“HOW do you feel about the walkout?”
I have been asked that question repeatedly over the last several weeks, and I think that I should answer it.
First, a bit of background.
I have been a professor of economics at Harvard for more than a quarter-century. Since 2005, one of my assignments has been to run Economics 10, the yearlong introductory course. About 750 undergraduates enroll every year, often making it the largest course on campus. I give some lectures, invite a few of my colleagues to do so as guests and oversee an army of graduate-student teaching fellows who run small sections.
On Nov. 2, a group of students staged a walkout of one of my lectures. In an open letter to me, the organizers said the action was meant “to join a Boston-wide march protesting the corporatization of higher education as part of the global Occupy movement.” They said that “the biased nature of Economics 10 contributes to and symbolizes the increasing economic inequality in America.”
The university administration, which had heard about the planned protest, sent several police officers to sit in my class for the day as a precautionary measure. Luckily, they weren’t needed.
Eight minutes into the lecture, about 5 to 10 percent of the class stood up and quietly left. Some other students who had taken the class in previous years then walked into the room as a counterprotest. I have been told that at least one of the students who walked out sneaked back in later: he wanted to support the protest but didn’t want to miss the lecture. After a few minutes, I resumed the class as usual.
So how do I feel about it?
My first reaction was nostalgia. I went to college in the late 1970s, when the memory of the Vietnam War was still fresh and student activism was more common. Today’s college students tend to be more focused on polishing their résumés than on campaigning for social reform. I applaud the protesters for thinking beyond their own parochial concerns and trying to make society a better place for everyone.
But my second reaction was sadness at how poorly informed the Harvard protesters seemed to be. As with much of the Occupy movement across the country, their complaints seemed to me to be a grab bag of anti-establishment platitudes without much hard-headed analysis or clear policy prescriptions. Ironically, the topic of the lecture that the protesters chose to boycott was economic inequality, including a discussion of recent trends and their causes.
The course I teach is a broad survey of mainstream economics. It includes ideas of many greats in the field, like Adam Smith, David Ricardo, Arthur Pigou, John Maynard Keynes and Milton Friedman. The material is similar to what you’d learn at most other universities.
Many Harvard students recognize this. An editorial in the student newspaper, The Harvard Crimson, said: “The truth is that Ec 10, a requirement for economics concentrators, provides a necessary academic grounding for the study of economics as a social science. Professor Mankiw’s curriculum sticks to the basics of economic theory without straying into partisan debate.”
Perhaps the protesters were motivated by an inchoate feeling that standard economic theory is inherently slanted toward a conservative world view. If so, they would be following a long tradition.
As a student, I took my first economics course using Paul Samuelson’s famous textbook. For the second half of the 20th century, it was a leading text for introductory economics. It offered many millions of students around the world their first and often only look at the subject.
Professor Samuelson’s own politics were decidedly left of center, but that did not prevent him from being attacked by those even further left. A two-volume critique of his book, called “Anti-Samuelson,” was published in 1977. (It was condensed from the original four-volume German edition.) Written by Marc Linder, now a professor of labor law at the University of Iowa, it aimed to provide a Marxian counterpoint to the standard economics of the day. Professor Linder focused on the Samuelson book not because he thought it was particularly egregious but because it was a prominent representation of mainstream economic thought.
I don’t claim to be an economist of Paul Samuelson’s stature. (Probably no one alive can.) But like him, I have written a textbook that has introduced millions of students to the mainstream economics of today. If my profession is slanted toward any particular world view, I am as guilty as anyone for perpetuating the problem.
Yet, like most economists, I don’t view the study of economics as laden with ideology. Most of us agree with Keynes, who said: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.”
That is not to say that economists understand everything. The recent financial crisis, economic downturn and meager recovery are vivid reminders that we still have much to learn. Widening economic inequality is a real and troubling phenomenon, albeit one without an obvious explanation or easy solution. A prerequisite for being a good economist is an ample dose of humility.
My fervent hope is that any students who are still protesting the class will return — and that, while recognizing our limitations, they will learn from us what they can. A few might choose to become economic researchers themselves. Their contributions will surely be welcome. They might even improve the next generation of textbooks.
http://www.nytimes.com/2011/12/04/business/know-what-youre-protesting-economic-view.html?_r=1&scp=1&sq=Greg%20Mankiw&st=cse
Showing posts with label nyt. Show all posts
Showing posts with label nyt. Show all posts
Monday, December 5, 2011
Thursday, June 23, 2011
Mobile Shopping Set to Spike, Says Forrester
The retail industry is itching to sell products on mobile phones; it’s just waiting for consumers to start buying. Already, 25 of the 30 top online retailers have iPhone apps, even though less than 15 percent of online consumers report having used their mobile phones to buy something.
