dagblog - Business

Tesla and the Uncertain Middle Class

Donal — Thu, 10 May 2012 15:33:04 +0000

Tesla is about to release its Model S sedan. Despite operating at a loss, despite never having turned a profit, despite being the recipient of government loans (which the right wing hates about the Volt), despite its stock price dropping due to perceived competition from the Toyota RAV4 EV, some Wall Street pundits are still bullish on Tesla.

Why? Well it promises decent range:

Tesla: The Time Has Come

The Tesla Model S will give you significantly more range than a Nissan LEAF or any other practical all-electric car to date. The Nissan is EPA-certified at 73 miles on average. Tesla claims 160 miles for the base version of the Model S. ...

Tesla will also sell you an alleged 230-mile and a 300-mile version of the Model S. Each step up is $10,000 more.

Who will buy these cars? According to Rocco Pendola, writing for The Street, rich people will.

Sell Ford, Buy Tesla on Growing Income Inequality

We have what I will hesitate to call an income inequality "problem" in America. I use the word "problem" with caution, as that word can take us deep into subjective territory. Objective data does show, however, that both income and wealth concentrate in the relatively small upper echelons of society. Expect that trend to hold constant or intensify, but not revert meaningfully anytime in the foreseeable future. ...

My bull case on Tesla has always focused on three things:
- Tesla's ability to build a revenue bridge between models by developing EVs for other companies, such as Daimler and Toyota.
- The existence of that revenue as an additional stream of income during periods of core EV sales.
- Tesla's prime and well-positioned target market.

Again, that target market is ... rich people:

It's well-to-do types from places like Silicon Valley, San Francisco and Southern California who will fork out more than $50,000 for a Model S, just like they did for Tesla's inaugural $110,000 (sold-out) Roadster. ...

To achieve this level of success, Tesla does not have to concern itself with a very large portion of the population.

So far, Pendola's few commenters think he's nuts. I have to wonder if rich people will buy a car from a company that abandons customers with bricked batteries—but that's just me. But Pendola is also concerned that no one will have enough cash to buy Ford's EVs:

At day's end, in a nation (and world) increasingly divided between haves and have nots, I do not want to be long companies, for the most part, that serve an uncertain "middle class" American. Nine times out of 10, I get bullish stocks that serve the relatively poor and the modestly-to-filthy rich.

While this somewhat snobby view of the landscape does not sit well with my socially conscious side, it is what it is. I do my best to not let that part of me influence my investment decisions to any great extent.

Overstock.com CEO Patrick Byrne palling around with terrorists?

William K. Wolfrum — Sun, 15 Apr 2012 13:53:36 +0000

Ernest Hancock and Freedom’s Phoenix “watering the tree of liberty” with guns at an Obama appearance.

I’ve written several times about Overstock.com CEO Patrick Byrne, focusing on his love for intimidating and slandering financial journalists, his constant misleading of investors, and other subjects.

Byrne – who has led Overstock to yearly loss after loss and has been key in driving OSTK stock to it’s current $5.01 per share – is also an extreme right-winger. Not a Sean Hannity-type extreme right-winger, mind you, but closer to one of those faux-Libertarian, overthrow-the-government types of extremists.

Such does Byrne support the right-wing libertarian militia movement, that he was recently a guest of Earnest Hancock on Freedom’s Phoenix radio show. Who is Hancock, you ask? Well, just someone who has been accused by Arizona State Senator Russell Pearce - a far-right conservative himself - of being a terrorist.

Ernest Hancock, the online radio host who staged an interview with an assault rifle-wielding associate at the Obama event in Arizona yesterday — and was himself armed with a 9 millimeter pistol — was a vocal supporter and friend of right-wing anti-government militia members who were convicted of conspiracy and weapons charges in the 90s.

And in an interview today with TPMmuckraker, Hancock said he still believes the Viper Militia case was “manufactured” by the same government that manufactured Waco and lied to its people about 9/11.

The federal government initially accused the Arizona Viper Militia of plotting to blow up federal buildings, which the twelve-member group cased on videotape.

In July 1996, after a grand jury indicted the suspects, federal agents “seized about 90 high-powered rifles and hundreds of pounds of a bomb-making compound from the shabby bungalow of a man whom officials identified as the ordnance specialist of a local paramilitary group,” the New York Times reported at the time.

Hancock, who in recent years designed the famous “Ron Paul rEVOLution” graphic, was an oft-quoted defender of the militia members. The tapes of the government buildings, he said at the time, were purely “educational.”

More on Hancock and the Viper Militia here, via TPM and here at The Huffington Post.

Byrne – who notably railed against Utah voters for rejecting his push to “reform” the Utah school system by making it a voucher program and runs the libel factory known as Deep Capture – shared some of his radical, paranoid views with Hancock, including his claims that “Naked Short Sellers” have destroyed the stock prices of his mismanaged company.

Hancock is not currently under arrest, and it was by no means a crime for Byrne to appear on his radio show. But it shows he is a supporter of those with radical and dangerous ideologies. If you don’t think right-wing terrorism is a problem in the U.S., read some of David Neiwert’s work on the subject.

People like Hancock like to talk how they just want to be “left alone” by the federal government, but what they really want to be left alone to be racists who dream of an overthrow of the U.S. government. These are violent, ignorant, paranoid people who fantasize that Ron Paul will someday be President and allow them to unleash chaos in the name of of something they like to call Libertarianism.

And Overstock.com CEO Patrick Byrne supports them.

–WKW

Crossposted at William K. Wolfrum Chronicles

Why College Costs So Much, Part 2

Doctor Cleveland — Mon, 19 Mar 2012 18:33:31 +0000

In my previous post about college prices, I focused on the massive state spending cuts that have driven up tuition at public school universities and also made it easier to raise private tuition, because private universities no longer face serious price competition from the public sector. (See also tmmccarthy's excellent post on tuition and budget cuts.) In this post, I'd like to focus on the cost side of the question, and start with the private universities instead of the public ones.

The costs of providing a college education to students have actually risen, even as government support for public education has all but disappeared and the most important check on rising tuition prices vanished with it. No matter how exorbitant the annual tuition seems, the schools are not charging more than they're spending per student. In fact, in almost every case they are taking at least a small loss; even the students whose parents pay the full freight aren't paying enough to defray the full cost of educating those students. And the richer the school, the bigger the loss it takes on tuition.

