Category Archives: Business and Economy

Would new local taxes on large tech firms really cause them to leave Silicon Valley?

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Several communities in Silicon Valley are considering levying special taxes on large companies, possibly affecting some of the biggest tech companies:

Cupertino, Mountain View and East Palo Alto have begun to ponder new taxes based on employer headcounts — levies that could jolt Apple and Google — and if voters endorse the plans, a fresh wave of such measures may roll toward other corporate coffers.

Alarmed by traffic and other issues brought on by massive expansion projects, the three Silicon Valley cities are pushing forward with separate plans to impose new taxes that could be used to make transit and other improvements…

A lot of factors point to this being a prime time for efforts such as these. San Francisco ranked fifth worst for traffic congestion in the world — and third worst in the U.S. — last year, according to INRIX Global Congestion Ranking. Record housing prices in 2018 boosted the median price of a single family home in the Bay Area to a record $893,000 in April, according to a CoreLogic report.

Federal tax cuts also have improved the balance sheets on an array of U.S. companies, large and small. Silicon Valley’s largest tech companies have contributed to the gridlock on freeways and soaring housing costs as they’ve grown rapidly in recent years, with brisk hiring and expansion in unexpected areas and mega-leases that gobble up huge swaths of office space.

If this works the way that some would argue it does, then the local taxes will be viewed by the tech companies as an unnecessary burden for their operations. They should then consider moving elsewhere where they are not subject to such local taxes. Indeed, if they wanted to move sizable operations, they could probably get numerous communities to offer them tax breaks.

However, this assumes that the local taxes are the primary factor that determines where companies and organizations locate. Instead, there are a variety of factors that both support and work against staying in their current location. I assume these are important reasons for why Apple, Facebook, Google, and others are in this location: the construction and maintenance of large headquarters, proximity to other like-minded organizations, an talented employee pool nearby, and the proximity to major cities like San Jose and San Francisco. Are local tax issues more important than these other concerns? Probably not. And even if they are, it would take some time before a large organization could significantly alter their operations in response.

McMansion ad campaign aimed at McDonald’s

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Burger King has a new advertising campaign that shows off one particular feature of the purported McMansion backyards of McDonald’s executives:

Each of the company’s newest print ads, designed by an agency called DAVID Miami, claims to show what was once the lavish backyard of a real McDonald’s executive, the kicker being that each yard also appears to contain a grill.

“Flame grilling is hard to resist,” read the words printed over each grilling apparatus, the suggestion being that McDonald’s executives themselves preferred a flame-grilled patty…

AdAge reports that some of the photos were taken from real estate listings, meaning these particular grills may not have necessarily belonged to the “retired McDonald’s director” or “retired McDonald’s president” who may have used those backyards.

The primary emphasis is on the grill, a staple of many an American backyard. American homes and summer has long been associated with a male homeowner taking raw meat to the backyard and cooking it on the grill as the family plays and gathers around.

Of course, these are not just any grills or any homes. The news story includes three ad images. The grills look rather long – so they likely have more than four burners – and they have a stainless steel exterior. (In one image, there appears to be a Green Egg next to the stainless steel grill.) Given that these are grills supposedly owned by executives plus they are located at large homes, these are likely expensive grills.

Beyond tying McDonald’s executives to expensive grills, this also connects them to undesirable homes: McMansions. While the purpose of the ads is the grills, these grills are in front of expensive and large homes. But, they are not just mansions – they are McMansions. I’m not sure if there is a larger message here or not: should McDonald’s feel shame about having derided homes named after their restaurants (the Mc- prefix)? (Compared to the fast food of Burger King, this seems like a better pitch for places like Five Guys or Smashburger that would claim to have a more premium burger.) Does this suggest their executives have bad taste? Does this mean Burger King executives have nicer homes?

 

When bricks and mortar stores can’t make it even in Manhattan

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Heart of one of the world’s leading global cities, Manhattan has its own struggles with keeping brick and mortar retailers in operation:

That’s right: On a nine-block stretch of what’s arguably the world’s most famous avenue, steps south of the bustling Time Warner Center and the planned new Nordstrom department store, lies a shopping wasteland.

