Derek Thompson

Are sports on TV a good deal? Depends.

If you watch sports, millions of pay-TV households who never click on their ESPN channels are subsidizing your habit. If you don't watch sports, you're one of the suckers paying an extra $100 a year for a product you don't consume.

Out-of-control sports TV costs are receiving a lot of attention these days, and much of the press coverage is misleading, miscalculated, or just plain wrong. Let's divide fact from fiction.

A shocking share of your monthly cable bill goes to sports programming.

TRUE. Here's how your cable bill works. You pay $80-ish each month for cable (just talking TV here, not Internet, which is often included in the bill). About $30 are the programming costs -- the wholesale price of all the channels. ESPN gets about $5 per household per month. MTV gets about $0.39.

Half of your cable-TV bill pays for sports channels.

FALSE. Somehow, this stat, or something like it, made its way into headlines and ledes at the Los Angeles Times and Philadelphia Inquirer and Mother Jones and beyond. It's not true.

Your pay-TV bill is $80. Programming costs are $30. Sports programming costs (all of the sports networks combined) are $12, or more if you live in Southern California, as the graph above from the LA Times shows. Twelve dollars divided by $80 isn't 50% of your bill. It's 15%.

How did the newspapers get it wrong? First, they mistook programming costs for the entire cable bill. Big mistake. Second, they relied on analysis by Craig Moffett, who in September calculated that if you include the high costs of sports rights from TNT, USA, NBC, CBS, and ABC, it's clear that "sports easily accounts for more than half of the cost of a Pay TV subscription." But those are networks that practically every pay-TV customer watches, whether or not he/she likes sports. You could say that TNT "Law and Order" fans are subsidizing TNT basketball fans. But it's also the case that TNT basketball fans are keeping the lights on for TNT original dramas. In short: Channels are bundles, too.

It's all cable's fault.

FALSE. When we get mad at the price of a cable bill, we tend to blame the company name at the top of the bill. It's not that simple. Cable companies make deals to carry channels. Channels make deals to carry sports. Big sports leagues, understanding their unique position in a fragmented media market to be a major audience driver, force channels to pay through the nose for new contracts. 

Here are two examples. In September ESPN agreed to pay the NFL 70% more per game to carry Monday Night Football through 2021. Last week, the LA Times reported a possible deal between the Dodgers and Fox that would be worth 20-times more -- twenty! -- than the current contract. Expensive new contracts means higher costs for channels, who pass the costs to the cable providers, who pass the costs to you. That's why deals like these make sports programming a leading source of your steadily rising cable bill, whether or not you watch sports.

Television's bundling model allows runaway price inflation in sports. 

TRUE. If you pay for cable and hate sports, then ... well, gosh, I'm just really sorry. Actually a better word would be grateful. You're subsidizing my ESPN addiction. Thanks.

Seriously, though, you have the worst of two worlds. Channels competing over sports rights bid up the price of programming. The bundle pricing model means you have no choice but to pay what amounts to a mandatory sports tax. Media companies' all-or-nothing deal with cable providers means you have no choice but to pay at least $100 per year for sports you don't plan to watch.

Some awesome tech company will come along and fix everything.

FALSE. Hopefully you see at this point why there is little that Google, or Apple, or Microsoft, or whoever, can do to make watching TV much cheaper. Google can't force ESPN to pay less for the NFL, or force Fox to pay less for the Dodgers. If tried to compete nation-wide with Comcast and Time Warner Cable, it would stuck with the same programming cost inflation crisis that scares TWC ... plus! It would have to spend an extra $200 billion to build a nationwide infrastructure to move live video.

The evolution of TV is probably going to be much more boring. Maybe DISH will decide it won't pay the high costs that ESPN and regional sports networks demand and will become synonymous will "cable for people who hate sports." That way, households in an area served by DISH and Comcast can choose between sports and not-sports, and if more people choose not-sports, then sports networks will necessarily slow their inflation rate to keep from upsetting sports fans who suddenly get stuck with a higher bill. For now, maybe nothing changes. Time Warner Cable has offered cable packages without ESPN and other expensive sports networks to subscribers in the New York area. According to their press office, most of the people who started with cable-lite eventually upgraded to the full cable package, egregious sports programming and all.

The only thing we love more than complaining about the cable bundle is ... the cable bundle.

Ah, December, time for my favorite Gallup survey of the year: Ranking the most- and least-honest professions. Here they are:

There is no such thing as a Universal Theme of Vocational Trust, but there is something at play here, which you might call The Twilight of (Some) Elites. To over-generalize: Un-elected positions of authority dominate the top of the list, especially in medicine. Elected officials and salespeople dominate the second half.

There are a couple ways to read this. First, we trust people we have no choice but to trust. Nurses and doctors and engineers and professors and priests and psychologists aren't merely professionals, they're experts in fields where expertise comes at a high price. Most of those jobs require significant post-secondary education in something the average person doesn't know much about. We trust their honesty partly because we're rarely in a position to prove them wrong.

On the other hand, in professions where consumers or patients are more likely to have strong opinions -- or feel a real sense of agency -- it seems we're more likely to distrust supposed experts. We choose what cars to buy, what ads to look at, what politicians to elect, what stocks to buy, what insurance policy to purchase ... and choosing between competing options forces us to distrust or disparage the choice we don't make. In particular, we don't trust people trying to sell us something because we know that their objective isn't to provide a service, but to make a sale. More broadly, we don't trust people whose job is to compete with other people for our attention and money. Not sure if that says more about us or them.

More »

The second trend is the "sharing economy" of links on the Web. To a degree that might be unappreciated for people who don't work in journalism, traffic for the vast majority of sites is overwhelmingly dependent on readers sharing our stories: on Facebook; on Twitter; on editorial communities like Reddit and LinkedIn and Hacker News; and on email/chat/dark social. Unless you are one of a handful of destination sites -- the New York Times, the Huffington Post, Yahoo News -- with homepages that push traffic like fire hydrants push water, this social web is your most important source of clicks.

With the advantage of hindsight, it seems The Daily made two fundamental, conceptual errors. First, it built an expensive, subscriber-only newspaper that cost $30 million a year in a weak U.S. economy, in a weak publishing industry, in a troubled News Corp company that is taking its best cross-subsidy for expensive journalism -- its booming TV/movie/video-entertainment business -- and turning it into a separate company, called Fox Group.

The second error is more subtle: The Daily doubled down on the mobile trend to the expense of the sharing trend. The social web is on the Web. The Daily isn't. You can create a web page for a Daily article, but it's cumbersome and renders somewhat awkwardly and isn't ideal for frictionless sharing (i.e.: on most sites, you press a Facebook button and your work is done). News Corp built a populist newspaper away from where the people are. They're on the Web.

