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The Problem With Rewards Credit Cards

2025-07-24T10:18:00-04:00

I don’t mean to shock you, but being a coal miner at the turn of the 20th century was not super fun. The work was dangerous, unpleasant, and low paid. The industry was extractive and poorly regulated. The people who ran it could be irresponsible and indifferent to human suffering. Also, the shopping was abysmal—when you wanted groceries or new clothes, you generally had to buy whatever was available at the company store, often using scrip: fake money issued by your employer as credit against a future paycheck. Even if you felt like you had consumer choice, you were really locked into a closed system run by one company, your life weirdly governed by something sort of similar to—but fundamentally different from—actual money.

I was thinking of the coal miners because Chase recently changed the terms on its highest-end consumer credit card, the Sapphire Reserve. Most notably, the annual fee increased by nearly 45 percent, from $550 to $795. That hike was theoretically to be offset by an increase to the card’s rewards, which are now purportedly worth $2,700 annually, offered not in the form of legal tender but rather as a long and complex list of credits, many of them issued in the conditional tense. For example, you can get $500 off stays at hotels—if those hotels are on a special list picked by Chase, and if you book for at least two nights. And the credits are actually meted out in chunks, so to get the full reward, you need to book two different stays: one in the first half of the year, the other in the second. You also get a host of similarly caveated coupons to Chase’s corporate partners—Apple, StubHub, DoorDash, Lyft, Peloton. The line item advertising $300 in DoorDash promos reads like an ancient riddle: You can get up to $25 off each month, though only $5 can be used on restaurant orders, and $20 can go to two separate grocery or retail orders. (I have omitted the asterisks, of which there are many.) It is technically possible to save money—if you can figure out how to do it.

To be clear, being a coal miner in 1903 was pretty different from being a high-net-worth individual in 2025. But not completely different: As coal mines did for their miners, today’s credit-card issuers have essentially invented their own fiat currency—“points,” usually—that can be redeemed only within their apparatus, for rewards the company has designated, at an exchange rate that it can change at will. Three out of every four credit cards are now rewards cards: They are how Americans, especially rich ones, shop. As the cards get more popular, though, reaping their benefits is becoming harder and more like homework. Last year, the Consumer Financial Protection Bureau reported a 70 percent increase in complaints about points-issuing credit cards since 2019: The agency found card issuers hiding complex redemption requirements in fine print, forcing borrowers to use janky proprietary portals to book rewards travel, and failing to resolve technical glitches or customer-service issues, among other things. The report concluded that 82 cents out of every dollar in rewards that American credit-card holders earned in 2022 went unclaimed at the end of the year—a 40 percent increase since 2019. In effect, credit-card companies are selling consumers a book of coupons they are unlikely to use.

The Sapphire Reserve is a fascinating product. It costs money, but it’s not exactly something you buy. You can’t sell it, because it has no inherent market value. But it comes packaged like a $10,000 watch and is advertised via perplexing billboards designed to make the card look like a high-fashion accessory, which maybe it kind of is. At any rate, the message is not subtle: This is a fancy card for fancy people. It enables the purchase of luxuries, and is itself a luxury.

When the Reserve was introduced, in 2016, the highest-status credit card on the market had been the American Express Centurion, which you may know from rap music and James Bond as the Black Card, and which was available by invitation only. The Reserve, though, required only decent credit and a willingness to shell out for a sizable annual fee. It kicked off a new era in spending money: “That’s where we really saw this premium-card market go mainstream,” Nick Ewen, a senior editorial director at the credit-card-review website The Points Guy, told me. The Reserve, and cards like it—most notably Capital One’s Venture X and American Express’s Platinum—had high fees, high rewards, and high-spending customers who dined out and traveled a lot. Like the Centurion, they signaled exclusivity, but in a different way: The Black Card’s conspicuous consumption largely involved shopping; the new cards were for consumers who prioritized experiences. They advertised by using imagery of hot urbanites at restaurants and on vacation, their lives rich with money but also adventure. “What they did was they made it about your values,” Stephanie Tully, a consumer-behavior expert at the University of Southern California, told me. Wealth wasn’t just about how much you had; it was about how you spent it. Literally.

[Read: There are two kinds of credit cards]

And spending is what card issuers are hoping you will do. The Reserves of the world generally make money not from the interest on unpaid balances but from transaction fees charged to businesses. In other words, these cards want you swiping. They encourage it by offering benefits—fat introductory bonuses, cash back on all kinds of purchases, ungettable restaurant reservations, access to airport lounges. Recently, they have gone beyond flat-rate rewards and added more and more complex, hyperspecific perks onto the pile, partnering with businesses that are happy to offer the card companies a discount in exchange for access to their customers. Card issuers have also increased their annual fees, presumably betting that people will either not notice or not care, and that they will happily trade real money for fake money, or at least the promise of it.

Rewards make the consumer feel in control and empowered, as if they’re making money even while they spend it. They reduce what behavioral economists call “pain of payment”: They make parting with your wealth feel fun, as if you are a video-game protagonist collecting magic stars, even when you are buying diapers or booking flights to a funeral. Rewards seem somehow different from normal currency. “It’s not your income minus your expenses; it’s just this extra pool of money that has been accumulating through other things that you do,” Tully told me. “It feels like free money”—like a windfall or winning the lottery, even if you paid hundreds of dollars for the right to earn the rewards in the first place. In a 2024 poll, 37 percent of rewards cardholders said they’d spend less on their cards if points weren’t offered.

In 2023, the CFPB received 1,200 complaints about credit-card rewards across a number of brands. Cardholders report that rewards are devalued, denied, disappeared, or fine-printed to oblivion, their actual redemption details dramatically different from their marketing materials. They are often subject to dynamic pricing; sometimes, a card’s portal will glitch, and the number of points required to book a flight or hotel will spike. Sometimes, the airport lounge that a customer is theoretically entitled to is full, crowded with all of the other people who are also trying to maximize their rewards. Sometimes, dealing with it all is just too complicated—hence, all of the unredeemed credit-card points.

[Read: A fancy card is becoming the only way to get a restaurant reservation]

Of course, nobody emails the government about how much they love their credit card, and an unredeemed point is not necessarily a wasted one. Still, Ewen has noticed that his readers—who presumably have a more sophisticated understanding of credit-card rewards than the average person—are having a hard time figuring out how to use theirs. People are so flummoxed by the logic puzzle of spending their points that they sit on them, something he called “analysis paralysis.” But, he told me, that’s not a great strategy, because card companies reserve the right to change terms whenever they want. Suddenly, points that were worth $300 might be worth much less. The Points Guy’s official stance on rewards is “earn and burn,” Ewen said: “Points are not a long-term investment.”

Ewen has 24 credit cards, and he loves to get the most out of them. Every year, he sits down and crunches the numbers to make sure he’s made back his annual fee on each of his cards. This is both his job and his hobby—he’s a points guy! But not everyone is. “For some people, it absolutely is kind of like a game,” Tully said. But, she said, even for the people who don’t think about credit-card points for a living, “it can become a job almost.” Consumers, she continued, need to weigh “how much time and effort they want to put into their credit cards when they’re choosing what credit card to buy.”

Fancy cards are like coupon books or miners’ scrip, but they are also, in this sense, more like high-end gym memberships. The commodity they offer is access to a rarefied place, one where everyone else is attractive and competent, putting in the work and reaping the rewards. The product is a subscription to do more work—it’s a tax on laziness or a deposit on your future self’s conscientiousness. But it seems to me that credit-card companies, and gyms, know something consumers don’t: Everybody thinks they’ll be a more diligent person tomorrow.

The Worst of Crypto Is Yet to Come

2024-10-30T07:00:00-04:00

Cryptocurrency has been declared dead so many times that its supposed demise is a running joke within the industry. According to the website 99Bitcoins, the obituary of crypto’s flagship token has been written at least 477 times since 2010. A round of eulogies occurred last year, after several crypto-trading giants, including FTX, collapsed, and the Securities and Exchange Commission filed a barrage of lawsuits against major blockchain companies. “Crypto is dead in America,” said the tech investor Chamath Palihapitiya on the All-In podcast in April 2023. Publications including The Wall Street Journal and The Atlantic wondered if the technology was, once again, kaput.

So we shouldn’t be surprised that crypto is back. What’s shocking is just how back it is. The total market capitalization of crypto assets this year has been within striking distance of its all-time highs in 2021. The crypto sector has been the biggest political donor in the current election cycle, surpassing even the fossil-fuel industry, with contributions flowing to candidates from both parties. In May, the House of Representatives passed a bill that included many of the policy demands of crypto lobbyists, while the Senate rolled back guidelines by the SEC designed to protect consumers of cryptocurrencies. And both presidential candidates have flirted with crypto enough that, no matter who wins in November, the market could be on the brink of a deregulation-fueled bonanza.

How did crypto bounce back so fast? Part of the answer is pure smashmouth politics: The industry started spending gobs of money—at least $130 million to date—to elbow its way into this year’s congressional races. It has also refined its sales pitch. Since the FTX meltdown, the industry has been making efforts to distance itself from the Sam Bankman-Fried school of charm. Gone are the mussed hair and grandiose talk of altruism and saving humanity. In are the MBAs and lawyers, the Ivy Leaguers who know how to speak the language of Washington persuasion. The industry’s message now: Make crypto normal. Regulate us, please. All we want is to know the rules of the road. They highlight the most mundane, inoffensive applications of crypto, while condemning the scammers who tarnish the industry’s reputation and avoiding mention of the “degens,” or degenerate gamblers, who represent much of crypto’s actual demand.

[Annie Lowrey: When the Bitcoin scammers came for me]

But the truth is that the scammers are only getting bolder, finding new creative ways to rip off retail investors. Should the crypto lobby get its way, the new regulatory regime will clear a path not just for the industry’s “respectable” wing but also for the wildcatters and criminals. If you thought crypto was a problem before, you should be alarmed. The worst is likely yet to come.

The crypto industry insists that its goal—the reason it’s spending ungodly sums of money to sway elections—is to be boring. Nothing to see here. Crypto companies say they merely seek “regulatory clarity.”

This phrase is, to be generous, a sleight of hand. Companies don’t just want clarity; they want a particular set of rules. Currently, crypto exists in a state of regulatory limbo. The SEC says that most crypto assets are securities, defined as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” The paradigmatic case is a share of stock in a publicly traded company. Securities are subject to a lot of rules: You can only trade them through a registered exchange, and issuers have to disclose a bunch of information about the underlying companies. That way, investors can make informed decisions about which securities to buy and which to avoid.

If digital assets are indeed securities—a position that some federal judges have accepted, at least one judge has questioned, and is currently being tested in a number of ongoing enforcement cases—then crypto operations would have to behave like other Wall Street institutions. Companies like Coinbase, for example, would need to separate their brokerage services—that is, helping their customers buy and sell tokens—from their exchange services. (This is one aspect of the SEC’s pending lawsuit against Coinbase.) Plus, crypto operations could no longer launch overnight—not legally, at least. They’d have to register with the SEC and issue thorough disclosure documents before allowing the public to invest, a burdensome and costly process that would weed out a huge share of dodgy crypto schemes with no sound business model.

The main plank of crypto’s bid for normalcy is that tokens should be considered commodities, not securities. What could be more boring than a commodity? Wheat, orange juice, coffee beans, livestock: Commodities are interchangeable, and you can trade them with other people directly. The crypto lobby says tokens are clearly commodities, since they’re fungible like bags of corn and do more than just go up and down in price. For example, users can spend tokens as “gas” to interact with a blockchain or participate in the governance and upkeep of the blockchain; they don’t merely rely on “the efforts of others.” (The SEC agrees that bitcoin is a commodity, since unlike almost every other crypto asset it has no central issuer.)

Classifying cryptocurrencies as commodities would bring them under the purview of the Commodity Futures Trading Commission, rather than the SEC. The CFTC has been friendlier to crypto, going so far as to advocate for controversial deregulatory measures pushed by FTX. It’s also much smaller, with roughly one-sixth the budget and staff. With the CFTC in charge, the SEC’s long list of pending cases would disappear, and we’d probably see a lot fewer prosecutions of crypto companies.

Consumer advocates argue that exempting crypto from securities laws would make it easier for Americans to buy risky digital assets: Not only would exchanges like Coinbase and Kraken be likely to offer fringier coins—they’d be harmless commodities, after all—institutional investors like pension funds might see the new rules as a stamp of approval to dive into crypto. Hilary J. Allen, a law professor at American University who studies financial regulation, told me that designating cryptocurrencies as commodities would create a loophole that non-crypto companies could exploit. “Slap a blockchain on it,” she said, “and you too can be free from securities regulation.” Dennis Kelleher, the CEO of the nonprofit Better Markets, told me the real reason the crypto industry doesn’t want tokens to be classified as securities is that disclosure rules would expose them as financially dangerous. “If you had to fully and truthfully disclose the risks associated with crypto, the people who would engage in crypto would be near none,” he said.

The industry deflects such arguments by downplaying its chaotic history and focusing on its more mundane use cases: stablecoins, for example, which are designed to maintain a fixed value and can be used for instantaneous peer-to-peer transactions, particularly cross-border remittances, and as a hedge against inflation. (Argentina has seen growing adoption lately.) Or, even more boring, “decentralized physical infrastructure networks,” or DePIN, which employ blockchain technology to reward users for providing public resources such as data storage or Wi-Fi.

But the rules the industry is pushing would also juice some of crypto’s most degenerate schemes. The breakout hits of 2024 are fundamentally just new ways to gamble. Polymarket, the platform where wagers are made exclusively with crypto, has taken off this year thanks to interest in betting on the election. “Tap-to-earn” games such as Hamster Kombat have surged in popularity, luring users with rewards in the form of tokens. The apotheosis of speculative crypto insanity, though, is the website Pump.fun. On Pump.fun, anyone can create a memecoin instantly—all you need to do is select a name and an image—and the site creates a market where people can buy and sell it. One recent top token was named after the internet-famous baby hippo Moo Deng. Inevitably, creators are going to absurd lengths to promote their tokens: One guy posted a photo of himself apparently using meth. Another suffered burns after shooting fireworks at himself during a livestream.

The industry doesn’t foreground these casino-like use cases, but it implicitly blesses them. Speculation is normal, advocates say. In fact, it’s what drives innovation in the first place. “Speculation, taking risks—that’s what fuels the economy,” Kristin Smith, CEO of the Blockchain Association, told me. Sheila Warren, CEO of the Crypto Council for Innovation, says that allowing people to buy and sell tokens isn’t about whether crypto is good or bad. “I don’t necessarily know that it’s net positive or negative,” she told me. “I think it’s about the ability of people to determine what they want to do with their own money.”

The biggest degen of all is on the ballot. Donald Trump clearly has no idea what a blockchain is, but he understands that it’s related to money, which seems to be enough. He has declared himself “the crypto president.” In July, speaking at a bitcoin conference in Nashville, he pledged to make the United States “the crypto capital of the planet” and called crypto “the steel industry of a hundred years ago.” In September, he stopped by a bitcoin-themed bar in New York City and spent $950 worth of bitcoin on a round of burgers and Diet Cokes. Trump has also announced his involvement in a new crypto platform called World Liberty Financial. While the details of the project are hazy, it would apparently offer a stablecoin. (The project’s launch last week saw low demand and extended outages.)

[Read: The Trump sons really love crypto]

The industry is salivating at the prospect of a Trump win. Trump has said he would fire SEC Chairman Gary Gensler, create a “strategic national bitcoin stockpile,” and free the American cybercriminal and crypto hero Ross Ulbricht from prison. Any Trump-affiliated crypto project, such as World Liberty Financial, would operate in a legal gray area unless Congress passed the new regulatory regime the industry is asking for. In other words, he has skin in the game. “It’s clear Trump would be very positive for crypto,” Smith, the Blockchain Association CEO, said.

How a Kamala Harris administration would regulate the technology is less clear, but her recent statements have given crypto fans hope. In September, she promised to help grow “innovative technologies” including “digital assets.” Then she announced that she would support regulations that enable “Black men who hold digital assets to benefit from financial innovation” while keeping those investors “protected”—a strange and careful framing that implicitly acknowledged how many Black men have lost money on crypto. These comments could just be campaign rhetoric meant to fend off attacks by the crypto lobby. But they show that Harris is listening to the industry’s arguments, particularly those couched in the language of opportunity and equity. Harris is, if nothing else, sensitive to the direction of political winds. If a newly crypto-friendly Congress were to pass the industry’s desired legislation in a bipartisan way, a President Harris might feel great pressure to sign it.

And even if Trump and Harris do nothing to help crypto, the technology has by now proved its indestructibility. As if to drive home the point, 99Bitcoin’s obituary tracker seems to have dropped off this year. The last entry is from April. I messaged the site’s owner to ask if he was still updating it. He didn’t respond.

A Bogus New Rationale for Trump’s Economic Agenda

2024-10-28T14:02:00-04:00

Perhaps the most levelheaded defense of Donald Trump’s misguided plan for steep global tariffs is that they’ll never be imposed. Trump surrogates have lately been assuring the business world that the former president will, if elected, use merely the threat of across-the-board import taxes of 10 to 20 percent to pressure other countries to lower their own barriers to American goods. The result: freer trade among participating nations, and more revenue for American companies, without ever firing anything more than a warning shot.

Howard Lutnick, a billionaire co-chair of the Trump transition, recently made a version of this argument on CNBC, using the auto industry as an example. “If we said, ‘We’re going to tariff you the way you tariff us,’ do you think they’re going to allow Mercedes and all these Japanese companies and Porsches and BMWs to all of a sudden have 100 percent tariffs in America?” he said. “Of course not. They’re going to come and negotiate, and their tariffs are going to come down, and finally Ford and General Motors are going to be able to sell in these places.”

The idea that the White House can use import restrictions to affect foreign governments’ policies is not entirely without precedent. Research shows that from the 1970s through the early 1990s, various administrations sometimes succeeded in prying open foreign markets by threatening tariffs or other protectionist measures. A reasonable case can even be made that Trump’s 2019 promise to slap 10 percent tariffs on Mexican imports helped push our southern neighbor to cooperate more fully on restricting illegal immigration.

Trump’s new global tariff threat, however, would likely be far less successful, and would impose significant costs even if the tariffs were never applied. The “just a threat” strategy sounds nice in the abstract but in reality suffers from fatal flaws: It ignores not only America’s checkered history of such gambits but also the economic damage that threats alone can inflict on the American and global economies.

[David Frum: Trump’s plan to raise your taxes]

The occasional tariff-threat success stories are exceptions to a broader negative trend. In a comprehensive analysis of every U.S. unfair-trade investigation from 1975 to 1993—91 cases targeting foreign discrimination against U.S. goods, services, and intellectual property—Kimberly Ann Elliott and Thomas O. Bayard found that American efforts to pressure foreign countries to open up their markets were successful less than half of the time. The authors’ definition of “success” was generous to U.S. officials: It could include just the partial achievement of U.S. objectives and result in no actual trade liberalization. Even then, the wins occurred mostly when a single country was dependent on the U.S. market—a situation that applies to only a few countries today—and during a short period in the mid-1980s, when the U.S. had far more economic heft in global markets than it has now. (China in 1991, for example, shipped almost one-third of its exports to the United States; today, the number is about 15 percent.) When the U.S. government actually applied trade restrictions, moreover, the strategy worked only twice in 12 tries. In the other 10 cases, foreign governments did not acquiesce to American demands; despite new U.S. protectionism, they kept in place the policies and practices to which Washington objected.

Trump-era trade actions have encountered similar difficulties. No nation lowered its tariffs on U.S. goods in response to tariffs imposed, or merely threatened, during the Trump administration, and most of those U.S. tariffs remain in force today. Even worse, several foreign governments—in China, the European Union, India, Turkey, Canada, Mexico, and Russia—retaliated against U.S. exports, which in some cases remain depressed. Since then, Trump’s “Phase One” deal with Beijing, signed in early 2020 and hailed as proof that the tariffs were working, because China had agreed to buy American farm goods and open certain domestic markets, has fizzled out; China has largely failed to follow through. And, as the current U.S. Trade Representative Katherine Tai just confirmed, the China tariffs have not changed Chinese government policies or behavior.

Overall, a recent analysis of the Trump-era retaliation shows that “a one percentage point increase in foreign tariffs was associated with a 3.9 percent reduction in U.S. exports.” So Trump’s previous strategic tariff experiment resulted in less trade, not more, and America is still paying for it.

Just the threat of a tariff also can inflict considerable economic costs, because it increases uncertainty for business, which has been found to reduce U.S. investment, output, and hiring. An unpredictable policy environment gives private companies an incentive to stay out of the U.S. market until policy is clarified, resulting in a lower level of current economic activity overall. Numerous studies have confirmed these effects, but they’re really just common sense: Who would want to wager millions of dollars on a new U.S. facility that might soon face higher production costs, or be unable to sell products abroad, thanks to possible tariffs?

Various measures of what economists refer to as “trade policy uncertainty,” or TPU, spiked during Trump’s time in office as he routinely announced or teased radical changes to U.S. tariff policy on Twitter. According to one index, average TPU during the Trump administration was the highest recorded under any president since 1960, when the series began. A study in the Journal of Monetary Economics estimated that the increase in Trump-era uncertainty reduced aggregate U.S. investment by $23 to $47 billion in 2018 alone.

American trade law compounds this uncertainty by giving the president broad and ambiguous power to quickly impose new tariffs without congressional input or approval. As my Cato Institute colleague Clark Packard and I detail in a new paper, following the Smoot-Hawley tariff debacle of the 1930s—in which Congress dramatically increased U.S. protectionism and thereby set off a global trade war that deepened the Great Depression—the legislative branch delegated much of its constitutional trade authority to the executive. Congress assumed that the president, with national constituency and foreign-affairs responsibilities under Article II, was less likely to repeat Smoot-Hawley. This approach to U.S. trade policy making worked reasonably well for 80-plus years, but Trump (and, to a lesser degree, Joe Biden) exposed a key flaw: The laws at issue are so broad and ambiguous as to allow a president to unilaterally impose or maintain damaging tariffs on dubious grounds.

[Rogé Karma: Reaganomics is on its last legs]

Over the past seven years, moreover, U.S. courts have rejected every challenge to the Trump-era tariffs on steel, aluminum, and Chinese imports, and to the laws under which the tariffs were imposed. Judges have proved to be particularly deferential to the executive branch in cases alleged to involve “national security,” a term so broad and undefined that one Trump-administration lawyer famously refused to concede that it couldn’t apply to imported peanut butter.

Given this precedent, the next president will effectively have a green light to impose new tariffs—and dictate U.S. trade policy—with little concern that the other branches of government will stand in the way. Any such tariffs, as well as their size and scope, will thus come down to the whims of one person in the Oval Office, who might be Trump. Future courts might find global, across-the-board tariffs to be fundamentally different from past actions and thus beyond the bounds of whatever law was used to justify them, but that outcome is far from guaranteed. Until Congress changes the law, trade policy will be vulnerable to abuse and will therefore continue to thicken the fog surrounding trillions of dollars in annual U.S. trade.

That fog is, unfortunately, again building up as trade-policy uncertainty has climbed back to levels not seen since Trump’s time in office. His victory next week would likely boost uncertainty even more, with inevitable collateral damage to the U.S. investment climate and economy. Indeed, with reports of corporate angst and delayed investment already proliferating, the damage appears to have already begun.

The Most Opinionated Man in America

2024-10-25T07:00:00-04:00

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Mike Solana has opinions. Here are a few of them: Building stuff is good. The media are unduly harsh on tech companies. Labeling things as “misinformation” is just an excuse to stifle speech. Donald Trump is “the greatest clown in human history” (though not entirely in a bad way), the court cases against him are “fake show trials,” and J. D. Vance would be “a great guy in the White House.” The siege of the Capitol on January 6 was a “riot” like many others the previous year. Also, the Capitol rioters should have been shot. (He later retracted this one.) Kamala Harris is a joke of a presidential candidate, but it’d be fun to get a drink with her and gossip about members of Congress. The Democrats are “no longer a free-speech party.” Fewer people should vote. Germany is “a very stupid nation,” but France is cool. Marvel movies are good. Cats are bad. The moon should be a state.

Solana has shared these views—and many more—on Pirate Wires, the newsletter turned website that he started in 2020, as well as on his podcast of the same name. He’s also prolific on X, where he lobs takes to his quarter-million followers and trolls his haters—mostly on the left—from behind his distinctive avatar, a portrait of Ulysses S. Grant, and where Elon Musk regularly replies to his posts.

I was curious to see if the corporeal Solana matched the online version. When we met up at his favorite dive bar in Miami, where he lives, he did not disappoint, riffing on topics as varied as immigration (we need to slow it down to allow for assimilation), gay identity (it doesn’t make sense as a category), and his theory that the Marvel villain Thanos is a typical “environmentalist” because he wants to eliminate half the human population. Solana delivers his spiels with a sunny, earnest energy; with his large eyes and lively brows, he looks like a friendly Pixar dog. So it’s a bit jarring to hear him hold forth on, say, why liberals hate themselves.

For years, Solana played a supporting role in the tech world, serving as the chief marketing officer for Founders Fund, Peter Thiel’s venture-capital firm. Solana calls Thiel his mentor, and says he owes his career to him.

Solana started Pirate Wires during the pandemic and has built it into a small media company covering tech, politics, and culture. After raising money from Thiel and Founders Fund, among others, in 2023, he hired a handful of staff. The Pirate Wires free daily newsletter now has 100,000 subscribers, mostly young men, according to Solana. (He would not disclose how many readers have signed up for paid subscriptions, which provide expanded access to the site.) It has become a must-read among Silicon Valley’s anti-woke crowd, including some of tech’s most influential figures, and a grudging should-read for journalists and some on the left trying to glimpse the thinking of the masters of the Thiel-verse.

Solana’s rise corresponds with the ascent of a new political ideology in Silicon Valley, one that mixes pro-tech, anti-media, and Trump-curious sentiments. To the extent that Pirate Wires has a thesis statement, it might be Solana’s pinned post on X: “I just want us to be fucking amazing.” From his perspective, the good guys are the ones trying to build stuff, while the bad guys are the ones getting in the way. These bad guys take many forms: regulators, censors, scolds, environmentalists, and “decels.” Solana doesn’t think the stuff the good guys build is always good. They can create phones that addict people, apps that spy on them, or—perhaps worst of all—generative-AI tools that refuse to show white people. But Solana trusts their motivations, and he thinks we should hear them out.