Yes, there are bank branches, restaurants, fast-food outlets, theaters, Duane Reades, a vitamin shop and a few tourist-targeted “discount” stores. But mainly there are oodles of empty spaces covered with signs touting SUPERB CORNER RETAIL OPPORTUNITY.

The same crisis blights the rest of Manhattan. The people invested in storefront retailing — real-estate developers, landlords and retail companies themselves — tell us not to worry. It’s a “transitional” situation that will right itself over time. Authoritative-sounding surveys by real-estate and retail companies claim that Manhattan’s overall vacancy is only just 10 percent.

But they are all wrong. Bricks-and-mortar retail is shrinking so swiftly and on such a wide scale, it’s going to require big changes in how we plan our new buildings and our cities — although nobody wants to admit it.

This is an interesting argument to make: even with all of the tourists, wealth, and attention bestowed upon the borough, retail is disappearing from Manhattan. And if shopping disappears, with shopping being one of the favorite leisure activities of Americans, might this negatively affect the business and social life of a Manhattan used to ultra-busy sidewalks?

On the other hand, Manhattan may not be the best example. The median household income in Manhattan is not as high as one might expect, there is not much of a middle class, and the cost of living is high. Add in that Manhattan does have a lot of tourists, workers that arrive for the day and leave at night, and concentrations of residents in different parts of the island. The sheer density of people might suggest that retailers should be able to make it in Manhattan but it is a complicated place.

More broadly, what will tourist locations of the future look like if even more shopping is done online? For decades, the international tourist destination includes significant amounts of shopping. What would fill that space?

Speculation: more Americans choose to pursue unretirement to find meaning

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Various data points show more Americans continuing to work even when do not need the money at retirement age:

Unretirement is becoming more common, researchers report. A 2010 analysis by Nicole Maestas, an economist at Harvard Medical School, found that more than a quarter of retirees later resumed working. A more recent survey, from RAND Corporation, the nonprofit research firm, published in 2017, found almost 40 percent of workers over 65 had previously, at some point, retired…

Even more people might resume working if they could find attractive options. “We asked people over 50 who weren’t working, or looking for a job, whether they’d return if the right opportunity came along,” Dr. Mullen said. “About half said yes.”

Why go back to work? We hear endless warnings about Americans having failed to save enough, and the need for income does motivate some returning workers. But Dr. Maestas, using longitudinal data from the national Health and Retirement Study, has found that the decision to resume working doesn’t usually stem from unexpected financial problems or health expenses…

Researchers note that older workers have different needs. “Younger workers need the paycheck,” Dr. Mullen said. “Older jobseekers look for more autonomy, control over the pace of work. They’re less concerned about benefits. They can think about broader things, like whether the work is meaningful and stimulating.”

One of the primary ways that adult Americans find meaning is in their jobs. Not only does a job help pay the bills, a job has become a reflection of who you are. Think of that normal question that leads off many an adult conversation: “What do you do?” With a shift away from manufacturing and manual labor jobs, service and white-collar jobs can encourage the idea that our personality and skills are intimately tied up with our profession.
Put this emphasis on an identity rooted in a job or career together with a declining engagement in civic groups and a mistrust in institutions. Americans are choosing to interact less with a variety of social groups and this means they have fewer opportunities to find an identity based in those organizations. We are told to be our own people.
Imagine a different kind of retirement than the one depicted in this article: older Americans finish a long working career and then find time to get involved with extended family life or various causes, secular and religious, where they can provide both expertise and labor. Where would many congregations or civic groups be without the contributions of those who are retired and now can devote some more time to the public good? What if the child care needs that many younger families face be met with grandparents who could consistently help? What if retired Americans could regularly mentor children and teenagers who would benefit from wise counsel and a listening ear? That is not to say there are not plenty of retirees who do these things; however, this approach involves a broader look at life satisfaction that goes beyond a paying job.

Subprime mortgages still around

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Although they do not appear to be anywhere near the common product as they were in the 2000s, subprime mortgages are still available:

Financial Times reports that subprime mortgage bond issuance doubled in the first quarter of 2018 compared to a year ago, going from $666 million to $1.3 billion. Furthermore, it quotes a financial analyst predicting that issuance for the year will hit $10 billion, which is more than double the $4.1 billion issued last year. For context, the value of American subprime mortgages was estimated at $1.3 trillion in March 2007.