Many critiques of The Daily today are saying it failed to carve out a niche and locate an audience. Perhaps. When I subscribed, I found it a good newspaper, with great editors and journalists, that broke interesting stories, and built cool infographics. The trouble is, I didn't want to read it, not because of what it was, but because of where it was: Trapped inside an iPad. Building a $30 million newspaper without significant subsidies is hard to do, no matter where you put it. But it's certainly impossible when you lock it in the app world when traffic on the Internet is all about sharing.

Since 1980, total tax rates have fallen for each income group -- rich, poor, and everybody in the middle. But who got the biggest break?

This fabulous series of charts from the New York Times offers one answer -- and it exactly the group you're expecting. Total tax rates -- that's federal income + payroll + corporate + state/local -- have gone down for poor and rich alike since 1980.

So, we all get a break. But who got the biggest?

Divide the first by the 2010 rate by the 1980 rate, and you get an answer. Taxes fell 5% for the poorest households. They fell about 7% for the typical household. And they fell 14% for the richest households. It is fair to say that between President Carter and President Obama, taxes have fallen by twice as much for the richest families as for the median family.

When it comes to taxes, "fair" is a four-letter word, and one that splits liberals and conservatives. I'd encourage anybody on either side of the debate to go back and study these New York Times graphs to see three points: (1) the richest households pay a growing share of our taxes, because (2) they earn a growing share of national income and (3) the tax code is largely progressive, except for the tippy-top.

______________

*This is true for the mass, mass majority of tax payers. But at the very tippy-top of the income pyramid, it becomes less true. The richest households earn most of their money from capital gains, which are taxed at a lower rate than earned income. In 2009, for example, the average salary of the 400 richest U.S. households was $22 million. Their average capital gains income? $92 million. So that's why the tax code bends back toward regressivity at the very top: We've decided to give investment income a tax break, and the rich happen to earn most of their money from investments.

More »

Anybody see a trend?

GRAPH: 19 of the 20 fastest-growing cities in 2012 were in China; 19 of the 20 slowest-growing cities were in Europe

If you want to see what economists are talking about when they talk about a "two-speed" world, just look at this graph above, from today's Brookings Global MetroMonitor, which ranks the world's 300 biggest cities by GDP and job growth.

The top 50 fastest-growing cities, by GDP per capita, are practically all in the developing Asian world. The top 18 are in China. The rest are in China, Indonesia (Jakarta), India (Chennai), and Australia (Perth).

Of the world's fastest-shrinking cities, 42 of the bottom 50 were in the EU. The others included Dubai, Adelaide, Australia, and Albuquerque.

Entering next year, both the fastest growing and fastest shrinking cities in the world are in countries with big question marks. China's iffy transition from investment economy to consumption economy has some worried about the regions growth and the global commodity boom that supports resource-rich economies like Australia and Peru. Meanwhile, Europe has managed to prevent a depression by enforcing a managed recession on the entire EU. There is no expectation that Europe will grow more than 0.0% in 2013; meanwhile India's growth has returned to its 2007 lows.

But, as the graph at the top suggests, world markets rely on world-leading Chinese growth, and a clear deceleration in its economy -- even if it turns out to be good for wages, workers, and the China's necessary evolution into a modern consumer economy -- would result in hundreds of slower-growing cities around the world in 2013.

To play you out, here are the top ten/bottom ten cities, according to Brookings (every metro in the top chart is in China) ...

The debt ceiling isn't a weapon of legislative restraint. It's a just another cliff -- a Financial Cliff -- that warps Washington into behaving even more foolishly than normal.

There are countless ways to criticize the debt ceiling -- it's a tax on the majority party; a high-stakes yes-or-yes question; a weird, mandatory hostage crisis -- but they all arrive at the same conclusion, which is that it's a really dumb idea.

The case for the debt ceiling might go something like this. Just as cars need brakes, and Ulysses needed a mast, governments need restraints. The U.S. government's ability to borrow debt has no actual limit. We will probably run deficits, large and small, for every year in the life of the republic, just as we have in our two-and-a-half-century history. But we have installed a ceiling for the purpose of forcing lawmakers to reflect on our debt and consider the tradeoffs of borrowing.

In theory, restraint is a nice idea. In practice, here's how it works out.

The minority party votes against the debt limit, stealing the moment to abuse the majority about its policies -- that's why it's a tax on the majority. Then, the party in power votes in unison to raise the limit, because doing otherwise would scare international markets half to death -- that's why it's a high-stakes yes-or-yes question. And then, a few years later, the roles switch, and the abused party because the abuser -- thus re-staging our weird, mandatory hostage crisis once again.

You can think of the debt ceiling as a Financial Cliff. Without a vote, the U.S. automatically defaults on its debt, sending world markets into ... well, actually we don't know. It's never happened. And it never should. But it almost did last year.

In 2011, a peculiarly intransigent Republican Party demanded major concessions in exchange for not destroying the country, which is a clever move, if you can play it. They played it. And the "solution" to the debt ceiling, a Financial Cliff, was to create a Fiscal Cliff at the end of 2012, which we are now debating replacing with an Entitlement Cliff, or perhaps some other Cliff, to force Congress to make more undesirable decisions, at a later date.

If you're thinking this sounds awfully silly, even for Congress, you're right.

The best solution would be to abolish the debt ceiling forever. The second best idea comes from Tim Geithner, who proposed a cure for this madness in his opening fiscal cliff offer. First, he said, give the president the power to raise the debt ceiling. Second, give a two-thirds majority in Congress the power to override the president's decision.

"This almost completely prevents a debt ceiling crisis ever again, while keeping the ceremonial aspect that people like," Joe Weisenthal writes. "There would still be votes, but they'll mainly serve as a way to let politicians play politics, without putting anything at risk."

Exactly right. Lawmakers love talking restraints and responsibilities and prudence. But the debt ceiling doesn't make Congress look like a mast-bound Ulysses. It makes them look like fools. The debt ceiling is bad Washington theater. Let's make a law that treats it as nothing more.

The typical American family spends half its income on housing and transportation. That sounds like a sad stat. But it sits atop a happy trend.

Food and clothes consumed 60% of consumer spending in 1900, but as we found more efficient ways to make burgers and socks, that number fell all the way to 17% in 2003. As a result, in most major cities, we spend the majority of our income on planes, trains, automobiles, and dwellings.

But the overall number conceals incredible variety within the country. In small cities or rural areas, housing can be quite cheap. In the Miami metro area, middle-lower-income families spend a whopping 72% of their income on housing and transportation (henceforth: H&T). In Washington, D.C., average monthly H&T costs are the highest in the nation. But as a share of the capital's high income, H&T is, remarkably, the most affordable of any major city.

Here's a graph compiled by the Center for Housing Policy and the Center for Neighborhood Technology of H&T costs as a share of income for families earning between 50% and 100% of the median income in their city. Florida and California lead the pack...

The study (whose 2006-2010 database probably overstates the cost of housing in the Sun Belt) is chock full of fun facts. Here are some that caught my eye.