“Technology is neither good nor bad,” he told me. “I think that it just changes the world, and there’s always a trade-off. And the question is, is it worth the trade-off? And I think most of it is.”

Solana rejects efforts to categorize his political views. He used to be a libertarian, then he was a Marxist, then he became libertarian again, only more so. Now he says he’s open to government taking a role in problem-solving—“I’m fine with taxes,” he said—and considers himself a pragmatist: “I just want things to work. I just want a new rail system. If I have to be left-wing, sure, I’ll be left-wing until the rail is finished. And then what else do I want? I want crime to be illegal. Is that right-wing? Okay, I’ll be right-wing then.” In practice, Solana articulates a politics that could be described as less pro-Trump than anti-anti-Trump. It’s often a matter of emphasis: Whatever the right might be doing wrong, the left’s reaction is worse.

Pirate Wires itself is a mix of opinion essays by Solana and others, interviews with major tech figures such as Jack Dorsey and Palmer Luckey, and reporting on tech and San Francisco politics largely from a left-critical perspective. Solana said his target reader is “a smart guy in tech or business, in his 20s or 30s, who feels a little disaffected by the conversations around him and craves community with like-minded people.” The message seems to be: We’re having more fun than you. Join us.

For now, Solana is juggling Pirate Wires with his day job at Founders Fund. To his detractors, this fact suggests that Pirate Wires is simply the house organ for Silicon Valley billionaires. But Solana stresses that the site is separate from the investment firm—Thiel has no editorial control—and says he wants it to be more than just an “anti-woke New York Times op-ed page.” “I want to be generating real news about the industry,” he said. Whether that’s possible while conducting friendly interviews with allies and taking orders from Thiel by day is an open question.

Solana’s favorite movie is The Matrix. He was 13 when it came out, in 1999, and what resonated most, besides its philosophy, was its portrayal of camaraderie. “I think everybody wants to feel like they’re in this secret crew with special knowledge about the world, right?” he said. “You’re looking at this dystopian environment and you’re thinking, Wouldn’t it be cool if I was there?”

Solana grew up in a cramped house on the Jersey Shore, the son of a teacher and an on-and-off construction worker. He got mediocre grades until senior year of high school, when, he said, he decided to pay attention in class and became an A student. “This feeling of being the smart one in class became super addicting,” he said. “I loved being better than everybody else.”

At Boston University, Solana grew irritated watching other kids coast. “I used to wreck people in class,” he said. This was his Marxist phase. Solana explains himself during that period as “a boy who realized he wanted to date other boys in the Bush years and needed a place to go where people said, There’s nothing wrong with you.” But then one day in class, he was arguing against property rights when he realized that he didn’t believe what he was saying. He turned back to libertarianism.

After college, Solana took an internship at Farrar, Straus and Giroux and then a job as an editorial assistant at Penguin Books in New York City. The imprint where he worked, TarcherPenguin, specialized in titles on metaphysics, the occult, and other offbeat topics. Mitch Horowitz, who was then Tarcher’s editor in chief and has written several books on the occult as well as hosting the Discovery series Alien Encounters: Fact or Fiction, told me he felt an affinity with Solana. “I knew the experience of feeling like an outsider,” Horowitz said.

In 2009, Solana read an essay by Thiel called “The Education of a Libertarian,” in which Thiel lays out a vision for how to “escape” politics by means of the internet, outer space, and living at sea. (It’s the essay in which Thiel famously wrote, “I no longer believe that freedom and democracy are compatible.”) Solana reached out to the Thiel-backed Seasteading Institute—an organization dedicated to establishing semiautonomous ocean-based communities—and offered to work for free. He began organizing meetups in New York, and Thiel came to the first one. “He said he had a book he was working on but didn’t know anything about publishing,” Solana said. “I was like, ‘Great—I know everything about publishing.’”

[Barton Gellman: Peter Thiel is taking a break from democracy]

Solana moved to San Francisco to work for Thiel, who needed help preparing to teach a Stanford class on start-ups. Solana and another young colleague would stay up late creating slides, download them onto two thumb drives, and commute separately from San Francisco to Palo Alto in case one of them hit traffic. The class was a digest of Thiel’s business philosophy—including the idea that monopolies can be good and “competition is for losers”—and became the basis for his best-selling book, Zero to One.

Solana wasn’t an obvious fit for Founders Fund. He felt intimidated being surrounded by experts in investing and engineering. But the company didn’t have a PR department, so Solana took up the task, in addition to organizing events and running the firm’s branding. He was also doing his own writing. In 2014, he published a sci-fi novel, Citizen Sim, and got a starred review in Kirkus Reviews. But he largely avoided writing about politics. “It felt much bigger than me,” Solana said of his fiction. “I didn’t want to poison that with my own opinions.”

That gradually changed after the 2016 election. “I was like, I’d follow this man to hell,” Solana said, of Thiel. “And then he endorsed Trump, and I did.” Solana was never exactly a Trump fan, but he found the left’s reaction to Trump’s presidency hysterical. “Trump’s purpose was the same as a court jester,” he told me. “He existed to throw the curtain back and point at the reality of what our government is and how it functions and what we’re capable of and what America is right now.” Solana started tweeting more, and his tweets were sharp and unvarnished. (“Imagine being as good at anything as germany is at fascism”; “journalists don’t miss gawker, they miss power.”) His follower count grew.

In March 2020, he created a podcast called Problematic and soon started writing a newsletter. Solana says the name Pirate Wires came to him as if it were a memory. (The protagonist in his sci-fi novel has a similar experience when discovering his powers.) It evokes various antecedents: pirate radio, digital piracy, piracy on the high seas—romantic rule-breaking for fun and profit. He stopped worrying about his political opinions hurting his career as a fiction writer: “I realized that this was my work.”

Illustration by Adam Maida

In June of this year, Solana published a manifesto titled “We Are the Media Now.” In it, he tells the familiar story of how, over the past two decades, news organizations went from comfortable businesses subsidized by classifieds to click-hungry digital-content machines reliant on display advertising. Their mistake, he writes, was a failure to control their distribution, which led to a collapse when Facebook and other social-media companies turned down the traffic spigot.

Solana says he’s designed Pirate Wires around the inbox. “That’s all that matters now,” he said. “If you don’t have distribution, you’re not a media company.” There’s an intimacy to being in a reader’s digital space, he says, which lends itself to a more personal form of writing. The challenge of the inbox is creating enough content without overwhelming the reader. For Solana, that means keeping it brief. The daily newsletter is three quick takes with no outbound links, so a reader can digest it and move on with their day. “You wake up; you read it; you’re like, Fuck yeah, fuck yeah, fuck yeah,” Solana said. Paid subscriptions are $20 a month or $120 annually—fairly steep for the amount of material you get.

The problem with most establishment media, Solana said, is they’re all doing the same thing. “The New York Times has a very distinct style that happens to be very popular,” he said. “The Washington Post, the L.A. Times—they’re just doing New York Times drag worse, much worse.” What makes Pirate Wires distinctive, he says, is its point of view, which leads it to report stories that liberal-leaning outlets might not.

Media coverage of technology goes through cycles. In the 1980s and ’90s, it was largely booster-ish. Steven Levy’s book Hackers valorized the “heroes of the computer revolution,” and Tracy Kidder’s The Soul of a New Machine portrayed engineers as romantic obsessives. Wired magazine charted the rise of the personal computer and commercial internet with nerdy glee. The dot-com crash induced a brief bout of skepticism, but the following decade and a half saw a return to form as Google, Amazon, and Facebook ascended.

After Trump was elected, journalists turned a critical eye on the industry, and a thousand scandals bloomed: Cambridge Analytica, Uber’s efforts to evade law enforcement, alleged sexual misconduct at Google, the Facebook Papers. Theranos was exposed as a fraud and WeWork as a folly. “Move fast and break things” went from promise to threat, while start-ups pledging to “make the world a better place” became a punch line on HBO’s Silicon Valley. Also, Juicero.

But to many in Silicon Valley, the “techlash” felt like an overcorrection. The solution, according to some tech leaders: “going direct.” That is, bypassing news outlets and communicating directly with one’s audience, be it on X or one’s own website or podcast. Jason Calacanis, an investor and a co-host of the popular All-In podcast, told me in an email that he advises founders not to talk with journalists at “left-leaning publications”: “You’ll get slaughtered if you speak to The Atlantic, The New York Times, or NPR. Going direct allows you to reach more folks and avoid having your message distorted by an angry journalist looking to score points with their paid subscribers.” Calacanis added that he planned to post his responses to my questions on X, lest I misquote him.

Tech-insider media such as Pirate Wires might be considered a half step between the traditional route and going direct. Garry Tan, the CEO of the start-up incubator Y Combinator, says Pirate Wires is taking advantage of the “atomization” of media, in which readers have relationships with specific people rather than institutions. “Solana is a hybrid creature—he’s got one foot in the tech world, but he’s also just an actually good writer with a lot of access,” says Liz Wolfe, an assistant editor at Reason magazine who writes about tech. “A layperson could feasibly read Pirate Wires and understand what a whole bunch of people in Silicon Valley are talking about behind closed doors that I think frankly a lot of the tech press isn’t aware of.”

In “We Are the Media Now,” Solana implores tech workers to “give us information. Why are you sharing scoops with journalists who hate you?”

Mat Honan, the editor in chief of MIT Technology Review, told me he started following Solana for his media criticism. “Even when he was totally wrong or being an asshole, I thought he was funny,” Honan said. Ben Smith, the editor in chief and a co-founder of Semafor, told me he’s “basically a fan” of Pirate Wires. “It’s a valuable articulation of how a slice of powerful people in Silicon Valley see the world,” Smith said.

Solana does have blind spots, Smith added. “When Mike writes about the media, it reminds me of the way the media writes about Silicon Valley: These are plausible theories if you haven’t had much contact with the workings of an industry you’re writing about.”

As for Solana urging tech-industry readers to share information with him instead of with journalists who “hate you,” Smith said there’s a word for this: access journalism. “That’s a very classic pitch you hear every day in Washington,” Smith said. “I guess he’s really learning.”

“He’s a little bit of a bitch,” Solana told me, claiming that Smith had made condescending comments about him and Pirate Wires online. Smith said he didn’t know what Solana was talking about. “He should report that out,” Smith said.

In January 2022, Solana organized a summit called Hereticon. Billed as a conference for “thoughtcrime,” the event—held at the Faena Hotel in Miami Beach—featured speakers on topics including UFOs, cyborgs, sex work, hypnosis, polyamory, and eugenics. Mitch Horowitz, Solana’s former boss, gave a talk on why ESP is real. Grimes DJed, while Elon Musk bobbed his head in the background. According to attendees, there was an unofficial rooftop party with Jeffrey Epstein–themed decor. (Solana said he wasn’t aware of this party.)

“Heresy” is a recurring theme in Solana’s work. It’s likely what endeared him to Thiel, whose whole thing, according to Solana and others, is contrarianism. (Thiel did not respond to interview requests.) It also informs Solana’s views on tech. “Technology itself is a little bit heretical,” he said. “It’s fundamentally destabilizing of power.” Even if one form of technology becomes dominant, another will eventually come along to subvert it. And anyway, he thinks the media’s portrayal of Silicon Valley is largely a caricature. “I’ve never met a ‘tech bro,’” he said on his podcast.

Lately, however, the mainstream media has published plenty of positive tech coverage, including a string of sympathetic profiles of Nvidia CEO Jensen Huang and Anduril founder Palmer Luckey. In this environment, Solana’s plea for scoops from tech workers because the mainstream press “hates” them might not land in quite the same way. Which raises questions about what will make Pirate Wires distinctive going forward.

Solana told me he wants to do more original reporting. He has scored interviews with some of the biggest names in tech, including Jack Dorsey after his exit from Bluesky. Earlier this year, after Solana wrote an acid critique of Google’s Gemini AI image generator, a number of Google employees contacted him, yielding a follow-up article arguing that the company’s DEI-driven “culture of fear” makes it hard to ship good products. The two articles became the site’s most popular ever.

But unlike tech, reporting doesn’t scale—as media outlets have been learning the hard way for decades. It’s expensive and time-consuming. Another possible obstacle: Solana’s boss at Founders Fund. “I hate talking about Peter,” he said once when I mentioned Thiel. (We were sitting in the blindingly sunlit office of Founders Fund in Miami, and one of his Pirate Wires employees was working in a conference room down the hall.) In another conversation, Solana said his affiliation with Founders Fund has upsides and downsides. It opens doors and gives him insight into the worlds of tech and finance that other writers might not have. At the same time, if there were a scandal involving a start-up in the fund’s portfolio, he might not be the one to break the news. He also said he sometimes misses scoops because he agrees not to report on a portfolio company’s new feature. And although Thiel doesn’t have any control over what Pirate Wires publishes, Solana said, he’s not likely to commission a story that reflects negatively on his mentor: “There are a thousand places you can go to write a Peter Thiel takedown,” he said. “Should you expect that from Pirate Wires? No, of course not. He’s a friend of mine.”

Solana points out that he criticizes tech companies plenty. And this is true. But it’s almost always through a cultural or political lens. He mocked Google’s AI for its inability to generate images of white people. He derides attempts to moderate social media as “censorship.” A recent Pirate Wires series highlighted how political disputes among Wikipedia editors sometimes shape the site’s content. Solana seems less bothered by tech companies’ economic power. He has criticized Lina Khan’s crackdown on tech companies for alleged monopolistic behavior—“She really has a problem with people making lots of money,” he said on his podcast—and called VCs’ support for Khan a “self-own.” He dismissed congressional grilling of tech executives as punishment for “winning.”

[Kaitlyn Tiffany: What’s with all the Trumpy VCs?]

He saves his harshest words for the people trying to curb what they describe as “hate speech,” “misinformation,” and “disinformation,” but which, Solana argues, is really just speech they don’t like. When Trump was kicked off Twitter and Facebook after January 6, Solana equated it to the president being “erased from the internet.” The 2022 suspension of the “manosphere” influencer (and now alleged human-trafficker) Andrew Tate from social-media platforms for misogynistic comments amounted to “Stasi shit.”

Part of the challenge for Solana is that journalism and free-speech crusading, although often aligned, are not the same thing. In June, Solana got a scoop when someone told him that a Trump-themed crypto token called $DJT had the backing of Donald Trump’s son Barron. If a traditional news outlet had been covering this story, it probably would have added some important context—particularly the fact that no one in the Trump family had confirmed on the record that the coin was, in fact, “official.”

Instead, Solana posted to the Pirate Wires X account: “Per conversations, Trump is launching an official token—$DJT on Solana. Barron spearheading.” (Solana is the name of a crypto blockchain; no relation to the man.) He also posted a link to the token’s location on the blockchain so readers could see that it indeed existed—and, if they wanted, buy it.

After the Pirate Wires post, the coin’s value skyrocketed. A frenzy ensued, as crypto enthusiasts tried to confirm Solana’s claim that Barron Trump was involved; many assumed that Pirate Wires had been hacked. Martin Shkreli, the infamous businessman who was convicted of securities fraud in 2017, came forward, announcing that he had helped create the coin along with Barron and a third person, and that the project had Donald Trump’s blessing. But Barron never confirmed his involvement, and the coin quickly tanked.

The whole affair had the trappings of a classic pump and dump. According to analyses of blockchain transactions, insiders—including one wallet that was also invested in another Shkreli crypto project—made millions off the announcement. (Shkreli declined to be interviewed for this article except on the condition that his criminal record not be mentioned.)

Did Solana’s anonymous source use Pirate Wires to profit from the announcement? I asked Solana if he’d considered the motives of the person who’d leaked him the Trump-coin information. “I don’t really care what their motivation was,” he said. To him, it was news because it said something about Donald Trump’s interest in cryptocurrency.

Solana told me that starting a media company has given him a greater understanding of the challenges facing traditional news organizations. “What I try and do is give people their flowers when they deserve them more,” he said. For example, he admired The New York Times’ early reporting on the second assassination attempt on Trump. In response, he started writing a post praising the newspaper for its coverage. “Then they published this piece calling out Trump’s ‘history of violent rhetoric,’ which to my ear implicitly blamed him for the assassination attempt, and I thought, Fuck! Goddamn it, I was wrong.”

The Truth About Immigration and the American Worker

2024-10-03T07:00:00-04:00

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Donald Trump and his allies on the populist right believe they have a compelling argument for why the GOP is the true blue-collar party: Immigration is killing the American worker, and only Trump will put a stop to it. “Kamala Harris’s border invasion is also crushing the jobs and wages of African American workers and Hispanic American workers and also union members,” Trump declared at a recent rally. At other times, he has referred to immigration as “all-out economic warfare” on the working class. It’s a message that the former president repeats in one form or another at just about every one of his public appearances.

The argument carries a certain commonsense logic: Immigration means more workers competing for jobs, which translates to lower wages and employment rates for the native-born. During Tuesday night’s vice-presidential debate, Republican Senator J. D. Vance said that his boss’s proposal to round up and deport millions of undocumented immigrants would “be really good for our workers, who just want to earn a fair wage for doing a good day’s work.”

Mainstream Democrats used to vigorously dispute the notion that immigration hurt native-born workers. No longer. Today, the two major parties are jockeying to convince voters that they are the ones who will truly secure the border. To the extent that liberals still defend immigration, they often do so by arguing that deporting migrants would reduce the labor supply and send prices soaring again—an argument that implicitly accepts the premise that immigrants do in fact depress wages.

This is a tragedy. The effect of immigration on wages is one of the most thoroughly studied topics in empirical economics, and the results are clear: Immigrants do not make native-born workers worse off, and probably make them better off. In many domains, the conventional wisdom among progressives is mistaken, oversimplified, or based on wishful thinking. The economics of immigration is not one of them.

Econ 101 tells us that when the supply of a good, like labor, increases, then the price of that good falls. This is the lens through which economists viewed immigration for much of the 20th century: great for corporations (cheap labor) and consumers (lower prices) but bad for native-born workers. Then a study came along that shattered the consensus.

In 1980, Fidel Castro briefly lifted Cuba’s ban on emigration, leading 125,000 people, most of whom lacked a high-school education, to travel from Mariel Bay to Miami in what became known as the Mariel Boatlift. In a few months, Miami’s workforce expanded by about 25 times as much as the U.S. workforce expands because of immigration in a typical year, creating the perfect conditions for a natural experiment. The economist David Card later realized that if he compared Miami with cities that did not experience the boatlift, he could isolate the effect that immigration had on native-born earning power. If immigrants really did depress wages, then surely the effect would be visible in Miami in the 1980s.

Instead, in a paper published in 1990, Card found that the boatlift had virtually no effect on either the wages or employment prospects of native-born workers in Miami, including those who lacked a college degree. Economists have since used similar natural experiments to study the effect of immigration in countries including Israel and Denmark, arriving at the same conclusion that Card did. (These studies mostly focus on low-skill immigration; high-skill immigration has long been viewed almost universally as economically beneficial.)

[Derek Thompson: Americans are thinking about immigration all wrong]

The simple Econ 101 story turned out to have a blind spot: Immigrants aren’t just workers who compete for jobs; they are also consumers who buy things. They therefore increase not only the supply of labor, which reduces wages, but also the demand for it, which raises them. In the end, the two forces appear to cancel each other out. (The same logic explains why commentators who suggest that immigration is a helpful inflation-fighting tool are probably wrong. I have made a version of this mistake myself.)

Inevitably, not everyone accepted the new consensus. In a paper first circulated in 2015, the Harvard economist George Borjas reanalyzed Card’s data and concluded that even though average wages were indeed unaffected, the wages for natives who lacked a high-school degree—and thus competed most directly with the Marielitos—had fallen as a result of the boatlift. Borjas’s study seemed to back up restrictionist policy with empirical data, and for that reason became a pillar of anti-immigration discourse. In 2017, for example, Stephen Miller cited it when pressed by a New York Times reporter for evidence that immigration hurts American workers.

But Borjas’s debunking of Card, such as it was, has itself been debunked. The data underlying his argument turned out to be extremely suspect. Borjas had excluded women, Hispanic people, and workers who weren’t “prime age” from his analysis, arguing that the remaining group represented the workers most vulnerable to immigrant competition. As the economist Michael Clemens has pointed out, Borjas ended up with an absurdly tiny sample of just 17 workers a year, making it impossible to distinguish a legitimate finding from pure statistical noise. Another study looking at the same data, but for all native-born workers without a high-school degree, found no negative impact on wages. Subsequent natural experiment studies have yielded similar conclusions. “Economic models have long predicted that low-skill immigration would hurt the wages of low-skill workers,” Leah Boustan, an economist at Princeton University, told me. “But that turns out not to be true when we actually look at what happens in the real world.”

On paper, immigrants and natives without a high-school education might look like easily substitutable workers. In reality, they aren’t. Take the restaurant industry. New immigrants may disproportionately get hired as fry cooks, which, in turn, depresses wages for native-born fry cooks. But by lowering costs and generating lots of new demand, those same immigrants enable more restaurants to open that need not just fry cooks but also servers and hosts and bartenders. Native-born workers have an edge at getting those jobs, because, unlike new immigrants, they have the English skills and tacit cultural knowledge required to perform them.

This dynamic helps explain why many efforts to deport immigrants have hurt native-born workers. From 2008 to 2014, the Department of Homeland Security deported about half a million undocumented immigrants through its “Secure Communities” program. Because the initiative was rolled out in different counties at different times, researchers were able to compare how workers fared in places where mass deportation was under way against outcomes for those in as-yet unaffected places. They found that for every 100 migrant workers who were deported, nine fewer jobs existed for natives; native workers’ wages also fell slightly. Other studies of immigration crackdowns throughout American history have reached similar conclusions. When a community loses immigrant workers, the result isn’t higher-paid natives; it’s fewer child-care services provided, fewer meals prepared, and fewer homes built.

Low-skill immigration does have some economic costs. Most studies find that the income of other immigrants takes a hit when a new wave of migrants arrives. Low-skill immigration also tends to slightly exacerbate inequality because it increases demand for college-educated professionals such as doctors, managers, and lawyers, resulting in even larger wage gains for that group. But these complications don’t mean that immigration is crushing the American working class.

Hold on, immigration’s critics say: Natural experiments can only tell you so much. You must instead look at the broad sweep of American history. As the liberal New York Times columnist David Leonhardt has pointed out, the decades in which American workers experienced their fastest income gains—the 1940s, ’50s, and ’60s—occurred when immigration was near historic lows; since the ’70s, immigration has surged while wages for the median worker have stagnated. “The trajectory of American history tells a very clear story,” Oren Cass, the chief economist at American Compass, a conservative think tank, told me. “High levels of immigration are correlated with poor outcomes for workers.”

The problem with relying on history is that correlations also only tell you so much. Some readers will recall that quite a few things have changed since the 1970s; most relevant for our purposes, these include the loosening of trade policy, the weakening of labor unions, and the enormous rise in corporate concentration. All of these trends have been more persuasively linked to the declining fortunes of the working class. Without some evidence of causation, the co-incidence of stagnating wages and rising immigration really does look like just that: a coincidence.

[Michael Podhorzer: The paradox of the American labor movement]

Two data points are instructive here. First, the parts of the country that have received the largest numbers of immigrants in recent decades—Texas, Florida, the D.C.-to-Boston corridor—are those that have experienced the least wage stagnation. Second, since the onset of the coronavirus pandemic, the U.S. has experienced both a huge surge in illegal immigration and perhaps the most significant reduction of wage inequality since the 1940s. That doesn’t mean high levels of immigration caused the spike in wages at the bottom. But that’s exactly the point: Historical trends don’t necessarily imply neat causal relationships.

The other problem is that you can just as easily make the circumstantial case that the natural-experiment literature underestimates the economic benefits of immigration. The aforementioned Denmark study tracked every single individual across the country (something that isn’t possible in the U.S. because of data constraints) over a 20-year period and found that low-skill natives who were most exposed to immigration responded by pursuing higher levels of education and moving to higher-paying occupations. Ultimately they achieved higher earnings than their peers who weren’t exposed to immigration. A study in the U.S. found that immigrants were 80 percent more likely than native-born Americans to start a business, and that the rate of entrepreneurship was just as high for immigrants from low-income countries as those from high-income countries. “Immigrants to the U.S. create so many successful businesses that they ultimately appear to create more jobs as founders than they fill as workers,” Benjamin F. Jones, one of the authors, wrote in The Atlantic last year. Immigrants, he noted, are inherently risk-takers. “We should not be surprised that they are exceptionally entrepreneurial once they arrive.”

I admit to being partial to this view for personal reasons. My grandfather came to the U.S. in the 1960s as an undocumented immigrant from Lebanon, having never finished high school and speaking very little English. Within a few months, he landed a job as a car mechanic at a local gas station, leaving for work each morning before his kids woke up and returning after they were asleep at night. An economic study might find that he helped depress the wages of native-born mechanics, which might have been balanced out by his spending in other areas. What it probably wouldn’t capture is what happened next: He opened up his own station, and then another, and then another, employing dozens of mostly native-born mechanics, attendants, and cashiers. Along the way, he became a darling of his community, bringing a little bit of Arab hospitality to a mostly white suburb of New Jersey. His life was its own kind of natural experiment.

The appeal of restricting immigration has, to put it lightly, never been primarily about economics. Surveys of public opinion generally find that people’s feelings about immigration are driven less by material concerns than they are by cultural anxieties about crime, social norms, and national identity. Anti-immigrant sentiment is much higher among older Americans (many of whom are retired) living in rural areas that contain few immigrants than it is among working-age Americans in immigrant-heavy cities such as New York and Los Angeles.

Even if conservative policy wonks sincerely believe that limiting immigration would help the American worker, the guy at the top of the Republican ticket clearly has other things on his mind. In his debate against Kamala Harris, Trump, who has accused immigrants of “poisoning the blood of our country,” mentioned the supposed economic impact of migration exactly once. He spent much more time portraying undocumented immigrants as a marauding horde of psychopathic murderers “pouring into our country from prisons and jails, from mental institutions and insane asylums.” At one now-infamous moment, he even claimed that immigrants were eating pets in Springfield, Ohio. In Trump’s hands, the economic case against immigration is a fig leaf that barely obscures a much larger and more nakedly bigoted body of work.