But Forrester Research predicts that a boom will come. Mobile commerce is expected to reach $31 billion by 2016, up from $3 billion in 2010, according to a forecast the firm published Friday. But even with such rapid growth, mobile shopping is expected to make up only about 7 percent of e-commerce by 2016. That amounts to about 1 percent of total retail sales.
Several things are holding people back from using their phones to shop, according to Forrester. At the top on the list are concerns about security. These concerns may fade in the same way that they stopped being a barrier to online shopping. But there are also technical barriers — mobile sites are often slow and unwieldy – and confusion among retailers about how best to pursue their mobile strategies.
Over 90 percent of online retailers have mobile strategies, according to a recent survey conducted by Shop.org for Forrester, but the report characterizes the vision of many retailers as “immature.” For now, companies are using mobile primarily to offer information about the products they sell or to give basic information about their stores. But there are more ambitious plans in the works.
Among those most often cited by retailers are enabling customers to use their phones to pay at check out, share ratings and reviews, and receive notices about sales and other offers.
Putting the focus on consumers may be misguided, said Sucharita Mulpuru, the author of the report. Rather than hope that shoppers will use their phones to buy things, she said retailers should focus on training store employees to use mobile devices in ways that would make them more helpful. Several retailers, like Home Depot and Urban Outfitters, have already indicated that they will do so, but they are a relatively small minority, the report says.
“While the opportunity to arm store associates with instantaneous information and richer payment acceptance capabilities may be the most compelling reason for retailers to invest in mobile, most companies view mobile as a channel that is primarily about completing sales through a mobile site,” Ms. Mulpuru writes.
In an earlier version of this post, a graphic incorrectly stated that it was measuring millions of dollars. It measures billions.
http://bits.blogs.nytimes.com/2011/06/17/mobile-shopping-set-to-spike-says-forrester
Wednesday, June 15, 2011
After Years Without Change, Cracks Appear in I.P.O. Process
The last few decades have wrought a revolution in finance. One thing, though, remains stubbornly the same. It is the control that investment banks wield over initial public offerings.
The way companies go public looks almost identical to the Ford Motor Company’s I.P.O. more than 55 years ago. A company hires lead underwriters, which serve as the company’s spiritual and logistical advisers, helping the company prepare the necessary regulatory documents and marketing the offering to potential investors. The lead underwriters, and sub-underwriters hired by them, then build a book of investors who buy the shares. Through this process, an I.P.O. price is set and the company’s shares are sold into the public market.
The goal of the underwriting process is to provide a steady channel for companies to go public, and a vetting procedure to determine whether a company is ready to do so.
But today, the I.P.O. market is heated, and there is the specter of a bubble in social media Internet stocks as well as a postbubble hangover in Chinese issuers. During this period, the flaws in the current system become more apparent. Some of these flaws are significant and hurt investors.
The first crack to appear is in the gate-keeping function. Underwriters are set up by the regulatory system to be gatekeepers. Underwriters pass on some companies and certify others that their I.P.O. is worthy for the public. Theoretically underwriters should be doubly incentivized beyond the regulatory requirements to bring good companies to market. Otherwise customers will refuse to buy shares in future I.P.O.’s underwritten by that bank.
The wave of Chinese and social media I.P.O.’s shows that this gate-keeping function can become weak. Companies are being brought to market with uncertain prospects or because they are in a hot space. If a company is characterized as such, its main quality too often seems to be whether it can be sold instead of whether it should be sold. This is a rerun of the technology bubble.
In this type of market, not only is the gate-keeping function diminished, but the banks appear to be captive of the issuers. Take LinkedIn, which had questionable corporate governance in the form of a dual-class stock and a staggered board. But LinkedIn also deliberately stoked its first-day price rise by offering only a small number of its shares at a low price. The lead underwriters for its I.P.O. were Morgan Stanley, Bank of America Merrill Lynch and JPMorgan Chase.
There is a debate over whether this jump in share price was the fault of the underwriters or LinkedIn, but the bottom line is that the underwriters did not appear to do anything to damp the enthusiasm. This raises another problem with the gatekeeper function. Banks appear not only as weak gatekeepers in a hot market, they also dilute any negative impact on their reputation by spreading the wealth.
The Groupon I.P.O. has four lead underwriters, including Morgan Stanley. Groupon just announced the addition of six more banks to help it with its I.P.O.. The world of major underwriters is small, and they share the wealth by ensuring that those not chosen as lead underwriters are included in the sub-underwriting group. In other words, the potential impact on any one investment bank’s reputation is limited since they are all involved.