The Least Affordable Neighborhood in the U.S.? From the report: "In the Philadelphia region, moderate-income households are faced with average housing and transportation costs exceeding 90 percent of their income in some neighborhoods." Wow.

The Price of Density: Housing in Houston isn't so bad -- it's the 8th most affordable large city to own a home in. But the same thing that helps make it an affordable place to own a home (lots of space!) also raises its commuting costs. Factor in transportation, and it's the 8th least affordable large city to live. On the other hand, dense expensive cities like San Francisco, Boston and New York are considerably more affordable when you add in transportation costs because of their superior public transit.

It's Worse for the Poor: For homeowners earning between 50% and 100% of the median income in each city, H&T costs for homeowners who still owe a mortgage average -- average! -- a whopping 72%. Stated differently: Homeowners whose earnings put them in the second quartile of households pay three in every four dollars in mortgage and transportation.

Nationwide, Housing Grew 2X as Fast as Income: Combined H&T expenses average $30,296 for a median-income household, according to the report. But they're growing much faster than median household income.

More »

So you didn't win the lottery? That's fantastic news, says behavioral economics.

You'll probably find nothing in classical economics that tells you winning $500 million is bad. No sentence, no theory, no lesson. Nada. Money is a pretty good thing. You can use it to buy stuff. Stuff you want. Stuff that will bring happiness to you and the people you love. You don't need an econometrics class to know that sounds alright.

Here's the problem. A fuller understanding of motivation and money reveals a different picture of lottery winners. This isn't your old-fashioned "Money can't buy happiness" lesson.* This is your slightly newer "Winning the lottery can make you miserable" lesson.

To start, there's nothing wrong with buying a lottery ticket, so long as you understand what you're buying. When you buy a ticket in a $500 million lottery, your chances of winning are, roughly, one divided by infinity. You aren't buying a chance to win, because there is really no probability that you will win. You are buying the right to fantasize about winning. And that's okay.

It's winning that can get you in trouble.

Happiness is relative. This fact (or theory, really, since happiness studies is a fluid science) explains all sorts of surprising observations, such as why poor countries are as happy as rich countries; why Americans aren't more joyous than we were 40 years ago, despite considerably more money and better technology; and why, after some time, paraplegics and people who go blind in middle-age report average levels of life satisfaction.

It also explains the downside of awesome experiences -- or what psychologists call peak experiences. "The good thing about peak experiences is that they make us happy while we are having them, but the bad thing is that they then serve as a standard of comparison for all the experiences that follow," Harvard psychologist Daniel Gilbert explained. "When researchers looked at lottery winners, they weren't happier than a control group, but they did take less pleasure in everyday events. The big happiness rush you get when you receive the big check is gone pretty soon, and then when good things happen you find yourself saying, 'That was nice but it wasn't like the day I won the lottery.'"

In a well-known 1978 study from Northwestern University, researchers surveyed a small group of major lottery winners, paralyzed accident victims, and a control group. They found two surprising things about lottery winners. Not only were they not happier than the controls, but also they "took significantly less pleasure from a series of mundane events," which is rather unfortunate, considering that most of life consists of a series of non-extraordinary events. Crucially, it was determined that the lottery winners' blasé attitude was not due to "preexisting differences between people who buy or do not buy lottery tickets," suggesting that the lottery victory itself changed their perspective.

What's going on? It's all about the psychological power of adaptation and relativity with money. Adaptation: At first, the thrill of becoming millions of dollars richer is, well thrilling, but after a while, the thrill wears off. Relativity: Winning the lottery creates an indelible memory, a comparison point, that makes typical life events seem disappointing and boring. Money can buy happiness, if you know how to spend it, but the incidence of winning the lottery does not, on its own, buy much happiness at all. In the long-term, it can be a net cost to life satisfaction.

So, you didn't win the lottery? Of course you didn't. Best news of your life.

____________

*Because it's not true. Money can buy happiness. It just buys less happiness, per dollar, after you blow by $70,000 or so, and people are better at buying what satisfies their momentary urges than what brings them long-term satisfaction.

The problem with budgeting 75 years into the future is that you end up with a lot of numbers that are much more meaningful to actuaries than to other living people

Wanna scare somebody about America's debt on the eve of the Fiscal Cliff? I mean, really scare somebody? Here's a trick. Don't talk about the debt. Talk about "unfunded liabilities."

The U.S. national debt comes out to about $16 trillion today. That's something. But it's nothing compared to the extra $87 trillion in unfunded liabilities to Social Security, Medicare, and federal pensions. Here's how that works. If you add up all of the U.S. government's promises to pay retirement and health care benefits for the next 75 years and subtract the projected tax revenue dedicated to those programs over the next 75 years, there is a gap. A $87 trillion gap -- in addition to a $16 billion hole.

"Why haven't Americans heard about the titanic $86.8 trillion liability from these programs?" Chris Box and Bill Archer ask in the Wall Street Journal. The authors blame the U.S. government for using shoddy accounting and for misleading the American public on their finances. In fact, the most misleading thing about that $87 trillion is the way the figure is often used in the media.

(1) That's not our debt. Our $16 trillion in debt and our $87 trillion in "unfunded liabilities" represent two very different ideas: real past promises and projected future promises. Real past promises are, well, very real. We have to pay back our debt. Failing to do it would be an illegal and disastrous default. Unfunded liabilities are future promises, and, since they're not as real, we can change them whenever we want without destroying ourselves. For example, raising the taxable income ceiling and slowing the growth of benefits could reduce the Social Security gap to zero tomorrow.

And that's if there is a Social Security "gap" to begin with. Technically, it's not legal for Social Security to have "unfunded liabilities" since it can only pay as many benefits as it receives in earmarked taxes. Both it and Medicare hospital insurance are prohibited from spending money they haven't collected from specific revenue dedicated to their programs (i.e.: payroll taxes). It is impossible for either to technically be "unfunded", since they cannot legally outspend their funding.

(2) 75-year projections are scarier than they are informative. Seventy-five-year projections always sound gargantuan because, well, they're calculated over three-quarters of a century, which is an awfully long time to count anything. But here's the flip side: In 75 years, our economy will be massive. Growing slowly at a 2% annual average, our GDP would be $66 trillion in today's dollars in 2087. That's an incomprehensibly big number, too. Once you run out any number over 75 years, the mind starts to boggle. That's good for scaring people with mind-boggling numbers, but it's not so good for informing. When Republicans say unfunded liabilities come out to $520,000 per U.S. household, they're taking a figure from 2087 and dividing it over a 2012 population to exaggerate. Scary, to be sure, but not very informative.