[Gilad Edelman: Donald Trump’s theory of everything]

The example of Springfield is a revealing one. In the past few years, thousands of Haitian immigrants—overwhelmingly with legal status—have settled in the town of 58,000. This has led to some problems. Housing prices rose quickly. The health-care and education systems have come under stress. And relations between longtime residents and the new arrivals have at times been contentious, especially after a traffic accident caused by a Haitian immigrant last year resulted in the death of an 11-year-old boy.

But after decades of dwindling population and shrinking job opportunities, Springfield has also experienced a jolt of economic energy. The immigrants have helped auto factories stay in operation, filled shortages at distribution centers, and enabled new restaurants and small businesses to open. Wage growth in the city took off during the migration wave and stayed above 6 percent for two years, though it has since slowed down. And the flip side of strain on the housing, education, and health-care systems is that there are now more jobs available for construction workers, teachers, and nurses to meet that increased demand. “What the companies tell us is that they are very good workers,” Ohio Governor Mike DeWine, a Republican, said in a recent interview, referring to the Haitian immigrants. “They’re very happy to have them there, and frankly, that’s helped the economy.”

For DeWine and other public officials, this is a trade that is well worth making: Immigrants might cause some social tensions, but overall they make the place better off. Others, of course, disagree. According to Gallup, 2024 is the first year in nearly two decades that a majority of the public wants less immigration to the U.S. In the past year alone, the desire to reduce the amount of immigration has jumped by 10 points for Democrats and 15 points for Republicans. No matter who wins in November, we will likely see more restrictive immigration policy in years to come. If that is the will of the voters, so be it. Just don’t expect it to do anything to help the working class.

Revenge of the Office

2024-10-02T07:00:00-04:00

More than a year since the World Health Organization declared the end of the pandemic public-health emergency, you might expect the remote-work wars to have reached a peace settlement. Plenty of academic research suggests that hybrid policies, which white-collar professionals favor overwhelmingly, pan out well for companies and their employees.

But last month, Amazon CEO Andy Jassy announced that the company’s more than 350,000 corporate employees must return to the office five days a week come January. In a memo, Jassy explained that he wants teams to be “joined at the hip” as they try to out-innovate other companies.

His employees don’t seem happy about it. The Amazon announcement was met with white-collar America’s version of a protest—a petition, angry LinkedIn posts, tense debates on Slack—and experts predict that some top talent will leave for companies with more flexible policies. Since May 2023, Amazon has allowed corporate employees to work from home two days a week by default. But to Jassy, 15 months of hybrid work only demonstrated the superiority of full-time in-office collaboration.

[Derek Thompson: The biggest problem with remote work]

Many corporate executives agree with him. Hybrid arrangements currently dominate white-collar workplaces, but a recent survey of 400 CEOs in the United States by the accounting firm KPMG found that 79 percent want their corporate employees to be in the office full-time in the next three years, up from 63 percent the year before. Many of America’s executives have had enough of the remote-work experiment, and as the Amazon announcement suggests, some are ready to fight to end it. They seem to be fighting not only because they believe that the evidence is on their side, but also because they long to return to the pre-pandemic office experience. (Management professors even have a name for this: “executive nostalgia.”) Quite simply, they are convinced that having employees in the office is good for business—and that having them in the office more is even better.

Managers have some empirical basis for preferring in-person work. A 2023 study of one Fortune 500 company found that software engineers who worked in proximity to one another received 22 percent more feedback than engineers who didn’t, and ended up producing better code. “When I was on Wall Street, I learned by showing up to the office,” Imran Khan, a hedge-fund founder and the former chief strategy officer of Snap, told me. “How do you learn if you don’t come to work?”

Remote work can also take a toll on creativity and culture. A study of Microsoft employees found that communication stalled when they went remote during the pandemic. Another found that people came up with less creative product pitches when they met over Zoom rather than in person. Eric Pritchett, an entrepreneur and a Harvard Business Review adviser, had the ill fortune to launch Terzo, his AI start-up, in March 2020. He left California for Georgia, where social-distancing rules were laxer and he could call people into the office. “You think of these iconic companies,” he said, counting off Amazon, Tesla, and Nike. “These iconic companies didn’t invent themselves on Zoom.” (Even Zoom, in August 2023, told employees to come into the office two days a week.) Jassy, the Amazon CEO, wrote in his back-to-office memo that he wanted Amazon to operate “like the world’s largest startup.”

But some Amazon employees don’t buy Jassy’s argument. CJ Felli has worked at Amazon Web Services since 2019. When the pandemic sent workers home, he was apprehensive about spending every day at his Seattle apartment. Now he’s a work-from-home evangelist. “I was able to deliver projects,” he told me. “I could work longer than I could in the office, I could eat healthier, and I was able to get more done.” He earned a promotion during the pandemic and was praised for his efficiency, which he sees as further evidence of his productivity gains. His colleagues who have kids or who get distracted in Amazon’s open-floor-plan office tell him that their work has improved too.

If remote work is such a drag, its defenders ask, then why has business been booming since the pandemic? Profits are up, even as employees code in sweatpants or practice their golf swing. As one Amazon employee wrote on LinkedIn, “I’d rather spend a couple of days being really productive at my house, taking lunch walks with my dog (or maybe a bike ride). This is how my brain works.” One mid-level manager at Salesforce, who spoke on condition of anonymity in order to publicly criticize his employer’s policies, pointed to the company’s success throughout the pandemic. “We’re not machines either,” he told me. “People aren’t meant to just be wrung like a towel to get every drip of productivity out of them.”

The big-picture data are a bit fuzzy. Some studies have found a modest negative effect on productivity—defined as work accomplished per hour on the clock—when companies switch to fully remote work. But this can be at least partly offset by the commuting time that workers regain, some of which they spend working longer hours. “There is no sound reason to expect the productivity effects of remote work to be uniform across jobs, workers, managers, and organizations,” as one academic overview puts it. The debate between bosses and workers “feels a lot like my view of how productive my teenager is being when she says she’s working while talking to her friends on her cellphone,” Nicholas Bloom, a Stanford professor who co-authored the study, told me. “She’s probably doing more work than I think—which is zero—and probably less work than she thinks, which is a lot.”

In theory, hybrid work should be the compromise that satisfies both sides. A May Gallup poll found that only 7 percent of employees wanted to work in person five days a week, 33 percent wanted to be fully remote, and 60 percent wanted some kind of hybrid arrangement. A study by Bloom found that employees of the travel site Trip.com who spent three days in the office were just as likely to be promoted as their fully in-person counterparts. They wrote code of the same caliber, and were more likely to stay at the company. Crucially, after a six-month trial, managers who had initially opposed hybrid work had revised their opinion. All of that helps explain why the percentage of companies with a hybrid policy for most corporate employees doubled from 20 percent at the start of 2023 to about 40 percent today, according to the Flex Index, which tracks work arrangements.

[Ed Zitron: Why managers fear a remote-work future]

But as Amazon’s announcement shows, the decisions around work arrangements were never going to be just about the data. When Jassy spoke last year about the company’s decision to move from a remote policy to a hybrid one, he said that it was based on a “judgment” by the leadership team but wasn’t informed by specific findings. Executives might just have an intuition that in-office work is better for the companies they helped build. It may make their jobs easier to have everyone close by. They also seem to find it hard to believe that their employees are doing as much work when they’re at home as when they’re in the office, where everyone can see them. Eric Schmidt, the former CEO of Google, said the company fell behind in the AI arms race because employees weren’t in the office. “Google decided that work-life balance and going home early and working from home was more important than winning,” he said in a speech at Stanford. “The reason start-ups work is because the people work like hell.” (He later claimed that he “misspoke about Google and their work hours.”)

“I largely do believe we are moving toward some truce between executives and employees,” Rob Sadow, the CEO of Flex Index, told me. “But I also think this is much less settled than the average person thinks it is.” He predicts that the battle will drag on for years. Companies might have trouble actually enforcing a full-time in-office policy for workers who have gotten used to flexibility. Talented coders are still in high demand. Theoretically, if enough people from Amazon decamp to Microsoft, say, then Jassy could be all but forced to backtrack. Bloom has followed one company that officially requires people to be in the office three days a week; most employees spend fewer than two days in person. He was skeptical that Amazon would discipline a high-performing employee who preferred to code from the couch. The middle manager at Salesforce told me that he is preparing a list of excuses he can offer to executives who ask why his team isn’t in the office.

But executives have tools at their disposal too. Amazon and Google have already begun tracking badge data and confronting hybrid workers who don’t show up as often as they’re told to. (An Amazon spokesperson told me that the company hopes to eventually stop surveilling employees’ work locations.) Even if bosses struggle to penalize their employees, perhaps they can lure them in with promises of career advancement. Eighty-six percent of the CEOs in the KPMG survey said they would reward employees who worked in person with promotions and raises. “You’re a young person coming out of college, and you want to be CEO someday—you will not get there via remote work,” Ron Kruszewski, the CEO of the investment bank Stifel, says of his company. “It just won’t happen.”

We Need Supply-Side Education Policy

2024-09-27T09:28:00-04:00

On Wednesday night, in a speech in Pennsylvania, Kamala Harris announced that, if elected, she would “eliminate degree requirements” for hundreds of thousands of federal jobs. And, she added, she would challenge “the private sector to make a similar commitment.”

This policy—often called “skills-based hiring”—is very popular with voters, which explains why Harris made a similar promise earlier this month. The Trump administration also tried to loosen degree requirements in federal hiring with an executive order, making it the rare policy that draws bipartisan support. (Little seems to have come of that order, which was issued right before the 2020 election.) Nearly 60 percent of adults ages 25 to 29 do not have a bachelor’s degree. If they have the skills to do a certain job, why should they be denied the chance solely because they lack a somewhat arbitrary paper credential?

And yet, despite its popularity, skills-based hiring is a dead-end policy. If every employer in America formally stopped requiring a four-year college degree for every available position as of tomorrow, nothing much would change. Indeed, companies such as Walmart, Apple, and many others have proudly touted their removal of degree requirements in job postings, but the net effect on hiring has been very small. A recent Harvard Business School study found that when companies remove degree requirements, the share of hires with a bachelor’s degree declines by only two percentage points. Employers may not insist on a college degree, but they still prefer it.

So even if a degree isn’t formally required, applicants who have one will still usually beat out applicants who don’t, because employers need some way to differentiate between them. The real issue, in other words, is not the existence of degree requirements, but the lack of alternative ways for workers to prove their qualifications. If political leaders really want to expand opportunities for non-college-educated Americans, that’s the problem they need to solve. Doing so is not particularly complicated—but it will require the government to take a markedly different approach to higher education than it is accustomed to.

The proposal to remove degree requirements fits into a larger historical pattern of higher-education and workforce-development policy, particularly within the Democratic Party. Both the Obama and Biden administrations increased the generosity of the Pell Grant for low-income students, forgave some student loans, and increased transparency in reporting college graduates’ outcomes. The Bipartisan Workforce Pell Act working its way through Congress would expand students’ ability to use federal financial aid for nondegree training programs. These are all demand-side policies, meaning they seek to change incentives through prices, subsidies, and regulations.

[Kevin Carey: The problem with “in demand” jobs]

What we’re missing is supply-side policy for career and technical education. The U.S. spends a paltry 0.03 percent of GDP on job training, compared with an average of 0.11 percent across other advanced economies. The absence of credible nondegree pathways leads to a lack of interest in the skilled trades among young people, which in turn creates shortages in necessary professions, such as plumbing. Adjusting the knobs on the demand-side dials won’t work, because what we really need doesn’t yet exist.

Why do employers hire college graduates for entry-level jobs in the first place? Recent grads don’t typically have much practical knowledge, but being admitted to college and finishing a four-year program of study at least signals that a graduate has some measure of talent and grit. This helps explain why the college wage premium starts small but grows quickly as workers gain experience. Companies hire untested college graduates in the hopes that their investment will pay off over time.

Most employers would prefer a worker who can be productive right away, which explains the theoretical appeal of skills-based hiring. The problem is that skills are hard to verify. Companies know their employees’ capabilities but have no incentive to share that knowledge with rivals, who would use it to steal the good workers away. (The Harvard economist Amanda Pallais has shown that entry-level workers benefit from having information about their capabilities shared publicly with the labor market.) Sub-baccalaureate credentials unfortunately do not send a very clear signal, either, because they vary widely and present a confusing patchwork of options to employers. Fixing that problem would expand opportunities for Americans without a college diploma much more than eliminating degree requirements would.

To give just one example, consider credentialing for cardiovascular technicians. At Bunker Hill Community College, in Boston, for instance, you can enroll in a full-time, two-year program to earn your associate’s degree in cardiac sonography. At Hudson Valley Community College, in Troy, New York, you can obtain a one-year certificate in cardiac sonography—but only after you’ve completed either an associate’s degree in another health-related field or a bachelor’s degree in an unrelated discipline. Meanwhile, many other community colleges in both states don’t even offer specific cardiovascular-tech programs, opting instead to provide general “allied health” degrees and leaving the specific training to employers.

The variation across colleges means employers don’t know what they are getting. A cardiovascular technician with a certificate from HVCC might be able to get a job in Troy, where local employers understand her qualifications. But if she wants to get a better job at a hospital in Boston, she has no way of demonstrating that her certificate has any value. This limits her mobility and, in turn, her career prospects: Switching employers is a crucial part of wage growth. A big advantage of a bachelor’s degree is that you can take it anywhere.

[David Deming: The college backlash is going too far]

Vice President Harris has spoken favorably about expanding apprenticeship programs, which combine paid on-the-job training with classroom instruction. Apprenticeships work—a careful evaluation of the federally funded registered-apprenticeship program found that it produced substantial earnings gains—but they are bespoke and expensive. In 2021, the most recent year for which data were available, more than 25,000 active programs served an average of fewer than 10 apprentices each.

A more scalable model is the FastForward Program, which has funded career-oriented training for almost 45,000 learners in 23 community colleges across Virginia. As part of the program, the state community-college system has created career maps in fields such as manufacturing and health sciences, with a common curriculum that allows people to obtain advanced credentials that build on one another, or “stack,” and opens doors to better-paying jobs. An early evaluation of FastForward found that enrolled students who received an industry-recognized credential saw increased earnings of about $4,000 a year.

Congress could do something similar on a national scale by creating and funding a federal certification program for career pathways in fields with high job demand and good prospects for upward mobility, such as advanced manufacturing and cardiovascular technology. Federal standards would create common quality benchmarks and a shared language around the skills required for career success in each field. This would make factories and hospitals across the country more willing to hire graduates from out-of-state programs, because they would know what they are getting. It would also be easier to stack credentials across different sectors, which would give workers greater career mobility.

Building better pathways for career and technical education in the U.S. requires institution-building rather than market-based reforms—much like the Biden administration’s approach in areas such as infrastructure investment and clean energy. Cities and states should be able to tailor career and technical education to the strengths of the local economy, but only the federal government can provide the nationwide credibility and the funding to create more good jobs for the majority of Americans who do not have a four-year degree.

Trump’s Deranged Plan to Lower Food Prices by Raising Them

2024-09-20T07:00:00-04:00

At a campaign event on Tuesday night, Donald Trump vowed to lower the price of groceries by … taxing them? Responding to a question about food costs, Trump told the Michigan audience that his plan would entail both energy deregulation and protectionist restrictions on food imports, which, he claims, would help American farmers.

Leaving aside that U.S. grocery inflation has been dead in its tracks since last year—prices are up just about 1 percent compared with summer 2023—Trump is in some sense correct: Reducing fuel costs could reduce food prices a bit if the energy-intensive American agriculture industry passed on the savings to U.S. consumers. And yes, restricting imports of certain farm goods, presumably via Trump’s favorite tool, tariffs, could boost the incomes of American farmers by shielding them from foreign competition.

As a plan to lower grocery prices, however, Trump’s protectionism is ludicrous. If implemented, it could even return us to the bad old days of American grocery scarcity.

[Annie Lowrey: The truth about high prices]

Imports are essential to the U.S. grocery market today, and to its steadily increasing abundance. In 1980, the typical supermarket carried only about 100 different produce items. Selection was limited by North American growing seasons—good luck finding a strawberry in winter—and few Americans had even heard of, let alone tasted, products such as lychee or jackfruit. Today, the variety of produce items has more than doubled, and a stroll through those same aisles reveals an incredible variety. This is thanks to global trade. According to the Food and Drug Administration, 55 percent of fresh fruits and 32 percent of fresh vegetables in the United States are sourced from abroad.

Much of this boom in international food trade is owed to agreements struck in the 1990s that allowed more products to enter the United States duty-free. The North American Free Trade Agreement, which took effect in 1994, improved Americans’ access to warm-weather produce from Mexico and specialty foods from Canada. Since the late ’90s, fresh-vegetable imports—mainly from these two countries—have nearly tripled. A standout example is avocados, about 90 percent of which are imported today, almost all from Mexico. Our southern neighbor also supplied more than half of all U.S. berry imports in 2023.

Globally, the 1995 World Trade Organization agreements, especially the Agreement on Agriculture, significantly reduced worldwide food-related trade barriers. Since then, agricultural trade has more than doubled, giving the U.S. access to foods that would otherwise be unavailable or prohibitively expensive—not just produce but also meats, cheeses, and innumerable foreign specialty items.

Bringing back food tariffs, as Trump proposes, would stymie this incredible progress, especially for foods that can’t be easily grown here, such as pineapples. With less available supply and new import taxes, prices would almost certainly rise. In fact, the U.S. already imposes tariffs and other barriers on a wide range of imported foods, including beef, seafood, sugar, and tomatoes. Studies consistently show that these trade restrictions inflate consumer prices. (Sugar, for example, costs twice as much in the United States as it does globally.)

In theory, foreign exporters could lower their prices to offset new tariffs, as Trump is fond of claiming. In practice, however, this rarely happens. Evidence from the Trump presidency shows, for example, that American companies and consumers absorbed nearly all the tariffs’ costs, either through additional import taxes or higher prices for both foreign and domestic goods. Given that U.S. grocers already operate on thin margins (historically about 2 percent), the chances of these companies simply absorbing new tariff-related costs, instead of passing them on to you and me, are minimal.

[Scott Lincicome: What Kamala Harris doesn’t get about food costs]

Of course, if foreign food exporters did somehow pay new tariffs without raising prices, then the tariffs wouldn’t protect American farmers, as Trump says they would. The whole point of a protective tariff is to push consumers toward domestic goods by raising the prices we pay for imports. If prices didn’t change, then neither would the purchasing decisions of American shoppers.

In short, if American farmers are earning more because of Trump’s tariffs, then we’re all paying more for the food they make. And if we’re not paying more, then “our farmers” aren’t earning more. Trump can’t have it both ways.

As anyone over the age of 40 can attest, American grocery stores weren’t always the global fantasylands they are today. They were smaller, less diverse, and relatively more expensive. Trump’s plan to restrict food imports could drag us back to that era. So although we’re generally not fans of Kamala Harris’s “We are not going back” slogan, we’re with her in this particular case. We don’t want to go back to a time when, say, blueberries were the occasional luxury, and neither should you.

Did the Fed Wait Too Long to Act?

2024-09-18T14:05:00-04:00

The Federal Reserve has declared victory in the war on inflation. At its meeting today, the central bank announced that, after setting higher interest rates for two years in an effort to tame prices, it is finally beginning to bring them back down.

The Fed lowered interest rates by 0.50 percent (or 50 basis points), and has suggested that future cuts will be similarly sized. That’s more aggressive than some observers expected, but even at that pace, the super-low rates of pre-pandemic America are still years away. The immediate financial effects will therefore be modest. More important, in all likelihood, is the message that the announcement sends: Inflation is no longer a major concern, and the Fed is now focused on keeping the economy, particularly employment, running strong.

No one really knows how interest rates and consumer prices interact. The leading theory is that by raising borrowing costs, higher rates force consumers to cut back on spending and businesses to lay off workers, sparking a vicious cycle that brings prices under control by strangling the economy.

But that didn’t happen this time. The Fed raised rates and inflation abated without all the economic pain in between. Consumer spending and the labor market have remained strong. If higher interest rates caused inflation to cool off, the precise mechanism remains a mystery. In fact, the theme of this year’s Jackson Hole Economic Symposium—think Davos for central bankers—was “Reassessing the Effectiveness and Transmission of Monetary Policy.” That’s Fed-speak for “Interest Rates: How Do They Work?”

Making matters even more complicated, setting interest rates is about more than the literal rate of interest. The central bank also uses rate policy to influence people’s expectations of the future and, in turn, their behavior. Two years ago, when inflation was spiking, the Fed moved quickly and decisively to raise rates. “We will keep at it until we are confident the job is done,” Fed Chair Jerome Powell said in August 2022, making clear that the Fed would do whatever it took to bring prices under control. Some experts believe that is why inflation fell so painlessly last year. Convinced that the problem was under control and that a major slowdown was around the corner, consumers stopped spending as fast and employers curtailed their hiring sprees just enough to help the economy get back to normal.

[Rogé Karma: The Federal Reserve’s little secret]

This theory has problems of its own. Most people have very little idea what the Fed is doing and may have only a vague sense of what’s going on in the broader economy. In poll after poll, a majority of Americans continue to say that inflation is a major problem, which undermines the notion that the Fed’s steady hand has calmed the nation’s nerves.

Today’s rate cut, however, could be a rare and important case in which the Fed’s message clearly does get through. The long-awaited policy change will generate enormous media coverage. Most Americans might not be able to explain what the federal-funds rate is or why it matters, but they will hear that the country’s economic experts have declared that inflation has been defeated and that better days are ahead. This could become a self-fulfilling prophecy: If the Fed succeeds at brightening the economic mood of the country, then perhaps businesses will keep hiring and raising wages, consumers will keep spending, investors will finance new projects, and the economy will remain strong.

The Fed’s announcement, just seven weeks before the presidential election, could also have a political impact. Voters think inflation is the central problem facing the country, and they blame the Biden administration for it—including Vice President Kamala Harris, according to some polls. This view has persisted despite a long stretch of very little inflation. A big “inflation is over” news cycle might finally convince at least some voters that the problem really has been solved, to Harris’s benefit.

The risk remains that the Fed waited too long to act. Inflation has been near the central bank’s target for almost a year, and the economy, while still far from recession territory, has begun to show clear signs of slowing. The number of job openings has fallen, the unemployment rate has risen, and more people are behind on their credit-card bills and car payments. None of this would be particularly worrying if the Fed could simply press a button and provide an immediate boost to the economy, but it can’t. In fact, economists generally believe that rate changes take a while to filter through the economy. How long, exactly? No one knows. As the monetary-policy experts Christina Romer and David Romer wrote at the beginning of 2023, “If policymakers keep tightening until inflation falls as much as they want, they will likely have gone too far—because the effects of tight policy will continue for many months after they stop raising rates.”

Many other prominent economists have made similar warnings. If they’re right, then the recession that America miraculously avoided may turn out to be merely delayed. Then again, experts made a lot of dire predictions about the economy over the past three years that have turned out to be wrong. Hopefully they have one more in them.

The Wrath at Khan

2024-08-30T07:00:00-04:00

Updated at 3 p.m. ET on August 30, 2024.

Reid Hoffman, the LinkedIn founder and Democratic megadonor, seems to love almost everything about the Biden administration. And, he says, he’s “thrilled” by the prospect of a Kamala Harris presidency. That’s why he’s donating $10 million to support her campaign.

He has just one request: Fire Lina Khan. In a July interview with CNN, Hoffman accused the Federal Trade Commission chair of “waging war” on American business and said he hoped Harris would “replace her” if elected as president. That same week, another prominent Harris donor, the media and technology executive Barry Diller, told CNBC that Khan is a “dope” who’s against “almost anything” that would help American businesses grow.

Hoffman and Diller have plenty of personal reasons—billions, even—to oppose Khan. Hoffman sits on the board of Microsoft, whose $69 billion acquisition of Activision Blizzard the FTC tried and failed to block. Microsoft is also being investigated by the agency for its licensing deal with an AI company that Hoffman co-founded. (In a follow-up interview with CNN’s Jake Tapper, Hoffman stressed that his opinion on Khan was offered in his capacity as an “expert,” not as a donor. This parsing caused Tapper to respond, incredulously, “But there aren’t, like, a hundred Reid Hoffmans!”) Some of Diller’s companies, too, are reportedly under investigation by the FTC.

Hoffman says, however, that he is motivated by concern for the little guy. The FTC under Khan has become more aggressive in seeking to block acquisitions—particularly by tech giants—than it has been in decades. The same goes for the Department of Justice Antitrust Division under Jonathan Kanter. If the agencies keep it up, Hoffman argues, then start-ups won’t be able to cash out by selling to a bigger company, and investors will stop giving them money in the first place. “That’s going to quell investment, and that’s bad for creating new competitors,” he told Tapper. (Hoffman declined to be interviewed for this article.)

[Richard R. John: The tech giants’ anti-regulation fantasy]

This argument is gaining adherents among Khan’s detractors in Silicon Valley on both the left and the right. In a July blog post, the Trump-supporting venture capitalist Marc Andreessen complained that regulators “are punitively blocking startups from being acquired by the same big companies the government is preferencing in so many other ways.” In 2021, the National Venture Capital Association warned that “expanding antitrust law to restrict acquisitions could chill investment into startups.” Now that’s precisely what’s happening, NVCA president and CEO Bobby Franklin told me in an interview.

The question of what antitrust means for tech start-ups might seem obscure during the home stretch of an election in which nitty-gritty policy appears to hardly matter. But the outcome of the fight over the FTC, should Harris become president, could say a great deal about how she will govern. The commitment to strong antitrust enforcement has been a pillar of the Biden administration’s populist economic agenda. Hoffman and company are now challenging that agenda on its own terms. Do they have a point?

For most of the 20th century, a business hoping to expand was generally looking to go public, which would reward employees and long-term investors for creating a sustainable enterprise. The venture-capital model that emerged over the past few decades has a different blueprint for success. VCs plow money into a company at its inception, typically pushing it to prioritize rapid growth over generating revenue—let alone profits—and they expect a quick return on investment. More often than not, the goal of VCs is to find a buyer. According to an NVCA survey from 2020, 58 percent of American founders hope to sell their company. Others will do so grudgingly. In the early 1990s, about 70 percent of venture-backed exits were IPOs, and the rest were acquisitions. Nowadays, acquisitions make up about 90 percent of exits.

