makes the case that private companies shouldn't have that much pricing power over a basic utility like broadband.

There are many ways that government, audiences, and technology cut down the mega-goliath that is the modern TV business. But for now, Les Moonves, CEO of CBS and a mega-goliath in his own right, is correct: Everything that was supposed to be bad for the TV business has turned out to be good for the TV business.

The Daily Dish's business experiment matters to the future of the Daily Dish. BuzzFeed's business experiment matters to the future of online journalism.

At first blush, they would seem to have nothing to do with one another. BuzzFeed -- the Internet's finest crackerjack box of sticky, clicky listicles sprinkled with original reporting -- announced that it raised $19 million in venture funding. In a far-away corner of the Web, Andrew Sullivan, the pioneering blogger who has expanded into a mini-magazine within the Daily Beast, announced he was taking his team private, forgoing advertising and venture money, and relying instead on all-you-can-eat subscriptions for $19.99 (or more, if readers felt generous).

It is serendipitous that BuzzFeed and Sullivan's Dish made their announcements hours apart, because their stories belong together even if their styles are opposite. The archetypal BuzzFeed article begins, "50 Puppies to Get You Through Your Bad Day: Bet you can't stop looking at these dogs." The archetypal Dish article begins, "The Future of the Welfare State, Cont.: Douthat counters Ezra [blockquote]." But both sites are doing something extremely correct, both sites entertain and inform a mass audience, and both sites offered fitting glimpses of the future of paid journalism -- or, more accurately, two halves of that future.

Let's start with the Dish. Andrew Sullivan's massively successful blog has taken a grand tour of old-school media, from Time, to The Atlantic, to Newsweek/Daily Beast. Flying solo, it will have to bring in somewhere around $1 million every year. Andrew's strategy is to junk the ads and raise the money entirely through subscriptions. Like NYTimes.com, the model is a meter: After a certain number of internal clicks, you hit a limit -- no more click-throughs! -- and you're asked to pay (links from other articles around the Web don't count toward the limit). Andrew lays out the core principle:

We want to create a place where readers - and readers alone - sustain the site. No bigger media companies will be subsidizing us; no venture capital will be sought to cushion our transition (unless my savings count as venture capital); and, most critically, no advertising will be getting in the way.

I don't doubt Andrew's sincerity, but this is a core principle motivated or reinforced by economic necessity. It's possible that the Dish could attract some independent advertising, but it would require a sales and marketing team, which has never been a part of Sully's stable. Furthermore, it's possible that the very thing that makes Andrew compulsively readable makes him a challenge to advertise. Fiercely independent, hyper-personal, and often unpredictable essays and amuse-bouche-links about politics and culture are not in the highest demand among tony advertisers, who have historically spent most of their money on sites and channels dedicated to business, technology, consumer products, or local needs -- none of which are really Andrew's forte. But all that doesn't matter a lick if readers are willing to pay. And they are. Twelve thousand readers subscribed at $28 on average through yesterday, bringing the Dish roughly 30% toward its one-year goal.

It's probable that the Dish can live a year on subs alone. It's plausible that the Dish can live for two years on subs alone, or three, or 30. But practically everything else -- the vast majority of journalism, from the New York Times to the pop culture blogs that specialize in bikini shots -- cannot survive on the good will and generosity of their readership, and there is no expectation that they will. Advertising is what makes news and entertainment -- first in 19th-century newspapers, then on early 20th-century radio, then on late-20th-century television, and now on early-21st-century Web and mobile -- affordable at a mass scale. The news needs successful advertising to breathe.

That's why BuzzFeed's story matters. It's commonly understood that Web advertising stinks, quarantined as it is in miserable banners and squares around article pages. BuzzFeed's approach is different: It designs ads for companies that aim to be as funny and sharable as their other stories. Jonah Peretti, the CEO of BuzzFeed, told the Guardian's Heidi Moore that he attributed nearly all the company's revenues to this sort of "social" advertising. "We work with brands to help them speak the language of the web," Peretti said. "I think there's an opportunity to create a golden age of advertising, like another Mad Men age of advertising, where people are really creative and take it seriously."

The online reaction to the Dish and BuzzFeed seems to be that what Andrew's doing is sort of quaint and old-fashioned and what BuzzFeed is doing is weird and revolutionary. The opposite is true. Funding a journalistic enterprise without advertising is weird and revolutionary and experimenting with ads that are suitable to their medium is a clear echo of history. Just as the first radio ads were essentially newspaper ads read aloud, and the first television ads were little more than radio spots over static images, many on the Web are fighting the last war rather than building ads that work for the Internet, journalism history professor Michael Schudson explained to me.

Banners and pop-up ads are so awful they practically sulk in their acknowledged awfulness, fully aware that they are interruptions rather than attempts to compete with editorial content for the readers' attention. BuzzFeed (and other companies experimenting with designing advertising for their advertisers) gets that and tries to fix it. Just as TV ads are successful precisely because they try to be as evocative, funny, arresting, and memorable as actual TV, there's no reason why advertising content shouldn't aim to be as informative or delightful as an original online piece. That's not a new idea. Consider it a corollary to the rule set by Adolph S. Ochs, the long-ago publisher of the New York Times: "Advertising in the final analysis should be news; if it is not news, it is worthless."