(3) Projections can change fast.  An unfunded liability is a projection, and projections shift all the time for two big reasons: (1) Circumstances change and (2) laws change. Let's take circumstances first: The shortfall in Medicare and Social Security is exquisitely sensitive to just about every demographic trend you can imagine, including longevity, immigration, income growth, and birth rates. Furthermore, it assumes that seven decades of innovation will do nothing to change the rate of health care inflation, which is a brave assumption. We know next to nothing about how medical inflation will change after this decade. The fact that actuaries pretend to know the future doesn't make them oracles. It just makes them dutiful actuaries.

Now, about our laws. Strictly speaking, the U.S. doesn't have an entitlement problem, or even a Medicare problem. Rather, we have a health care cost problem -- medical insurance and hospital costs and so on are getting expensive faster than our ability to pay for them. Medicare and Medicaid are part of this big expensive system. If we cut these programs without changing the system, we won't be "saving" money, so much as shifting costs to old folks, who will be forced to pay much more for their health care, or else see much worse coverage.

What can we do? We can get quantitative, and we can get creative. Getting quantitative means finding the fairest ways to raise revenue and cut benefits to close the foreseeable Medicare gap. Getting creative means firing a quiver of ideas at the health care inflation monster, like exchanges and advisory boards and innovation centers and laws nudging insurers to pay for health outcomes rather than gratuitous services.

Closing this liability gap -- whether it's $87 trillion or $8 trillion -- will require patience. The bad news is that none of these measures to fix our real problem (health care costs) will be easy, few of them will be initially popular, and most of them might not work. The good news is we have 75 years.

More »

If you were a pundit who had to answer every Big Question about politics and economics with the same four-word explanation, what would it be?

Some TV regulars do quite well already with "Taxes are too high," or "I blame Ben Bernanke," or "It's all W.'s fault." It's useful for professional speakers to know more than four words, but if I were playing along, I might go with this: "First, look at demographics."

This answer would do sensationally well for diagnosing President Obama's big electoral victory, where he took women and minorities by historic margins but lost the white male vote by double-digits. Outside of politics, it's even more consistently useful. What's behind health care prices? First, look at demographics: An aging world is driving medical inflation around the globe, in health care systems of all varieties. Why have the last three recoveries been so slow? First, look at demographics: Since women maxed out their own labor-force participation rate, our overall worker-participation ratio has gone flat and started to fall, which hurt our ability to recover quickly from downturns.

We're now in the midst of a great graying of America, where companies that cater to the elderly could see faster-growing opportunities than those that cater to the young. Here's a look at the very, very, long trend: 1950-2050.

Why these four graphs? (1) Cars and (2) Houses -- for which I'm using "living room chairs" as a stretch/reasonable proxy -- power recoveries. Together they accounted for half of economic growth during the 1970s recoveries; one-third of economic growth during the 1981 recovery; and only one-tenth of the latest recovery. Why is this recovery different from all others? Demographics, of course. New car sales rely on a burst of activity from 20somethings. Twentysomethings were the hardest hit demographic in the country, with the highest unemployment and worst income drop on top of student debt.

The most important economic story of the next generation is health care. You can get a good feel for why costs and employment in the medical industry are rising in graphs (3) and (4), respectively. As the Boomer generation moves right along the X-Axis of Life, national spending on drugs will boom along with demand for personal health aides. As health care adds more people (as other industries, like retail, make do with fewer), costs will rise faster than inflation, putting pressure on the government's ability to pay for our seniors' care from a smaller base of taxpayers.

In short, there is no four-word explanation of the world. But you could do much worse than starting from demographics every time.

The difference matters.

It's hard to watch political talk shows these days and not be struck by the guests' deep faith that a Grand Bargain to reduce the deficit will shock the economy into hyper-growth. Trillions of dollars among large U.S. corporations are just sitting on the sidelines waiting for the certainty that only deficit reduction can bring, Honeywell CEO David Cote argued Sunday on ABC's This Week. The panel rushed to agree. On Meet the Press, pundits and politicians sang in unison: Deficit reduction is the espresso shot our lethargic economy needs.

And they might be right. The future is another country, and nobody can say for sure that deficit reduction won't unleash a herd of boisterous animal spirits, first in the stock market, second in the housing market, and finally on Main Street. But they're probably wrong. Deficit reduction isn't stimulus -- borrowing from tomorrow to accelerate growth today. It's the opposite -- sacrificing a bit of today's growth to protect tomorrow's health.

So, let's take a step back and consider why deficits matter, when they can be healthy, and when they can be dangerous.

A SHORT DEFENSE OF TALL DEFICITS

Each year that the government spends more money than it collects in taxes, it borrows the remainder from various sources, including foreign investors, at a certain interest rate. That interest rate goes up and down for many reasons, among them (a) inflation expectations and (b) the relative desirability of U.S. debt. Today, our economy is growing slowly, with little inflation, and we're borrowing in our own currency while many of the safe havens where cautious investors used to park their money before the crash (e.g.: mortgage-backed securities and European bonds) have set themselves on fire. Upshot: The U.S. is financing big deficits at historically cheap rates.

Big deficits are like strong medicine -- necessary when you're sick; unnecessary, even harmful, when you're healthy. Today, the economy is still wheezing faintly -- 1.8% GDP growth for the last two years with ~8% unemployment -- and the Congressional Budget Office has repeatedly said that keeping taxes low and spending high could add up to three points to economic growth by the end of next year.

We won't be sick forever. We're adding 150,000 jobs per month, state-government austerity is over, and housing really appears to be making a comeback. When the economy gets going, inflation expectations will rise, interest rates will rise, and so more of our taxed income will leave the country as interest payments to foreign investors if we don't reduce our deficits. That's bad. Also, there is the outside risk that interest rates could spike, which would force us to choose between high inflation (to make the debt more affordable) or a self-administered recession. That's even worse.

Deficit reduction is an insurance policy against that sort of calamity. We don't know when a debt crisis is coming, or even that it will come. But if we pay a small annual premium with higher taxes and lower spending, we can reduce its likelihood dramatically.

GET SERIOUS

Insurance can be good. Insurance can be important. But insurance isn't stimulus. Paying for flood insurance doesn't make your richer in the short-term. In fact, it reduces your take-home pay. Similarly, deficit reduction takes economic activity out of the economy. So you have to be careful when you choose to adopt it as a policy. If you want to see what austerity does to a weak private sector, look at Europe.

Chief execs claim a Grand Bargain will lay a runaway for the economy's 2013 takeoff. Most job creation comes from rapidly expanding small companies, whose most important concerns are health care costs and local demand. Deficit reduction doesn't really address either right now: Reducing government health care spending probably isn't enough to bend the cost curve, and raising taxes is more likely to hurt demand in the short term, or have no effect. There is always the possibility that a spectacular display of bipartisanship from Capitol Hill will inspire business leaders push billions of dollars off their cash piles into the economy. But I wouldn't hold out much hope.  Multinationals all around the world have been stock-piling trillions in cash for years now, and even the most optimistic deficit hawks can't expect to move global trends.