So naturally, antitrust enforcement—and blocking mergers in particular—is going to alarm VCs. If big companies are prevented or discouraged from buying smaller ones, they argue, then start-ups will have fewer suitors competing to acquire them. Their valuations will in turn be lower, and fewer of them will get funding in the first place, because VCs will be less confident of a big acquisition-fueled payout. “For me to make an investment in a company, I have to believe that an exit is possible in the first place,” Bradley Tusk, the political strategist turned investor who supports Harris, told me.

Khan’s Silicon Valley critics point out that merger activity is down by about half since 2021, when Khan and Jonathan Kanter took over. VC investment has dropped too: The number of deals has declined by 20 percent, and deal value has been cut in half, according to PitchBook. “It appears that the cage-rattling has had an impact,” Susan Woodward, the founder of Sand Hill Econometrics, told me.

When you take the long view, however, funding levels don’t look so bad. Current VC investment is roughly on par with that of 2019. According to the latest report by Silicon Valley Bank, “There is still more money flowing to founders than 26 of the last 30 years.” If anything, 2021 was the anomaly. Juiced by interest-rate cuts, that year saw an unprecedented boom in investment. “It was stupid,” Tusk acknowledged. “Valuations were way too high.” Which makes the current landscape look more like a healthy correction than a crisis. VC investment now appears to be ticking up compared with 2023, according to analysis by PitchBook and the NVCA.

What about start-up formation generally—are fewer founders founding? According to PitchBook, the number of pre-seed and seed deals expected to close in 2024—that is, investments in new start-ups—is roughly the same as before the pandemic. Meanwhile, outside the VC-driven world of Silicon Valley, small business is booming. Applications to start new businesses surged during the pandemic and have not slowed down. Score one for the little guy.

Tightening the rules on mergers, of course, means fewer mergers. In terms of raw numbers, the shift in enforcement hasn’t been drastic. The antitrust agencies’ newfound boldness appears more in which cases they bring, and their willingness to go to trial rather than settle, than in the proportion of mergers that get challenged. Antitrust advocates say they’re not opposed to acquisitions generally—just the ones that reduce competition. That includes so-called killer acquisitions, in which a bigger company buys a rival start-up in order to snuff it out. A well-known study published in 2021 conservatively estimated that about 6 percent of acquisitions in the pharmaceutical industry fit that description. John Kwoka, an economist at Northeastern University who has advised the FTC, told me that the structure of the acquisition market gives the big players an incentive to catch and kill. “Who’s going to pay the most for a new bright idea? It will always be the company that feels most threatened by it,” Kwoka said.

The killing can be unintentional too—less murder than manslaughter. Mark Lemley, an intellectual-property expert at Stanford Law School and one of the most cited American legal scholars ever, argues that in many cases, larger companies simply don’t know how to deploy the technology they acquire without hurting their original business. Twitter bought Vine, the beloved short-form video platform, then abruptly shut it down. Sometimes the bureaucracy of the parent company saps the dynamism that the start-up had. Plus, when founders sell their equity and become salaried employees, they lose the incentive to shoot the moon. As a result, acquired companies often “disappear and are never heard from again,” Lemley told me.

Tim Wu, a professor at Columbia Law School who served as Joe Biden’s antitrust adviser in the White House, told me that, in a lax antitrust environment, tech start-ups might be more numerous but “are more likely to build complementary, often low-impact products seeking acquisition.” Strong antitrust enforcement, by contrast, makes start-ups more likely to think big and compete with the giants head-on. Wu cited the period of the 1970s and ’80s when enforcement was relatively strong, which gave rise to enduring companies such as Apple, Microsoft, Oracle, Sun, Lotus, Dell, and others.

Tech entrepreneurs I spoke with offered evenhanded analyses of antitrust policy, recognizing the importance of restraining monopolies while allowing innovative start-ups to find funding—including via acquisition. But these founders emphasized that the most exciting part of starting a company isn’t the prospect of getting bought by Meta or Amazon or Google. Angela Hoover co-founded the AI-powered search assistant Andi with the goal of “taking on Google,” she told me—not getting bought by Google. “Our hope,” she said, “is to take it all the way.”

No one is saying that all mergers are bad. Some companies create widgets that should be integrated into the larger corporate machinery rather than being forced to survive on their own. Some entrepreneurs are good at inventing things but have no idea what to do with their creations. The question is where to set the balance.

[From the July/August 2018 issue: How to fight Amazon (before you turn 29)]

Antitrust advocates say we tried lax enforcement for decades and saw the results. “We ran the experiment of a permissive policy, and what we have is the emergence of these behemoths,” Kwoka said. Presumably there’s a point at which the crackdown could go too far, but given the continued dominance of the giants, we’re not there yet.

A surprisingly diverse set of bedfellows agrees. Republican vice-presidential nominee J. D. Vance has praised Khan’s efforts. A group of more than 700 Silicon Valley investors signed a letter endorsing Harris in July, and some VCs are promoting Khan’s agenda. Garry Tan, the CEO of the start-up incubator Y Combinator and an aggressive critic of San Francisco’s political left, has praised Khan as “fighting for innovation.” Last October, Tan was asked on X if there was a tension between supporting start-ups, on the one hand, and cracking down on mergers, on the other. “Ultimately even if you want an exit via M&A it’s better to have 5 companies competing to buy you rather than 1-2,” Tan replied. “Selling to monopolist with gun to your head is not the only fate.”

Reid Hoffman is right that VC investment has helped many businesses get off the ground. Still, it’s worth asking whether the exit-via-acquisition model creates the most value for society. That model has become dominant for many reasons—IPOs have gotten more expensive, for one—but it could also reflect a kind of learned helplessness: If you can’t beat ’em, get acquired by ’em. Mark Lemley argues that this paradigm produces less ambitious start-ups. If your goal is to get bought by one of the Big Tech companies—or even if that’s just a likely outcome—you’re less inclined to challenge an incumbent. Any founder who starts a company with the explicit goal of getting acquired, Lemley said, “would much prefer to have no antitrust law. But if that’s what you’re doing, it’s not obvious that you’re benefiting the world at all.”

This article originally implied that the FTC had sued Google. Actually, the Department of Justice filed both antitrust lawsuits against the company.

Marijuana Is Too Strong Now

2024-08-29T07:00:00-04:00

Updated at 11:08 a.m. ET on August 29, 2024

A strange thing has happened on the path to marijuana legalization. Users across all ages and experience levels are noticing that a drug they once turned to for fun and relaxation now triggers existential dread and paranoia. “The density of the nugs is crazy, they’re so sticky,” a friend from college texted me recently. “I solo’d a joint from the dispensary recently and was tweaking just walking around.” (Translation for the non-pot-savvy: This strain of marijuana is not for amateurs.)

In 2022, the federal government reported that, in samples seized by the Drug Enforcement Administration, average levels of tetrahydrocannabinol, or THC—the psychoactive compound in weed that makes you feel high—had more than tripled compared with 25 years earlier, from 5 to 16 percent. That may understate how strong weed has gotten. Walk into any dispensary in the country, legal or not, and you’ll be hard-pressed to find a single product advertising such a low THC level. Most strains claim to be at least 20 to 30 percent THC by weight; concentrated weed products designed for vaping can be labeled as up to 90 percent.

For the average weed smoker who wants to take a few hits without getting absolutely blitzed, this is frustrating. For some, it can be dangerous. In the past few years, reports have swelled of people, especially teens, experiencing short- and long-term “marijuana-induced psychosis,” with consequences including hospitalizations for chronic vomiting and auditory hallucinations of talking birds. Multiple studies have drawn a link between heavy use of high-potency marijuana, in particular, and the development of psychological disorders, including schizophrenia, although a causal connection hasn’t been proved.

[Read: Marijuana’s health effects are about to get a whole lot clearer]

“It’s entirely possible that this new kind of cannabis—very strong, used in these very intensive patterns—could do permanent brain damage to teenagers because that’s when the brain is developing a lot,” Keith Humphreys, a Stanford psychiatry professor and a former drug-policy adviser to the Obama administration, told me. Humphreys stressed that the share of people who have isolated psychotic episodes on weed will be “much larger” than the number of people who end up permanently altered. But even a temporary bout of psychosis is pretty bad.

One of the basic premises of the legalization movement is that marijuana, if not harmless, is pretty close to it—arguably much less dangerous than alcohol. But much of the weed being sold today is not the same stuff that people were getting locked up for selling in the 1990s and 2000s. You don’t have to be a War on Drugs apologist to be worried about the consequences of unleashing so much super-high-potency weed into the world.

The high that most adult weed smokers remember from their teenage years is most likely one produced by “mids,” as in, middle-tier weed. In the pre-legalization era, unless you had a connection with access to top-shelf strains such as Purple Haze and Sour Diesel, you probably had to settle for mids (or, one step down, “reggie,” as in regular weed) most of the time. Today, mids are hard to come by.

The simplest explanation for this is that the casual smokers who pine for the mids and reggies of their youth aren’t the industry’s top customers. Serious stoners are. According to research by Jonathan P. Caulkins, a public-policy professor at Carnegie Mellon, people who report smoking more than 25 times a month make up about a third of marijuana users but account for about two-thirds of all marijuana consumption. Such regular users tend to develop a high tolerance, and their tastes drive the industry’s cultivation decisions.

The industry is not shy about this fact. In May, I attended the National Cannabis Investment Summit in Washington D.C., where investors used the terms high-quality and potent almost interchangeably. They told me that high THC percentages do well with heavy users—the dedicated wake-and-bakers and the joint-before-bed crowd. “Thirty percent THC is the new 20 percent,” Ryan Cohen, a Michigan-based cultivator, told me. “Our target buyer is the guy who just worked 40 hours a week and wants to get high as fuck on a budget.”

Smaller producers might conceivably carve out a niche catering to those of us who prefer a milder high. But because of the way the legal weed market has developed, they’re struggling just to exist. As states have been left alone to determine what their legal weed markets will look like, limited licensing has emerged as the favored apparatus. That approach has led to legal weed markets becoming dominated by large, well-financed “multistate operators,” in industry jargon.

Across the country, MSOs are buying up licenses, acquiring smaller brands, and lobbying politicians to stick prohibitions on home-growing into their legalization bills. The result is an illusion of endless choice and a difficult climate for the little guy. Minnesota’s 15 medical dispensaries are owned by two MSOs. All 23 of Virginia’s are owned by three different MSOs. Some states have tried to lower barriers to entry, but the big chains still tend to overpower the market. (Notable exceptions are California and Colorado, which have a longer history with legal marijuana licensing, and where the markets are less dominated by mega-chains.) Despite the profusion of stores in some states and the apparent variety of strains on the shelf, most people who walk into a dispensary will choose from a limited number of suppliers that maximize for THC percentage.

If the incentives of the market point to ever-higher concentrations of THC, one path to milder varieties would be government regulation. But legal weed exists largely in a regulatory vacuum.

Six years ago, my colleague Annie Lowrey observed that “the lack of federal involvement in legalization has meant that marijuana products are not being safety-tested like pharmaceuticals; measured and dosed like food products; subjected to agricultural-safety and pesticide standards like crops; and held to labeling standards like alcohol.” Very little has changed since she wrote that. Some states have limited THC percentages per serving for edibles, but only Vermont and Connecticut have potency caps on so-called flower, meaning the old-fashioned kind of weed that you smoke in leaf form. And then there’s the Wild West of legal hemp-derived THC products, which functionally have no potency limits at all.

[Read: Congress accidentally legalized weed six years ago]

Marijuana is still illegal under the federal Controlled Substances Act. States have been allowed to do their own thing, but the lack of federal legalization has meant a lack of federal regulation. In May, the Department of Justice officially proposed rescheduling marijuana from Schedule 1 under the CSA, where heroin is, to Schedule 3, where ketamine and anabolic steroids are. That change, if it happens, will dramatically expand medical-marijuana research and access, but it won’t affect the recreational market at all.

To establish an approach to marijuana legalization that protects consumers and gives them real choice and information about what they’re using, Congress would need to fully deschedule weed, not just reschedule it. Descheduling marijuana would circumvent the legal baggage of Schedule 3, allowing the federal government to ease into a nationally standardized set of health and safety regulations for recreational use, not just medical.

Such a change would ideally allow the federal government, particularly the Food and Drug Administration, the power to regulate marijuana in the same way they regulate other uncontrolled substances such as alcohol and tobacco—by overseeing packaging, advertising, and distribution. Sellers could be required to create clear, standardized nutrition-fact-style labels that indicate true THC percentage, recommended dosages, and professional suggestions for what to do in the case of a bad high. A full descheduling would also shorten the research knowledge gap, because private marijuana companies could run FDA-approved tests on their products and develop modern regulatory strategies that align with public-health standards.

The history of drug enforcement in America was long one of discriminatory, draconian enforcement. But the shift toward legal weed has tacked too far in the opposite direction. If marijuana is to be sold legally, consumers should know what they’re buying and have confidence that someone is making sure it’s safe. If we can agree as a society that getting high on weed shouldn’t be illegal, we can also agree that smoking weed shouldn’t involve dissociating at a house party or running into the middle of a snowstorm because you think imaginary bad guys are after you. The sad irony of legalization is that as weed has become easier to obtain, it has become harder to smoke.

What Kamala Harris Doesn’t Get About Food Costs

2024-08-23T12:47:00-04:00

Last week in North Carolina, Kamala Harris called for a new federal law to ban “price gouging on food.” Such a law might be popular, but it would have, at best, no impact on grocery prices and might even make the problem worse. That’s especially unfortunate because it distracts from all the federal policy changes that actually could reduce food prices.

The evidence that price gouging was responsible for the post-pandemic spike in food prices is somewhere between thin and nonexistent. A recent report from the New York Federal Reserve found that retail food inflation was mainly driven by “much higher food commodity prices and large increases in wages for grocery store workers,” while profits at grocers and food manufacturers “haven’t been important.” Similarly, a 2023 report from the Kansas City Fed observed that rising food prices were overwhelmingly concentrated in processed foods, the prices of which are more sensitive to (and thus driven by) labor-market tightness and wage increases. Grocery profits did rise briefly during the pandemic, but the increase was the predictable result of increased demand (thanks to government stimulus along with more Americans eating at home) running headfirst into restricted supply (thanks to pandemic-related closures and supply-chain snarls, along with the war in Ukraine, a major food producer). In fact, expanding corporate profits frequently accompany bouts of heightened demand and inflation; the past few years have been no different.

Even if excessive corporate profits had been the cause of higher food costs, a price-gouging ban would do nothing to relieve Americans’ current burdens for the simple reason that food prices long ago stopped rising. From January 2023 to July 2024, the “food at home” portion of the Consumer Price Index increased by just over 1 percent, much less than the overall rate of inflation, and consistent with the long-term, pre-pandemic trend. The U.S. Department of Agriculture adds that the share of consumers’ income spent on groceries, which did tick up during the pandemic, declined last year and remains far below levels seen in previous decades. Did corporate profiteering suddenly just stop?

[Gilad Edelman: The English-muffin problem]

In reality, the grocery business has always had notoriously thin profit margins. According to the latest industry-wide data from NYU’s Stern School of Business, the industry’s average net profit margins were just 1.18 percent in January 2024—ranking 80th of the 96 industries surveyed and lower than the margins the food industry recorded in all but one of the past six years. Even Biden White House economists’ own analyses of grocery-price inflation in both 2023 and 2024 downplayed corporate profiteering when discussing recent price trends and what’s behind them.

Inflation is generally a macroeconomic issue, driven by broad monetary and fiscal policies, not the choices of individual corporate actors. Food prices in particular are shaped by volatile forces—weather, geopolitics, natural disasters—beyond government control or influence, which is why economists’ “core inflation” metric omits them. As economics textbooks and centuries of experience teach us, limiting the amount that companies can charge is more likely to reduce supply by discouraging investment and production: a recipe for both shortages and higher, not lower, prices in the long term. The main solution to voters’ grocery angst is simply time, as normal market conditions return and increases in American incomes slowly outpace those in U.S. food prices.

That fix, of course, is a nonstarter for candidates running for an election just months away and tagged, fairly or not—mostly not—with causing higher grocery prices. Politicians whose pitch to voters is “Just be patient” could soon be out of a job—so they must promise to do something. The good news is that an eager White House and Congress, laser-focused on food prices, have plenty of policy reforms available that would give American consumers some relief. The bad news is that they would all involve angering powerful business interest groups, which is why they never actually happen.

Start with trade restrictions. To protect the domestic farming industry from foreign competition, the United States maintains tariffs and “trade remedy” duties on a wide range of foods, including beef, seafood, and healthy produce that can’t be easily grown in most parts of the country: cantaloupes, apricots, spinach, watermelons, carrots, okra, sweet corn, brussels sprouts, and more. Special “tariff-rate quotas” further restrict imports of sugar, dairy products, peanuts and peanut butter, tuna, chocolate, and other foods. These tariffs do what they are designed to do: keep prices artificially high. Sugar, for example, costs about twice as much in the U.S. as it does in the rest of the world. The USDA conservatively estimated in 2021 that the elimination of U.S. agricultural tariffs would benefit American consumers by about $3.5 billion.

In addition to tariffs, regulatory protectionism—against imported products such as tuna, catfish, and biofuel inputs—causes more consumer pain for little health, safety, or environmental gain. The 2022 baby-formula crisis exposed the degree to which Food and Drug Administration regulations effectively wall off the U.S. market from high-demand, safely regulated alternatives made abroad—alternatives that the Biden administration tapped when the crisis hit. These regulatory measures further inflate prices: The USDA, for example, once calculated that mandatory country-of-origin labeling for meat imports cost American meatpackers, retailers, and consumers about $1.3 billion annually. Those rules were scrapped after years of litigation, but cattle ranchers and their congressional champions continue working to reinstate them.

Propping up the domestic food sector is a long-standing American tradition. For dairy products, the Agricultural Marketing Agreement Act of 1937 artificially raises milk, cheese, and other dairy prices, while USDA loans to sugar processors effectively create a price floor for sugar. Produce-marketing orders allow U.S. fruit, nut, and vegetable farmers to limit supply and set rigid inspection rules and other terms of sale that stymie foreign competition and entrepreneurship and further increase domestic prices.

Finally, there’s U.S. biofuel policy. The federal Renewable Fuel Standard, created by Congress in the 2000s, requires a certain amount of biofuels to be blended into transportation fuel. The purpose of this mandate is ostensibly environmental: Burning corn-based ethanol produces lower greenhouse-gas emissions than burning gasoline. But, as a 2022 study published in the Proceedings of the National Academy of Sciences concluded, when the environmental impact of growing and processing the corn is taken into account, ethanol contributes significantly more to climate change. The fuel standard thus has a negative environmental impact even as it significantly increases U.S. corn prices and reduces the land available for other crops. The Congressional Budget Office and other organizations estimate that artificial demand for ethanol has raised Americans’ total food spending by 0.8 to 2 percent. Additional price pressures are likely on the way, if they’re not here already: A 2024 Kansas City Fed analysis estimates that Inflation Reduction Act subsidies for “clean” and plant-based transportation fuels could boost demand for and prices of oilseed crops and vegetable oils.

Laws and regulations like these add up—especially for Americans with low incomes or large families. So, with grocery prices front of mind for millions of voters, you might expect campaigning politicians to target these policies to achieve a significant, onetime reduction in U.S. food prices and, perhaps, an accompanying bump in the polls.

[Annie Lowrey: The truth about high prices]

Instead, our elected officials not only ignore these measures but actively work to add even more. In just the past year, for example, the Senate voted to override a USDA rule allowing beef from Paraguay, and various members of Congress have championed new duties on imported shrimp and tomatoes.

This reveals a sad reality for American consumers. The federal policies inflating U.S. food prices all result from the same political malady: Each one on its own costs the average person a few cents here and there, but it delivers big and concentrated financial benefits to American cattlemen, shrimpers, farmers, sugar barons, and other powerful groups. As a result of this imbalance, we consumers rationally ignore the policies, while the beneficiaries fiercely lobby to maintain them. So, when elected officials must choose between modestly reducing Americans’ grocery bills and delivering many millions of dollars’ worth of regulatory goodies to entrenched political benefactors, the choice is simple. Consumers don’t stand a chance.

“Corporate greed” is indeed a problem in the U.S. grocery market. Just not in the way politicians say it is.

TV Still Runs Politics

2024-08-22T07:00:00-04:00

When Kamala Harris “introduces” herself to the American public with her acceptance speech at the Democratic National Convention tonight, most of the people who catch her remarks will do so via television—just as they did when John F. Kennedy accepted the party nomination in 1960. TV may not be the omnipresent force that it was before the rise of the internet, but it is still the most important medium in American politics.

Pundits and wise men have been predicting the fall of television, and particularly television news, for decades. In 2002, The New York Times forecast “the coming disappearance” of nightly network newscasts. No less an authority than Roger Ailes, the founder of Fox News, averred that once “dinosaurs” such as Dan Rather, Tom Brokaw, and Peter Jennings left their anchor chairs, the traditional 30-minute newscast would face “extinction.” More recently, it was cable TV and cable news that were supposed to be heading for the boneyard, given the ominous trend of cord-cutting and the stampede to streaming. (Confession: I’ve written that take myself.)

These eulogies were premature. Television is no longer the only game in town, but it still sets the game’s agenda. Just about every major development in the current presidential campaign started as a television event. Video clips suggesting that Joe Biden had lost more than a step circulated on social media throughout his presidency, but only after more than 51 million people saw his disastrous June debate appearance did the pressure to drop out of the race become irresistible. Tim Walz was all but unknown outside Minnesota until his run of folksy cable-news interviews helped propel him onto the Democratic ticket. Similarly, J. D. Vance would probably never have been a contender on the Republican side without the help of his regular Fox News appearances, in which he honed his craft as arch-Trumpist attack dog. As for this week’s convention, it has been scheduled, staged, and choreographed to fit the rhythms of TV, just as dozens were before it.

[Derek Thompson: The ‘Trump effect’ on cable news]

No one would suggest that we still live in the age of Walter Cronkite. Americans now get political news and information through dozens of platforms and tens of thousands of sources—YouTube and TikTok videos, Facebook and X posts, Substack newsletters and podcasts. And yet the TV-news audience has hung around.

Outside of NFL games, nothing on television attracts as large a crowd as the traditional nightly newscasts. Every night, an average of almost 19 million people combined watched ABC’s World News Tonight, NBC Nightly News, and CBS Evening News during the 2023–24 TV season. Although that’s several million fewer people than watched the big three 10 years ago, the rate of decline is far slower than that of just about everything else on television, broadcast or otherwise. More people now watch the evening newscasts than the networks’ prime-time entertainment programming. Pretty good for 6:30 p.m.

If anything, cable news has been even more resilient, despite some cyclical ups and downs. During the first quarter of 2024, Fox News, CNN, and MSNBC attracted about as many viewers on average as they did eight years ago. That’s despite the fact that millions of households stopped subscribing to cable over the same period.

The explanation isn’t much of a mystery: The cable-news audience is dominated by older viewers, the cohort least likely to give up cable for streaming apps. The rest of the cable industry wishes it had the news channels’ relative stability. USA Network, for example, has lost 75 percent of its nightly audience over the past 10 years; FX and the History Channel have lost about two-thirds.

Relying on an older audience does make TV news less attractive to most advertisers, who want to reach and influence younger consumers. The reverse is true for political campaigns. Old people vote in far greater numbers than young people, making them a highly coveted target audience for anyone who wants to get or stay elected. As a result, cable news remains the de facto town square and community soapbox. As Jack Shafer put it in Politico Magazine early this year, “Cable has become the place that candidates toss their hats into the ring, where they launch trial balloons for new policies, where the debates that once took place in House and Senate chambers are now often conducted under studio lights, where evidence to impeach presidents is first presented, and where Supreme Court nominees are first vetted.”

Television more broadly is where political campaigns will still spend the bulk of their war chests to persuade voters. Many local TV stations, if not their viewers, will benefit from the projected $16 billion in ad spending by presidential, Senate, and House candidates and their allied PACs this cycle. The demand for airtime in swing states, in particular, is so strong that some stations expect to sell all of their available commercial slots this fall.

[Elaine Godfrey: Trump’s TV obsession is a first]

The future of political advertising likely belongs to TV, too. Digital sources now claim about a quarter of political ad spending, but their continued growth is in question, according to Travis N. Ridout, a co-director of the Wesleyan Media Project, which tracks political ads. “Campaigns are questioning the value of social media ads” for several reasons, he told me. The primary one is the format itself. Political ads make relatively complicated arguments in favor of a candidate or a policy, demanding more attention than the average commercial for Tide or Taco Bell. But ads on Facebook or Instagram can be easily ignored. People quickly swipe or scroll away; they don’t have their sound on. People ignore TV commercials, too, but the medium is more immersive; it arrests a viewer’s attention with sights and sound that fill the screen without distraction.

Instead of being rendered obsolete by social media, TV news has achieved a sort of symbiosis with it, in which television is the dominant species. Michael Socolow, a professor and media historian at the University of Maine, told me that Walz’s and Vance’s appearances on cable shows created the clips that then seeded social media. The combination of old and new media worked in concert to raise their profiles, certifying them as plausible choices. “It’s not cable TV per se” that matters, Socolow said, but the meme culture that it feeds. Television’s future “is through viral-meme creation and social-media circulation.”

The upshot is that new-media sources appear more likely to take their place alongside television than to replace it. If that’s the case, it rebukes the long-standing conventional wisdom that TV news was doomed by senescence and technology. It calls to mind then-CBS president Howard Stringer’s response when he was confronted by a gloomy prediction about the future of his business at a conference some 30 years ago. “They keep saying the networks are dinosaurs,” Stringer said. “What they don’t say is that the dinosaurs ruled the Earth for millions of years.”

Sometimes You Just Have to Ignore the Economists

2024-08-22T07:00:00-04:00

Last week, the economics commentariat and much of the mainstream media erupted with contempt toward Kamala Harris’s proposed federal price-gouging law. Op-eds, social-media posts, and straight news reports mocked Harris for economically illiterate pandering and warned of Soviet-style “price controls” that would lead to shortages and runaway inflation.

The strange thing about these complaints is that what Harris actually proposed was neither radical nor new—and it certainly wasn’t price controls. In fact, almost every state already has a law restricting at least some forms of price gouging. Although Harris has not specified the exact design of her proposal, one hopes that it would follow the basic outline of state-level bans: forbidding unwarranted price hikes for necessary goods during emergencies.