Even as Sullivan's Dish is pushing the boundaries of subscriptions, testing how much a dedicated audience is willing to pay for online journalism that is supposedly free, BuzzFeed is pushing the boundaries of advertorial -- advertising content like looks like editorial content -- testing how far each side of their two-sided market (readers and companies) is willing to go. The future of paid journalism -- if we can even try to guess at it -- will probably be a blend of the two strategies celebrated this week: Ads that are less useless and ignorable, and readers who are asked to show a little more love than they're used to.

More »

Four long years after his first presidential oath of office, Barack Obama's second term begins in an uncomfortably familiar place. The U.S. unemployment rate is 7.8 percent, according to this morning's BLS report, the exact same number as on that cold, historic day in January 2009.

Like a final chapter that sums up all the themes of a long book, December's jobs report was practically archetypal. After averaging just over 150,000 net new jobs per month 2011 and just over 150,000 monthly jobs in 2012, we added 155,000 net new jobs last month. Practically nothing changed -- not the unemployment rate (7.8 percent), nor the number of unemployed people (12.2 million), nor the number of long-term unemployed (4.2 million), nor the employment-population ratio (58.6 percent).

There's an instinct to call these sort of jobs reports "boring." They might be for the journalists paid to write about them each month. But the better words for the real stakeholders -- the unemployed, and all workers whose wages would be get a boost from full(er) employment -- might be "deeply frustrating." Just because job creation is thermostatic doesn't mean we should be resigned to the number on the thermostat. One hundred and fifty thousand jobs isn't the number we deserve, but, at a moment when deficit showdowns have replaced a viable jobs policy, it's the number we've settled for.

Here are two facts about taxes under the fiscal cliff deal.

Fact One: This year, the 1 percent will pay more in taxes than in any year since 1979.

Fact Two: We're still not raising enough revenue for the next ten years. Total tax revenue for the next decade will be 18 percent or 18.5 percent of the overall economy. Okay, so that's not far from our historical average. But the next decade's spending demands are nothing like our historical average. We're entering a historically unique moment where we've promised to pay health care and retirement insurance to tens of millions of Boomers, and that will require more money than we're currently collecting for the government -- even if we means-test or change benefits.

Fact One suggests we might be through raising taxes on the rich. Fact Two suggests we're not through raising taxes in total. And both facts together suggest that the next tax increase will have to come from families further down the ladder. Maybe we'll start by raising rates or limiting deductions for the 98th and 97th percentiles, who are hardly middle class, but also hardly millionaires. Or maybe under Republican leadership we'll start by clearing out deductions that force lower-income families, many of whom don't owe positive federal income tax, to take fewer benefits.

Right now, Washington doesn't need more money and most families can scarcely afford to pay more in taxes without threatening the shallow recovery. Still, it's impractical to think that revenue as a share of GDP will stay this low after the economy improves and interest rates rise and Medicare and Medicaid costs swell for the retiring Boomer generation. Taxes will have to keep rising and we might be running out of space at the top. 

One of the most dangerous misconceptions about the economy right now is that rising student debt and stagnating middle class wages prove that college isn't "worth it" any more

We're pushing up against a cost crisis in higher education, where the escalating price of college isn't reflected in similarly escalating income gains for graduates. But the price of not attending college -- that is, the wage difference between college graduates and high school graduates -- has doubled in the last 30 years. That suggests that the fundamental crisis in college is not costs but, well, advertising --better information in the hands of undecided customers. Getting a degree at a good school has never been more important. The challenge is getting that information to families and teenagers who don't know it, yet.

Poorer families without former college-graduates typically don't have a good understanding of local colleges; the difference between listed tuition price and net cost; financial aid opportunities; or the admissions process. News stories about college being unaffordable only serve to justify their indifference toward continuing their education past high school, according to 2001 report by the Advisory Committee on Student Financial Assistance. A separate study found that low-income teens overestimate tuition costs by 100% and repeatedly underestimate the lifetime gains among university graduates.

So cheers to this simple and revelatory new study from the University of Toronto. Researchers Philip Oreopoulos and Ryan Dunn asked low-income high schoolers in Toronto to take two surveys about the perceived benefits of higher education. Half were shown a simple 3 minute video about the returns of college and asked to calculate their possible financial-aid. "Those exposed to the video, especially those initially unsure about their own educational attainment, reported significantly higher expected returns, lower concerns about costs, and expressed greater likelihood of PSE attainment," the authors reported.

If a 3-minute video about college's internal rate of return does not exactly sound like an incendiary breakthrough in innovation, that's understandable. But the difference it made in these students' impressions of college is a good reminder that a little information can go a long way. For all we study and write about college, the vast majority of the families applying (and not applying) to school have basically no idea how it's meant to pay off. Compared to the level of detail investors receive with a mortgage or a 401(k) plan, a two- or four-year degree is essentially a black hole of data.  

Here's a graph I made last year with help from Kevin Carey that compared the elite "US News" problem of wild tuition inflation among select schools to the "real college problem," which is that more than 60 percent of 21-year-olds aren't currently enrolled in college.

That 60 percent imposes real costs -- not just on themselves, but also on the country -- in the form of lower wages, lower tax revenue, and more welfare services and resources demanded from government. It's fine to point out that college isn't perfect for everybody, or that, like every investment, it has varying returns, or that taking out $120,000 in debt on an art history degree from a mid-level institution is a risky bet. But the obsessive media focus on these kind of stories distracts news audiences from the bigger picture. We have an education crisis in this country that starts with tens of millions of young people who are electing to cut short their education before or just after high school. Solving that crisis starts with information about the real returns to a smart college investment, not scare-mongering.

More »