If we're going to be serious about the deficit, we should be serious about the reasons to reduce it. Growing the economy in the short-term probably isn't one of them. Protecting growth in the long-term is. That's why the best time for taxes to rise and spending to fall is during periods of strong growth, when employment is full, and the economy can stand to lose a bit of steam. Today, however, it is precisely because of our high deficits that U.S. growth has out-paced most of the largest advanced economies despite getting crushed in 2008 (see graph to right). Let's agree to keep deficits very high for at least another year. And then let's buy an insurance policy against that debt crisis when we can really afford it.

Some people complain about "The Media," in the singular, as if it's The Borg taking directions from one mysterious and anonymous force. But they'd struggle to explain the current fiscal cliff debate, which has revealed two very distinct and very opposed financial "media."

If you watched various shows on Fox Business, CNBC, and even MSNBC, you could come away with the impression that the "fiscal cliff" is ready to destroy us, and if Congress doesn't come to a solution by Christmas, the financial consequences will be cataclysmic enough to make the Mayans' prediction look quaint.

Yet, if you surround yourself with economic blogs and online commentary (and certain TV shows) you can come away with an opposite impression: That the fiscal cliff is not a cliff, but a slope; not a cataclysm, but a manageable problem; and that it won't destroy the dollar or push up interest rates, but rather strengthen the dollar, do nothing to interest rates, and possibly have very little effect at all, even if it extends into January, if we resolve it responsibly.

But try telling that to CNBC, which launched its own advocacy movement, "Rise Above," to bill the fiscal cliff as "the most important issue of this time." Some CNBC hosts have relentlessly lobbied Washington to reach a solution -- particularly one that avoids raising taxes, as host Joe Kernens said -- in fear that the markets will crater if we go into 2013 without a deal, with the economy following swiftly behind.

The future is hard to predict. But the evidence suggests that the economy is not going to suddenly collapse next year, even if there is no deal, because tax hikes and spending cuts won't come down like a guillotine (or a cliff) in January.

TAXES. Here's a handy pie chart showing the breakdown of tax increases (in BLUE) versus spending cuts (in RED) from the fiscal cliff. The vast majority of it is taxes. The typical family's income could decline by as much as 4% in 2013 if Congress does nothing.

But Congress won't do nothing. It will do something. And taxes won't necessarily go up starting January 1. As Reuters reports, "the Treasury Department and the Internal Revenue Service have flexibility as to when to implement new, higher taxes. And even if higher withholding rates do take effect in January, they could be retroactively reversed later in the year."

SPENDING. The Budget Control Act calls for $65 billion in spending cuts by the end of next year. But it doesn't say anything about one cent of cuts by the end of January. If we go into 2013 with a deal in the works, but not yet on the president's desk, it's possible that no cuts will happen, no contracts will be canceled, no workers will be fired, and practically nothing will change.

A bad deal could do more damage than the looming presence of a cliff. If both sides agree to let the payroll tax cuts expire, that's a $160 billion hit focused on families in the bottom 80%. If Republicans and Democrats agree on tax increases and spending cuts that shrink the deficit too quickly, it will surely steal from 2013 growth. If Democrats give away a higher Social Security retirement age for practically no revenue, it will mean balancing the budget on the backs of the future's middle-class retirees. This is precisely why you hear so many people in the second "media" above caution that getting the right deal, at some time in the near future, is more important that getting any deal, at some time in the next month.

Getting the best deals starts with understanding the science of prices -- and the games retail companies play to fool us into paying more than we should


The first and last rule of prices is that nobody knows what anything is really worth. Shoppers are guided by shallow clues ("this is cheaper than that") and latent emotions ("it just feels like a good deal") rather than knowledge and deliberate thinking. Smart shopping might be an oxymoron. But smarter shopping? That's a noble goal. Here are 11 tips from microeconomics, behavioral economics, and social psychology to guide you to successful and as-smart-as-possible Black Friday.

(1) Remember Why It's Called "Black Friday." No, not because it starts at 3 am. It's called Black Friday because it's the beginning of the season when many stores go from being in the red to being in the black. That doesn't sound like much of an economic lesson for you, but that's the point. Black Friday isn't for you. It's for the stores.

The biggest mistake that people make on Black Friday is that they assume that the most popular day of the year to shop is the best day of the year to buy anything. If you're walking into a store at 5 AM Thursday morning, you're probably expecting floor-kissing prices in every corner. But store-wide discounts aren't in the best interest of the store. It's more common that a few tantalizing items will be sold at a loss to lure shoppers through the door while smart floor design guides them toward more profitable (even full-priced) items. "Black Friday is about cheap stuff at cheap prices, and I mean cheap in every connotation of the word," Dan de Grandpre, a veteran deal expert, told the New York Times.

Stores know you're making this mistake, and they know how to manipulate floor traffic to their higher-margin stuff. As experts in "retail ergonomics" (it's a thing) have shown, counterclockwise traffic flows result in more spending; putting high-margin items at eye-level to the customers' right is most likely to motivate a purchase; and forcing you to walk around a display is an easy way to draw our attention to items the store wants us to throw in the cart.

(2) The Best Deals Aren't This Week (Probably). The two most common reasons for steep discounts are price discrimination and inventory pressure. Price discrimination is the store saying: "Hey you, cheapo, I know you won't buy this steel pot at $50, so we're selling it at $40. Buy it now!" Inventory pressure is the store saying: "You didn't buy our steel pot at $50, or $40, and now it's taking up overhead and costing us money, so how about $38?"

It's in the stores' interest to make you think prices will go up after Black Friday. But for many items, they probably won't. Instead, as inventory piles up, prices will stay low or go lower in early December. Still, it's better for the economy if more customers buy into the Black Friday hype and behave as though we're in a mini-inflationary cycle where prices on all goods are about to jump. The alternative -- everybody sits on their hands and waits until December 26 to shop for gifts -- isn't particularly good for anybody. Plus, predicting exactly when prices on your single favorite item will be lowest is like trying to buy a plane ticket at its single lowest price. Even our smartest algorithms struggle to do it.

(3) Two Words to Remember: Net Cost. The damage from Black Friday won't be found on your mall receipts. To appreciate the net cost of your shopping trip, remember to include the gas you use commuting from mega-sale to mega-sale, the shipping and handling costs, and the warranties and rebates (much more on those later).

We tend to ignore net cost when we shop because we're focused on the bargain story. Shoppers love stories -- "This skirt was 80% off, EIGHTY!!" -- precisely because we don't know what most items are really worth. Narratives fill the space where knowledge should be. If you drive 40 minutes to a super-sale and sit in a parking-lot line for another 20 minutes, that's an hour of your time and gasoline. That hour might not be part of the story you tell yourself and your friends later. But those are real costs counting against that magnificent 80% discount you found inside.