Price gouging in the popular imagination has a “know it when you see it” quality, but it is actually a well-developed body of law. A typical price-gouging claim has four elements. First, a triggering event, sometimes called an “abnormal market disruption,” such as a natural disaster or power outage, must have occurred. Second, in most states, the claim must concern essential goods and services. (No one cares if you overcharge for Louis Vuitton handbags during a hurricane.) Third, a price increase must be “excessive” or “unconscionable,” which most states define as exceeding a certain percentage, typically 10 to 25 percent. Finally, the elevated price must be in excess of the seller’s increased cost. This is crucial: Even during emergencies, sellers are allowed to maintain their existing profit margins. They just can’t increase those margins excessively.

For example, early in the coronavirus pandemic, some New York City residents complained that grocery stores were charging exorbitant prices for Lysol. But because those stores were merely passing along price increases from their distributor, they didn’t get in trouble. Instead, the state pursued a case against the wholesaler, which agreed last year to pay $100,000 in penalties and restitution. (During the pandemic, I took a sabbatical from teaching law to work for New York Attorney General Letitia James, with a focus on price gouging; I worked on the appeal of the Lysol case.)

[Annie Lowrey: The truth about high prices]

Price-gouging bans are broadly popular—except among economists. The reason is that, in the perfect world of simple economic models, allowing sellers to charge whatever they want during periods of heightened demand is actually a good thing: It signals to the rest of the market that there’s money to be made on the product in question, which in turn leads to more supply. Accordingly, prohibiting gouging leads to less production of essential goods and services. Plus, letting prices rise helps ensure that the product will be sold to the people who value it the most.

Here, regular people seem to understand a few things that economists don’t. During an emergency, such as a natural disaster, short-term demand cannot be met by short-term supply, setting the stage for sellers to exploit their position by raising prices on goods already in their inventory. The idealized law of supply and demand predicts that new investors would rush in, but the real world doesn’t work like that. A short-term price spike won’t always trigger the long-term investments needed to increase supply, because everyone knows that the situation is, by definition, abnormal; they can’t count on a continued revenue boom. During a rare blizzard, sellers might jack up the prices of snowblowers. But investors aren’t going to set up a new snowblower-manufacturing hub based on a blizzard, because by the time they had any inventory to sell, the snow would long be melted. So after the disruption, all goes back to normal—except with a big wealth transfer from the public to the company that raised prices.

And that’s before taking into account the barriers to entry that exist in today’s concentrated markets. Incumbents in heavily consolidated sectors like food are largely insulated from the threat of new competition. Price-gouging laws thus operate as a kind of poor man’s antitrust. They don’t address the lopsided balance of power, but they at least prohibit that power from being exploited in certain high-stakes contexts.

The other big problem with the textbook economics take on price gouging is the assumption that temporarily higher-priced products will find their way to the people who value them the most. That might be true in a world where everyone had the same amount of money to spend. In the world we actually inhabit, that is not the case. During a power outage, a working-class cancer patient who desperately needs to buy the last generator in stock to keep his medications refrigerated might not be able to outbid a healthy millionaire who just wants to run their air conditioner.

This is another way of saying that price-gouging bans are a form of moral policy. The laws recognize that consumers, not being the coldly rational Homo economicus of academic models, are going to be less price-sensitive during disaster; their desperation can be exploited. And people who lack the savings to get through a crisis or the resources to comparison shop are even more likely to suffer from price increases on essential items. In a pandemic, war, or major weather event, it seems morally repugnant to give an unearned bonanza to a big firm while denying essential services to vulnerable members of society. All parents, not just the wealthiest, should have an equal chance to obtain diapers even if supply chains are disrupted. Price-gouging laws represent a different set of market rules, grounded in fairness.

Price-gouging laws also protect against volatility and instability. During the immediate aftermath of COVID, unchecked price increases made an already-bad inflation problem even worse, contributing to a dangerous spiral that harmed the macro economy as well as individual consumers.

[Rogé Karma: We’re entering an AI price-fixing dystopia]

The problem with price-gouging laws is that they exist only at the state level. Few states have the resources to take on the multinational corporations that dominate markets for many essential goods. Even if they did, they would still face jurisdictional challenges. If a company makes baby formula in Wisconsin and then sells to a distributor in Minnesota, which then sells to a supermarket in Oregon, that company might radically hike the price it charges in Minnesota when the next pandemic hits—but then be unreachable by the Oregon attorney general even if Oregonians end up paying the cost.

Most price gouging today happens far beyond the reach of most state attorneys general. A strong federal law would help not only the public but also the small-business owners who lack the ability to do anything but pass on big increases—and who become, unfairly, the face of ugly profiteering for many consumers. If properly designed, such a law would very rarely need to be used. With a federal ban in place, the biggest corporations in the world would keep a price-gouging expert at the ready to wag their finger the next time they’re tempted to exploit a disaster for profit.

We’re Entering an AI Price-Fixing Dystopia

2024-08-10T07:30:00-04:00

If you rent your home, there’s a good chance your landlord uses RealPage to set your monthly payment. The company describes itself as merely helping landlords set the most profitable price. But a series of lawsuits says it’s something else: an AI-enabled price-fixing conspiracy.

The classic image of price-fixing involves the executives of rival companies gathering behind closed doors and secretly agreeing to charge the same inflated price for whatever they’re selling. This type of collusion is one of the gravest sins you can commit against a free-market economy; the late Justice Antonin Scalia once called price-fixing the “supreme evil” of antitrust law. Agreeing to fix prices is punishable with up to 10 years in prison and a $100 million fine.

But, as the RealPage example suggests, technology may offer a workaround. Instead of getting together with your rivals and agreeing not to compete on price, you can all independently rely on a third party to set your prices for you. Property owners feed RealPage’s “property management software” their data, including unit prices and vacancy rates, and the algorithm—which also knows what competitors are charging—spits out a rent recommendation. If enough landlords use it, the result could look the same as a traditional price-fixing cartel: lockstep price increases instead of price competition, no secret handshake or clandestine meeting needed.

Without price competition, businesses lose their incentive to innovate and lower costs, and consumers get stuck with high prices and no alternatives. Algorithmic price-fixing appears to be spreading to more and more industries. And existing laws may not be equipped to stop it.

In 2017, then–Federal Trade Commission Chair Maureen Ohlhausen gave a speech to antitrust lawyers warning about the rise of algorithmic collusion. “Is it okay for a guy named Bob to collect confidential price strategy information from all the participants in a market and then tell everybody how they should price?” she asked. “If it isn’t okay for a guy named Bob to do it, then it probably isn’t okay for an algorithm to do it either.”

The many lawsuits against RealPage differ in their details, but all make the same central argument: RealPage is Bob. According to one estimate, in more than 40 housing markets across the United States, 30 to 60 percent of multifamily-building units are priced using RealPage. The plaintiffs suing RealPage, including the Arizona and Washington, D.C., attorneys general, argue that this has enabled a critical mass of landlords to raise rents in concert, making an existing housing-affordability crisis even worse. (In a statement, RealPage has responded that the share of landlords using its services is far lower, about 7 percent nationwide. RealPage’s estimate includes all rental properties, whereas the lawsuits focus on multifamily-building units.)

[Christopher Beam: Welcome to pricing hell]

According to the lawsuits, RealPage’s clients act more like collaborators than competitors. Landlords hand over highly confidential information to RealPage, and many of them recruit their rivals to use the service. “Those kinds of behaviors raise a big red flag,” Maurice Stucke, a law professor at the University of Tennessee and a former antitrust attorney at the Department of Justice, told me. When companies are operating in a highly competitive market, he said, they typically go to great lengths to protect any sensitive information that could give their rivals an edge.

The lawsuits also argue that RealPage pressures landlords to comply with its pricing suggestions—something that would make no sense if the company were merely being paid to offer individualized advice. In an interview with ProPublica, Jeffrey Roper, who helped develop one of RealPage’s main software tools, acknowledged that one of the greatest threats to a landlord’s profits is when nearby properties set prices too low. “If you have idiots undervaluing, it costs the whole system,” he said. RealPage thus makes it hard for customers to override its recommendations, according to the lawsuits, allegedly even requiring a written justification and explicit approval from RealPage staff. Former employees have said that failure to comply with the company’s recommendations could result in clients being kicked off the service. “This, to me, is the biggest giveaway,” Lee Hepner, an antitrust lawyer at the American Economic Liberties Project, an anti-monopoly organization, told me. “Enforced compliance is the hallmark feature of any cartel.”

The company disputes this description, claiming that it simply offers “bespoke pricing recommendations” and lacks “any power” to set prices. “RealPage customers make their own pricing decisions, and acceptance rates of RealPage’s pricing recommendations have been greatly exaggerated,” the company says.

In December, a Tennessee judge rejected RealPage’s motion to have a class-action lawsuit against it dismissed, allowing the case to go forward. It would be a mistake, however, to conclude from that example that the legal system has the algorithmic price-fixing problem under control. RealPage could still prevail at trial, and in any case, it isn’t alone. Its main competitor, Yardi, is involved in a similar lawsuit. One of RealPage’s subsidiaries, a service called Rainmaker, faces multiple legal challenges for allegedly facilitating price-fixing in the hotel industry. (Yardi and Rainmaker deny wrongdoing.) Similar complaints have been brought against companies in industries as varied as health insurance, tire manufacturing, and meat processing. But winning these cases is proving difficult.

The challenge is this: Under existing antitrust law, showing that companies A and B used algorithm C to raise prices isn’t enough; you need to show that there was some kind of agreement between companies A and B, and you need to allege some specific factual basis that the agreement existed before you can formally request evidence of it. This dynamic can place plaintiffs in a catch-22: Plausibly alleging the existence of a price-fixing agreement is hard to do without access to evidence like private emails, internal documents, or the algorithm itself. But they typically can’t uncover those kinds of materials until they are given the legal power to request evidence in discovery. “It’s like trying to fit a square peg in a round hole,” Richard Powers, a former deputy assistant attorney general in the DOJ antitrust division, told me. “It makes the job really hard.”

In the case of RealPage, the plaintiffs were able to make the peg fit. But in May, a Nevada judge dismissed a similar case against a group of Las Vegas hotels who used Rainmaker, concluding that there wasn’t enough evidence of a price-fixing agreement, because the hotels involved hadn’t shared confidential information with one another and weren’t required to accept Rainmaker’s recommendations, even if they allegedly did so about 90 percent of the time. “The rulings so far have set the bar very high,” Kenneth Racowski, a litigation attorney at Holland & Knight, told me. The RealPage case “was able to clear that bar, but it might prove to be the exception.”

[Eric Schlosser: Do we really want a food cartel?]

And cases like RealPage and Rainmaker may be the easy ones. In a series of papers, Stucke and his fellow antitrust scholar Ariel Ezrachi have outlined ways in which algorithms could fix prices that would be even more difficult to prevent or prosecute—including situations in which an algorithm learns to fix prices withouts its creators or users intending it to. Something similar could occur even if companies used different third-party algorithms to set prices. They point to a recent study of German gas stations, which found that when one major player adopted a pricing algorithm, its margins didn’t budge, but when two major players adopted different pricing algorithms, the margins for both increased by 38 percent. “In situations like these, the algorithms themselves actually learn to collude with each other,” Stucke told me. “That could make it possible to fix prices at a scale that we’ve never seen.”

None of the situations Stucke and Ezrachi describe involve an explicit agreement, making them almost impossible to prosecute under existing antitrust laws. Price-fixing, in other words, has entered the algorithmic age, but the laws designed to prevent it have not kept up. Powers said he believes existing antitrust laws cover algorithmic collusion—but he worried that he might be wrong. “That's the thing that kept me up at night,” he said about his tenure at the Department of Justice. “The worry that all 100-plus years of case law on price-fixing could be circumvented by technology.”

Earlier this year, a handful of Senate Democrats led by Amy Klobuchar introduced a bill that would update existing laws to automatically presume a price-fixing agreement whenever “competitors share competitively sensitive information through a pricing algorithm to raise prices.” That bill, like so much congressional legislation, is unlikely to become law anytime soon. Local governments might have to take the lead. Last week, San Francisco passed a first-of-its-kind ordinance banning “both the sale and use of software which combines non-public competitor data to set, recommend or advise on rents and occupancy levels.”

Whether other jurisdictions follow suit remains to be seen. In the meantime, more and more companies are figuring out ways to use algorithms to set prices. If these really do enable de facto price-fixing, and manage to escape legal scrutiny, the result could be a kind of pricing dystopia in which competition to create better products and lower prices would be replaced by coordination to keep prices high and profits flowing. That would mean permanently higher costs for consumers—like an inflation nightmare that never ends. More profound, it would undermine the incentives that keep economies growing and living standards rising. The basic premise of free-market capitalism is that prices are set through open competition, not by a central planner. That goes for algorithmic central planners too.

My Mom Says She Loves Me. AI Says She’s Lying.

2024-07-29T07:30:00-04:00

Updated at 2:15 p.m. ET on July 29, 2024

Journalists have a saying about the importance of confirming even the most basic facts: “If your mother says she loves you, check it out.” Recently, I decided to follow that advice literally, with the help of an AI-based lie detector.

The tool is called Coyote. Trained on a data set of transcripts in which people were established as having lied or told the truth, the machine-learning model then tells you whether a statement is deceptive. According to its creators, its textual analysis is accurate 80 percent of the time.

A few weeks ago, I called my mom. After some initial questioning to establish ground truth—how she spent her vacation in France, what she did that morning—I got to the point. “Do you love me?” I asked. She said yes. I asked why. She listed a handful of positive qualities, the kinds of things a son would be proud to hear—if they were true.

Later, I plugged a transcript of her answer into Coyote. The verdict: “Deception likely.”

People have been trying and failing to create a reliable lie detector for a very long time. The industry is never not booming; the polygraph accounts for $2 billion in business every year. Now a wave of newcomers is challenging the century-old device, catering to a ready market in the corporate world and law enforcement. The most cutting-edge of them claim to have cracked the case using artificial intelligence and machine learning, with accuracy levels purportedly as high as 93 percent.

Historically, every advance in the lie-detection field has failed to live up to the hype, and, indeed, these new tools seem to suffer from many of the same problems as older technologies, plus some new ones. But that probably won’t stop them from spreading. If the tech-world ethos of “Anything we can do, we will do” applies, we could soon have AI lie detectors lurking on our Zoom calls, programmed into our augmented-reality glasses, and downloaded onto our phones, analyzing everyday conversations in real time. In which case their unreliability might actually be a good thing.

Ask people how to spot a lie, and most will say the same thing: Liars avoid eye contact. This belief turns out to be false. Human beings think they’re good at detecting lies, but studies show that they’re only slightly more accurate than a coin flip.

The history of lie-detecting technology is one tool after another built on premises that are intuitive but wrong. The modern industry began in the early 20th century with the polygraph, which measured blood pressure, respiratory rate, and galvanic skin response (sweating), under the theory that guilty parties show greater arousal. Early critics pointed out that the polygraph detects anxiety, not dishonesty, and can be gamed. In 1988, Congress passed a law prohibiting companies from using lie detectors during hiring, and a 1998 Supreme Court ruling held that polygraph results can’t be used as evidence in federal court. Nonetheless, the FBI and CIA still use it, and it’s certainly effective at eliciting confessions from jittery subjects, guilty or not.

[Read: Can you spot a liar?]

In the 1960s, the psychologist Paul Ekman theorized that body and facial movements can betray deception, a phenomenon he called “leakage.” Ekman’s work gave rise to a cottage industry of “body-language experts,” who could supposedly discern truth and falsehood from a speaker’s glances and fidgets. (It also inspired the TV series Lie to Me.) But Timothy R. Levine, a professor of communication studies at the University of Alabama at Birmingham, told me that the more researchers study deception cues, the smaller the effect size—which, he wrote in a blog post, makes these cues a “poster child” for the replication crisis in social sciences.

Language-based detection was the next frontier. Starting in the 1970s, studies found that liars use fewer self-references like I or we and more negative terms like hate or nervous. In the 1990s, researchers developed a system called reality monitoring, which is based on the theory that people recalling real memories will include more details and sensory information than people describing imagined events. A 2021 meta-analysis of 40 studies found that the reality-monitoring scores of truth tellers were meaningfully higher than those of liars, and in 2023, a group of researchers published an article in Nature arguing that the one reliable heuristic for detecting lies is level of detail.

Wall Street is a natural testing ground for these insights. Every quarter, executives present their best face to the world, and the investor’s job is to separate truth from puffery. Hedge funds have accordingly looked at language-based lie detection as a potential source of alpha.

In 2021, a former analyst named Jason Apollo Voss founded Deception and Truth Analysis, or DATA, with the goal of providing language-based lie detection to investors. Voss told me that DATA looks at 30 different language parameters, then clusters them into six categories, each based on a different theory of deception, including clarity (liars are vague), authenticity (liars are ingratiating), and tolerance (liars don’t like being questioned).

When I asked Voss for examples of DATA’s effectiveness, he pointed to Apple’s report for the third quarter of 2023, in which the company wrote that its “future gross margins can be impacted by a variety of factors … As a result, the Company believes, in general, gross margins will be subject to volatility and downward pressure.” DATA’s algorithm rated this statement as “strongly deceptive,” Voss said.

Three quarters later, Apple lowered its expectations about future gross margins. “So our assessment here was correct,” Voss said. But, I asked, where was the deception? They said their gross margins would be subject to downward pressure! Voss wrote in an email that the company’s lack of specificity amounted to “putting spin on the ball” rather than outright lying. “Apple is clearly obfuscating what the future results are likely to be,” he wrote.

Voss’s approach, for all its ostensible automation, still seemed fundamentally human: subjective, open to interpretation, and vulnerable to confirmation bias. Artificial intelligence, by contrast, offers the tantalizing promise of lie detection untainted by human intuition.

Until recently, every lie-detecting tool was based on a psychological thesis of deception: Liars sweat because they’re anxious; they avoid detail because they don’t have real memories to draw on. Machine-learning algorithms don’t need to understand. Show them enough pictures of dogs and they can learn to tell you whether something is a dog without really “knowing” what dog-ness means. Likewise, a model can theoretically be trained on reams of text (or audio or video recordings) labeled as deceptive or truthful and use the patterns it uncovers to detect lies in a new document. No psychology necessary.

Steven Hyde started researching language-based lie detection as a Ph.D. student in management at the University of Texas at San Antonio in 2015. He didn’t know how to code, so he recruited a fellow graduate student and engineer, Eric Bachura, and together they set out to build a lie detector to analyze the language of CEOs. “What if we could prevent the next Elizabeth Holmes?” Hyde recalls thinking. Part of the challenge was finding good training data. To label something a lie, you need to show not only that it was false, but also that the speaker knew it was false.

Hyde and Bachura looked for deception everywhere. They initially focused on corporate earnings calls in which statements were later shown to be false. Later, while building Coyote, Hyde added in speeches by politicians and celebrities. (Lance Armstrong was in there.) He also collected videos of deception-based game shows on YouTube.

A typical machine-learning tool would analyze the training data and use it to make judgments about new cases. But Hyde was wary of that brute-force approach, since it risked mislabeling something as truth or a lie because of confounding variables in the data set. (Maybe the liars in their set disproportionately talked about politics.) And so psychological theory crept back in. Hyde and Bachura decided to “teach” the algorithm how language-based lie detection works. First, they’d scan a piece of text for linguistic patterns associated with deception. Then they’d use a machine-learning algorithm to compare the statistical frequency of those elements in the document to the frequency of similar elements in the training data. Hyde calls this a “theory-informed” approach to AI.

When Hyde and Bachura tested their initial model, they found that it detected deception with 84 percent accuracy. “I was blown away,” Hyde said. “Like, no frickin’ way.” He used the tool to analyze Wells Fargo earnings calls from the period before the company was caught creating fake customer accounts. “Every time they talked about cross-sell ratio, it was coded as a lie,” he said—proof that the model was catching deceptive statements. (Hyde and Bachura later parted ways, and Bachura started a rival company called Arche AI.)

Hyde’s confidence made me curious to try out Coyote for myself. What dark truths would it reveal? Hyde’s business partner, Matthew Kane, sent over a link to the software, and I downloaded it onto my computer.

Coyote’s interface is simple: Upload a piece of text, audio, or video, then click “Analyze.” It then spits out a report that breaks the transcript into segments. Each segment gets a rating of “Truth likely” or “Deception likely,” plus a percentage score that represents the algorithm’s confidence level. (The scale essentially runs from negative 100, or totally dishonest, to positive 100, or totally truthful.) Hyde said there’s no official cutoff score at which a statement can be definitively called a lie, but suggested that for my purposes, any “Deception likely” score below 70 percent should be treated as true. (In my testing, I focused on text, because the audio and video software was buggy.)

I started out with the low-hanging fruit of lies. Bill Clinton’s 1998 statement to the grand jury investigating the Monica Lewinsky affair, in which he said that their encounters “did not constitute sexual relations,” was flagged as deceptive, but with a confidence level of just 19 percent—nowhere near Hyde’s suggested threshold score. Coyote was even less sure about O. J. Simpson’s statement in court asserting his innocence in 1995, labeling it deceptive with only 8 percent confidence. A wickedly treacherous soliloquy from Season 2 of my favorite reality show, The Traitors: 11 percent deceptive. So far, Coyote seemed to be a little gun-shy.

I tried lying myself. In test conversations with friends, I described fake vacation plans (spring break in Cabo), what I would eat for my last meal (dry gluten-free spaghetti), and my ideal romantic partner (cruel, selfish). To my surprise, over a couple of hours of testing, not a single statement rose above the 70 percent threshold that Hyde had suggested. Coyote didn’t seem to want to call a lie a lie.

[Read: Artificial intelligence is misreading human emotion]

What about true statements? I recruited friends to ask me questions about my life, and I responded honestly. The results were hard to make sense of. Talking about my morning routine: “Truth likely,” 2 percent confidence. An earnest speech about my best friend from middle school was coded as a lie, with 57 percent confidence. Telling my editor matter-of-factly about my reporting process for this story: 32 percent deception.

So according to Coyote, hardly any statements I submitted were obvious lies, nor were any clearly truthful. Instead, everything was in the murky middle. From what I could tell, there was no correlation between a statement’s score and its actual truth or falsehood. Which brings us back to my mom. When Coyote assessed her claim that she loved me, it reported that she was likely being deceptive—but its confidence level was only 14 percent. Hyde said that was well within the safe zone. “Your mom does love you,” he assured me.

I remained confused, though. I asked Hyde how it’s possible to claim that Coyote’s text analysis is 80 percent accurate if there’s no clear truth/lie cutoff. He said the threshold they used for accuracy testing was private.

Still, Coyote was a model of transparency compared to my experience with Deceptio.ai, a web-based lie detector. Despite the company’s name—and the fact that it bills itself as “AI-POWERED DECEPTION DETECTION”—the company’s CEO and co-founder, Mark Carson, told me in an email that he could not disclose whether his product uses artificial intelligence. That fact, he said, is “proprietary IP.” For my test-drive, I recorded myself making a truthful statement and uploaded the transcript. Among the suspicious terms that got flagged for being associated with deception: “actually” (could conceal undisclosed information), “afterwards” (indicates a passing of time in which you do not know what the subject was doing), and “but” (“stands for Behold the Underlying Truth”). My overall “truth score” was 68 percent, which qualified me as “deceptive.”

Deceptio.ai’s framework is based on the work of Mark McClish, who created a system called “Statement Analysis” while teaching interrogation techniques to U.S. marshals in the 1990s. When I asked McClish whether his system had a scientific foundation, he said, “The foundation is the English language.” I asked Carson, Deceptio.ai’s founder, about his level of confidence in the tool’s assessment. “This is a bit of ‘Trust me, bro’ science,” he said.

And maybe that’s enough for some users. A desktop app called LiarLiar purportedly uses AI to analyze facial movements, blood flow, and voice intonation in order to detect deception. Its founder, a Bulgarian engineer named Asen Levov, says he built the software in three weeks and released it last August. That first version was “very ugly,” Levov told me. Still, more than 800 users have paid between $30 and $100 to sign up for lifetime subscriptions, he said. He recently relaunched the product as PolygrAI, hoping to attract business clients. “I’ve never seen such early validation,” he said. “There’s so much demand for a solution like this.”

The entrepreneurs I spoke with all say the same thing about their lie detectors: They’re not perfect. Rather, they can help guide investigators by flagging possibly deceptive statements and inspiring further inquiry.

But plenty of businesses and law-enforcement agencies seem ready to put their faith in the tools’ judgments. In June, the San Francisco Chronicle revealed that police departments and prisons in California had used junk-science “voice-stress analysis” tests to assess job applicants and inmates. In one case, prison officials used it to discredit an inmate’s report of abuse by guards. Departments around the country subject 911 calls to pseudoscientific linguistic analysis to determine whether the callers are themselves guilty of the crimes they’re reporting. This has led to at least one wrongful murder conviction, ProPublica reported in December 2022. A 2023 federal class-action lawsuit in Massachusetts accused CVS of violating the state’s law against using lie detectors to screen job applicants after the company allegedly subjected interviewees to AI facial and vocal analysis. (CVS reached a tentative settlement with the lead plaintiff earlier this month.)

If the industry continues its AI-juiced expansion, we can expect a flood of false positives. Democratized lie detection means that prospective hires, mortgage applicants, first dates, and Olympic athletes, among others, would be falsely accused of lying all the time. This problem is unavoidable, Vera Wilde, a political theorist and scientist who studies research methodology, told me. There’s an “irresolvable tension,” she said, between the need to catch bad guys and creating so many false positives that you can’t sort through them.

And yet a future in which we’re constantly being subjected to faulty lie-detection software might be the best path available. The only thing scarier than an inaccurate lie detector would be an accurate one.

[Read: The lie detector in the age of alternative facts]

Lying is essential. It lubricates our daily interactions, sparing us from one another’s harshest opinions. It helps people work together even when they don’t agree and enables those with less power to protect themselves by blending in with the tribe. Exposing every lie would threaten the very concept of a self, because the version of ourselves we show the world is inherently selective. A world without lying would be a world without privacy.