Since the financial crisis, mortgage-backed securities have been almost entirely issued by government-sponsored mortgage facilitators Freddie Mac, Fannie Mae, and Ginny Mae. And since the financial collapse, those organizations have refused to insure subprime mortgages. The Dodd-Frank regulation passed after the collapse put tight rules around subprime lending that for awhile effectively killed the practice.

But over the last couple years, specialty firms have jumped back into the subprime market, rebranding it as “noprime.” Investors hungry for bonds with higher yields have generated enough demand for those loans to be secularized, just as they were in the run-up to the financial collapse. The result is a rapidly expanding subprime mortgage market.

That subprime mortgages would seep back into the market right now is curious, given the current state of housing. The slow pace of new home construction and few existing homes for sale has led to an inventory shortage that has pushed home prices well out of reach for many low- and middle-income prospective homebuyers.

Subprime mortgages could be lucrative for some, even if it is now widely recognized that they are not a good idea in general for potential homeowners or the broader market and society.

I think the bigger question is whether subprime loans could once again become a mainstream product. What if the housing market continues to be sluggish or potential buyers have a difficult time securing conventional loans or the market suddenly heats up and lots of people want mortgages? Even with the fallout and the long recovery after the burst housing bubble of the 2000s, someone within the next decade will make a public plea for loosening regulations on subprime mortgages or will suggest subprimes are a necessity for serving certain portions of the market.

Could governments ever stick to “nonaggression pacts” involving companies?

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As companies like Amazon look for good deals from local communities, one economist suggests non-aggression pacts:

It’s hard to draw conclusions about how much local economies gain from fulfillment centers and whether incentives are warranted from the experience of individual towns or counties, said Tim Bartik, senior economist at the Michigan-based W.E. Upjohn Institute for Employment Research.

Fulfillment centers likely do benefit the surrounding community, but the gains may be modest compared with other types of economic development projects that could generate more business for local companies, Bartik said. The jobs have modest wages, limiting the amount workers would potentially spend at local retailers, and warehouses generally don’t patronize local suppliers, he said…

He advocates states form “nonaggression pacts” to contain costs of incentives that simply shift jobs from one part of the country to another, though he acknowledges those pledges are unlikely to stick.

“The next company comes along, and they decide it’s an exception,” Bartik said. “We haven’t seen one that’s really survived.”

Here are at least four arguments I could imagine people making against such pacts:

  1. Competition is central to the American economic system. Why shouldn’t local communities be able to offer whatever they want to attract a company or development? Having and sticking to such pacts is collusion by communities.
  2. If companies cannot get good deals from communities, they will leave the country. This would not make much sense to me as the American market is a pretty lucrative one but it could apply more for certain companies or industries.
  3. Local officials need to be able to show local results, not that they are cooperating with other places. They want to be able to say that they brought specific jobs or benefits to their community, not that the whole region is benefiting (though this may be true).
  4. What is good for companies is good for communities and America. This is a tricky argument all around: thriving companies are important yet it is much harder to figure out whether firms are helping communities in the ways they should. (This is an open question these days involving Walmart, Amazon, and tech companies.)

Perhaps the best argument that could be made for such pacts is that the general public – in the abstract – wins if companies are unable to obtain massive tax breaks or incentives for certain actions.

For better or worse, the decision Amazon makes about where to locate its second headquarter will keep this issue in the spotlight for a long time.

Can you be opposed to Walmart in your community but not Amazon?

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Alana Semuels compares the fight of Greenfield, Massachusetts and other New England towns against Walmart and other big box stores to a struggle with shopping on Amazon. The story begins and ends with an activist who led the fight in Greenfield against Walmart:

Al Norman has been fighting to keep Walmart and other big-box retailers out of small towns like this one for 25 years. He’s been successful in Greenfield, his hometown and the site of his first battle with Walmart, and in dozens of other towns across the country—victories he documents on his website Sprawl-Busters, an “International Clearinghouse on Big Box Anti-Sprawl Information.” Partly because of Norman’s efforts to keep out such stores, Greenfield still has a Main Street with dozens of businesses, including a bookstore, a record store, and Wilson’s, one of the last independently owned department stores in the country.