(4) Make a List. Check it Twice. Shoppers understand that spending a little money makes it easier to spend a little more money. We get a dopamine rush from buying the perfect thing. We also allow past savvy purchases to guide future (dumber) purchases. Making choice after choice depletes our good judgment. This effect, called decision fatigue, exhausts our ability to resist items that feel cheap at the end of a shopping trip.

Keeping track of how much you've spent sounds like sage advice, especially if you're keeping a budget. But be aware that that number will also frame prices in a negative way. Economist Dan Ariely has called this the "problem of relativity." Imagine you see a fetching $50 chair. Would you be more likely to buy it after a $5 lunch or as part of a $500 spending spree? Fifty dollars is $50, no matter how you cut it. But it's easier to swallow when it's "only" a tenth of your total haul.

The best way to overcome decision fatigue and "the problem of relativity" is to write a list and buy only what's on the list. That way you approach Black Friday not as an exploratory mission into the dark world of discounts and window shopping, but as a pure check-the-boxes trip.

(5) Beware of "Free." Something weird happens to our brains when the price for something goes from $1 to $0.01 to free. We stop thinking clearly. Getting things for free feels like such a good deal that we'll go out of our way to get it. Here's Dan Ariely in his book Predictably Irrational:

"A few years ago, Amazon.com started offering free shipping of orders over a certain amount. Someone who purchased a single book for $16.95 might pay an additional $3.95 for shipping, for instance. But if the customer bought another book, for a total of $31.90, they would get their shipping FREE! Some of the purchasers probably didn't want the second book (and I am talking here from personal experience) but the FREE! shipping was so tempting that to get it, they were willing to pay the cost of the extra book."

Free isn't bad. It's good. It's great. It's free! But we're often so enraptured by free that we overreact, tailoring our purchases around getting to FREE! shipping, or FREE! membership, or FREE! headphones, and wind up spending more in the process. Don't do it. Instead, just buy exactly what you want and nothing more.

(6) Warranties and Rebates Are Dastardly Tricks. Price discrimination is most dangerous when you can barely see it. Buying insurance on an electronic toy? Ah, such peace of mind! Rebates? Ah, such savings!

Perhaps. But both are forms of price discrimination. Warranties push risk-averse customers into paying a higher price for the same product.  "[Warranties] make no rational sense," Harvard economist David Cutler told the Washington Post. "The implied probability that [a product] will break has to be substantially greater than the risk that you can't afford to fix it or replace it. If you're buying a $400 item, for the overwhelming number of consumers that level of spending is not a risk you need to insure under any circumstances."

Rebates test customers' memories and willpower. A $10 rebate on a $40 candlestick feels right in the moment. But four months later, when the words "candlestick rebate" flash in your brain at work, are you really going to take time out of your day to save the equivalent of one day's lunch? Retail companies are betting that many of you will answer that question with a "meh."

(7) Avoid the Rush. Your brain is smarter in slow motion. Feeling hurried can force bad decisions in all aspects of life, as nowhere is it true more than a crowded store. When we're bombarded with stimuli, racing to grab cardboard boxes before the frantic mother of five behind us, we forget the key question in shopping: Will I still want this thing when I leave the store?

Thinking about how much we'll regret our purchases can radically change our shopping behavior. A recent study of holiday shopping out of Harvard and Columbia Business Schools devised a mischievous three-part experiment. First, shoppers chose between an expensive or cheap article of clothing. Second, they were randomly divided into groups and asked how much they expected to regret their purchase in one day or ten years. Third, they were released into a mall. The economists found that thinking about short-term regret moved shoppers to buy discounted products. Those primed to take the long view bought more extravagant goods.

One conclusion from the study is that short-term thinking leads to discount hunting while taking a longer perspective on our buying habits motivates us to price quality over bargains. In the frenzied atmosphere of a Black Friday store, we're manically focused on saving money. But a broader perspective might move us to spend more on the few items we really care about.

(8) Beware "Good Deals" on Items You Know Zilch About. I love this story from Priceless by William Poundstone. Once, Williams-Sonoma couldn't sell their $279 breadmaker, perhaps because, you know, it was a $279 breadmaker. But when the company introduced a $429 breadmaker next to their $279 model, sales of the cheaper model doubled even though practically nobody bought the $429 machine.

Plausible Lesson 1: Williams-Sonoma shoppers are inscrutably nuts. Plausible Lesson 2: We don't know what anything's worth, especially weird stuff like breadmakers, so we're more susceptible to cues that tell persuasive stories about what they *should* cost. Don't let that happen! Don't fall for what looks like a "good deal" just because you can justify it to yourself on the basis of "it was 40% cheaper than the other model." Research prices before you allow store cues to give you answers.

(9) The Most Efficient Gift Is the Worst Gift. It's cash. Yes, it's awful. It's cold and bloodless and impersonal and everybody will hate you if you get it for them. It's also extremely efficient for buying somebody exactly what they want for the perfect price. The famous economic paper "The Deadweight Loss of Christmas" showed that gift-giving "destroys" between a tenth and a third of the value in what we buy. That means the recipient of a $100 shirt would value it between $70 and $90. Cash is better.

You can't get cash for that special someone, unless you happen to be dating an economist studying deadweight loss. So best to follow the advice of Geoffrey Miller, the University of New Mexico professor, whose book The Mating Mind informs us the best gifts are "the most useless to women and the most expensive to men."

(10) Waking Up at 2 AM to Stand in Line For Hours Isn't *Necessarily* Crazy. Your shopping experience, like any experience, has a value. In other words, it has a price. It might seem silly for people to waste perfectly good hours of sleep to wait in line at Best Buy. I happen to think it is silly. But it is not irrational, for two reasons.

First, it's another example of price discrimination, since retail stores are essentially gifting their best deals to their most discount-desperate customers. Second, if you love waiting in frigid Walmart lines at 2 AM, well that's just, like, your time-cost preference, man. Maybe the absurd inconvenience of the wait is a part of the story you want to remember and tell friends later. We pay for memories and stories and extreme experiences that will bring us joy later down the line all the time. Maybe this isn't any different. So don't think: While I was sleeping, my friends were wasting their lives for a slim bargain. Think: While I was sleeping, my friends were paying for an entertaining experience with their time.

(11) One Last Thing: Don't Buy That One Last Thing! Black Friday is exhausting. And when you feel exhausted, your brain gets drunk with stupid. It's decision fatigue, it's leg fatigue, it's everything fatigue. Retail stores know this. So they put cheap stuff tantalizingly close to our arms in the checkout aisle. It's so cheap, and small, and cute, I have to have it, your decision-fatigued brain will plead. Don't listen.

The fiscal cliff debate is stirring up all kinds of confused reactions today, ranging from to the merely misguided ("deficits first, jobs later") to the purely delusional ("austerity will fix everything!"). Somewhere in the middle are the "Very Important Businesspeople" who are threatening to stop working in the face of a tax hike of, like, $50.

Meet Kristina Collins (link via Kevin Roose) ....