Profit-driven companies have every incentive to create that world. Knowing a consumer’s true beliefs is the holy grail of market research. Law-enforcement personnel who saw Minority Report as an aspirational tale rather than a cautionary one would pay top dollar to learn what suspects are thinking. And who wouldn’t want to know whether their date was really into them? Devin Liddell, whose title is “principal futurist” at the design company Teague, says he could see lie-detection tools getting integrated into wearables and offering running commentary on our chatter, perhaps through a discreet earpiece. “It’s an extrasensory superpower,” Liddell told me.

Some companies are already exploring these options. Carson said Deceptio.ai is talking to a large dating platform about a partnership. Kane said he was approached by a Zoom rival about integrating Coyote. He expects automated language-based tools to overtake the polygraph, because they don’t require human administration.

I asked Hyde if he uses Coyote to analyze his own interactions. “Hell no,” he said. “I think it would be a bad thing if everyone had my algorithm on their phone, running it all the time. That would be a worse world.” Hyde said he wants to mitigate any damage the tool might inflict. He has avoided pitching Coyote to the insurance industry, a sector that he considers unethical, and he doesn’t want to release a retail version. He reminded me of the leaders of generative-AI companies who agonize publicly over the existential risk of superintelligent AI while insisting that they have no choice but to build it. “Even if Coyote doesn’t work out, I have zero doubt this industry will be successful,” Hyde said. “This technology will be in our lives.”

Hyde grew up Mormon, and when he was 19 the Church sent him on his mission to Peoria, Illinois. One day, one of the other missionaries came out to him. That man, Shane, is now one of Hyde’s best friends. Shane eventually left the Church, but for years he remained part of the community. Hyde thinks often about the number of times Shane must have lied to survive.

“The ability to deceive is a feature, not a bug,” Hyde said. No lies detected.

This article originally misstated the question that Mark Carson was responding to when he said, “This is a bit of ‘Trust me, bro’ science.”

The Urban Doom Loop Could Still Happen

2024-07-20T08:00:00-04:00

“It’s another truly amazing gold rush!” Marc Benioff posted on X in September 2023. The founder and CEO of Salesforce was celebrating San Francisco’s AI-fueled revival, touting a report that pegged demand for new office space in the city at nearly 1 million square feet. By February 2024, The Economist was declaring that “San Francisco staged a surprising comeback.”

It looked like quite a turnaround for a city whose epitaph had been written again and again since the pandemic. Just months before Benioff’s exclamatory post, Salesforce had reduced its office footprint, leaving the city’s tallest tower a costly emblem of urban decay. According to the “urban doom loop” hypothesis, reduced demand for office space would lead to a collapse in commercial real-estate values and, in turn, a decline in city revenues and services—which would then push even more businesses and workers out of the city. San Francisco, which famously experienced a major exodus of workers during the pandemic, was long considered the doom-loop poster child. If it could rebound from its struggles, then perhaps the rest of America’s cities would also avoid that fate.

But the comeback is not what it seems, and a doom loop is still possible. Historically, a booming economy has reliably translated into a booming commercial-real-estate sector. Now, however, San Francisco and other so-called superstar cities have entered a kind of Schrödinger’s economy, booming and busting at the same time. City leaders must come to terms with the fact that pre-pandemic office demand is never coming back, and plan accordingly.

By mid-2022, San Francisco was in trouble. Tens of thousands of people had moved out of the city, notable venture-capital investors had relocated to Miami, and multiple local tech companies—most notably Meta—had announced plans to embrace remote and flexible work permanently. The municipal budget deficit continued to expand.

Nationally, most cities were doing better, but the average vacancy rate was still inching into record territory. In October 2022, Bloomberg’s economic forecast put the odds of a recession at 100 percent, and the situation looked like it would only get worse. Barring some kind of deus ex machina, San Francisco and other cities seemed destined to continue spiraling downward.

And then God stepped out of the machine. In November 2022, San Francisco–based OpenAI launched ChatGPT and kicked off a new technology boom. In 2023 alone, investors poured nearly $30 billion into artificial-intelligence start-ups and billions more into AI-related public companies, many of which are based in and around San Francisco. Economic conditions across the country were equally surprising. The “inevitable” recession failed to materialize. By early 2024, the S&P 500 reached a new all-time high, unemployment remained low, and technology stocks reached a level of valuation (perhaps overvaluation) that exceeded the dot-com bubble. In many cities, including San Francisco, net migration flipped from negative to positive.

[Rogé Karma: Whatever happened to the urban doom loop?]

But something still wasn’t right. In the first quarter of this year, the national office-vacancy rate reached 20 percent, the highest level on record—even higher, slightly, than during the 2022 doldrums. In San Francisco, more than a third of all office space was vacant. In fact, shortly after Benioff’s celebratory X post, Salesforce again shrank its footprint, this time by 700,000 square feet. The AI boom was real, but so was the threat of urban doom. A similar dynamic has been playing out in cities across the country dependent on a variety of other industries.

This is unusual. For decades, office demand has been correlated with macroeconomic indicators, meaning that when the economy is strong, so is demand for commercial real estate. A model developed by the Commercial Real Estate Development Association (commonly and confusingly known by the acronym NAIOP) has done a pretty good job of predicting and explaining office demand based on GDP growth, corporate profits, employment, and other economic indicators since the early 1990s. But starting in 2022, that historic relationship broke down. As the economy emerged out of the pandemic, the model predicted that net office demand would increase by 43 million square feet. In reality, net demand was nearly 90 percent lower than expected and, by the following year, had turned negative, meaning more space was vacated than leased.

What explains the divergence? The obvious culprit is the rise of remote work.

Four years after the initial COVID-19 lockdowns, more than a quarter of all paid workdays are performed from home, according to an ongoing survey by the Stanford economics professor Nicholas Bloom and others. The main reason companies are reducing their office footprint is because they can. As more leases come up for renewal, vacancy continues to rise. Even without a recession, this trend is likely to endure as tenants continue to express a desire to cut down or let go of existing offices ahead of a wave of lease expirations in 2025 and 2026.

Within the academic community, there is some debate as to whether factors besides remote work, such as interest rates or recession expectations, are also to blame for persistently high vacancy rates. One thing is clear: Even if the economy continues to grow and unemployment remains low, high office vacancies will have an adverse impact on municipal budgets and residents’ quality of life. Lower crime, a rebound in tourism, and a slight increase in population won’t be enough to offset the loss of revenue from commercial property and business taxes because of lower rents and lower spending from regular commuters. Cities can diversify their tax base, but that would require changes to the physical environment that take years to materialize, plus direct investment and tax incentives. It would also necessitate a sense of urgency and determination that has been lacking in many cities—particularly in light of the recent “comeback.” Stijn Van Nieuwerburgh and Arpit Gupta, two of the authors of the original doom-loop paper, have recently updated their estimates based on the latest data and project that, despite some good news, “many American cities … will face significant tax revenue shortfalls in the years ahead.”

[Dror Poleg: The next crisis will start with empty office buildings]

Van Nieuwerburgh and Gupta’s latest assessment includes a new concern that was not part of the original thesis. Artificial-intelligence advances may reduce the number of office jobs and improve the quality of remote collaboration. Data from the epicenter of the AI revolution offers a preview. In 2003, the year in which Google first passed the $1 billion revenue mark, the company employed some 1,600 people. Last year, OpenAI required less than half that number of workers to exceed the same milestone. Over the past 18 months, Big Tech companies laid off tens of thousands of employees while growing their revenue and hiring fewer—but higher-paid—AI specialists. The “1 million square feet” sought by San Francisco’s AI companies sounds like a lot, but it is overshadowed by the city’s 30 million square feet of vacant office space and the specter of many more lease expirations in the coming years.

AI threatens to make the connection between economic activity and office demand, and thus between economic activity and city-budget health, even less linear and predictable. The possibility alone is enough to inject more uncertainty into labor and office markets that are already on edge. An economy in which most companies can predict their needs in advance and commit to long-term leases is not returning any time soon.

Ever since the pandemic, many landlords, mayors, and bosses have been going through what one might call “the five stages of office grief.” First, in 2020, there was denial that working from home would have any lasting impact. Then, in 2021, there was anger at employees who wouldn’t return, followed by bargaining on the exact number of days people would spend at the office. By 2022, depression had set in, and cities seemed ready to accept the need for radical change. Now, however, the country’s economic rebound provides new ammunition for those who wish to slide back into denial.

Our cities will be better served by embracing the transition to a world that is less centered around offices. That will require diversifying their economic base, streamlining the construction and conversion of new housing and mixed-use neighborhoods, enhancing public services, and doubling down on what makes urban life attractive in its own right—not just as an employment destination. And the effort must start with the recognition that, in good times and bad, the relationship between economic activity and office demand has changed forever.

What the VW-Rivian Deal Means for Big Auto

2024-07-08T07:00:00-04:00

Cars and trucks are the archetypal examples of industrial hardware. And automotive manufacturing historically has been all about finding ways to efficiently engineer and assemble metal, glass, and plastics into road-going vehicles with consumer appeal. But the big change in locomotion from the internal combustion engine to electric motors has shaken everything up. So when Volkswagen, the world’s highest-earning automaker, announced last month that it was going to invest billions of dollars into a joint venture with the start-up electric-vehicle maker Rivian, it was a dramatic sign of how much automaking has changed over the past decade.

Volkswagen is partnering with Rivian not because it wants access to the company’s manufacturing expertise or even its EV technology. It’s doing so because it wants access to Rivian’s software. What this deal represents is an admission by Volkswagen that it needs help, and that its attempt to go it alone with EVs has stalled. But that’s progress. As they say, the first step to solving a problem is admitting that you have one.

[Thomas Chatterton Williams: Touch screens are ruining cars]

On the face of it, the deal may look almost like an act of charity by Volkswagen. VW is investing $1 billion up front in Rivian itself, another $1 billion later this year in the joint venture (which will focus on developing software and electronics for EVs), and a further $2 billion if certain financial goals are met, plus an additional $1 billion loan to Rivian down the line. The EV maker, meanwhile, isn’t putting up any cash; all it’s contributing is its knowledge and intellectual property.

This is unquestionably a good deal for Rivian, because it’s getting what it most needs right now: money. Running a car company is very expensive, especially in the early stages when the company needs billions in plant and equipment, and it has no economies of scale because it isn’t making that many vehicles. (Rivian is supposed to sell 57,000 of its models this year. Volkswagen, in contrast, delivered more than 9 million vehicles worldwide last year.) Even though Rivian’s SUV and pickup truck have gotten glowing reviews and are very popular among high-end car buyers, the company is still losing more than $38,000 per vehicle. So VW’s billions will come in handy, which is why Rivian’s stock—which had been bumping along at about 10 percent of its 2021 IPO price—jumped 50 percent when the deal was announced.

What’s interesting, though, is that this could turn out to be an even better deal for Volkswagen. That’s because it could solve one of the biggest problems VW has faced in recent years: making software for its electric vehicles that actually works. When VW rolled out its ID.3 model, which was supposed to be its flagship electric sedan, the vehicle’s software was glitchy, the touch screen was unreliable, and some drivers complained that the traffic-detection technology was so erratic that their cars were braking suddenly for no reason.

Even more frustrating for owners, VW was unable to consistently update the software wirelessly in real time, something Tesla has been doing for years. At one point, ID owners had to drop their car off at the dealer to get a hardware update that was supposed to improve the software updates—an unofficial recall, in effect. Software problems also led to delays in the release of the ID.4 and actual recalls after its launch, as well as coding issues with vehicles from VW’s luxury brands Audi and Porsche.

[Read: Rivian wants to be the Apple of electric pickup trucks]

The striking thing is that these failures were not for lack of trying. Volkswagen was not a latecomer to the EV party, trying to buy its way in. Nor was it unaware of the importance of what the auto industry now calls software-defined vehicles. On the contrary, the company has been very committed to electric vehicles and invested heavily in pursuit of the future. VW has poured billions of dollars into manufacturing plants and building more than half a million charging stations across Europe (and some 4,000 in the United States). In 2019, the firm invested $2.6 billion in an autonomous-vehicle start-up called Argo AI. VW also launched a huge in-house software-development arm, Cariad, which planned to employ 10,000 “digital experts.” All of this investment made industry observers optimistic about VW’s electric future: In 2022, the research firm Bloomberg Intelligence predicted that Volkswagen would overtake Tesla as the world’s largest EV manufacturer by 2024.

That obviously did not happen. By market share, VW is now the fourth-largest EV maker in the world, behind Tesla and the Chinese companies BYD and SAIC. As yet, VW sells very few EVs in America. And the CEO who had championed the company’s aggressive move into electric and software-defined vehicles, Herbert Diess, was fired not long after Bloomberg made that prediction.

What went wrong? It was, in some sense, a textbook example of why big, established companies have a hard time adapting to new technologies and markets. After all, even as Volkswagen has been trying to pivot to EVs, it has continued making millions of gas-powered, ICE vehicles every year. So a lot of vested interests at the company had little immediate incentive in helping EVs take off. VW is also a large, bureaucratic organization that changes slowly. And its expertise was very much in hardware—manufacturing cars—not in software. Successful software-defined vehicles (such Teslas or Rivians) also tightly integrate hardware and software from the start. VW has struggled to do that, as the company’s leadership now seems well aware: Rivian is not, in fact, the only company VW has partnered with recently—it has also invested $700 million in a Chinese company named Xpeng, with which it’s planning to build “intelligent connected vehicles” for the Chinese market.

[Read: Tesla is not the next Ford. It’s the next Con Ed.]

To be sure, some electric vehicles from old-school car companies have become popular successes with fewer tech glitches; these include the Ford F-150 Lightning and Hyundai’s Ioniq. But today’s EV-market-defining companies (most obviously, Tesla and BYD) make only EVs and hybrids and are not weighed down by legacy investments, either physical or psychological. The same is true, of course, of Rivian.

All of this could mean that VW’s new joint venture is doomed to be another false start, a halting effort to retrofit cutting-edge technology to legacy auto manufacture. But this conclusion would drastically overstate the nature of Volkswagen’s problem as well as underestimate the potential gains of the deal. Volkswagen still has, after all, tremendous expertise in actually making vehicles, and that still matters in the car business. (When Tesla tried to ramp up manufacturing volume of its Model 3 sedan in 2018, the effort sent the company into what Elon Musk called “production hell.”) So if working with Rivian puts software in those vehicles that’s reliable and user-friendly, VW would be well on its way to realizing its ambition to be a force in the EV market. If you can’t beat ’em, join ’em could be VW’s winning strategy.

NASA Finally Has an Alternative to SpaceX

2024-06-05T11:25:15-04:00

A Boeing spacecraft launched from the coast of Florida into orbit this morning, taking off in the kind of picture-perfect weather that every rocket hopes for in Cape Canaveral. Two veteran NASA astronauts are now on their way to the International Space Station. This particular commute to the space station is a major moment in American space travel. Barry Wilmore, the mission commander, and Sunita Williams, the pilot, are test-driving the new vehicle, known as Starliner. It’s the first time Boeing has launched astronauts into space, and the first time a woman has flown a trial of a new orbital spacecraft.

Every astronaut vehicle that has blasted off from U.S. soil since the beginning of the Space Age has experienced a nail-biting maiden voyage. It is a relief every time a crew safely reaches orbit, especially on a test flight. But the initial success of this mission is particularly comforting because the astronauts are flying on Boeing’s creation, whose debut was delayed by a series of issues. On this first crewed launch, Boeing has proved that it is not a disaster. But its triumph will lead only to more nail-biters. To show that it is reliable, Starliner will have to bring the astronauts home a little over a week from now, and then repeat the whole endeavor.

The troubles of Boeing, the airplane manufacturer, have not reflected kindly on Boeing, the builder of spacecraft. Over the past couple of months, NASA has fielded questions from reporters about whether the mountain of safety issues at the company’s airline division has spilled over into the space department. Bill Nelson, the NASA administrator, has told reporters that Boeing CEO Dave Calhoun has previously assured him about the quality of the leadership at Boeing’s space division. (At the end of this year, Calhoun will become the second Boeing chief to step down in five years because of the turmoil.)

Boeing has a long history as a space contractor—it worked on Apollo rockets, the space station, and many projects in between. It’s also the primary contractor for NASA’s newest rocket, the Space Launch System, which is scheduled to launch astronauts toward the moon later this decade. With Starliner, Boeing is attempting to prove that it can deliver the nation’s astronauts to the space station and back by itself—and keep up with SpaceX, which has been doing the job since 2020. The effort has had its own share of technical problems and oversights, including in the past few weeks.

When NASA retired its fleet of space shuttles, in 2011, the space agency turned to the private sector for transporting people to and from the International Space Station, and soon after gave Boeing and SpaceX billion-dollar contracts to develop their own crewed systems. When the companies weren’t carrying government workers, they could sell seats to private citizens, a service that SpaceX has completed several times. SpaceX beat Boeing to the launchpad for an uncrewed test flight of its Dragon capsule, in 2019, which was mostly smooth from start to finish. But when Boeing followed later that year, the attempt had to be cut short. Starliner’s flight software malfunctioned soon after launch, and on the way down, engineers found and quickly patched a software glitch that would have resulted in complete failure of the mission—and, if any astronauts had been on board, the loss of lives.

After spending a year and a half wringing out software bugs, Boeing prepared in 2021 for a second attempt, only to discover more than a dozen corroded valves on the spacecraft as it sat waiting on top of the rocket. In 2022, Starliner finally made it to the International Space Station and back, but before Boeing could attempt a crewed flight, it had to address newly found problems with Starliner’s parachute system, as well as tape within the spacecraft that testing revealed to be flammable. Boeing finally felt ready enough to bring astronauts on board early last month, but the launch attempt was canceled hours before liftoff because of a faulty valve on the rocket. (The rocket, from the manufacturer United Launch Alliance, is used frequently, but it had never flown astronauts before today.) Over the next several weeks, engineers encountered more problems with Starliner itself, but by Saturday, NASA and Boeing felt ready to try again. “All is going well,” Mark Nappi, the manager of Boeing’s commercial-spaceflight program, said at a prelaunch press conference last week. But Starliner was grounded once again: an issue with a launchpad computer this time, one that turned up less than four minutes before the scheduled liftoff, when the astronauts and everyone watching likely believed that they were finally going.

Like the officials, the astronauts now flying on Starliner have stressed that the crewed mission may experience some problems. “Flying and operating in space is hard. It’s really hard, and we’re going to find some stuff,” Wilmore told reporters in March. Officials said the same about SpaceX’s first few crewed Dragon missions, but SpaceX’s launches weren’t preceded by quite so much bad press or quite so many glitches.

Wilmore and Williams are scheduled to arrive at the space station tomorrow. Along the way, the astronauts will briefly take control of the Boeing craft and see how it handles. Then Starliner must dock with the space station and later endure a fiery reentry through Earth’s atmosphere to touch down in the western United States, ideally at the primary landing site in the New Mexico desert. Starliner must pass each of these tests before NASA certifies the vehicle for regular flights, with more than two astronauts at a time, to the space station.

SpaceX underwent the same process in 2020 with its own inaugural crewed flight. By now NASA astronauts have flown on SpaceX often enough that it’s hardly a blip on space watchers’ radar. But the first few crewed flights on Dragon were all nerve-racking. The same will be true for Boeing’s Starliner. Boeing, in other words, is about to be tested publicly again and again. The writer Jerry Useem recently observed in The Atlantic that Boeing’s decisions in commercial air travel have in recent years turned “the company that created the Jet Age into something akin to a glorified gluer-together of precast model-airplane kits.” Another truncated space mission would certainly ding Boeing, and a major failure could turn a company that helped define the Space Age into an emblem of constant calamity.

The Rise of Poverty Inc.

2024-06-01T08:00:00-04:00

In 1964, President Lyndon B. Johnson declared “unconditional war on poverty,” and since then, federal spending on anti-poverty initiatives has steadily ballooned. The federal government now devotes hundreds of billions of dollars a year to programs that exclusively or disproportionately benefit low-income Americans, including housing subsidies, food stamps, welfare, and tax credits for working poor families. (This is true even if you exclude Medicaid, the single-biggest such program.)

That spending has done a lot of good over the years—and yet no one would say that America has won the War on Poverty. One reason: Most of the money doesn’t go directly to the people it’s supposed to be helping. It is instead funneled through an assortment of private-sector middlemen.

Beginning in the 1980s, the U.S. government aggressively pursued the privatization of many government functions under the theory that businesses would compete to deliver these services more cheaply and effectively than a bunch of lazy bureaucrats. The result is a lucrative and politically powerful set of industries that are fueled by government anti-poverty programs and thus depend on poverty for their business model. These entities often take advantage of the very people they ostensibly serve. Today, government contractors run state Medicaid programs, give job training to welfare recipients, and distribute food stamps. At the same time, badly designed anti-poverty policies have spawned an ecosystem of businesses that don’t contract directly with the government but depend on taking a cut of the benefits that poor Americans receive. I call these industries “Poverty Inc.” If anyone is winning the War on Poverty, it’s them.

Walk around any low-income neighborhood in the country and you’re likely to see sign after sign for tax-preparation services. That’s because many of the people who live in these neighborhoods qualify for the federal earned-income tax credit, which sent $57 billion toward low-income working taxpayers in 2022. The EITC is a cash cow for low-income-tax-prep companies, many of which charge hundreds of dollars to file returns, plus more fees for “easy advance” refunds, which allow people to access their EITC money earlier and function like high-interest payday loans. In the Washington, D.C., metro area, tax-prep fees can run from $400 to $1,200 per return, according to Joseph Leitmann-Santa Cruz, the CEO and executive director of the nonprofit Capital Area Asset Builders. The average EITC refund received in 2022 was $2,541.

Tax preparers might help low-income families access a valuable benefit, but the price they extract for that service dilutes the impact of the program. In Maryland, EITC-eligible taxpayers paid a total of at least $50 million to tax preparers in 2022, according to Robin McKinney, a co-founder and the CEO of the nonprofit CASH Campaign of Maryland—or about $1 of every $20 the program paid out in the state. “That’s $50 million not going to groceries, rent, to pay down student debt, or to meet other pressing needs,” McKinney told me.

[Annie Lowrey: The war on poverty is over. Rich people won.]

Low-income tax prep is just one of many business models premised on benefiting indirectly from government anti-poverty spending. Some real-estate firms manage properties exclusively for tenants receiving federal housing subsidies. Specialty dental practices cater primarily to poor children on Medicaid. The “dental practice management” company Benevis, for example, works with more than 150 dental practices nationwide, according to its website, and reports that more than 80 percent of its patients are enrolled in either Medicaid or the Children's Health Insurance Program. (In 2018, Benevis and its affiliated Kool Smiles clinics agreed to pay $23.9 million to settle allegations of Medicaid fraud brought by federal prosecutors. The companies did not admit wrongdoing.)

A second crop of companies that make up Poverty Inc. are the contractors paid directly to deliver services on the government’s behalf. The 1996 welfare-reform legislation repealed a federal prohibition on contracting out for welfare services. Barely a month after President Bill Clinton signed it into law, behemoths such as Lockheed Martin, Andersen Consulting, and Electronic Data Systems were vying for multimillion-dollar contracts to run state welfare systems. Today, the sector is dominated by firms like Maximus, a full-service contractor that, among other things, operates the state of Texas’s entire welfare system. Over the years, Maximus has been hit with multiple lawsuits and investigations, including a 2007 federal prosecution resulting in a $30.5 million settlement over allegations of Medicaid fraud and a 2023 federal class-action suit alleging that a data breach exposed the personal information of 612,000 Medicare beneficiaries. In 2023, Maximus reported revenues of $4.9 billion and gross profits of $1 billion. Its CEO made nearly $7 million in total compensation last year (including $5 million in stock).

Contractors also deliver most government-funded job-training programs, which have a well-deserved reputation for ineffectiveness. One reason is the abundance of companies that are approved to receive federal funds as “eligible training providers” despite showing unimpressive results. In California, that includes institutions such as Animal Behavior College in Valencia, which offers an online dog-grooming course for a total cost of $6,298.87—and whose graduates were making median quarterly earnings of just $5,000 six months after graduation, according to state data.

Perhaps the greatest damage that Poverty Inc. inflicts is through inertia. These industries don’t benefit from Americans rising out of poverty. They have a business interest in preserving the existing structure of the government programs that create their markets or provide their cushy contracts. The tax-prep industry, for instance, has spent millions over the past 20 years to block the IRS from offering a free tax-filing option to low-income taxpayers. The irony is that this kind of rent-seeking is exactly what policy makers thought they were preventing when they embraced privatization 40 years ago.

In his second term, President Ronald Reagan empaneled the President’s Commission on Privatization, which recommended the wholesale transfer of major government functions to the private sector, including Medicare, jails and prisons, public schools, and even air-traffic control. Privatization advocates were heavily influenced by “public-choice theory,” posited by the Nobel-winning economist James M. Buchanan. According to Buchanan, government agencies are as motivated by self-interest as any other entity. Instead of serving the public good, Buchanan argued, bureaucrats act to preserve their own status by maximizing their budgets and job security. Insulated from competition, they become inefficient and detached from the public interest.

Privatization was supposed to pop that bubble of bureaucratic indolence. Instead, it merely shifted it from government agencies to corporate boardrooms.

Perhaps the clearest example of public-choice theory turned on its head is Job Corps, a $1.8 billion job-training program for young adults that, unlike most War on Poverty initiatives, has been contracted out since its inception in 1964. Decades of evidence suggest that the program accomplishes very little. It served barely 50,000 students a year before the pandemic, meaning it cost about $34,000 a student. (Job Corps largely shut down during the pandemic and hasn’t fully restored operations since.) In one 2018 audit, the Department of Labor’s inspector general concluded that the program “could not demonstrate beneficial job training outcomes.” Another investigation, by the Government Accountability Office, noted more than 13,500 safety incidents from 2016 to 2017 at Job Corps centers, nearly half of them drug-related episodes or assaults. In 2015, two students were murdered in separate campus-related crimes. Critics have also questioned the value of running an expensive residential program in mostly rural areas, far from actual jobs.

[K. Sabeel Rahman: Fix America by undoing decades of privatization]

Nevertheless, Job Corps administrators manage to hang on to government contracts for decades. (One such company notes on its website that it won its first Job Corps contract in 1964.) Today, the biggest operator is the Management & Training Corporation, a Utah-based company that runs 20 Job Corps centers nationwide. In 2022, MTC won three multiyear contracts, worth a total of about $263 million, to run Job Corps Centers in Nevada, New Jersey, and Hawaii. The program remains popular in Congress, especially in districts where centers are located. The Friends of Job Corps Congressional Caucus, organized by a lobbying organization for Job Corps contractors, has 80 members. (MTC’s president serves on the organization’s board.)