The thing to remember is that private colleges and universities are non-profit institutions that live and grow primarily by charitable donations and by the investment income on those donations. As I've blogged elsewhere, this means that it's a mistake to think of universities' business model as selling classes to the students. They do have a business model (as even non-profit foundations do), but it's not about charging students for classes. It's about fund-raising. It's like the newspaper business, which isn't really in the business of selling papers but in business selling advertising in papers. College tuition, like the price of the daily paper, helps defray operating costs. Fund-raising, like a newspaper's ad revenue, brings in the money that helps the enterprise grow and thrive: the big donors who give a new building or an endowed professorship; the larger group of alumni who contribute regularly to the annual fund or the capital drive; the bequests that leave the school a piece of real estate, or money to establish a student prize, or a special scholarship for kids who come from the donor's home town. Fund-raising is where a college gets its economic capital. Many college administrators spend more than half their time raising funds.

When your economic life-blood comes from fund-raising, the two most important things are prestige and successful alumni. These two things are interrelated in complicated ways. Prestige is not an abstract concern, but part of the bottom line. The better the school's reputation, the more willing people will generally be to give money to it. The relationship is indirect; having a faculty member win the Nobel Prize doesn't translate into X amount of dollars in donations next week. But the relationship is also real, and over time the places that amass the most prestigious reputations also amass the fattest endowments. A few extremely famous places have so much prestige that they can even occasionally attract large donations from people who didn't actually go to the school.

But the most important source of donations has always been a college's own alumni. They are the people who do the annual giving. They are the group from which the large donors usually come. They are the people who remember the school in their wills. When a school's former students thrive, as a group, so does the school. Prestige and alumni success tend to feed each other; successful and prominent alumni definitely increase a school's reputation, and the strength of a school's reputation helps it attract more of the talented students who are likely to become successful later.

I'm describing this as a business model, because it is, but that doesn't mean that the people involved in the system don't have altruistic motives. There aren't many business models more selfless than "Set promising young people on the road to success," especially when the only returns come from old students' voluntary gratitude. And the main way that universities seek prestige is advancing human knowledge, which is not a bad thing. But even when universities seem to be putting ideals ahead of the bottom line, they are following their long-term economic self-interest. Giving scholarships to bright poor kids turns out to be a good long-term investment, because a good percentage of them go on to be successful and a good percentage of the successful ones are grateful to the school.

(And it usually turns out that the people who execute the underlying economic strategy most effectively are people who aren't thinking about the economic aspect at all, but focusing on the university's official values. It's hard to find the faculty who will build a school's reputation without being genuinely interested in advancing scholarship. And picking students out of naked self-interest, looking for the future million-dollar donors, doesn't work nearly as well as evaluating a bunch of kids for things like "intellectual potential" and "leadership" and "character." You get the successful ones by choosing the "best." It's not a choice between believing in the values and playing the game; believing in the values is one of the keys to the game.)

How do you get successful alumni? Do you try to attract the students most likely to succeed as adults? Do you put your money into educating the students you have, to maximize their potential and increase their chances of success? Obviously, you do both. You pick the most promising students that you can afford, you educate them as well as you can afford to do, you provide them with career development services on the way out the door, and you help them network with your other alumni. You do everything your school can afford, and look for ways that you can afford more. This is the school's long-term future.

Some critics of higher education complain that universities, unlike businesses, tend to spend every cent of their budgets. This is true; they do. They do this, first, because they are non-profits. Like all non-profits, they spend everything they can on their non-profit goals. But universities have perfectly sensible and compelling economic reasons to spend as much as they can possibly manage on the three things that maximize their long-term fund-raising: 1) attracting the students most likely to become successful later in life, 2) increasing those students' odds of success, and 3) strengthening the overall reputation of the university.

Since I picked on Harvard as one of my examples in my last post, I'll do the fair thing and pick on Harvard again. They can take it: they're the richest and most famous school in America because they play the academic prestige game as well as anyone. They spend enormous amounts on educating their hand-picked students, and on the apparent luxury of research and all that entails: rare books, new lab space, sabbaticals for faculty, hiring raids on other universities, you name it. But the more they spend on these things, the wealthier they grow. They're spending money on goals that may seem "pure" rather than practical, but the reputation they build in that unselfish enterprise is the key to building their endowment.

For the last fifty years or so, their financial resources have grown so great that they are can choose their students without worrying about those students' ability to pay. Not only does Harvard's endowment allow them to spend much more per student than any student pays in tuition, it allows them to admit students "need-blind," and take the kids they think most likely to become successful alumni rather than kids whose parents can afford full tuition. (And as the school gets richer, they seem to discount tuition more and more sharply.) They're not just looking for the few individuals who'll be filthy rich someday; it's the financial success of the the group as a whole that will end up reflected in annual giving. And it's not just financial success they're hoping for; they also want the students who will end up as high-profile successes in one field or another, and thereby add to the school's reputation. That list of incoming students, in a lot of ways, is Harvard's long-range investment portfolio, and they invest time and money into choosing and attracting the most promising.

But with Harvard's budget the pressure must be off, right? The richest school in America can't be a good example for discussing cost pressures, can it? You bet it can, and the pressure at Harvard is definitely not off. The more they spend, the richer they get, but the richer they get, the more pressure they feel to spend. It's pretty clear that Harvard feels intense competitive pressure from Yale, Princeton, Stanford, and whatever other schools currently makes their rivals list. If that sounds silly, think of the way it looks to Harvard's administrators. Do you want to be the admissions dean that tells the university president that you've started losing the best students to Yale? Do you want to be the university president who tells the trustees that you've fallen behind another school in fund-raising, or reputation, or number of applicants? If a college stops trying to compete with its peer institutions, it falls behind them, and once it falls behind it becomes harder to raise the funds it would need to catch back up. So the elite schools are constantly struggling to maintain their position, and that creates a constant, insistent pressure to spend more. The good news is that the spending doesn't get passed on to the students, because the competition between schools demands that they spend as much as they can on financial aid for the students they want.

But once you get out of that rarefied Ivy-League air, there's less financial-aid money to cushion the blow for students. And the competition for students and prestige remains intense, as does the competitive pressure to spend. A good, normal private university isn't trying to compete with Harvard and Yale, but it is almost certainly trying to raise its reputation a notch, and to attract a stronger student body. (Most university presidents are hired with the goal of taking the university, wherever it is in the food chain, "to the next level.") And the schools outside that top handful have more than a handful of rival schools to compete with. The more other schools there are at your level of reputation and funding, the more competitors you have, and all of those schools are trying to climb ahead of yours and to scoop up the best students left in the applicant pool after the rich and famous schools have taken their pick.