... a chiropractor in McLean, Va*., [who] said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.

Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.

"If we're really close and it's near the end-year, maybe we'll just close down for a while and go on vacation," she said.

When President Obama says he's going to raise the top marginal tax rate, the key words there are "top" and "marginal." According to the president's plan, every dollar under $250,000 of earned income will enjoy the same tax cut it has today. He's only pledged to raise taxes on income above that level by about 5%. So, if you make $251,000 next year, your tax bill wouldn't go up by $12,000. It would go up by $50. A steak dinner, not a small car.

Basically, Kristina Collins is making a miscalculation that's probably worth tens of thousands of dollars. No wonder she doesn't want to expand her company.

An economic journalist needn't play financial adviser for his sources. But the distinction between marginal and total rates is confusing and ought to be made clear to readers. If thousands of small business owners like Mrs. Collins are operating under the presumption that Obama wants to raise taxes on every dollar of income for rich households, some might choose to keep from expanding their businesses. That's not just bad for their hypothetical new employees. It's bad for them! If not understanding the tax code is preventing you from working, that right there is ignorance making you poor.

The generous interpretation to my neighbor Mrs. Collins and her husband is that they do understand marginal rates, and have simply decided that they don't value income taxed at 40% above $250,000 as much as they value vacation time. That's fine, vacations are great, and money only buys so much happiness, and so on. But something tells me she -- like many other VIBs -- doesn't understand marginal rates, and her ignorance, passed along by the New York Times as dispassionate reporting, stands to make thousands of people poorer if they, too, don't full appreciate the meaning of the term marginal.

__________

*I don't know Kristina Collins, but I grew up in McLean, Va., which is a medium-sized D.C. suburb, and I'll be back there for Thanksgiving, so maybe if I catch her at that Starbucks off Chain Bridge Road, I'll let her know about the marginal rates.

More »

In the new math of college sports -- where new schools plus new TV-paying households equals more money -- the Big Ten knows it's gotta be bigger than ten

The Big Ten is about to expand to 14.

The University of Maryland and Rutgers are set to join twelve other schools in the Big Ten conference in 2014, in a move that is making football traditionalists apoplectic. College sports isn't typically in the purview of the Atlantic's Business page, but this particular story isn't really about Rutgers football, or Terrapin basketball. It's about economics. Television economics, pure and simple.

In college football, as in professional football, money equals audience. And the most valuable audience is the one watching you on TV. That's why the Big Ten was brilliant to start its own cable channel, the Big Ten Network, dedicated to following college sports for the millions of Midwestern alums living nostalgically through their alma maters on TV. 

THE NEW MATH OF COLLEGE FOOTBALL

Cable channel make money in two ways: (1) advertising and (2) the small cut of your monthly cable bill. For most BTN subscribers, that small cut is $1 per household. That's one dollar, each month, from your checking account to the Big Ten, through the TV.

Stop right there. Stop thinking like a college fan who wants to preserve the 1980s-era conferences, and start thinking like a television executive. I just told you that every pay-TV household with BTN is worth one dollar a month. The obvious question is: How do I get more of those folks? Answer: You expand into more television markets where people haven't had any reason to care about the Big Ten, yet. Each time the Big Ten adds a school in a new city, the Big Ten Network adds a market. So, more schools, more schools!

The University of Maryland, which just announced it would join the Big Ten in two years, sits in a local market around Washington, D.C., with more than 3 million households paying for television. Let's say Maryland joins the Big Ten, and BTN negotiates with those local cable providers to get the same deal it's made in the Midwest. That's a cool $36 million for the conference "before the first ad gets sold," Andy Staples writes.

We haven't even gotten to the point where the Big Ten renegotiates its licensing rights with other networks in 2017, where larger guaranteed audiences yield larger paychecks. In 2011, the Pac-12, another mega-conference, sold a little more than a 100 annual basketball and football games to ESPN and Fox in exchange for $3 billion over 12 years. In four years, the Big Ten will get even more.

THE GOOD NEWS

Does it make you sick to think of amateur athletes creating billions of dollars of wealth for their schools? Maybe it should. But if you're seeking silver linings, think of it from the perspective of a middle-income college student from Baltimore facing the prospect of rising public college tuition. In May, the University of Maryland narrowly escaped a "Doomsday Budget" that would cut education spending and forced the school to reduce services and raise tuition. Similar budget cuts have been one of the most important drivers of tuition inflation at public schools around the country.

There is a debate whether college football is a net gain, or net leech, on most university budgets, but one thing is for certain: It's not going anywhere. And in an atmosphere of tight money, one ought to hope for a college football program that pays for itself and the new science labs rather than a college program that pays for itself by shuttering the old science labs.

The Home Economy is strong. It's the Away Economy that's got issues.

The American consumer is the most optimistic s/he's been since before the Obama presidency. Meanwhile, large U.S. companies are cutting spending at the fastest pace since the Great Recession.

Who's right about where we're heading, the pessimists or the optimists? Both.

For the moment, imagine two American economies. The Home Economy and the Away Economy. In the Home Economy, there is mostly good news to report, so long as Washington doesn't screw it up. GDP growth and job growth have been steady, if slow, for more than three years. Consumer spending is healthy. Housing indicators are turning up all over the place, like home prices, home starts, home sales, and construction employment. It adds up to the possibility of accelerating job growth and a recovery worthy of its name in 2013. Small businesses sentiment, which relies less on world markets and more on the animal spirits of the neighborhood, is still higher than it was for most of 2011.

Meanwhile, in the Away Economy, there is a world of precarious, scary, and outright depressing news, which is weighing on large corporations that tend to make more than half of their income from customers outside the U.S. GE and Pfizer, for example, are listed in U.S. stock indices. When their prices fall, it looks like a reflection of the U.S. economy. But both companies make more than 50% of their revenue abroad, and Apple makes more than 60% outside the Americas. When the world catches a cold, multinationals sneeze ... even if the typical U.S. household is feeling alright.

Today's bad news in the away economy fits mostly, but not entirely, into three buckets: (1) Demand from Europe, which is a continent-wide recession that could turn into a continental depression; (2) Demand from China, which could slow as it re-balances its economy toward household spending and away from government investment; (3) The fall in commodity/energy prices, which is a combination of secular trends, like plentiful natural gas, and a perceived slowdown in energy-intensive economies (namely Europe and China).

(Yes, there is also the issue of the fiscal [topography metaphor here], which is raising uncertainty and stress on Wall Street, but also will almost certainly be resolved in a way that doesn't dramatically change taxing and spending levels in 2013. Meanwhile, there is still the fact that equipment, software, and construction investment has been declining among major corporations for the last four quarters, not just the last week and a half.)

In the real world, the home and away economies aren't entirely separable. When worldwide copper prices go up, and Caterpillar receives orders for more earth-digging machines for Peru, they'll hire more workers in their Milwaukee plant, who will spend more on local dry-cleaning and coffee, boosting businesses whose work has nothing to do with copper. These aren't two distinct economies, so much as two halves of the same global machine.