But Norman and business owners in Greenfield are noticing that the Main Street stores are now struggling in the face of another force that’s become more and more powerful in recent years: e-commerce…

But the challenge posed by online shopping to local businesses is immense. Even Al Norman, who refuses to shop at Walmart, says he doesn’t have the same aversion to Amazon, in part because he thinks the internet is the future of shopping. His wife has a Prime account, and he recently ordered tea from the website when he couldn’t find it locally, he said, adding that he has no plans to organize protests or zoning meetings about Amazon. He doesn’t love the idea that some of his money is going to Jeff Bezos, “the richest human around,” as he refers to the Amazon founder, and so still shops locally whenever possible. He doesn’t know whether he’ll still be doing that in a decade. When he launched the first campaign against Walmart in Greenfield 25 years ago, he led activists with bumper stickers that said, “If you build it, we won’t come.” He knows the same can’t be said for Amazon, because shoppers, including him, are already there.

Can a community oppose Walmart and not Amazon? Here are some of the common complaints against Walmart and other big box retailers:

  1. Land use, particularly the large parking lots and the contribution to sprawl and driving as well as issues with water and open space.
  2. A negative influence on local businesses. Walmart’s prices and options made it an attractive place to shop compared to local small businesses.
  3. A detrimental effect on local social life, ranging from decaying downtowns that used to be at the center of civic life to low wage jobs affecting health care systems and local wealth.
  4. The wealth generated by large corporations located somewhere else with little visible impact on communities where stores are located.

Do these same concerns apply to Amazon? They could: Amazon’s warehouses and other facilities take up space, it certainly affects local businesses, it encourages less social interaction as you can shop from home, and Amazon has tremendous revenues (and its founder, like the Waltons, have tremendous wealth). But, it seems like the fact that Amazon is “somewhere else” compared to the big box stores – the physical footprint of Amazon touches fewer communities that all the locations of Walmart, Target, Home Depot, and others – means that people can support it without feeling as bad about its negative effects on communities. Because it is viewed as being online, Amazon is an issue for only some communities and not many.

Yet, I think an argument could be made that Amazon and other online retailers can shape local conditions even more than big box stores or other local retailers. The Internet makes it possible to act as if we are in a completely placeless world (even though this is not true) and to leave certain problems for others to solve in other places. Only in certain circumstances, like when cities fight to offer Amazon a great tax break or deal in order to become home to a second headquarters or groups in Silicon Valley express frustration about mammoth tech headquarters, are we reminded that even Internet companies affect communities.

To be consistent, big box retailers and Internet retailers both threaten local communities and smaller businesses. One may be more obvious than others and they offer different kinds of conveniences but both can contribute to a less civically minded and placed America.

The double-edged sword of record home prices in many American metro areas

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The housing bubble of the late 2000s may be long gone as housing prices continue to rise:

Prices for single-family homes, which climbed 5.3 percent from a year earlier nationally, reached a peak in 64 percent of metropolitan areas measured, the National Association of Realtors said Tuesday. Of the 177 regions in the group’s survey, 15 percent had double-digit price growth, up from 11 percent in the third quarter.

Home values have grown steadily as the improving job market drives demand for a scarcity of properties on the market. While prices jumped 48 percent since 2011, incomes have climbed only 15 percent, putting purchases out of reach for many would-be buyers.

The consistent price gains “have certainly been great news for homeowners, and especially for those who were at one time in a negative equity situation,” Lawrence Yun, the Realtors group’s chief economist, said in a statement. “However, the shortage of new homes being built over the past decade is really burdening local markets and making homebuying less affordable.”

Having read a number of stories like this, I wonder if there is a better way to distinguish between economic indicators that are good all around versus one like this that may appear good – home values are going up! – but really mask significant issues – the values may be going up because many buyers cannot afford more costly homes. The news story includes this information but I suspect many will just see the headline and assume things are good. Another example that has been in a lot of partisan commentaries in recent years (with supporters of both sides suggesting this when their party was not president): the unemployment rate is down but it does not account for the people who have stopped looking for work.