What makes this competition especially treacherous is that schools outside the top handful can't just ignore students' ability to pay the way Harvard or Yale can. They have some money for financial aid, and some scholarships for especially talented students without a lot of money, but they still need a solid majority of their students to pay a solid majority of the tuition price. Now you need to put together the best class of students you can afford to accept, which is not the same as the best class of students that applied to you. That already involves a bunch of compromises, and forces you to trade off some long-term value for short-term necessity. And it creates a powerful incentive to make your school more attractive to students, so that you can improve the quality of your student body. In the worst case scenario, if you start getting fewer (or weaker) applications, or if you start losing more of your accepted students to offers from other places, you can find yourself with an ugly problem. Do you leave those places in your first-year class unfilled, and take a major hit to your budget? Do you lower your standards and let in less-qualified students who can pay, setting back the reputation for quality that you've been trying to build? Do you let in bright students that you don't have any financial aid money for? None of the choices is good.

(At the very poorest end of the private-college spectrum, of course, are schools that never have to make these choices because they need all or nearly all of their students to pay full price. These schools, with only local or marginal reputations and very small endowments, can't afford serious admissions standards. They are not academically exclusive, but are socially and economically exclusive.)

But if you're a private university with a mid-major reputation, competing for the same pool of reasonably bright and reasonably affluent students that all of the other mid-major universities are going after, you need to spend money to make your school attractive to the students you want. That means spending on academic programming, and it means spending on the "student experience." You need your campus to seem to be an attractive place: athletic programs, renovated dorms, a new student center, you name it. This may not seem like part of the core academic mission, but you won't be able to fund the academic mission if you neglect it, and because so many schools are competing for the same students, spending on these kinds of amenities becomes part of a competitive arms race. You can't afford to spend less on these things (or on many more important things) than comparable schools do, or you will fall behind them and eventually be able to afford even less. In fact, you can't afford to spend less than you can afford. That's market pressure at work.

Schools with shallower pockets for financial aid have a smaller field of potential students to attract, and more competitors for those students. The shorter a school is of funds, the smaller the pool of attractive recruits gets, and the more important it becomes to allocate the money the school does have to attracting as many of those students as possible. That by itself would cause university spending to spiral upwards, but over the past thirty years the competitive pressure has been intensified by three factors:

1) Major state universities entering the market for out-of-state students. When public education began losing its public funding, one of the first moves state universities made was to try to attract more out-of-state students, who can be charged a higher tuition. (If this seems like it gets the state university mission backwards, I agree. But college administrators were forced into this strategy, bit by bit, as they tried to keep quality as high and in-state tuition as low as they could.) This meant the private schools with pretty good reputations suddenly had a whole new pool of competitors fighting over the same group of students: the out-of-state students that Michigan and Texas and Cal started looking for are in exactly the same pool that the private colleges are fighting over.

2) The rise of popular national rankings, especially the U.S. News and World Report rankings. In 1983, the U.S. News and World Report began publishing its annual college rankings, using a combination of statistics about each school and surveys that measured schools' reputations inside the academic world. These rankings are a long way from scientific, and most academic leaders will tell you that the rankings are inaccurate or even misleading. But that doesn't mean anyone can afford to ignore them, and nobody ever complains that they've been ranked too high. Schools take the rankings seriously because applicants and applicants' parents do.

It is not really possible to distinguish the 6th-best school in American from the 5th- or 7th-best, or the 42d-best from the 43rd-best. It's definitely not the case that a school is 6th best in the country one year, 9th best the next year, and 4th best the year after that, or that a school goes from 42d one year to 36th or 50th the next. That's just silly. It often is the case that a school ranked 8th is significantly different from one ranked 58th, and one ranked 58th is different from a school ranked 258th. What these rankings do is quantify and nationalize reputations that had previously been fuzzy and regional. (The fuzzier approach was more accurate; it's more helpful to think of schools in general groups or tiers than it is to think of numerical rankings.) Real reputations rise and decline slowly, but the ranking go up and down every year, and the pressure to keep a school's ranking high and push it higher is intense. And the things that raise your ranking cost money: better student/faculty ratios, bigger endowments, better reputations with the leaders of other schools. Meanwhile, the national rankings forced schools that once competed primarily within one region, where their reputation among potential applicants was especially strong, to compete in a nation-wide field of schools. This wider market is more expensive for everyone. A school like Vanderbilt, for example, loses some measure of his power to attract top students from the South (because more students in that pool are applying outside the South) and is forced to do more national recruiting. Meanwhile, private colleges outside the South suddenly have to compete with Vanderbilt, and a bunch of other formerly-regional powerhouses, in a way they've never had to before. More competition for everyone. More money spent just to keep from falling behind.

3) The admissions arms race. Since the 1980s, college admissions has been part of a vicious cycle in which college admissions rates get lower and lower, so that nearly every selective college is always statistically harder to get into than it was three years earlier, and students apply to many more colleges. When I was a high school student in the 1980s, things were already crazy in a new and unprecedented way. Back then kids like me were encouraged to apply to between 5 and 8 schools, and the most selective colleges' admissions rates had dipped under 20%. Today, students are encouraged to apply to 15 or 20 schools, and the most selective admissions rates are well under 10%.

How can nearly every school's acceptance rate keep getting lower and lower? Because the number of applications they get keeps getting higher and higher. Where do all these applications come from? From high school kids applying to two or three times as many schools. Why do kids apply to more schools? Because with acceptance rates dropping, you need to apply to more schools to maximize your chances of getting in somewhere you'd like to go. You see how the cycle works. There's no reason to believe it won't keep building on itself for the foreseeable future.

This, on paper, at least, is good for the colleges. They get a much larger applicant pool to select from, and the lower and lower acceptance rates help their national rankings, which helps future applicant pools. (But since everyone else's acceptance rates keep falling, yours has to keep falling just so your college doesn't drop in the rankings.) One could even argue that more participants in a wider application-seasons market makes the market more rational in some ways; a kid applying to twenty schools is more likely to get the best possible result than a kid who applies to three schools. And the colleges get a broader, more national pool of applicants to choose from.

But again, this only intensifies the competition for students. Sure, you get more applicants and you can pick more selectively, but you have so many applicants because they all applied to ten other schools. So you're competing against those ten schools for the most desirable students, and that competition ultimately demands more spending.

All of this competition for students and rankings drives costs up for private colleges and universities, but public universities get caught in the same upward cost spiral. Part of this is simply the normal market effect on prices: things get more expensive when some people are willing to pay a lot for them, and a big-spending 25% of the market makes things pricier for other 75%. If private colleges, for example, are willing to spend more to hire a leading neuroscientist away from a public campus, it becomes more expensive for the public schools to keep their neuroscientists. But more importantly, the public colleges are caught up in the private colleges' expensive bidding war for students, because the public universities now also depend on a sizable number of tuition-paying out-of-state students. Since their mission is certainly not the education of other states' unpromising students, they're chasing the same pool of affluent and reasonably talented students that everyone else is, and have to spend the way everyone else does to land those kids.