Contractors’ longevity stems in part from their ability to outlast administrations—and the simple fact that, once a contract is awarded, the company that wins it often becomes a de facto monopoly. When the next contract rolls around, there may be no credible competitors.

In short, an effort to curtail Big Government has instead preserved the worst of both worlds: all the spending and bloat of government, with none of the public accountability. No wonder, then, that poverty sticks around. There’s simply too much demand for it.

Why Your Vet Bill Is So High

2024-04-25T09:31:00-04:00

In the pandemic winter of 2020, Katie, my family’s 14-year-old miniature poodle, began coughing uncontrollably. After multiple vet visits, and more than $1,000 in bills, a veterinary cardiologist diagnosed her with heart failure. Our girl, a dog I loved so much that I wrote an essay about how I called her my “daughter,” would likely die within nine months.

Katie survived for almost two years. My younger son joked that Katie wasn’t going to let advanced heart failure get in the way of her life goal of never leaving my side, but the truth was that I was the one who wouldn’t let her go. Katie’s extended life didn’t come cheap. There were repeated scans, echocardiograms, and blood work, and several trips to veterinary emergency rooms. One drug alone cost $300 a month, and that was after I shopped aggressively for discounts online.

People like me have fueled the growth of what you might call Big Vet. As household pets have risen in status—from mere animals to bona fide family members—so, too, has owners’ willingness to spend money to ensure their well-being. Big-money investors have noticed. According to data provided to me by PitchBook, private equity poured $51.6 billion into the veterinary sector from 2017 to 2023, and another $9.3 billion in the first four months of this year, seemingly convinced that it had discovered a foolproof investment. Industry cheerleaders pointed to surveys showing that people would go into debt to keep their four-legged friends healthy. The field was viewed as “low-risk, high-reward,” as a 2022 report issued by Capstone Partners put it, singling out the industry for its higher-than-average rate of return on investment.

[From the December 2022 issue: How much would you pay to save your pet’s life?]

In the United States, corporations and private-equity funds have been rolling up smaller chains and previously independent practices. Mars Inc., of Skittles and Snickers fame, is, oddly, the largest owner of stand-alone veterinary clinics in the United States, operating more than 2,000 practices under the names Banfield, VCA, and BluePearl. JAB Holding Company, the owner of National Veterinary Associates’ 1,000-plus hospitals (not to mention Panera and Espresso House), also holds multiple pet-insurance lines in its portfolio. Shore Capital Partners, which owns several human health-care companies, controls Mission Veterinary Partners and Southern Veterinary Partners.

As a result, your local vet may well be directed by a multinational shop that views caring for your fur baby as a healthy component of a diversified revenue stream. Veterinary-industry insiders now estimate that 25 to 30 percent of practices in the United States are under large corporate umbrellas, up from 8 percent a little more than a decade ago. For specialty clinics, the number is closer to three out of four.

And as this happened, veterinary prices began to rise—a lot. Americans spent an estimated $38 billion on health care and related services for companion animals in 2023, up from about $29 billion in 2019. Even as overall inflation got back under control last year, the cost of veterinary care did not. In March 2024, the Consumer Price Index for urban consumers was up 3.5 percent year over year. The veterinary-services category was up 9.6 percent. If you have ever wondered why keeping your pet healthy has gotten so out-of-control expensive, Big Vet just might be your answer.

To get a sense of what might happen when the profit-seeking dial gets turned up too high in veterinary medicine, we need look no further than human health care. An extensive body of research shows that when private equity takes over a hospital or physician practice, prices and the number of expensive procedures tend to go up. A study found serious medical errors occur more frequently after private equity buys the hospital. Another study found that costs to patients rise, too, sometimes substantially. And that’s in a tougher regulatory environment. In veterinary medicine, there is no giant entity like Medicare capable of pushing back on prices. There is no requirement, in fact, to provide care at all, no matter how dire the animal’s condition. Payment is due at the time of service or there is no service.

Whenever I told people I was working on this article, I was inundated with Big Vet complaints. Catherine Liu, a professor at UC Irvine, took her elderly pit-bull mix, Buster, to a local VCA when he became lethargic and began drooling excessively. More than $8,000 in charges later, there was still no diagnosis. “Sonograms, endoscopy—what about just a hypothesis of what the symptoms could be? Nothing like that at all was forthcoming,” Liu told me. Shortly before Buster died, a vet in private practice diagnosed him with cancer. The disease, Liu said, had not once been mentioned by the vets at VCA. (Mars Petcare, VCA’s parent company, declined to comment on the episode.)

I don’t mean to single out VCA here—in fact, I should note that a VCA vet’s medical protocol was almost certainly responsible for my dog’s longer-than-expected life. One reason Mars-owned chains attract outsized attention for their high costs and customer-service failures is that the company actually brands its acquisitions. That’s unusual. A study conducted by the Arizona consumer advocate Todd Nemet found that fewer than 15 percent of corporate-owned practices in the state slap their own brand identity on their vets; most keep the original practice name, leaving customers with the illusion of local ownership. (When I asked Thrive Pet Healthcare, a chain majority-owned by TSG Consumer Partners, about why the company doesn’t brand its clinics, a spokesperson replied, “We realize the value of local hospital brands and are committed to preserving and supporting them.”)

Indeed, some pet owners told me that they realized that ownership of their vet had changed only after what they thought was a routine visit resulted in recommendations for mounds of tests, which turned out to have shot up in price. Paul Cerro, the CEO of Cedar Grove Capital, which invests in the pet industry, says this issue is frequent in online reviews. “People will say, ‘I’ve been coming here for four years, and all of a sudden I’m getting charged for things I’ve never been charged for,’ and they give it one star.”

[Read: The great veterinary shortage]

Big Vet denies charging excessive prices. VCA Canada, for instance, recently told The Globe and Mail that prices can increase after an acquisition because “the quality of the care, the quality of everything we offer to them, goes up as well.” A spokesperson for Mars told me, “We invest heavily in our associates, hospitals, state-of-the-art equipment, technology, and other resources.” NVA, which is planning an initial public offering in 2025 or 2026, did not directly answer a question about why veterinary prices were rising so rapidly, instead sending me a statement saying, in part, “Our vision is to build a community of hospitals that pet owners trust, are easy to access, and provide the best possible value for care.”

Do rising prices really just reflect higher-quality care? There may be some truth to this, but there is also evidence to the contrary. A study published last year in the Journal of the American Veterinary Medical Association, for example, found that vets working for large corporations reported more pressure to generate revenue, whereas veterinarians working for independent practices reported higher levels of satisfaction for such things as the “ability to acquire new large equipment” and the “ability to get new/different drugs.” Preliminary research by Emma Harris, the vice president of Vetster, a veterinary telehealth start-up, found significant differences in pricing between corporate and privately owned veterinary clinics in the same geographic region. Usually, she told me, the increases “occurred immediately after the sale to a private-equity-owned group.”

All of this doesn’t sit well with many in the sector. Vets tend to be idealistic, which makes sense given that many of them rack up six figures in student-loan debt to pursue a profession that pays significantly less than human medicine. One vet, who worked for an emergency-services practice that, they said, raised prices by 20 percent in 2022, told me, “I almost got to the point where I was ashamed to tell people what the estimate was for things because it was so insanely high.” (The vet asked for anonymity because they feared legal repercussions.) Others described mounting pressure to upsell customers following acquisition by private equity. “You don’t always need to take X-rays on an animal that’s vomited just one time,” Kathy Lewis, a veterinarian who formerly worked at a Tennessee practice purchased in 2021 by Mission Veterinary Partners, told me. “But there was more of that going on.” Prices increased rapidly as well, she said, leading to customer complaints. (Mission Veterinary Partners did not respond to requests for comment.)

The combination of wheeling-and-dealing and price increases in the veterinary sector is beginning to attract the government’s attention. In the United States, the Federal Trade Commission required, in a 2022 consent decree, that JAB seek prior approval before purchasing any emergency or specialty clinic within 25 miles of one it already owns in California and Texas for the next decade. In her written comments, FTC Chair Lina Khan said she feared these one-by-one purchases could lead to the development of a stealth monopoly. (JAB denied any wrongdoing.) And in the United Kingdom, where corporate ownership is higher than in the United States (even the practice originally owned by the author of the classic veterinary novel All Creatures Great and Small has been rolled up), government authorities are moving forward with an investigation into high prices and market concentration after an initial inquiry drew what regulators called an “unprecedented” response from the public.

Pet owners used to have an easier time accepting the short lives of domestic animals. Few people were taking the barnyard cat or junkyard dog in for chemotherapy or ACL surgery, to say nothing of post-op aquatic physical therapy. “When we started out over 20 years ago, you had to live near a veterinary teaching hospital to have access to something like an MRI,” Karen Leslie, the executive director of the Pet Fund, a charity that aids people with vet bills, told me. “Now it’s the standard of care. It’s available basically everywhere—but that starts at $2,000.”

Big Vet, in Leslie’s view, helped fuel an increase in expensive services. The same medical progress that’s helped humans beat back once-fatal diseases is doing the same for cats and dogs, extending their life spans to record lengths. But only if you have the money to pay for it. Some pets—my late Katie, Liu’s late Buster—receive one expensive test or treatment after another, sometimes helpful, sometimes not. Other equally loved pets may go without basic care altogether, or even fall victim to what the industry calls “economic euthanasia,” where they are put down because their owners can’t afford their medical bills. (Pet insurance, widely promoted by the industry, is unlikely to help much. Uptake rates are in the low single digits, a result of relatively high costs and often-limited benefits.)

[Watch: Volunteer veterinarians in Ukraine]

The American Veterinary Medical Association’s tracker shows that vet visits and purchases of heartworm and flea-and-tick medications are down compared with this month last year, even as practice revenues are up, suggesting that some owners are having trouble affording routine, preventative care. The market researcher Packaged Facts found that a full third of pet owners say that they would take their animal to the vet more often if it were less expensive. Shelter Animals Count, an animal-advocacy group, reports that the number of pets surrendered to shelters rose in the past two years. Carol Mithers, the author of the upcoming book Rethinking Rescue, told me that some people give up pets because they believe the shelter system will provide them with necessary medical treatment—something that is, heartbreakingly, not true.

The veterinary past is easy to romanticize. The truth is that pets have never received all the needed care, and that wealthy pet owners have always had access to more care. But the emergence of Big Vet and the injection of cutthroat incentives into a traditionally idealistic, local industry threaten to make these problems far worse. It portends a future in which some pet owners get shaken down, their love for their pets exploited financially, while others must forego even basic care for their pets. I don’t think Katie, who loved all animals, would approve. I certainly don’t.

Boeing and the Dark Age of American Manufacturing

2024-04-20T08:00:00-04:00

The sight of Bill Boeing was a familiar one on the factory floor. His office was in the building next to the converted boatyard where workers lathed the wood, sewed the fabric wings, and fixed the control wires of the Boeing Model C airplane. there is no authority except facts. facts are obtained by accurate observation read a plaque affixed outside the door. And what could need closer observation than the process of his aircraft being built? One day in 1916, Boeing spotted an imperfectly cut wing rib, dropped it to the floor, and slowly stomped it to bits. “I, for one, will close up shop rather than send out work of this kind,” he declared.

When David Calhoun, the soon-to-be-lame-duck CEO of the company Boeing founded, made a rare appearance on the shop floor in Seattle one day this past January, circumstances were decidedly different. Firmly a member of the CEO class, schooled at the knee of General Electric’s Jack Welch, Calhoun had not strolled over from next door but flown some 2,300 miles from Boeing’s headquarters in Arlington, Virginia. And he was not there to observe slipshod work before it found its way into the air—it already had. A few weeks earlier, the door of a Boeing 737 had fallen out mid-flight. In the days following his visit, Calhoun’s office admitted that it still didn’t know quite what had gone wrong, because it didn’t know how the plane had been put together in the first place. The door’s restraining bolts had either been screwed in wrong, or not at all. Boeing couldn’t say, because, as it told astonished regulators, the company had “no records of the work being performed.”

The two scenes tell us the peculiar story of a plane maker that, over 25 years, slowly but very deliberately extracted itself from the business of making planes. For nearly 40 years the company built the 737 fuselage itself in the same plant that turned out its B-29 and B-52 bombers. In 2005 it sold this facility to a private-investment firm, keeping the axle grease at arm’s length and notionally shifting risk, capital costs, and labor woes off its books onto its “supplier.” Offloading, Boeing called it. Meanwhile the tail, landing gear, flight controls, and other essentials were outsourced to factories around the world owned by others, and shipped to Boeing for final assembly, turning the company that created the Jet Age into something akin to a glorified gluer-together of precast model-airplane kits. Boeing’s latest screwups vividly dramatize a point often missed in laments of America’s manufacturing decline: that when global economic forces carried off some U.S. manufacturers for good, even the ones that stuck around lost interest in actually making stuff.

The past 30 years may well be remembered as a dark age of U.S. manufacturing. Boeing’s decline illustrates everything that went wrong to bring us here. Fortunately, it also offers a lesson in how to get back out.

In Bill Boeing’s day, the word manufactory had cachet. You could bank at the Manufacturers Trust. Philadelphia socialites golfed at the Manufacturers’ Club. Plans for the newly consecrated Harvard Business School called for a working factory on campus. The business heroes of the day—Ford, Edison, Firestone—had risen from the shop floor.

There, they had pioneered an entirely new way of making things. The American system of production—featuring interchangeable parts, specialized machine tools, moving assembly lines—was a huge leap beyond European methods of craft production. And it produced lopsided margins of victory for the likes of Ford, GM, and Boeing. To coordinate these complex new systems, two new occupations arose: the industrial engineer, who spoke the language of the shop floor, and the professional financial manager, who spoke the language of accounting.

[Charlie Warzel: Flying is weird right now]

At first the engineers held sway. In a 1930 article for Aviation News, a Boeing engineer explained how the company’s inspectors “continually supervise the fabrication of the many thousands of parts entering into the assemblage of a single plane.” Philip Johnson, an engineer, succeeded Bill Boeing as CEO; he then passed the company to yet another engineer, Clairmont Egtvedt, who not only managed production of the B-17 bomber from the executive suite, but personally helped design it.

After the Second World War, America enjoyed three decades of dominance by sticking with methods it had used to win it. At the same time, a successor was developing, largely unnoticed, amid the scarcities of defeated Japan. The upstart auto executive Eiji Toyoda had visited Ford’s works and found that, however much he admired the systems, they couldn’t be replicated in Japan. He couldn’t afford, for instance, the hundreds of machine tools specialized to punch out exactly one part at the touch of a button. Although his employees would have to make do with a few general-purpose stamping presses, he gave these skilled workers immense freedom to find the most efficient way to run them. The end result turned out to be radical: Costs fell and errors dropped in a renewable cycle of improvement, or kaizen.

What emerged was a different conception of the corporation. If the managerial bureaucrats in the other departments were to earn their keep, they needed a thorough understanding of the shop floor, or gemba (roughly “place of making value”). The so-called Gemba Walk required their routine presence at each step until they could comprehend the assembly of the whole. Otherwise they risked becoming muda—waste.

When the wave of Japanese competition finally crashed on corporate America, those best equipped to understand it—the engineers—were no longer in charge. American boardrooms had been handed over to the finance people. And they were hypnotized by the new doctrine of shareholder value, which provided a rationale for their ascendance but little incentive for pursuing long-term improvements or sustainable approaches to cost control. Their pay packages rewarded short-term spikes in stock price. There were lots of ways to produce those.

Which brings us to the hinge point of 1990, when a trio of MIT researchers published The Machine That Changed the World, which both named the Japanese system—“lean production”—and urged corporate America to learn from it. Just then, the Japanese economy crashed, easing the pressure on U.S. firms. In the years that followed, American manufacturers instead doubled down on outsourcing, offshoring, and financial engineering. This round of wounds was self-inflicted. Already infused with a stench of decay, manufacturing was written off as yesterday’s activity.

At GE, which produced three of Boeing’s last four CEOs, manufacturing came to be seen as “grunt work,” as the former GE executive David Cote recently told Fortune’s Shawn Tully. Motorola—founded as Galvin Manufacturing and famed for its religious focus on quality—lost its lead in mobile-phone making after it leaned into software and services. Intel’s bunny-suited fab workers were the face of high-tech manufacturing prowess until the company ceded hardware leadership to Asian rivals. “Having once pioneered the development of this extraordinary technology,” the current Intel CEO, Pat Gelsinger, wrote recently, “we now find ourselves at the mercy of the most fragile global supply chain in the world.”

Phil Condit, the talented engineer who had overseen design of the hugely successful 777, was atop Boeing when I visited the company in late 2000. He was no stranger to the shop floor. Traversing Boeing’s Everett plant in a golf cart, he pointed out the horizontal tail fin stretching above us. Hard to believe it was larger than the 737’s wing, he marveled. Waiting back in his office—still located on the bank of the Duwamish River but greatly swollen by the recent merger with McDonnell Douglas—was a different sort of glee. “Wow! Double wow!” his mother had emailed him, referring to Boeing’s closing stock price that day. And, it would soon emerge, he wanted to get some distance from what he described to the Puget Sound Business Journal as “how-do-you-design-an-airplane stuff.” The next year, he moved Boeing’s headquarters to Chicago, pulling the top brass away from the shop floor just as the company was embarking on a radically new approach to airplane assembly.

Its newest plane, the 787 Dreamliner, would not be an in-house production. Instead Boeing would farm out the designing and building to a network of “partner” companies—each effectively its own mini-Boeing with its own supply chain to manage. “It used to be you’d have some Boeing people develop the blueprints, then march over and say, ‘Hey, would you build this for me?’” Richard Safran, an analyst at Seaport Research Partners and a former aerospace engineer, told me. “Now, instead, you’re asking them to design it, to integrate it, to do the R&D.”

The allures of this “capital light” approach were many: Troublesome unions, costly machine shops, and development budgets would all become someone else’s problem. Key financial metrics would instantly improve as costs shifted to other firms’ balance sheets. With its emphasis on less, the approach bore a superficial resemblance to lean production. But where lean production pushed know-how back onto the shop floor, this pushed the shop floor and its know-how out the door altogether.

Beyond that were the problems that a Boeing engineer, L. J. Hart-Smith, had foreseen in a prescient white paper that he presented at a 2001 Boeing technical symposium. With outsourcing came the possibility that parts wouldn’t fit together correctly on arrival. “In order to minimize these potential problems,” Hart-Smith warned, “it is necessary for the prime contractor to provide on-site quality, supplier-management, and sometimes technical support. If this is not done, the performance of the prime manufacturer can never exceed the capabilities of the least proficient of the suppliers.”

Boeing didn’t listen. Wall Street dismissed Hart-Smith’s paper as a “rant,” and Boeing put each supplier in charge of its own quality control. When those controls failed, Boeing had to bear the cost of fixing flawed components. Most troubling was the dangerous feedback loop Hart-Smith foresaw. Accounting-wise, those fixes, which in reality are the costs of outsourcing, would instead appear as overhead—creating the impression that in-house work was expensive and furthering the rationale for offloading even more of the manufacturing process.

In the short term, this all worked wonders on Boeing’s balance sheet: Its stock rose more than 600 percent from 2010 to 2019. Then the true folly of this approach made its inevitable appearance when two strikingly similar crashes caused by faulty software on Boeing planes killed a total of 346 people.

[James Surowiecki: What’s gone wrong at Boeing]

Today, if you stand along the Seattle waterfront long enough, sooner or later you’ll catch sight of a train headed south carrying the distinctive shape of a Boeing 737. Though it’s colored a metallic green and missing its tail—clearly not the finished product—it’s the kind of thing you point to and say, Look kids, a Boeing plane’s on that train! Not so. The logomark on the side spells it out: Spirit AeroSystems of Wichita, Kansas, has built this fuselage, which isn’t coming from Boeing. It’s going to Boeing.

A plane is a complex system in which the malfunction of one piece can produce catastrophic failure of the whole. Assembly must be tightly choreographed. But now—especially with Boeing continually trying to wring costs from its suppliers—there were many more chances for errors to creep in. And when FAA investigators finally toured the premises of Spirit AeroSystems—maker of the blown-out door as well as the fuselage it was supposed to fit in—they did not find a tight operation. They found one door seal being lubricated with Dawn liquid dish soap and cleaned with a wet cheesecloth, and another checked with a hotel-room key card.

A dark age doesn’t descend all at once. The process of emerging from one also takes time. It must begin with a recognition that something has been lost. Boeing’s fall just might have provided that rush of clarity. You could be from the 12th century and still know that soap and cheesecloth aren’t for making flying machines. Boeing’s chief financial officer recently admitted that the company got “a little too far ahead of itself on the topic of outsourcing.” It is in talks to reacquire Spirit AeroSystems and is already making the composite wings of its next-gen plane, the 777X, in-house at a new, billion-dollar complex outside Seattle. “Aerospace Executives Finally Rediscover the Shop Floor,” Aviation Week declared on the cover of a recent issue.

As for the rest of corporate America, one of the strongest signals may be coming from the company Boeing has striven so hard to emulate: GE. Under operations-minded boss Larry Culp, the company is finally—only 40 or so years late—pushing itself through a crash course in lean manufacturing. It is belatedly yielding to the reality that workers on the gemba are far better at figuring out more efficient ways of making things than remote bureaucrats with spreadsheet abstractions.

In the crucial field of semiconductors, meanwhile, Intel has recognized that Moore’s Law (the doubling of computing power roughly every 18 months) flows not from above but from manufacturing advances it once dominated. It has undertaken a “death march,” in the words of CEO Pat Gelsinger, to regain its lost edge on the foundry floor. The CHIPS Act has put a powerful political wind at his back. Green and other incentives are powering a broader, truly seismic surge in spending on new U.S. factories, now going up at three times their normal rate. No other country is experiencing such a buildout.

Add all the capacity you want. It won’t reverse the country’s long decline as a manufacturing superpower if corporate America keeps gurgling its sad, tired story about the impossibility of making things on these shores anymore. It’s a story that helped pour a whole lot of wealth into the executive pockets peddling it. But half a century of self-inflicted damage is enough. The doors have fallen off, and it’s plain for all to see: The story was barely bolted together.

Welcome to Pricing Hell

2024-04-16T07:00:00-04:00

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On February 15, Ron Ruggless was sitting in his home office in Dallas, listening to a Wendy’s earnings call—something he does every quarter as an editor and reporter for Nation’s Restaurant News. When the new CEO of Wendy’s mentioned that the company might introduce “dynamic pricing” in 2025, Ruggless wasn’t surprised; many restaurants have started adjusting prices depending on the time of day or week. It seemed like minor news, so he wrote up a brief report. He didn’t even bother to post it on social media.

About 10 days later, Ruggless saw that Wendy’s was going viral. The Daily Mail and the New York Post had picked up the story, framing the new policy as “surge pricing.” On X, Senator Elizabeth Warren called the plan “price gouging plain and simple.” Burger King trolled Wendy’s: “We don’t believe in charging people more when they’re hungry.” Wendy’s went into damage control. In a statement, it claimed that it wasn’t planning to raise prices during high-demand times, but rather to lower prices during low-demand times. That distinction was lost on most observers—including, frankly, this one—and the narrative took hold that Wendy’s was the next Uber.

The anti-Wendy’s backlash made sense. Who wants to pull into a drive-through without knowing how much the food is going to cost? But it was also selective. Dynamic pricing is hardly new. Airlines have been charging flexible fares for decades. Prices on Amazon change millions of times a day. Grocery stores have begun using digital displays to adjust prices on the fly. The list grows by the week.

Prices aren’t just changing more often—they’re getting more complex, too. Fees, long the specialty of banks and credit-card companies, have proliferated across industries. Previously self-contained products (toothbrushes, movies, Microsoft Word) have turned into subscriptions, while previously bundled items (Wi-Fi at hotels, meals on airplanes) are now sold separately. Buying stuff online means navigating a flurry of discount codes, often just expired. Meanwhile, prices are becoming more personalized as companies hoover up customer data.

We’re used to thinking of prices as static and universal. Sure, they might rise with inflation or dip during a sale, but in general, the price is the price, and it’s the same for everyone. And we like it that way. It makes our economic lives predictable, and, perhaps more importantly, it feels fair. But that arrangement is under attack from two directions. The first is obfuscation: the breaking down of prices into components and the piling on of fees. The second is discrimination: the charging of different prices to different customers at different times.

Contempt for fees is strong enough to unite even Republicans and Democrats, and price discrimination isn’t any more popular. One survey showed that half of customers think of dynamic pricing as price gouging; surge pricing in rideshare apps leads to more customer complaints; and polls show that shoppers are worried about companies collecting their data to shape prices.

The battle is not just between businesses and consumers, but also between economists, who prize efficiency, and the rest of us, who care about fairness. And right now, efficiency is running away with it. For every Wendy’s, there are a thousand companies quietly implementing similar schemes, in an ongoing quest to get every last burger—or car, or ink cartridge, or hotel room—into every last hand, for every last penny. Despite the occasional outcry, the era of the single price is rapidly fading into the past. In many ways, it’s already gone.

Pricing occupies a murky space between the mind and the gut. Some early philosophers thought the price of a thing should be determined by its “intrinsic” value, whatever that means, while others argued that its utility mattered most. Plato was against variable pricing. “He who sells anything in the agora shall not ask two prices for that which he sells, but he shall ask one,” he wrote in Laws. He also inveighed against the hotel fees of his day, condemning people who show hospitality to travelers but then extract “the most unjust, abominable, and extortionate ransom.”

The rise of the market economy shifted the understanding of price to be whatever someone is willing to pay for it. But even then, price remained attached to our sense of right and wrong. John Wanamaker, the Philadelphia entrepreneur credited with inventing the price tag in the 1800s, was a devout Christian whose advertisements promised “no favoritism.” According to a hagiographic history of the Wanamaker empire from 1911, “One price to all was neither more nor less than the application to merchandising of the immortal note of equality sounded in the second sentence of the Declaration on Independence.” The price tag had practical benefits, too: You didn’t have to train employees to haggle.