The second crack in the I.P.O. process is in the sales process. The current system does not benefit retail shareholders. Instead, investment banks sell I.P.O. shares to bigger institutional investors and rich individuals who have a relationship with the investment bank. And the profit from these sales can be large. I.P.O. gains average 10 to 15 percent in normal years, and a hot-market I.P.O., like LinkedIn’s, can have first-day gains greater than 100 percent. These are gains that retail shareholders not only miss but actually subsidize, since they must purchase in the more expensive aftermarket.
These two cracks highlight problems with I.P.O.’s, but perhaps the biggest problem is with the ones we do not see. Under the current system, underwriters have abandoned the small-issuer market. In 1996, according to Dealogic, 309 initial public offerings raised less than $25 million each. This number declined to 13 in 2010. Small companies, those with a market capitalization of $20 million to $250 million, are essentially locked out of the I.P.O. market. And this isn’t a Sarbanes-Oxley phenomenon, as the number of small I.P.O.’s declined to nine in 2001, before the act was passed.
The current underwriting system works, but only if you are a larger issuer or in a hot market. It also fails to serve as a check on an overly bubbly market. Instead, underwriters race to the bottom as they serve the demands of companies. How can any banker pass up being underwriter to an I.P.O. like LinkedIn’s, no matter the terms or quality?
Around the time of the Google I.P.O. in 2004, there was talk of trying to create alternative systems. Google abandoned the underwriting model and adopted an auction style that was more similar to how European I.P.O.’s were conducted before the American investment banks arrived there. The Google I.P.O. worked, but just barely. During the I.P.O. boom, Hambrecht & Quist and some other smaller investment banks also tried to start an auction-style I.P.O. system. None of these alternatives has gained traction.
There are advantages to the auction model. It brings retail investors back into the process because they can freely bid on issues. It also solves a related dilemma, which is that like commissions for real estate brokers, I.P.O. commissions are stubbornly uniform. They have stayed steady at 6 to 7 percent for years despite occasional attempts by issuers to lower them. Still, issuers don’t seem to care about this commission, and are instead willing to pay them to ensure good service at a propitious time in the company’s life.
Another alternative way for a company to get a stock market listing is through a reverse merger.
There are on average over 200 of these a year, according to the Reverse Merger Report. The Securities and Exchange Commission, however, issued a report last week highlighting the special risks inherent in these types of transactions. One reason was the lack of an underwriting vetting process.
So while retail investors would benefit from other models, they could also be hurt more in the long run by investing in unprepared companies that come to the market outside the traditional I.P.O. process.
Despite the criticisms, there does appear to be value in the underwriter model and its certification process. People simply trust these I.P.O.’s more. And with reason: companies that go public through the underwriting process appear to be of better quality.
The real issue thus appears to be how to get banks to serve as better gatekeepers and monitors. There is also a desperate need to encourage more small I.P.O.’s.
In other words, in this I.P.O. boom there is one big issue: how do you get underwriters to actually perform their underwriting function?
http://dealbook.nytimes.com/2011/06/14/after-years-without-change-cracks-appear-in-i-p-o-process/
The way companies go public looks almost identical to the Ford Motor Company’s I.P.O. more than 55 years ago. A company hires lead underwriters, which serve as the company’s spiritual and logistical advisers, helping the company prepare the necessary regulatory documents and marketing the offering to potential investors. The lead underwriters, and sub-underwriters hired by them, then build a book of investors who buy the shares. Through this process, an I.P.O. price is set and the company’s shares are sold into the public market.
The goal of the underwriting process is to provide a steady channel for companies to go public, and a vetting procedure to determine whether a company is ready to do so.
But today, the I.P.O. market is heated, and there is the specter of a bubble in social media Internet stocks as well as a postbubble hangover in Chinese issuers. During this period, the flaws in the current system become more apparent. Some of these flaws are significant and hurt investors.
The first crack to appear is in the gate-keeping function. Underwriters are set up by the regulatory system to be gatekeepers. Underwriters pass on some companies and certify others that their I.P.O. is worthy for the public. Theoretically underwriters should be doubly incentivized beyond the regulatory requirements to bring good companies to market. Otherwise customers will refuse to buy shares in future I.P.O.’s underwritten by that bank.
The wave of Chinese and social media I.P.O.’s shows that this gate-keeping function can become weak. Companies are being brought to market with uncertain prospects or because they are in a hot space. If a company is characterized as such, its main quality too often seems to be whether it can be sold instead of whether it should be sold. This is a rerun of the technology bubble.
In this type of market, not only is the gate-keeping function diminished, but the banks appear to be captive of the issuers. Take LinkedIn, which had questionable corporate governance in the form of a dual-class stock and a staggered board. But LinkedIn also deliberately stoked its first-day price rise by offering only a small number of its shares at a low price. The lead underwriters for its I.P.O. were Morgan Stanley, Bank of America Merrill Lynch and JPMorgan Chase.