What to take away from this long run-down? A few things:

The upward cost spiral is driven by market forces, and is therefore difficult to change. Sermonizing about how colleges ought to change their values, and that things ought to be different, is pointless. These decisions are being made by private institutions, and everyone involved is legitimately pursuing the best interests of the institutions they serve. Those institutional goals are tightly bound up with genuinely altruistic motives: the pursuit of excellence, the advancement of knowledge, the life of the mind. But even if they were not, telling college administrators not to compete won't do any good. The competition won't stop because one college, or a handful of colleges, stops competing. That would only mean that the college that stopped competing would lose. No one wants to risk their school's intellectual decline or its financial bankruptcy. The upward spiral is bad for everyone, but an individual school can easily get caught in a downward spiral, too: fewer students leading to budget cuts leading to a weaker reputation leading to fewer students and so on. It's very, very hard to stop that downward spiral once you get caught in it, and almost impossible to reverse it. A school that starts losing the competition for students ends up a much diminished place, or has to shut down entirely. If you've never heard of a college or university shutting its doors, believe me, everyone who runs a college or university has. And none of them are going to risk damaging their schools. They'd be crazy if they did.

Many of the typical solutions proposed to rein in spending focus on creating new efficiencies in some way or another (like through more instructional technology), or by cutting spending in some area that the proposer doesn't value (student-life amenities, research funding, fine arts departments, whatever). But while some specific cost-saving proposals are good ideas on their own, none of them are long-term solutions. Given the competitive market pressures, money saved in any one area is ultimately only freed to be spent somewhere else. Schools will still spend all the money they can in pursuit of the students and reputation they need in order to keep making money.

The competitive pressure will only diminish if something fundamental changes in the pool of students, such as a very large increase in the percentage of 18-year-olds with the mixture of ability and family income that schools are looking for, or in the buying power of the schools, such as a general increase in endowment funds that allowed many more schools to rely less on tuition for income. Neither change is around the corner.

The only intervention in the academic market that's been proven to work is the old-fashioned one that we've quietly given up on: publicly funded higher education. I'd like to have a hipper and snazzier TED-conference-style recommendation, but I don't. The model we've abandoned worked pretty well.

Private higher education, alone, is not sufficient to drive class mobility, and in many ways retards it. The good news is that individual private universities (to go back to the Harvard example), admit more poor students than they did fifty years ago, and support them better. Harvard, taken in isolation, is much better at promoting social mobility through its admissions process than it was in 1962, and vastly better than it was in 1932. It takes many middle-class kids, and it takes more outright poor students than it used to. (It always had some bright, poor scholarship boys, but it can afford more now.) But that's only a lucky few. It's like Willy Wonka's golden ticket. It's not a broad-based response to questions of class and upward mobility, and it never could be. The school's too small. All the elite colleges together are too small.

And once you get out of Harvard's price range, the prospects for working-class students dry up fast. The other private colleges have some money for scholarships for talented poor kids, but not as many scholarships as Harvard has. And taken as a group, all of the private universities together are reinforcing inherited class privilege through their admissions process, because most of them need a lot of well-heeled students, or students whose parents qualify for loans, to stay in business. No matter how high-minded any particular school is, or how committed to opportunity for all, private institutions need to choose the students who are best for the school's long-term survival and prosperity. For a few poor kids, private college admissions is a way up in the world. But it's a lottery economy. For a very lucky handful who can get into Harvard or Yale, the system will be very generous. For another not-quite-as-lucky group gets the smaller pool of scholarships at schools with smaller endowments. But the majority of perfectly capable poor students are locked out of private college admissions; there's no money for them. The lucky handful will always be pointed out as examples to prove how well the system works, but that's like pointing to lottery winners to prove that the recession is over. A lot of talent and potential goes wasted.

But the private colleges were never designed to bear the whole weight of American class mobility. Hell, they were originally designed to prevent class mobility, and I'm grateful that they no longer do it as thoroughly as they did in the bad old days. That 25% of the higher-education system could never be the main engine of the American dream (academic version). The bulk of that job has always gone to the public universities, who do the job of educating three-quarters of America's college students, and whose mission is to make quality education affordable and accessible. They can't do that mission the way they used to, because the taxpayers no longer support it, and so even a public-college education has become much too expensive. College education, which was part of building America's great post-war middle class, has now turned into one more barrier to entering the middle class. But this is exactly the outcome we should have expected when we stopped paying for public universities. We should never have expected Harvard and Yale to pick up our slack.

Why College Costs So Much, Part 1

Doctor Cleveland — Thu, 15 Mar 2012 19:30:22 +0000

Mitt Romney recently told an aspiring college student that if he had trouble affording college, he should just shop around for the best price, which proves that Romney has no idea how college prices work:

“Don’t just go to one that has the highest price. Go to one that has a little lower price where you can get a good education. And hopefully you’ll find that."

Romney also made sure to point out that the student should get no government assistance of any kind to go to college, which proves that Romney has no idea how America's post-war prosperity worked.

Meanwhile, the White House is holding another meeting about college affordability and productivity. The phrase "productivity" suggests that the White House already has a solution in mind, which is that colleges have to become more "productive" and "accountable." You can find this idea echoed by the economist Robert Frank. The idea is that college teaching is antiquated and therefore unproductive and inefficient, and needs to be transformed, through technmology and neoliberal management, to become more productive.

This is a superficially convincing idea. Tuition keeps going up because faculty pay keeps going up. Sounds totally logical, until you look at the numbers. But the numbers don't bear this out at all.

The price of college tuition has vastly outpaced inflation over the past few decades, growing almost three times as fast as the inflation rate. The average pay for full-time faculty, on the other hand, tends to do slightly better and occasionally slightly worse than inflation. So for faculty pay to be the main driver of these cost increases, the number of faculty on campuses would nearly have to triple. This is not what has happened, however. As I've mentioned before, colleges everywhere have been reducing the number of permanent faculty (the kind with salaries) and shifting the teaching burden to a small army of ill-paid "part-timers," who often string together gigs at three or four different schools each semester. The inflation in college costs are not primarily being driven by the cost of paying teacher's salaries.

The real story, as Catherine Rampell recently pointed out is that public education is no longer publicly funded.:

But at least at public colleges and universities — which enroll three out of every four American college students — the main cause of tuition growth has been huge state funding cuts.