Modern pricing “innovation” took off with the airlines. From the late 1930s through the 1970s, airfares were set by the government, so airlines competed on the basis of amenities. (In 1977, the syndicated columnist George F. Will reflected on his preference for United Airlines because it offered macadamia nuts instead of peanuts. “The macadamia nut is one of God’s more successful efforts,” he wrote. “It has a cachet that the pedestrian peanut cannot match.”) That changed with the Airline Deregulation Act of 1978, which preceded decades of “fare wars.” Discount carriers like People Express were soon undercutting the legacy airlines and encroaching on their routes. This forced the old-timers to revamp their pricing practices.

In his book Revenue Management: Hard-Core Tactics for Market Domination, the pricing consultant Robert Cross recalls watching a Delta employee hand out discounts for the last empty seats on a flight in the early 1980s. Cross knew the plane would fill up with business travelers at the last minute, so he suggested holding those seats and charging a higher fare. This idea—selling seats for a lower price if you book early and a higher price later—transformed the airline industry, and saved the legacy airlines.

[Ganesh Sitaraman: Airlines are just banks now]

From there, the field of revenue management, or adjusting price and availability based on real-time shifts in supply and demand, boomed. Multitiered pricing spread to airline-adjacent industries like hotels and cruise lines, and then beyond to telecoms, manufacturing, and freight. Companies adopted sophisticated software to track real-time supply and demand, and started hiring pricing consultants or even in-house pricers.

The internet, as you may have heard, changed everything. Consumer advocates hailed it as the great leveler, predicting that online shopping would facilitate price comparison and push prices down. Like many early forecasts about the internet, this one looks painfully naive in hindsight. Companies wasted little time making it harder for customers to compare prices. In 2004, the MIT economists Glenn and Sara Fisher Ellison found that online vendors were advertising the cheapest version of a product, then steering customers toward a pricier one. Websites also learned to block web crawlers that allowed their competitors to detect price changes.

One of the more powerful forms of price obfuscation was the fee. Retail platforms often listed products in order of price. “So, of course, certain retailers realized they could charge one cent for a video camcorder, and shipping would be $250,” Sara Fisher Ellison told me. Fees were often obscured until the end of a transaction—a practice dubbed “drip pricing.”

The airlines, having pioneered the use of dynamic pricing, now refined the art of the fee. In 2008, American Airlines began charging $15 for checked luggage. The practice spread and soon became a major driver of airline profits. In 2023, the airlines raked in $33 billion from baggage fees, and even more from other ancillary fees like seat selection, meals, and in-flight Wi-Fi. These add-on fees drove down the prices that were displayed to customers, thus making the offerings look more competitive. It was a win-win arrangement, with both wins going to the airlines.

The rest of the travel and events industry followed suit. Mysterious “resort fees” appeared on hotel bills. Car renters burned time poring over “facility fees,” transponder fees, and third-party insurance. Ticketing websites charged markups as high as 78 percent for concerts. Some fees sounded like jokes. In 2014, an airport in Venezuela charged customers a fee to cover its ventilation system, a surcharge widely mocked as a “breathing tax.” And fees mingled with the broader trend of digitization-enabled unbundling. Want to “unlock” your Tesla’s full battery life? In 2016, that cost an extra $3,250.

If the rise of the fee broke the expectation that prices are transparent, dynamic pricing challenged the assumption that they’re fixed. When Uber rolled out surge pricing in the 2010s, the company billed it as a way to lure more drivers when demand was high. But the phrase was perhaps too honest. It evoked a sudden price increase in response to extreme circumstances, and riders accused the company of gouging during emergencies. “It’s a term I tried to stamp out when I was at Uber,” said Robert Phillips, a pricing expert who worked there for almost two years. “It sounds like a digestive problem—I’ve got a little surge going on.”

At least old-school dynamic pricing applies equally to everyone at a given moment. That’s not the case with personalized pricing, which is made possible by the explosion of customer data available to firms. Everyone knows that companies use our data to target ads and decide which products we see. But the use of that data to set prices—to charge each person a different amount based on their calculated willingness to pay—is still taboo.

That doesn’t mean it’s not happening. Back in 2015, for example, The Princeton Review was caught charging higher prices to students who lived in zip codes with large Asian populations. Since then, the data that can be used to customize prices have become more fine-grained. Why do you think every brand suddenly has an app? Because if you download the Starbucks app, say, the company can access your address book, financial information, browsing history, purchase history, location—not just where you live, but everywhere you go—and “audio information” (if you use their voice-ordering function). All those data points can be fed into machine-learning algorithms to generate a portrait of you and your willingness to pay. In return, you get occasional discounts and a free drink on your birthday.

“Often, personalized pricing is embedded as part of a loyalty program,” Jamie Wilkie, a partner at McKinsey & Company who advises consumer and retail firms, told me. “If there’s a high-value customer who’s price sensitive, you may be able to give them a personalized offer. If they’re a lower-value customer, you may just want to reach out to them.” The New York Times recently reported that airlines—of course—are migrating to a ticket-sales platform that allows them to target consumers “with personalized fares or bundled offers not available in the traditional systems.”

Perhaps you don’t like the idea of being designated a lower-value customer, and missing out on the best deals as a result. Perhaps you don’t want companies calculating the precise amount of money they can squeeze out of you based on your personal data or a surge in demand. That’s a perfectly natural way to feel. Unless, that is, you’re an economist.

In a classic 1986 study, researchers posed the following hypothetical to a random sample of people: “A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.” Eighty-two percent said this would be unfair.

Compare that with a 2012 poll that asked a group of leading economists about a proposed Connecticut law that would prohibit charging “unconscionably excessive” prices during a “severe weather event emergency.” Only three out of 32 economists said the law should pass. Much more typical was the response of MIT’s David Autor, who wrote, “It’s generally efficient to use the price mechanism to allocate scarce goods, e.g., umbrellas on a rainy day. Banning this is unwise.”

The gap between economists and normies on this issue is huge. To regular people, raising the price of something precisely when we need it the most is the definition of predatory behavior. To an economist, it is the height of rationality: a signal to the market to produce more of the good or service, and a way to ensure that whoever needs it the most can pay to get it. Jean-Pierre Dubé, a professor of marketing at the University of Chicago Booth School of Business, told me the public reaction to the Wendy’s announcement amounted to “hysteria,” and that most people would support dynamic pricing if only they understood it. “It’s so obvious,” he said: If Wendy’s has the option to raise their prices when demand is high, then customers can also benefit from lower prices when demand is low.

[Read: How money became the measure of everything]

Economists think about this situation in terms of rationing. You can ration a scarce resource in one of two ways: by price or by time. Rationing by time—that is, first come, first served—means long lines during periods of high demand, which inconvenience everyone. Economists prefer rationing by price: Whoever is willing to pay more during peak hours gets access to the product. According to Dubé, that can benefit rich people, but it can also benefit people with greater need, like someone taking an Uber to the hospital. You can find academic studies concluding that Uber’s surge pricing actually leaves consumers better off.

When you think about it, though, dynamic pricing is a pretty crude way to match supply and demand. What you really want is to know exactly how much each customer is willing to pay, and then charge them that—which is why personalized pricing is the holy grail of modern revenue management. To an economist, “perfect price discrimination,” which means charging everyone exactly what they’re willing to pay, maximizes total surplus, the economist’s measure of goodness. In a world of perfect price discrimination, everyone is spending the most money, and selling the most stuff, of all possible worlds. It just so happens that under those conditions, the entirety of the surplus goes to the company.

Economists I spoke with pointed out that perfect price discrimination is all but impossible in real life. But technology-enabled personalized pricing is pulling us in that direction. Adam Elmachtoub, an associate professor of engineering at Columbia who studies pricing and fairness (he also works for Amazon), told me that personalization can be good or bad for consumers, depending on how you apply it. “I think we can agree that if personalized pricing worked in a way that people with lower incomes got lower prices, we’d be happy,” he said. “Or we’d say it’s not evil.”

Elmachtoub pointed to the example of university tuition. By offering financial aid to different groups, universities engage in personalized pricing for the purpose of creating a diverse student body. “We agree it’s a good idea in this setting,” he said. Likewise, he noted, it’s good that drug companies can sell medications for lower prices in poor countries.

Dubé argues that personalized pricing should benefit the poor overall, since, in theory, people with less money would exhibit lower willingness to pay. “By and large, when you personalize prices, the lowest-income consumers are getting the lowest prices,” he told me. Plus, he pointed out, there’s another, less controversial term for personalized pricing: negotiation. Consumers pay a personalized price every time they buy a car from a salesperson, who’s likely sizing them up based on the car they already drive, what they’re wearing, how they talk, and other factors. Data-driven personalized pricing merely automates that process, turning more and more transactions into miniature versions of going to a car dealership. Which, again, economists seem to believe is a point in its favor.

Most economists, but not all.

In a 2014 survey, prominent economists were asked whether they agreed or disagreed that surge pricing like Uber’s “raises consumer welfare” by boosting supply and allocating rides more efficiently. Out of 46 economists, only two disagreed. (Four were uncertain, and one had no opinion.)

One of those two was Angus Deaton, a Princeton economist who won the Nobel Prize in 2015 for his work on poverty, and who in recent years has publicly questioned the way his discipline looks at the world. Deaton argues that when it comes to pricing, economists are too focused on maximizing efficiency, without taking fairness into account. In a world of scarce resources, perhaps rationing by time is fairer than rationing by price. We all have different amounts of money, after all, whereas time is evenly distributed. Then there’s the way economists decide what’s good. The mainstream economist thinks that the best policy is the one that maximizes total economic surplus, no matter who gets it. If that benefits some people (companies) at the expense of others (consumers), the government can compensate the latter group through transfer payments. “A lot of free marketers say you can tax the gainers and give it to the losers,” Deaton says. “But somehow, miraculously, that never seems to happen.”

In other words, economics doesn’t pay enough attention to power. In the real world, corporations and consumers are rarely on equal footing. The more complex and opaque prices get, the more power shifts from buyer to seller. This helps explain why, in practice, poor people are often charged more than rich people for the same product or service. The poor pay higher rates for mortgages, bank loans, and other financial services. Wealthy Americans pay less on average for broadband internet. Neighborhoods with fewer grocery stores often have higher prices.

Or take Elmachtoub’s example of college tuition. Yes, poor students who get a free ride thanks to financial aid benefit from personalized pricing. But colleges also collaborate with a thriving “enrollment management” industry that bases financial-aid offers not on students’ need, but on how much an algorithm suggests they and their parents will be willing to pay. This can have perverse effects. As the higher-education expert Kevin Carey wrote for Slate in 2022, “parents of means who themselves have finished college are often sophisticated consumers of higher education and are able to drive a hard bargain, whereas lower-income, less-educated parents feel an enormous obligation to help their children move farther up the socioeconomic ladder and blindly trust that colleges have their best financial interests at heart.” Accordingly, many colleges offer more money to wealthier admitted students than they do to poorer ones.

The concept of willingness to pay contains endless potential for mischief. “I worry about a hotel website knowing that you absolutely must travel to get to a funeral that has recently been scheduled, or a situation where your kid urgently needs some medicine or supplies,” Rohit Chopra, the director of the Consumer Financial Protection Bureau and former FTC commissioner, told me. Improvements in AI technology make that process even easier and more opaque. When a bank denies you a loan, it has to provide a reason, Chopra pointed out. But with AI-based pricing, there’s no such transparency, as algorithms make pricing decisions that humans can’t understand.

According to Tim Wu, a professor at Columbia Law School who helped lead antitrust efforts as a special assistant to President Joe Biden, opacity is the point. The explosion of complex revenue-management schemes allows companies to increase their margins by innovating on pricing, rather than by improving their products or service. The closer we get to personalized pricing, Wu told me, the more we inhabit a world in which “everything in life is like paying for beer at the Super Bowl: Everything’s at your maximum willingness to pay.” There’s a joy—or, in economic terms, a utility—in paying less for something than you might have. “In that model,” Wu said, “you get none of it.”

Is there any way to reverse the march toward ever-more-vampiric pricing schemes?

Tackling junk fees is the low-hanging fruit. Most people, including economists, agree that companies should not charge fees that don’t correspond to actual services, especially when those fees are hidden or disguised. Even the CATO Institute, the libertarian think tank that never saw a regulation it liked, acknowledges that consumers “shouldn’t be charged for products without their consent, and businesses should disclose mandatory fees before purchases are made.” (It still opposes the Biden administration’s anti-junk-fee initiative, which it calls “incoherent” and overbroad.)

The problem is that the incentives are too powerful for companies to resist on their own. In 2014, StubHub switched to an “all-in” pricing model, in which customers saw full ticket prices up front. Revenues went down, so they switched back. “There’s a collective-action problem,” says Shelle Santana, assistant professor of marketing at Bentley University, who has studied drip pricing. If one company refuses to switch to all-in pricing, it can undercut the rest.

[Read: Hotel booking is a post-truth nightmare]

Such a clear, popular case for government intervention is rare, and the Biden administration has pounced. New rules and guidances have poured out of the FTC, the CFPB, and the White House over the past year, capping late fees for credit cards and limiting surprise charges at car dealerships, among other measures. Biden mentioned fees four times in his recent State of the Union.

But industry groups are pushing back. The U.S. Chamber of Commerce says the crackdown will make inflation worse by increasing compliance costs. (In other words, the costs of not charging excessive fees will be higher than charging excessive fees.) A lobbyist for the major airlines said the new transparency rules around add-on fees would cause “confusion and frustration” for customers. Live Nation, the company that owns Ticketmaster, promised to display the full cost of tickets up front for events at venues that it controls, but it has drawn criticism for not extending that policy to cover all events for which it sells tickets. Credit-card issuers are resisting limits on late fees, saying they’d be forced to reduce rewards for other customers, and Republicans in both chambers oppose the cap. Court battles could drag on for years.

And that’s the easy stuff. “The next frontier is going to be price,” Samuel Levine, the FTC’s director of consumer protection, told me. “Because that’s the dream, if companies can actually set personalized prices to maximize profits.”

Ultimately, preventing the dystopia of perfect price discrimination—or some more realistic approximation of it—means cutting off companies’ access to the data they use to determine how much to charge us. This isn’t complicated; it’s just a politically heavy lift. Getting Americans fired up about their personal data has been notoriously difficult, which helps explain why we still have no federal digital-privacy law. Perhaps if more voters understood that strong privacy protections would also protect them from price discrimination, Congress would feel more pressure to get something done. (A glimmer of hope appeared earlier this month when lawmakers announced a bipartisan bill that would limit the user data that companies can collect.)

Near-term solutions might depend on the companies themselves. If prices become too complex, that creates an opening for a firm to commit itself to clear, simple pricing, Bentley University’s Shelle Santana says. For example, Southwest Airlines allows two free checked bags. Mark Cuban’s pharmaceutical wholesaler, Cost Plus Drugs, markets itself as a transparent alternative to the usual stress of buying medicine. Boring Mattress Co. promises to help customers “escape mattress hell” by offering a simple flat-rate mattress with free shipping. Santana cited JetBlue’s early marketing. “Their whole campaign was, We like our customers,” she said. “As a flier, you’re like, You don’t even have to love me. Just don’t make me feel like I’m in hell.” In a world of constantly shuffling prices, could predictability become a competitive advantage?

Wendy’s might already be on it. A week after the dynamic-pricing flap, the chain announced that it would offer $1 burgers to celebrate March Madness. All you had to do was download the Wendy’s app.

Right-Wing Media Are in Trouble

2024-04-13T08:00:00-04:00

As you may have heard, mainstream news organizations are facing a financial crisis. Many liberal publications have taken an even more severe beating. But the most dramatic declines over the past few years belong to conservative and right-wing sites. The flow of traffic to Donald Trump’s most loyal digital-media boosters isn’t just slowing, as in the rest of the industry; it’s utterly collapsing.

This past February, readership of the 10 largest conservative websites was down 40 percent compared with the same month in 2020, according to The Righting, a newsletter that uses monthly data from Comscore—essentially the Nielsen ratings of the internet—to track right-wing media. (February is the most recent month with available Comscore data.) Some of the bigger names in the field have been pummeled the hardest: The Daily Caller lost 57 percent of its audience; Drudge Report, the granddaddy of conservative aggregation, was down 81 percent; and The Federalist, founded just over a decade ago, lost a staggering 91 percent. (The site’s CEO and co-founder, Sean Davis, called that figure “laughably inaccurate” in an email but offered no further explanation.) FoxNews.com, by far the most popular conservative-news site, has fared better, losing “only” 22 percent of traffic, which translates to 23 million fewer monthly site visitors compared with four years ago.

Some amount of the decline over that period was probably inevitable, given that 2020 was one of the most intense and newsiest years in decades, propping up publications across the political spectrum. But that doesn’t explain why the falloff has been especially steep on the right side of the media aisle.

What’s going on? The obvious culprit is Facebook. For years, Facebook’s mysterious algorithms served up links to news and commentary articles, sending droves of traffic to their publishers. But those days are gone. Amid criticism from elected officials and academics who said the social-media giant was spreading hate speech and harmful misinformation, including Russian propaganda, before the 2016 election, Facebook apparently came to question the value of featuring news on its platform. In early 2018, it began deemphasizing news content, giving greater priority to content posted by friends and family members. In 2021, it tightened the tap a little further. This past February, it announced that it would do the same on Instagram and Threads. All of this monkeying with the internet’s plumbing drastically reduced the referral traffic flowing to news and commentary sites. The changes have affected everyone involved in digital media, including some liberal-leaning sites—such as Slate (which saw a 42 percent traffic drop), the Daily Beast (41 percent), and Vox (62 percent, after losing its two most prominent writers)—but the impact appears to have been the worst, on average, for conservative media. (Referral traffic from Google has also declined over the past few years, but far less sharply.)

[Adrienne LaFrance: Mark Zuckerberg doesn’t understand journalism]

Unsurprisingly, the people who run conservative outlets see this as straightforward proof that Big Tech is trying to silence them. Neil Patel, a co-founder (with Tucker Carlson) of the Daily Caller, told me that the tech giants want “to crush any independent media that was perceived to have been helpful to Trump’s rise.” Patel calls this a form of “Big Tech–driven viewpoint discrimination” that “should scare any fair-minded individual.”

A simpler explanation is that conservative digital media are disproportionately dependent on social-media referrals in the first place. Many mainstream publications have long-established brand names, large newsrooms to churn out copy, and, in a few cases, large numbers of loyal subscribers. Sites like Breitbart and Ben Shapiro’s The Daily Wire, however, were essentially Facebook-virality machines, adept at injecting irresistibly outrageous, clickable nuggets into people’s feeds. So the drying-up of referrals hit these publications much harder.

And so far, unlike some publications that have pivoted away from relying on traffic and programmatic advertising, they’ve struggled to adapt. Rather than stabilizing amid Facebook’s new world order, traffic on the right has mostly continued south. Among the big losers over the past year are The Washington Free Beacon, whose traffic was down 58 percent, and Gateway Pundit, down 62 percent. Compare that with prominent mainstream and liberal sites, which, although still well below their 2020 heights, have at least stanched the bleeding. Traffic to The Washington Post and The New York Times from February 2023 to February 2024 was essentially flat. Slate’s was up 14 percent.

For conservative media publishers, the financial consequences of such a steep decline in readership are hard to know for certain. None of the best-known names publicly reports revenue figures, and many are supported by rich patrons who may not be in it for the money. But the situation can’t be good. Digital media still rely on advertising, and advertising still goes to places with more, not fewer, people paying attention. Traffic also drives subscriptions.

More broadly, the loss of readership can’t be helpful to the ideological cause. Top-drawing sites like the conspiratorial Gateway Pundit and Infowars help keep the MAGA faithful faithful by recirculating, amplifying, and sometimes creating the culture-war memes and talking points that dominate right and far-right opinion. Less traffic means less influence.

[Paul Farhi: Is American journalism headed toward an ‘extinction-level event’?]

The Daily Caller’s Patel insisted that faltering traffic alone isn’t a death sentence for the onetime lords of the conservative web. With the addition of a subscription service and tighter financial management, the Daily Caller’s financial health is solid and improving, he said. Outlets like his own can still succeed with people who “have lost trust in the corporate media and are actively seeking alternatives.”

The trouble is that there are now alternatives to the alternatives. The Righting’s proprietor, Howard Polskin, pointed out to me that the websites that dominated the field in 2016—Fox News, Breitbart, The Washington Times, and so on—are no longer the only players in MAGA world. The marketplace has expanded and fragmented since then, splintering the audience seeking conservative or even extremist perspectives among podcasts, YouTube videos, Substack newsletters, and boutique platforms like Rumble. “There’s a lot of choice,” Polskin said. “Even if [the big] sites went out of business tomorrow, there are a lot of voices still out there.”

The DIY ethic is embodied by the likes of Megyn Kelly, Bill O’Reilly, Steve Bannon, and Carlson, who became conservative celebrities while working for established media organizations but have maintained their profiles after leaving them in disgrace. Since being fired by Fox News last year, Carlson has moved his contentious commentaries and interviews (including one with Vladimir Putin) to X. Kelly has come back from a messy divorce with NBC in 2019 (which followed an unhappy exit from Fox News in 2017) to host a massively popular podcast. O’Reilly, likewise forced out of Fox in 2017, has kept talking via newsletters, video streams, and weekly appearances on the NewsNation cable channel. And Bannon, the former Trump consigliere who left Breitbart, which he founded, after publicly criticizing the Trump family, has gone the podcaster route himself; his War Room podcast was ranked as the leading source of false and misleading information in a broad study of the medium by the Brookings Institution last year.

The precipitous decline in traffic to conservative publications raises a larger and possibly unanswerable question: Did these operations ever really hold the political and cultural clout that critics ascribed to them at their peak? Recall the liberal anger in 2020 when Ben Shapiro was routinely dominating Facebook’s most-engaged content list, generating accusations that Facebook’s algorithm was favoring right-wing posts and pushing voters toward Trump. Yet Joe Biden went on to win the election easily, and Democrats overperformed in the 2022 midterms. Now, as conservatives cry that Big Tech has crushed their traffic, Trump is running neck and neck with Biden in the polls, even with a legal cloud hanging over him and shortfalls of campaign cash. Maybe who wins the traffic contest doesn’t matter as much as it once appeared.

Trump Media Is the New Bed Bath & Beyond

2024-03-28T07:30:00-04:00

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After the stock-market frenzy that ensued when Trump Media & Technology Group started trading on Tuesday (under the ticker symbol DJT), one thing is almost certainly true: Donald Trump is now the chairman of the most overvalued company on Nasdaq.

Trump Media had a grand total of $3.4 million in revenue in the first nine months of 2023, against more than $10 million in operating losses. Its only product is Truth Social, Trump’s right-wing Twitter clone, which has a tiny user base, few advertisers, and no real prospect of challenging the dominant players in the social-media space. And yet, as of market close on Tuesday, Trump Media was valued at almost $8 billion, making it worth more on paper than The New York Times.

Trump Media is, in other words, a meme stock. Like GameStop and AMC before it, it trades not on fundamentals, but on emotion. Exploiting that emotion is, you might say, Trump Media’s real business. And the only surprising thing about Trump orchestrating such a scheme is that it took him so long to do it.

What distinguished GameStop and AMC from classic bubbles, after all, was that the buying frenzies that propelled them to unsustainable heights were driven by a conscious collective effort on the part of retail investors, many of whom communicated with one another on Reddit and other message boards. These people wanted to make money, but they were also animated by a vague “Stick it to the man” worldview, built on resentment of short sellers, hedge funds, and “elites” more generally.

This was a situation tailor-made for Trump to exploit. He cultivates a populist, anti-elite image, and has legions of true believers who are convinced that, on top of having been a great president, he’s a great businessman. For these people, buying Trump Media stock—which inflates Trump’s net worth because he owns 58 percent of the company—is an easy way to register their commitment to him and own the libs, while also potentially getting rich. That’s why Truth Social on Tuesday was replete with messages from users urging Trump supporters to drive up Trump Media’s price and “drive the liberals insane!”

[Derek Thompson: The GameStop story you think you know is wrong]

The nice thing about this for Trump is that Trump Media’s dismal business prospects are basically irrelevant to its valuation. The prospectus for the merger of Trump Media and the special-purpose acquisition company Digital World Acquisition Corp. includes a seemingly endless list of risk factors, including the fact that “a number of companies that were associated with President Trump have filed for bankruptcy.” It offers no plausible path to rapid growth, let alone to profitability. And it doesn’t even provide a detailed picture of Truth Social’s current operations: Digital World—a shell company that appears to have been created for the sole purpose of taking Trump Media public—says in the prospectus that Trump Media did not provide it with “complete financial information.” Remarkably, Trump Media says that it has no plans to report, and in fact doesn’t even collect, data on how many active users Truth Social has, how many new users it’s signing up, or how many ad impressions it’s generating.

In other words, Trump Media’s message to investors who might want to evaluate its performance boils down to “Trust us.” And although that would normally send investors scurrying, it’s just fine for the retail investors who have been snapping up shares of DJT. They most likely feel no need to peruse the Digital World prospectus for risk factors. They trust Trump.

Even if Trump Media can rely on Trump supporters to keep its stock up, at least for the moment, plenty of volatility is still in store, because speculators will look to cash in on the meme-stock mania by either riding the stock up or selling it short. On Tuesday, for instance, the stock rose as high as $79 a share but then tumbled 28 percent in a couple of hours to close at $58. But the Trumpian retail investors should help keep the stock from totally cratering.

The question, though, is: For how long? In principle, a company’s stock price can stay completely out of whack with its fundamentals forever, as long as investors are collectively willing to pay more than it’s worth. But the history of meme stocks suggests that investors’ collective will to keep a stock up does eventually erode, whether because they cash out, lose faith, or just get bored. (GameStop and AMC now trade for a tiny fraction of their all-time highs, while Bed Bath & Beyond, another former meme-stock juggernaut, went bankrupt.) Trump Media investors may well feel more allegiance to Trump than GameStop investors felt to GameStop. But there’s still little doubt that this will end poorly for most of them.

That doesn’t mean it will end poorly for Trump, though. His stake in Trump Media is now worth more than $4.5 billion. Even if Trump Media’s stock fell 90 percent by the time Trump is allowed to sell his shares, in six months, he would still have almost half a billion dollars’ worth of stock to sell. Which, in a perverse way, suggests that he’s every bit the shrewd businessman his investors believe him to be.