There is a debate over whether this jump in share price was the fault of the underwriters or LinkedIn, but the bottom line is that the underwriters did not appear to do anything to damp the enthusiasm. This raises another problem with the gatekeeper function. Banks appear not only as weak gatekeepers in a hot market, they also dilute any negative impact on their reputation by spreading the wealth.
The Groupon I.P.O. has four lead underwriters, including Morgan Stanley. Groupon just announced the addition of six more banks to help it with its I.P.O.. The world of major underwriters is small, and they share the wealth by ensuring that those not chosen as lead underwriters are included in the sub-underwriting group. In other words, the potential impact on any one investment bank’s reputation is limited since they are all involved.
The second crack in the I.P.O. process is in the sales process. The current system does not benefit retail shareholders. Instead, investment banks sell I.P.O. shares to bigger institutional investors and rich individuals who have a relationship with the investment bank. And the profit from these sales can be large. I.P.O. gains average 10 to 15 percent in normal years, and a hot-market I.P.O., like LinkedIn’s, can have first-day gains greater than 100 percent. These are gains that retail shareholders not only miss but actually subsidize, since they must purchase in the more expensive aftermarket.
These two cracks highlight problems with I.P.O.’s, but perhaps the biggest problem is with the ones we do not see. Under the current system, underwriters have abandoned the small-issuer market. In 1996, according to Dealogic, 309 initial public offerings raised less than $25 million each. This number declined to 13 in 2010. Small companies, those with a market capitalization of $20 million to $250 million, are essentially locked out of the I.P.O. market. And this isn’t a Sarbanes-Oxley phenomenon, as the number of small I.P.O.’s declined to nine in 2001, before the act was passed.
The current underwriting system works, but only if you are a larger issuer or in a hot market. It also fails to serve as a check on an overly bubbly market. Instead, underwriters race to the bottom as they serve the demands of companies. How can any banker pass up being underwriter to an I.P.O. like LinkedIn’s, no matter the terms or quality?
Around the time of the Google I.P.O. in 2004, there was talk of trying to create alternative systems. Google abandoned the underwriting model and adopted an auction style that was more similar to how European I.P.O.’s were conducted before the American investment banks arrived there. The Google I.P.O. worked, but just barely. During the I.P.O. boom, Hambrecht & Quist and some other smaller investment banks also tried to start an auction-style I.P.O. system. None of these alternatives has gained traction.
There are advantages to the auction model. It brings retail investors back into the process because they can freely bid on issues. It also solves a related dilemma, which is that like commissions for real estate brokers, I.P.O. commissions are stubbornly uniform. They have stayed steady at 6 to 7 percent for years despite occasional attempts by issuers to lower them. Still, issuers don’t seem to care about this commission, and are instead willing to pay them to ensure good service at a propitious time in the company’s life.
Another alternative way for a company to get a stock market listing is through a reverse merger.
There are on average over 200 of these a year, according to the Reverse Merger Report. The Securities and Exchange Commission, however, issued a report last week highlighting the special risks inherent in these types of transactions. One reason was the lack of an underwriting vetting process.
So while retail investors would benefit from other models, they could also be hurt more in the long run by investing in unprepared companies that come to the market outside the traditional I.P.O. process.
Despite the criticisms, there does appear to be value in the underwriter model and its certification process. People simply trust these I.P.O.’s more. And with reason: companies that go public through the underwriting process appear to be of better quality.
The real issue thus appears to be how to get banks to serve as better gatekeepers and monitors. There is also a desperate need to encourage more small I.P.O.’s.
In other words, in this I.P.O. boom there is one big issue: how do you get underwriters to actually perform their underwriting function?
http://dealbook.nytimes.com/2011/06/14/after-years-without-change-cracks-appear-in-i-p-o-process/
Sunday, May 29, 2011
My Blog Is Also Paying My Bills
Casting the digital equivalent of a message-in-a-bottle into the Internet’s vast sea of content, many people start Web sites or blogs hoping that they will find an appreciative audience for their precocious parrot videos, cupcake recipes or pithy commentary on everyday life. The dream, of course, is that they will develop a large and loyal following — and potentially profit from it.
While most of these self-publishers don’t attract the attention of anyone other than indulgent family and friends, there are those who find wider recognition and some income. What the successful have in common is a passion for their subject and a near-compulsion to share what they know. Advertising, merchandising, offline events, book deals, donations and sometimes sheer luck also play a part.
“My advice is to choose a topic you’ll never get tired of,” said Stephanie Nelson, 47, of Atlanta, a homemaker who founded CouponMom.com in 2001 to share tips on saving money by using coupons. “The first three years I made no money at all, so I had to love what I was doing to keep going.”