In the long run, we need (1) better measures that can encompass more dimensions of particular issues, (2) better reporting on economic indicators, and (3) a better understanding among the general populace about what these statistics are and what they mean.

Amazon jobs vs. no jobs in American cities and suburbs

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With Amazon expanding in many locations across the United States, are these the kinds of jobs communities should seek? Here is the conclusion of one recent discussion of the issue:

It’s true that cities desperate for jobs may find it difficult to attract companies if they pass minimum-wage mandates or other labor laws. But the alternative, it seems, is jobs that don’t create a middle-class lifestyle for residents, which in turn affects local spending, the housing market, the tax base, and leads to a poor standard of living. Many cities, San Bernardino included, are calculating that any job creation is good news. They may soon find that with Amazon, that calculation does not apply.

This is not a new issue although Amazon might be the most visible manifestation of concerns right at the moment. Walmart has and still does face such questions. Fast food and retail jobs as larger categories attract this scrutiny at points.

For two reasons, I do not see most American communities during down these jobs, even if they are not ideal or even good positions of employment.

  1. Every politician from the local to federal level wants to promote job creation. It is still hard to have a deeper conversation about the kinds of jobs being created. What tends to matter are the numbers. If you are the politician who can claim adding jobs (and very rarely is this the result of one person or a short process), you have a powerful political weapon.
  2. What is the alternative to not accepting these jobs? Companies might move right over the border. This happened in Chicago when they insisted on certain with Walmart. The company responded by opening locations right over the border and the jobs and revenues went to other communities. If a community turns down jobs, will they be able to attract others? Until we have either regional cooperation where sets of communities set these conditions or states pass overarching regulations (or a third option of universal basic income?), individual communities will be forced to make tough decisions: promoting less than ideal jobs or possibly having no jobs.

This issue will continue whether with Amazon or other companies.

Comparing the costs of tearing down versus renovating a home

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Could it cost less money to buy and teardown a home than to renovate it? Here is one data point from a 2015 story about teardowns in the Chicago area:

The teardown candidates aren’t just tiny bungalows this time. Developers are targeting larger houses as well, particularly if they sit on coveted property. Antiquated plumbing, the absence of upscale amenities such as media rooms, and the high cost of gut rehabbing (roughly $300 a square foot, versus $200 for new construction) are pushing homes on North Shore lots near the lake into early retirement. Two properties that sold for around $4 million each in 2014—one in Wilmette and one in Winnetka—are on their way to the scrap yard, says Berkshire Hathaway HomeServices KoenigRubloff agent Joseph Nash. Both were on three-quarter-acre lots with private beaches, and the Winnetka house had seven bedrooms—big and nice, but apparently not nice enough.

At various points, I’ve thought about what might happen to much of the aging suburban housing stock in the United States. Many of those homes, small or large, will be slowly renovated over time. Depending on the neighborhood as well as the desirability of the individual homes, renovation could take place at faster or slower rates. Yet, will there be a point when many of the older suburban homes will be demolished? How long can they be maintained or renovated? If they need to be demolished, who has the money to replace them and if they are replaced, will the residents be able to stay?

From an economic perspective, presumably the money spent renovating the older homes will at some point surpass the cost of building new ones (that may also be of better quality and more up to code) and living in those. Yet, this ignores a lot of features of homes and their construction:

  1. They are part of neighborhoods and communities. People often enjoy having a certain character when they purchase in a particular place. This character is often related to the homes present as well as to a unified character on streets.
  2. Some will want to keep renovating them. (Clearly, however, others will not – hence, we have teardowns.)
  3. They may be able to last a lot longer than critics gave them credit for. (One of the common complaints about mass produced suburban homes is that they are of poor quality. While this may be true, it does not necessarily mean that they are uninhabitable or cannot be improved over the decades.)
  4. Replacing large swaths of suburban housing requires both foresight and funds. Who is willing to look that far into the future? Who has the resources to undertake large projects in this domain rather than working with the occasional house here and there?

For now, most of the news we hear about replacing suburban homes tends to be in wealthier communities where teardowns are desirable. This may change in the near future.