While the Baby Boomers were in college, state governments picked up the majority of the educational tab for students in state schools. Now they pay a very small amount of those school's budget; even at some flagship schools, the state's percentage of the budget is now sometimes 10% or lower. This has been done by massively off-loading the expense onto students, even while putting less money into their education. This is why University of California students now pay three or four times the tuition that they paid in 2000-2001. This is why, when you factor in financial aid policies, Harvard is now cheaper than Cal State, even for families with six-figure incomes. If that's shocking, it should be. But that fact isn't a freaky exception. It's an illustration of how things work these days.

This is actually the story of American education over the past thirty years. Public education has been privatized. It is the main story. Everything else is a sideshow or a smoke screen.

The price of college has skyrocketed at the state schools that 75% of students actually go to because their government funds have been taken away. Period. And that's more than 75% of the problem.

What about the other 25% of colleges, the private schools whose tuition continues to skyrocket? It's a complicated question, but here's a beginning.

The first thing that you will notice about college prices is that there is relatively little differentiation between them. Most private schools charge very similar tuitions, although they each vary a bit from year to year. If you checked prices for all the private universities in Boston, you would find that the tuition at Harvard and MIT was pretty much the same as the tuition at Boston College, Boston University, Tufts, Northeastern, and what have you. (Apologies to the 63 fine institutions of higher learning I've left out.) Similarly, private schools that have only local reputations and generally weaker programs than Tufts, Northeastern, BU, etc., also charge the same sticker price as Tufts, BU, or Harvard. What to make of this?

First of all, it suggests that the private schools exert a limited kind of market discipline on each other's prices. No one sets their tuition price too high above the competitors'. But similarly, very few private schools make any serious effort to undercut each other with sticker-price tuition. No school is going to ask 15% or 20% more in tuition than other private schools do, and no one decides to slash tuition by 15% to scoop up more students. (The reasons for this behavior require a second post.) Imagine that all luxury cars, Porsches and Jaguars and whatnot, sell for equivalent prices. Now imagine that mid-level cars, the Ford Tauruses for example, sell for basically the same price as the Jaguars, or even for $200 more.

Second, it becomes very clear that tuition prices do not respond to demand for a particular school. Harvard has its 7 or 8% admissions rate, or whatever shocking percentage it's fallen to, but charges the same tuition as other area schools for which there is much less demand. In fact, many of the schools which are in less demand might ask more in tuition, in any given year, than the most in-demand schools do. Harvard might decide that with demand from prospective students so high, it could jack up its top tuition price by 50%, or 100%, and still have more than enough good applicants. But (for perfectly sensible economic reasons) it does not.

In fact, the real cost of attending the wealthiest and most famous colleges, the ones usually in most demand, is actually lower than the price of going to less prestigious schools with smaller endowments and saner rates of admission. College tuition, especially at the powerhouse schools, is famously on a sliding scale based on the student's ability to pay and the depth of the school's pockets. Not only does Harvard keep its top sticker-price tuition the same as the sticker-price for its academic neighbors, but it discounts that tuition more deeply, and for more students, than its local competitors do. Harvard is the same price as BU or Tufts for the very richest students, and for most of its students it is actually far cheaper than BU or Tufts or similar schools. This is because private colleges' economic strategy revolves around producing successful alumni and raising funds from them, rather than around making money off tuition per se. Imagine that Jaguars and Ford Tauruses have the same sticker price, and the Jaguar dealers actually make customers better deals than Ford dealers so that in practice the Jaguars are cheaper than the Fords. That's the basic situation.

(If you're keeping track, Mitt Romney's "shop around" advice is ridiculous because there is no serious price competition in the market, and also because the only significantly cheaper option, public education, is no longer cheap.)

Now, the private colleges do restrain the growth of each other's tuition prices to a limited degree. But that restraint is not enough to keep tuition prices from rising much faster than inflation. The reason for this is that since World War II, the real check upon price growth at private universities has been the low price and high quality of public education.

Harvard will never raise its tuition much higher than that of the schools it deems competitors (Yale, Princeton, Stanford, etc.), but is content to rise at the same speed that they do. Other private colleges are likewise happy to raise rates at the same pace as other private schools. The only real price discipline has come from the existence of a much cheaper high-quality option. When the Universities of California, Michigan, Indiana, etc., were educating students for something like a quarter of the tuition at private institutions, or less, there was a genuine downward pressure restraining the prices of private schools. You could get a much, much cheaper education at a public school than a private one. In many states, the subsidized public education was well-funded and genuinely very good: "Ivy-League education at one-tenth the price." The Universities of California and Michigan are world-famous for reasons. So for private schools the question of tuition rates wasn't just what the private competitors were charging, but what premium students and their parents would pay for the superior prestige and perceived quality of a private college education.

Now that lower-priced alternative is not much lower-priced, and its price rises faster every year. Meanwhile, because shifting the economic burden onto students still doesn't make up for all the lost state revenue, even the premier state schools have to keep cutting back on the resources that they put into educating students. It used to be that the Jaguars and Fords were priced the same, but you could get a perfectly nice Volkswagen Jetta for a much lower price, and that Jetta would run reliably and well. It might even perform better, over time, than the Ford, and be less expensive to keep up than the Jag. The Jaguar had better ratings in car magazines and was more likely to impress people, of course, and Jag dealers could charge a premium for those things. But that premium was added to the low baseline market price that the Jettas set for good underlying quality.

There are still plenty of Jettas in the educational market, but they now cost 75% or 80% of what a Jaguar costs. And they no longer always come with a warranty. That obviously does not lower the demand for Jaguars or Fords. Now that the Jaguar and Ford schools' cheap, reliable competitors are no longer especially cheap or reliable, it's natural that the Jaguar and Ford prices rise at a faster rate.

In 1972, Ivy League schools competed with each other, but also with excellent and extremely cheap state universities. An Ivy League education was only marginally superior to the Cal or Michigan education, but Cal and Michigan charged a fraction of Ivy tuition. Today, Cal and Michigan are only marginally cheaper than the Ivies, and are forced to provide significantly diminished educational quality. The natural result is that the Ivy League prices go up, and the prices of less famous private colleges are effectively pegged to the Ivies' prices.

There are other issues that require a second post, but public support for higher education didn't just make college affordable for the 75% of America's college students who went to public schools. It also indirectly subsidized students at private universities, by placing market curbs on what private schools could charge. This will not be brought up at high-level policy meetings. But it's the truth.