But it's important to distinguish between home and away when you're making sweeping statements about the U.S. economy, as if it's a single body fighting a single cold. The swooning stock market of the past few weeks is not a sign that we're veering toward a double-dip. Instead, it's a reflection of a global investment market made queasy by a steady drumbeat of bad news from around the globe. Here at home, the news is good enough that some resilience from multinationals with some deal-making from Washington should manufacture a strong 2013 economy.

More »

When the economics of superstars meets the Internet, your reach is much bigger than your revenue

Here's a big (and basically defensible) statement: The App Economy is today's most successful broad-scale innovation revolution. The iPhone, which didn't exist in early 2007, unleashed an international competition to fill our phone screens with square baubles that used the phone's Internet connection, location-based technology, camera, and design intelligence to creates applications that far exceeded even Steve Jobs' wildest dreams. As a result, our smart phones today are better little computers than practically any of the big computers that existed just five years ago. 

The App Economy isn't merely delightful, it's also an economic juggernaut that's created more than 400,000 jobs and a multi-billion-dollar business where there was, very recently, nothing. That's the good news. The bad news is that in the App Economy, as in every hit-making business, there is the top 1% and there is everybody else. For a taste of the App Economy's inequality: Of the $6.5 billion that Apple has paid to app developers, only 25% made more than $30,000 and 4% made more than $1 million.

It's the Economics of Superstars law, applied to apps: In a crowded international field, small differences in talent can translate to huge differences in outcomes. The most popular photo app, Instagram, was bought by Facebook for $1 billion. The 10th best photo program probably isn't worth 1% of that figure, since networking effects will encourage users to cluster around the most popular apps. But the wealth is in the reach. Just as in music, where a global audience for the top artists vastly increases the number of markets where they will make money, the international market for smart phones (Apple sells more than 60% of its iPhones outside the Americas) means that the small number of big hits will find an audience around the world.

There's the Internet Corollary to the Economics of Superstars law, which is as true for apps as it is for music. When you're selling something very cheap, or even free, over the Internet, there is an unpredictable relationship between audience size and income. A New York magazine profile of the band Grizzly Bear showed that, in the brave new world of music-everywhere, you can simultaneously be popular enough to sell out Radio City Music Hall and middle-class enough to live in a small Brooklyn apartment without health care thanks to the paltry returns of music popularity. Here was the magazine's breakdown of the expected income of a beloved indie band (at $0.005 per stream, you could hit 1 million streams before making as much as getting a song attached to one small indie film):

Fortunately for developers, the App Economy has something that the music industry doesn't: The support of venture capital firms who buy equity in promising apps with the expectation that ad money, or something else, will follow audience. Some of these bets will pay off for VC firms, and some won't (venture capital is in the hit-making business, too). But since many of these bets are made with the expectations that somebody somewhere will figure out the model for monetizing mobile attention, it's not alarmist to suggest that the longer big companies like Google and Facebook struggle with mobile ads, the smaller VC's appetite for some apps will become. In that case, the bright and growing app economy will learn what the music industry is learning: Your big audience doesn't mean what you think it means if nobody is paying.

More »

Quick reminder: The difference between liquidation and extinction is like the difference between a fire sale and an actual fire

There are two reasons why you should pay $50 for a box of Twinkies online. First: You are the world's only Twinkie addict and the 7-11 is closed. Second: You are a billionaire sitting on a pile of money you've resolved to donate by the most bizarrely random means possible.

Since those are low-probability motivations for buying a sponge cake, I'm guessing that many of the people bidding $50 for a box of Twinkies think the liquidation of Hostess will spell the End of Twinkies, in which a dwindling supply of the soft golden food-bricks will drive up their market price.

Nice try, but this confuses liquidation for extinction. Hostess is going out of business. That means it's selling its assets, not setting them on fire.

The Twinkie will almost certainly survive when some company buys it as a distressed price in the Hostess fire sale and continues to produce the awful little snacks. Among the leading contenders: Kellogg, Campbell Soup, and Grupo Bimbo -- the parent company of Sara Lee, and Entenmann's, and other snacks only somewhat less artery-stuffing than a Twinkie.

On the other hand, I suppose a behavioral economist could cheekily point out that, since price has been shown to change "experienced pleasantness" (i.e.: we have a tendency to report that food tastes better when it's more expensive), the poor sap who spends $50 on a box of creme-filled starch-manufacturing might report the most delicious-tasting Twinkie in the world.

More »

We're living through a unique time in history, when the most important innovations, created by some of the country's smartest thinkers and hackers, are basically free

Recessions breed innovation. That's a smart lesson to draw from the 20th century.

Alexander J. Field called the 1930s "the most technologically progressive decade of the century." It was the decade that invented the television, popularized the washing machine, and accelerated our railroads.

In this Great Recession, some of the most visible innovation has been around smart phones and apps. The first iPhone was released in June 2007, six months before the downturn officially commenced. Since then, the "app economy" has grown into a $20 billion business responsible for more than 450,000 jobs. The recession and slow recovery will be remembered as the time when Twitter went from fringe microblog to publishing powerhouse; when Facebook went from private fascination to public juggernaut; and when Dropbox and Square were born.

But what's distinct about many of these innovations is that, unlike the generation of inventions that came out of the 1930s, they're basically free. Phones cost money, data plans are expensive, and Internet connections aren't cheap. But the software products and smart phones apps that some of this generation's smartest young men and women are dedicated their lives to building cost nothing or next to it. Users might considers that observation obvious. And it is. But it's also really, really weird.

The app economy -- a basically free technology revolution that costs nothing to users except our attention -- happened to arrive as millions of people had very little to pay for new products. It was the perfect tech revolution for the perfect moment: Software being the cheapest means of reaching a wide audience; venture capital firms being hungry for hot new services and apps that used software to capture millions of users; and then dangling somewhere in the distant future, the promise of monetization.

Some of these app companies will make money, either because they get customers to pay, or get advertisers to pay, or get some third party to pay for the customers' information. But many won't.

It's possible that venture capital firms will continue to support apps and software companies until they reach an audience and have to start thinking about making money. After all, inventing an app isn't like inventing the toaster: The first connects on a global platform that already exists (the Internet, the smart phone) and the second requires an expensive and labor intensive global supply chain to build and ship across the world. As a result, you can build a global software product with just a handful of great engineers, which makes it much easier to sell your product for next to nothing.

But it's also possible that as some of the app economy's monetization windows start to close as venture firms turn sober on online and mobile advertising, engineers and entrepreneurs starting a company will have to charge users more (or charge users earlier) for their program. In that case, we'll look back at this period as as unique breath of time when some of the smartest hackers and thinkers worked on innovations that were free to their hundreds of millions of users.

More »