Ms. Nelson said her Web site now has more than 3.8 million visitors a month, and the income it generates supports her family of four — allowing her husband to retire early from his corporate job five years ago. “I’m still not tired of it,” Ms. Nelson said.
Half of the site’s revenue comes from Google’s AdSense service, and the other half is from companies like Groupon and LivingSocial that buy ads directly from her. AdSense generates ads based on the words that appear on Web pages. For example, if a blog post is about dogs, ads for dog food or dog grooming might appear beside it.
Many of the Google ads generate income only if people click on them — usually yielding a fraction of a cent per click. It’s also possible to get paid every time a Google ad appears on a page. Rates are determined in part by advertisers bidding in an online auction.
Other companies like BuySellAds.com and BlogAds allow self-publishers to determine what they want to charge for placing an ad on their sites. They then match sites with eager advertisers for a percentage of ad sales — 14 to 30 percent is typical.
Federated Media, which is a sort of Web talent management company, is more selective, negotiating rates on behalf of independent content creators it agrees to represent. In general, online ad rates vary widely, from $54,000 a day for an ad on a popular blog like PerezHilton.com to $10 a month for an ad on the cartoon blog The Soxaholix. (The New York Times Company is an investor in Federated Media.)
Clayton Dunn, 32, and Zach Patton, 31, the bloggers behind The Bitten Word, make around $350 a month from pay-per-click Google ads, and in commissions from Amazon.com when readers follow links to cooking gadgets, books and magazine subscriptions they recommend. Mr. Dunn and Mr. Patton, who live in Washington and blog about recipes they have tried from popular magazines, started the site in 2008 and now have about 150,000 visitors a month.
“It more than pays for the groceries,” said Mr. Dunn, who added that they are further compensated by readers who may give them delicacies like fresh avocados and Hawaiian ginger syrup.
For those who want to generate more income through advertising, Jonathan Accarrino of Hoboken, N.J., founder of the technology news and how-to blog MethodShop.com, advises having contextual ads, which are highlighted words in posts that provide a link to the vendor of a relevant product or service. A commission is paid on resulting sales.
Adding video to a post is another strategy that Mr. Accarrino said contributes to his blog’s six-figure yearly income: “I’ll record video walk-throughs of my tutorials and upload them to Blip.tv,” a video sharing service similar to YouTube. And like YouTube, Blip.tv gives users the option to run ads with their videos. These generate $1 to $10 for every thousand views, depending on the advertiser.
Indeed, many video bloggers, or vloggers, make money this way. Sheila Ada-Renea Hollins-Jackson, a 22-year-old makeup artist in Farmington, Mich., makes up to $200 a month from the 63 videos about beauty treatments she has posted on YouTube since 2008. “It pays my cellphone bill,” she said. Vloggers either apply or are invited by YouTube to display ads based on demonstrated viewership or outstanding content.
Selling merchandise on a vlog, blog or personal Web site can bring in even more cash. Darren Kitchen, 28, of San Francisco said he makes $5,000 a month selling stickers, T-shirts, baseball caps and computer hacking tools on his Web site, Hak5.org, which offers a weekly video show about computer hacking.
“It’s crazy how many people want the stickers,” said Mr. Kitchen, who started Hak5 in 2005 and says he has 250,000 monthly viewers.
Book deals are the ultimate goal for many bloggers who are aspiring writers. Molly Wizenberg, 32, of Seattle, started her blog, Orangette, in 2004 as a way to hone her writing skills after dropping out of a Ph.D. program in anthropology.
Her musings about food and life attracted 350,000 visitors a month and the attention of Simon & Schuster, which led to the publication last year of her book, “A Homemade Life: Stories and Recipes From My Kitchen Table.” Last month she signed a contract to write another book. “It’s beyond what I ever imagined,” Ms. Wizenberg said.
Some people simply ask their fans and followers to make donations to support their creative efforts. Kelly DeLay of Frisco, Tex., said he gets $200 to $400 a month from visitors to his Web site, The Clouds 365 Project, where he posts a daily photograph of cloud formations. “People can be very generous,” said Mr. DeLay, who began taking pictures of clouds after he was laid off from his job as an interactive media director in 2009.
Charging for content is also an option. Collis Ta’eed, 31, of Melbourne, Australia, founded FreelanceSwitch.com, which gives practical advice to freelancers, and Tuts+, which offers technology-related tutorials. He said he brought in $150,000 a month from his sites, most of it from premium content — primarily tutorials and e-books.
“People will pay for content if you offer them something of value that is authentic and is generally useful,” said Mr. Ta’eed, who said his two blogs together have 6.4 million visitors a month. One example of useful content is FreelanceSwitch’s job board, which brings in $7,000 a month, he said. Job posters pay nothing; job seekers pay $9 a month.