Rush Limbaugh & Overstock.com’s Patrick Byrne: Misogynists getting their due

William K. Wolfrum — Mon, 05 Mar 2012 12:32:57 +0000

Rush Limbaugh apparently isn’t the only one paying dearly for his misogynistic ways. Overstock.com boss Patrick Byrne, who has shown himself to be a first-class misogynist himself (“So, why exactly did you become a reporter? Giving Goldman traders blowjobs didn’t work out?” he once e-mailed business reporter Bethany McLean), is currently riding his Internet retailing company straight into the ground.

Via Sam Antar:

Last Friday, Overstock.com (NASDAQ: OSTK) reported a fourth quarter net loss of $3.4 million compared to net income of $14.9 in the previous year’s fourth quarter. Its revenues declined 10% to $314.1 million compared to $348.9 million in the previous year’s fourth quarter. Details of the fourth quarter financial results were so bad, that Overstock.com did not present a full income statement for that quarter in its press release. Instead it only provided key metrics of its fourth quarter numbers and presented a full year income statement. For the entire year, Overstock.com reported a net loss of $19.4 million compared to net income of $13.9 million in the previous year. Its 2011 revenues decreased 3% to $1.054 billion compared to $1.090 billion in the previous year.As of December 31, 2011, the company reported a net working capital deficit (current assets less current liabilities) of $14.1 million. Overstock.com’s negative net working capital balance indicates that it’s having problems paying its bills as it entered into its traditionally weakest quarter of the year (the first quarter of 2012). Overstock.com common stock closed at $6.11 per share, down $0.77 per share as investors reacted to the company’s horrible earnings report.

This is the latest setback for Byrne & Overstock.com, which has spent years “cooking their books” and misleading investors. In 2011, OSTK managed to make one of the year’s greatest PR blunders in trying to change its name to “O.co” (not a typo, that’s the name).

The recent report came as a surprise to analysts. Via Reuters:

Analysts, on average, had expected the company to earn 45 cents a share, on revenue of $377.6 million.

One wonders who these analysts are. For those that have kept their eyes on Byrne – a donor to the Swiftboat attacks on John Kerry and a fierce supporter of a failed school voucher initiative in Utah – this collapse of his company has been easy to predict for some time now. And it appears no matter how hard he tries to libel & slander business journalists (he’s currently being sued for libel in Canada), his company will pay the ultimate price for his mismanagement.

–WKW

Crossposted at William K. Wolfrum Chronicles

Your New Year Public Domain Report: 2012

Doctor Cleveland — Sun, 01 Jan 2012 22:10:06 +0000

Happy New Year, all. My spouse and I spent part of yesterday evening at our local revival house, watching a classic New Year's Eve double-feature of The Thin Man and After the Thin Man. Then we adjourned to a favorite bar for midnight; after all, that's what Nick and Nora would do.

By coincidence, midnight last night was the moment when After the Thin Man was once set to enter the public domain. But of course, it didn't. For the 34rd year in a row, nothing new entered the public domain, which has been basically frozen in place since 1978. Under the original copyright laws in force when it was made, After The Thin Man should have entered public domain 19 New Year's Eves ago, during the first second of 1993. (Obviously, the earlier Thin Man movie would have become public domain even earlier.) A major copyright extension act in 1976 pushed that particular date back until the wee hours of this morning. And then, of course, another copyright extension law in 1998 (the Millennium Copyright Act or Sonny Bono Act), pushed that back for another twenty years. So After the Thin Man will cease to be private property on New Year's Day, 2032, 96 years after its theatrical release, under the current schedule. Look for that date to be pushed back again in five or six years, when Congress comes under pressure from the big media companies to extend the copyright term another 20 or 25 years.

So there's nothing new under the public domain's tree this year, but I'd like to list some of the movies, books, and recordings that would have become public today, under earlier versions of the law:

If not for the Millennium Copyright Act:

Porky Pig would enter the public domain today, as would Prokofiev's Peter and the Wolf.

Charlie Chaplin's Modern Times would enter in the public domain today, as would Mae West's Go West, Young Man, Frank Capra's Mr. Deeds Goes to Town, and a host of others: My Man Godfrey, Tarzan Escapes, Ballots or Bullets, Swing Time, Intermezzo, Charlie Chan at the Opera, Reefer Madness, Hitchcock's original Secret Agent and the original Anything Goes.

Margaret Mitchell's Gone with the Wind was set to exit copyright today, as was Double Indemnity, Dos Passos's The Big Money, Faulkner's Absalom, Absalom!, Carl Sandburg's The People, Yes!, Ayn Rand's We, the Living and of course Keynes's General Theory of Employment, Interest, and Money.

The songs "Good Night, Irene" and "Pennies from Heaven" should have entered public domain today, as should a bunch of other classics from the American songbook: "A Fine Romance," "The Way You Look Tonight," "It's De-Lovely," "Easy to Love" and "I've Got You Under My Skin." (The last three by Cole Porter, who was on an especially hot streak.) The public domain should also include classical music by Bartok, Barber, Shostakovich, Rachmaninoff, and Prokofiev, whose ballet Romeo and Juliet appeared in the same year as his Peter and the Wolf.

According to the Sony Bono Act, all of these works are too new to enter the public domain until 2032. People need a chance to make a little money off them before that happens.

If not for the Copyright Act of 1976:

Under the copyright laws in force when they were made, Rebel Without a Cause, Marty, The Seven-Year Itch, The Blackboard Jungle, Lady and the Tramp, and To Catch a Thief would all have entered public domain today. So would Davy Crockett, Guys and Dolls (with Brando and Sinatra), Oklahoma!, Kiss Me Deadly, The Man with the Golden Arm, East of Eden, Godzilla Raids Again and Abbott and Costello Meet the Mummy.

Also entering public domain today would be The Lord of the Rings (whose final volume would be leaving copyright), Moonraker, The Talented Mr. Ripley, Cat on a Hot Tin Roof, Waiting for Godot, Notes of a Native Son, A Good Man Is Hard to Find, William Golding's The Inheritors and Nabokov's Lolita. (The last book was not published in an English-speaking country until three years after the others on this list, but was published in France, in English, in 1955.)

The musical public domain would be enriched today by "Rock Around the Clock," "Folsom Prison Blue," "Unchained Melody," "Blue Suede Shoes,""Charlie Brown," "Tutti Frutti" and "Maybelline." If early rock and roll isn't your speed, they'd be joined by a batch of Sinatra classics: "Love and Marriage," "The Tender Trap," "In the Wee Small Hours of the Morning," and an old Doctor Cleveland favorite, "Learning the Blues."

However, federal law has subsequently determined that none of these works count as oldies yet. Under the current schedule, they are all slated to enter the public domain in 2051. And of course, it might take much, much longer. All that's certain is that next New Year's Day there will again be nothing else in the public domain, the same way it's been since January 1, 1979. And as we approach January 1, 2019, there will be a major campaign to keep anything from entering public domain ever again.