And sometimes people will pay to attend events organized by bloggers they admire. Steve Pavlina of Las Vegas said he made $40,000 from weekend workshops that were an outgrowth of his blog, StevePavlina.com, which focuses on issues related to personal development. He started the blog in 2004 and says it has 2.5 million visitors a month. Besides workshops, he said he made about $100,000 a month in commissions from sales of products like speed-reading courses and high-speed blenders that he recommends on his blog.
“I tell people if they want to start a blog just to make money, they should quit right now,” Mr. Pavlina said. “You have to love it and be passionate about your topic.”
http://www.nytimes.com/2011/05/26/technology/personaltech/26basics.html?partner=rss&emc=rss
While most of these self-publishers don’t attract the attention of anyone other than indulgent family and friends, there are those who find wider recognition and some income. What the successful have in common is a passion for their subject and a near-compulsion to share what they know. Advertising, merchandising, offline events, book deals, donations and sometimes sheer luck also play a part.
“My advice is to choose a topic you’ll never get tired of,” said Stephanie Nelson, 47, of Atlanta, a homemaker who founded CouponMom.com in 2001 to share tips on saving money by using coupons. “The first three years I made no money at all, so I had to love what I was doing to keep going.”
Ms. Nelson said her Web site now has more than 3.8 million visitors a month, and the income it generates supports her family of four — allowing her husband to retire early from his corporate job five years ago. “I’m still not tired of it,” Ms. Nelson said.
Half of the site’s revenue comes from Google’s AdSense service, and the other half is from companies like Groupon and LivingSocial that buy ads directly from her. AdSense generates ads based on the words that appear on Web pages. For example, if a blog post is about dogs, ads for dog food or dog grooming might appear beside it.
Many of the Google ads generate income only if people click on them — usually yielding a fraction of a cent per click. It’s also possible to get paid every time a Google ad appears on a page. Rates are determined in part by advertisers bidding in an online auction.
Other companies like BuySellAds.com and BlogAds allow self-publishers to determine what they want to charge for placing an ad on their sites. They then match sites with eager advertisers for a percentage of ad sales — 14 to 30 percent is typical.
Federated Media, which is a sort of Web talent management company, is more selective, negotiating rates on behalf of independent content creators it agrees to represent. In general, online ad rates vary widely, from $54,000 a day for an ad on a popular blog like PerezHilton.com to $10 a month for an ad on the cartoon blog The Soxaholix. (The New York Times Company is an investor in Federated Media.)
Clayton Dunn, 32, and Zach Patton, 31, the bloggers behind The Bitten Word, make around $350 a month from pay-per-click Google ads, and in commissions from Amazon.com when readers follow links to cooking gadgets, books and magazine subscriptions they recommend. Mr. Dunn and Mr. Patton, who live in Washington and blog about recipes they have tried from popular magazines, started the site in 2008 and now have about 150,000 visitors a month.
“It more than pays for the groceries,” said Mr. Dunn, who added that they are further compensated by readers who may give them delicacies like fresh avocados and Hawaiian ginger syrup.
For those who want to generate more income through advertising, Jonathan Accarrino of Hoboken, N.J., founder of the technology news and how-to blog MethodShop.com, advises having contextual ads, which are highlighted words in posts that provide a link to the vendor of a relevant product or service. A commission is paid on resulting sales.
Adding video to a post is another strategy that Mr. Accarrino said contributes to his blog’s six-figure yearly income: “I’ll record video walk-throughs of my tutorials and upload them to Blip.tv,” a video sharing service similar to YouTube. And like YouTube, Blip.tv gives users the option to run ads with their videos. These generate $1 to $10 for every thousand views, depending on the advertiser.
Indeed, many video bloggers, or vloggers, make money this way. Sheila Ada-Renea Hollins-Jackson, a 22-year-old makeup artist in Farmington, Mich., makes up to $200 a month from the 63 videos about beauty treatments she has posted on YouTube since 2008. “It pays my cellphone bill,” she said. Vloggers either apply or are invited by YouTube to display ads based on demonstrated viewership or outstanding content.
Selling merchandise on a vlog, blog or personal Web site can bring in even more cash. Darren Kitchen, 28, of San Francisco said he makes $5,000 a month selling stickers, T-shirts, baseball caps and computer hacking tools on his Web site, Hak5.org, which offers a weekly video show about computer hacking.
“It’s crazy how many people want the stickers,” said Mr. Kitchen, who started Hak5 in 2005 and says he has 250,000 monthly viewers.
Book deals are the ultimate goal for many bloggers who are aspiring writers. Molly Wizenberg, 32, of Seattle, started her blog, Orangette, in 2004 as a way to hone her writing skills after dropping out of a Ph.D. program in anthropology.