Germany's Bold Plan to Rescue Europe

Genghis — Mon, 05 Dec 2011 00:35:49 +0000

As Italy and Spain go tumbling after Greece into an abyss of insolvency, Germany has at last found the will to act boldly in defense of the European Union.

According to the New York Times, Chancellor Angela Merkel has launched a courageous effort to bail out Germany's struggling neighbors...with the International Monetary Fund's money.

Not that she's shirking responsibility. After all, Germany contributes a full six percent of the IMF pool.

And really, why should Germany be any more responsible for bailing out European debtors than the United States (17 percent) and the other 159 non-European members (60 percent). So Germany and Italy share the same currency, what of it?

Of course, some critics might point out that the primary reason Italy and Spain are in trouble now is that Germany has stubbornly prohibited the European Central Bank from devaluing the euro.

But such critics fail to appreciate Germany's aversion to devaluation. In the 1920s, Germans' great-grandparents had to push around around wheelbarrows of worthless marks, so it's understandable that their brilliant 21st century economists should deny the fundamental principles of modern economics.

The trouble is that it's one thing for Germany to inflict its prehistoric monetary policy on its own citizens; it's something else for Germany to impose such a policy on its neighbors. And to then ask the rest of the world to rescue those neighbors as Germany kicks them over the cliff... In America, we have a word for that. It's called chutzpah.

Let's not be too hard on Germany though. Americans are practical people, and we're willing to cut a deal. We'll help you out with Italy and Spain, if you help us bail out California.

Rethinking Income Inequality: A New Kind of Payroll Tax

Genghis — Fri, 02 Dec 2011 17:39:26 +0000

How do you alleviate economic inequality in America? It's easy to complain about greed and extravagance but much more difficult to come up with practical policies that would make a real difference in the long run.

The default proposal these days is to increase tax rates on top income brackets, starting with an elimination of the Bush tax cuts. That may help a bit, but as you can see from the following graph, the trend toward income concentration did not begin with Bush's presidency, and it would take radical tax increases to get back to 1970s levels. The government would have to strip an additional 30 percent from the incomes of the top ten percent and somehow put that money into everyone else's pockets.

The Top Decile Income Share in the United States, 1917-2007

Leaving aside the unpopularity of such a large tax increase and its economic ramifications, is that even how we really want things work? My ideal progressive society is not one in which the rich bankroll the poor through taxation. It is one in which the differences between rich and poor are far less extreme than they are today.

The real trouble with income tax as a solution to economic inequality is that it addresses the symptom, not the disease. The fundamental problem of economic inequality is not the rich pay too few taxes relative to the rest of us; it's that they earn too much money relative to the rest of us.

So how can we address the disease itself? One solution is to prop up the bottom by raising the minimum wage. To my mind, that's a no-brainer, and I would like to see progressives take up the cause more vigorously, but it only addresses half the problem. If we increased the minimum wage at the same rate that the incomes of the top ten percent have risen over the past forty years, we'd risk severe inflation and/or high unemployment.

To significantly reduce income inequality without such repercussions, we not only have to accelerate wage growth at the bottom; we also have to restrict income growth among at the top, and that is a much trickier feat to pull off.

Let's first distinguish between the two primary income streams of the top ten percent: capital gains and wages. Of these, Berkeley economist Emmanuel Saez blames wages for most of the recent income gains among the top ten percent. That is to say, the rich have been getting richer faster because companies have been aggressively raising the salaries of their top employees.

In that case, one solution could be a pay cap, which would compress income inequality between two federal mandates, a maximum and minimum wage. But leaving aside the unpopularity and legal implications, this approach suffers from a couple of drawbacks. First, economic competition is a valuable motivational tool, particularly at the very top. We don't really want to fill the ranks of CEOs, bankers, and lawyers with clock-punching dead weight. Second, the intense pressure to hire the best will invariably force companies to find alternative ways to compensate their top employees, legally or illegally.

What we really want is not to prohibit companies from overpaying their employees but to discourage them. How do you effectively deter a corporation from taking some action? You have to hit them where it counts: the balance sheet.

I'm about to present half-baked--make that quarter-baked--proposal that has absolutely no chance of becoming law in the foreseeable future. I offer it as a seed for brainstorming, to get us thinking about how we might do things differently.

I propose that we link corporate taxes to corporate salaries. The higher a company pays its employees over a certain threshold, the more it owes the government. This proposal would not necessarily increase overall corporate tax rates, but it would shift more of the burden to companies with highly compensated employees, like investment banks, hedge funds, and law firms, and it would discourage larger corporations from overpaying top executives.

What I'm advocating is essentially a payroll tax, but it's a different kind of payroll tax from the FICA contributions currently deducted from paychecks. It would not be tied to particular social programs, it would not be shared with employees or withheld from paychecks, it would not be capped, it would not be applied below a specified threshold, and it would be progressive rather than proportional.

Unlike pay caps, a progressive payroll tax would not eliminate economic competition at the top; it would just make it more costly to overcompensate employees. If done correctly so as to include all forms of compensation--bonuses, stock options, golden parachutes, and so on--it should add deflationary pressure to the relentless income growth of top-earners.

Such changes might seem semantic to some. After all, what does it matter whether wealthy wage-earners are taxed directly on their salaries or indirectly through their employers? There are a few differences. Wages count against a company's pre-tax earnings, reducing their tax burden; corporate taxes do not. Progressive payroll taxes would not penalize people for working two jobs or having other sources of income. And individuals cannot use personal deductions to offset payroll taxes.

But the primary contrast is psychological. The distinction between "my money" and "the company's money" can make all the difference in the world. It reduces the pain of seeing one's paycheck docked. It assuages the sense of unfairness in which the rich already feel that they pay more than their share. And it undercuts the conservative complaint that progressive taxes punish success.

The psychological difference between appropriating personal income and penalizing companies for overcompensation could make it possible to achieve popular support for progressive tax rates that are more heavily weighted towards the upper brackets. The greater the weight at the top, the larger the deterrent against extreme compensation packages. And that could finally reverse the decades-long trend towards income concentration.

There are plenty of details to work out, of course. For instance, we would need to prevent companies from avoiding taxes by paying portions of their employees' salaries through shell companies and similar evasions. It may also be politically difficult to pass such a plan, since a radical change to corporate taxes would receive aggressive pushback from companies with substantial influence in Washington. But sometimes it's worth exploring crazy quarter-baked ideas just to see where they lead.

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Black Friday as Myth-Buster

Ramona — Mon, 28 Nov 2011 12:08:07 +0000

After the Thanksgiving Day gluttony is over and after our teams have either won or lost (Our biggie between the Lions and the Packers went horribly awry for my loved ones, poor dears.) and after we've taken our tryptophan-induced naps, the next fun thing to think about, talk about or plan for is Black Friday, our annual Big Huge Shopping Extravaganza. It's the day when primitive survival skills kick in and the absolutely-must-haves traditionally go nuts and stampede in scenes that make even NatGeo watchers go "Wow!".

(Rumor has it that Black Friday is the one day of the year when China pays homage to US. They would make it a national holiday, except everyone is busy at work manufacturing things for our Christmas rush.)

There's a myth in this country that goes like this: America is broke. Aside from a paltry few tax-evading King Midas wannabes, nobody else has anything much. That's the story.

Our jobless, our homeless, our soup kitchens, our empty former homes, our overflowing ERs--that's all real. Painfully real. But what's also real is the hefty percentage of 99 Percenters who spread out at the stroke of Black Friday to go whole hog spending astonishing amounts of ready cash and pay-later credit on stuff.

It's an American tradition contrived and perpetuated by the merchant class and, really, who are we to tell people (other than Congress) how to spend their (our) money? But a group known as "Occupy Black Friday" , an off-shoot of Occupy Wall Street, while admirably opposing the longer open hours which would take employees away from their own families on Thanksgiving, and endorsing the efforts to buy locally, took it one step further and came up with the idea of boycotting, instead of occupying, the major chains on That Day. (The Occupying part wouldn't work at all, you see, since millions of shoppers would already be camping out and milling around, waiting for the doors to open.)

Attempting to show the strength of the masses by boycotting major retailers on that all-important shopping day is one of those ideas that seems okay on the face of it, but which, in reality, is doomed from the start. It's a whisper in the wind, a dusky dot in the night sky, and here's why: I've been boycotting "Black Friday" for years now and nobody has ever noticed. Multiply me by, say, several hundred thousand and we still wouldn't be noticed. It's a happy tradition, the official start of the Christmas shopping season. Even in the worst economic downturn in decades, it's still a force bigger than all of us.

Okay, granted, this year, for whatever reasons, it seemed more intense than fun. A woman took to pepper-spraying other shoppers threatening to get too close to the prize she was after. A man slipped a DVD under his shirt, not to steal it but to prevent it from being stolen from him, and got himself shoved to the ground and bloodied for his efforts. People were knocked around and bruised. There were grim reports of shootings and parking lot robberies. But to the victors went the spoils and it's those success stories that make it all worthwhile. (More to come the day after Christmas. Another happy tradition.)

As might be expected, the activities at "Occupy Black Friday" came to the attention of the folks over at Fox "News" . Their idea of the perfect smack-down was to tell people to go out and shop 'til they drop. That'll show those damned Occupiers. Hah!

Now, I really hate to think Fox had that much influence, but this year Black Friday alone took in $11.4 billion, a 6.6% increase over last year, while the Thanksgiving weekend broke all sales records with a staggering $52.4 billion spent over four days. It was a jump of 16% over last year's sales, with record numbers of shoppers spending even more bucks on average.

No stats yet on the sales outcomes of Small Business Saturday, a truly sensational idea, even if it did come from American Express.

Today is Cyber Monday (designated by the online merchants who felt left out, no doubt), the lead-in to Cyber Week (Because why stop the momentum of a very good thing?), and on to Christmas, the Big Kahuna of cash heavy, gift-giving holidays.

So about that whole "America is broke" business. We're looking into it. We'll have to get back with you on that.

(Cross-posted at Ramona's Voices.)

The Trouble with Banks

Genghis — Thu, 17 Nov 2011 01:18:21 +0000

It's hard out there for a bank. Last year, retail banks lost a major revenue source when the government regulated overdraft charges. This year, they took another hit when the government capped the debit card fees. And amidst an anemic credit market, they're having trouble finding investment opportunities for their deposits.

According to the New York Times' calculations, it costs the banks $200 to $300 a year to maintain a checking account, but they're only earning $85 and $115. So now they're scrambling to find new ways to charge customers, from conspicuous checking fees to sly little charges that sneak into bank statements.

But hold on a minute. Why does it cost $200 to $300 to maintain a checking account, especially now that so much is done electronically? By way of explanation, the Times mentions only FDIC insurance premiums and the cost of staffing branches. But FDIC premiums are just over a dime per $100 of deposits. If a customer deposits $1,000, it costs the bank about a buck.

Branch operating costs are more believable. Real estate and salaries are not cheap. For instance, I wandered into my own bank the other day--a spacious office in high-priced midtown Manhattan. As usual, there was no line for the teller. I counted eight employees in the building and only one other customer. You can't run a business that way unless the customers pay a lot of money.

Well then, why not just close some branches? There are some 700 branch banks in Manhattan, more than ten times the number of post offices. Nationwide, there are almost 100,000, four times as many as existed in 1970 before we had ATMs or electronic banking. Who needs so many branches? Leave us customers a few ATMs, and on the rare occasion that we need a human teller, we'll go the extra distance to central branch.

Only that's not how it works. See, those fancy branches all over town are not actually there for our convenience. Or rather, they are there for our convenience exactly once: when we sign up. After that, the bank never really wants to see us again, unless we sign up for additional products.

Have you ever paid attention to the layout of your bank? The teller window and ATMs usually occupy a relatively small proportion of the space. The rest of the room is filled with the desks of various assistant branch managers, customer service agents, financial advisors, and so on. They are not there to serve you. They are there to sell you.

That's why you rarely see an ATM owned by a major bank standing on its own. An ATM can serve you almost as well as a human teller, but it's not very good at selling you financial products.

Yet the New York Times said that those financial products aren't profitable. So why would retail banks spend so much to sell consumers money-losing products?

Because, of course, the products aren't money-losing. Retail banking has been extremely lucrative for a very long time. It has been so lucrative that banks have opened branch after branch at considerable expense in order to compete for customers. If consumer banking has suddenly become unprofitable, it is only because the reduced revenues no longer justify the immense sales and marketing infrastructure of the branch banks. And if the banks are now looking for new ways to charge customers, it is not because their business is truly unsustainable but because they are too accustomed to the huge margins that the sector formerly provided through hidden fees.

The good news is that with a more transparent marketplace, the profit margins will remain moderate. As Bank of America in its hubris recently discovered when it attempted to overcharge account holders for debit cards, customers will simply take their business elsewhere. The cheaper banks without so many fancy branches--some without any branches at all--will happily take customers without the extra fees.

It's only hard out there for a bank that can't kick the habit.