Her musings about food and life attracted 350,000 visitors a month and the attention of Simon & Schuster, which led to the publication last year of her book, “A Homemade Life: Stories and Recipes From My Kitchen Table.” Last month she signed a contract to write another book. “It’s beyond what I ever imagined,” Ms. Wizenberg said.
Some people simply ask their fans and followers to make donations to support their creative efforts. Kelly DeLay of Frisco, Tex., said he gets $200 to $400 a month from visitors to his Web site, The Clouds 365 Project, where he posts a daily photograph of cloud formations. “People can be very generous,” said Mr. DeLay, who began taking pictures of clouds after he was laid off from his job as an interactive media director in 2009.
Charging for content is also an option. Collis Ta’eed, 31, of Melbourne, Australia, founded FreelanceSwitch.com, which gives practical advice to freelancers, and Tuts+, which offers technology-related tutorials. He said he brought in $150,000 a month from his sites, most of it from premium content — primarily tutorials and e-books.
“People will pay for content if you offer them something of value that is authentic and is generally useful,” said Mr. Ta’eed, who said his two blogs together have 6.4 million visitors a month. One example of useful content is FreelanceSwitch’s job board, which brings in $7,000 a month, he said. Job posters pay nothing; job seekers pay $9 a month.
And sometimes people will pay to attend events organized by bloggers they admire. Steve Pavlina of Las Vegas said he made $40,000 from weekend workshops that were an outgrowth of his blog, StevePavlina.com, which focuses on issues related to personal development. He started the blog in 2004 and says it has 2.5 million visitors a month. Besides workshops, he said he made about $100,000 a month in commissions from sales of products like speed-reading courses and high-speed blenders that he recommends on his blog.
“I tell people if they want to start a blog just to make money, they should quit right now,” Mr. Pavlina said. “You have to love it and be passionate about your topic.”
http://www.nytimes.com/2011/05/26/technology/personaltech/26basics.html?partner=rss&emc=rss
Tuesday, May 24, 2011
Needed: Plain Talk About the Dollar
AT a recent news conference, Ben S. Bernanke, the Federal Reserve chairman, was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar.
Listening to that statement, I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.
When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”
“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”
For the record, my initial answer was much more reasonable. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.
Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market. The Treasury no more determines the price of the dollar than the Department of Energy determines the price of gasoline. Both departments have a small reserve that they can use to combat market instability, but neither has the resources or the mandate to hold the relevant price away from its market equilibrium value for very long.
In practice, all that “the exchange rate is the purview of the Treasury” means is that no official other the Treasury secretary is supposed to talk about it (and even he isn’t supposed to say very much). That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more understanding of the issues and more rational policy discussions.
Such discussions would start with some basic economics. The desire to trade with other countries or invest in them is what gives rise to the market for foreign exchange. You need euros to travel in Spain or to buy a German government bond, so you need a way to exchange currencies.
The supply of dollars to the foreign exchange market comes from Americans who want to buy goods, services or assets from abroad. The demand for dollars comes from foreigners who want to buy from the United States.
Anything that increases the demand for dollars or reduces the supply drives up the dollar’s price. Anything that lowers the demand for dollars or raises the supply causes the dollar to weaken.
Consider two examples. Suppose American entrepreneurs create many products that foreigners want to buy, and start many companies they want to invest in. That will increase the demand for dollars and so cause the dollar’s price to rise. Such innovation will also make Americans want to buy more goods and assets in the United States — and fewer abroad. The supply of dollars to the foreign exchange market will fall, further strengthening the dollar. This example describes very well the conditions of the late 1990s — when the dollar was indeed strong.
Now suppose the United States runs a large budget deficit that causes domestic interest rates to rise. Higher American interest rates make both foreigners and Americans want to buy more American bonds and fewer foreign bonds. Thus the demand for dollars increases and the supply decreases. The price of the dollar will again rise.
This example describes conditions in the early 1980s, when President Ronald Reagan’s tax cuts and military buildup led to large deficits. Those deficits, along with the anti-inflationary policies of the Fed, where Paul A. Volcker was then the chairman, led to high American interest rates. The dollar was very strong in this period.
Both developments — brilliant American innovation and troublesome American budget deficits — caused the dollar to strengthen. Yet one is clearly a positive for the American economy, the other a negative. The point is that there is no universal good or bad direction for the dollar to move. The desirability of any shift in the exchange rate depends on why the dollar is moving.
It also depends on the state of the economy. At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries.
But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.
Fed policy is determined by inflation and unemployment in the United States. But if Mr. Bernanke could discuss the exchange rate openly, he would probably tell you that one way any monetary expansion helps a distressed economy is by weakening the dollar. That is taught in every introductory economics course, yet the Fed is asked to pretend it isn’t true.
Likewise, fiscal policy is determined by domestic considerations. But trimming our budget deficit, as we should over the coming years, would also weaken the dollar. And that, in turn, would blunt the negative impact of deficit reduction on employment and output in the short run.
STRANGELY, every politician seems to understand that it would be desirable for the dollar to weaken against one particular currency: the Chinese renminbi. For years, China has deliberately accumulated United States Treasury bonds to keep the dollar’s value high in renminbi terms. The United States would export more and grow faster if China allowed the dollar’s price to fall. Congress routinely threatens retaliation if China doesn’t take steps that amount to weakening the dollar.
But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more in the current situation.
To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.
http://www.nytimes.com/2011/05/22/business/economy/22view.html?pagewanted=2&_r=2
Listening to that statement, I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.
When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”
“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”
For the record, my initial answer was much more reasonable. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.
Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market. The Treasury no more determines the price of the dollar than the Department of Energy determines the price of gasoline. Both departments have a small reserve that they can use to combat market instability, but neither has the resources or the mandate to hold the relevant price away from its market equilibrium value for very long.
In practice, all that “the exchange rate is the purview of the Treasury” means is that no official other the Treasury secretary is supposed to talk about it (and even he isn’t supposed to say very much). That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more understanding of the issues and more rational policy discussions.
Such discussions would start with some basic economics. The desire to trade with other countries or invest in them is what gives rise to the market for foreign exchange. You need euros to travel in Spain or to buy a German government bond, so you need a way to exchange currencies.
The supply of dollars to the foreign exchange market comes from Americans who want to buy goods, services or assets from abroad. The demand for dollars comes from foreigners who want to buy from the United States.
Anything that increases the demand for dollars or reduces the supply drives up the dollar’s price. Anything that lowers the demand for dollars or raises the supply causes the dollar to weaken.
Consider two examples. Suppose American entrepreneurs create many products that foreigners want to buy, and start many companies they want to invest in. That will increase the demand for dollars and so cause the dollar’s price to rise. Such innovation will also make Americans want to buy more goods and assets in the United States — and fewer abroad. The supply of dollars to the foreign exchange market will fall, further strengthening the dollar. This example describes very well the conditions of the late 1990s — when the dollar was indeed strong.
Now suppose the United States runs a large budget deficit that causes domestic interest rates to rise. Higher American interest rates make both foreigners and Americans want to buy more American bonds and fewer foreign bonds. Thus the demand for dollars increases and the supply decreases. The price of the dollar will again rise.
This example describes conditions in the early 1980s, when President Ronald Reagan’s tax cuts and military buildup led to large deficits. Those deficits, along with the anti-inflationary policies of the Fed, where Paul A. Volcker was then the chairman, led to high American interest rates. The dollar was very strong in this period.
Both developments — brilliant American innovation and troublesome American budget deficits — caused the dollar to strengthen. Yet one is clearly a positive for the American economy, the other a negative. The point is that there is no universal good or bad direction for the dollar to move. The desirability of any shift in the exchange rate depends on why the dollar is moving.
It also depends on the state of the economy. At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries.
But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.
Fed policy is determined by inflation and unemployment in the United States. But if Mr. Bernanke could discuss the exchange rate openly, he would probably tell you that one way any monetary expansion helps a distressed economy is by weakening the dollar. That is taught in every introductory economics course, yet the Fed is asked to pretend it isn’t true.
Likewise, fiscal policy is determined by domestic considerations. But trimming our budget deficit, as we should over the coming years, would also weaken the dollar. And that, in turn, would blunt the negative impact of deficit reduction on employment and output in the short run.
STRANGELY, every politician seems to understand that it would be desirable for the dollar to weaken against one particular currency: the Chinese renminbi. For years, China has deliberately accumulated United States Treasury bonds to keep the dollar’s value high in renminbi terms. The United States would export more and grow faster if China allowed the dollar’s price to fall. Congress routinely threatens retaliation if China doesn’t take steps that amount to weakening the dollar.
But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more in the current situation.
To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.
http://www.nytimes.com/2011/05/22/business/economy/22view.html?pagewanted=2&_r=2
Monday, May 9, 2011
Macroeconomic Uncertainties
AFTER more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers.
Now, if you follow economic commentary in the newspapers or the blogosphere, you have probably not run into many humble economists. By its nature, punditry craves attention, which is easier to attract with certainties than with equivocation.
But that certitude reflects bravado more often than true knowledge. So let me come clean and highlight three questions that perplex me. The answers to them may well shape the economy in the years to come.
How long will it take for the economy’s wounds to heal?
When President Obama took office in 2009, his economic team projected a quick recovery from the recession the nation was experiencing. The administration’s first official forecast said economic growth, computed from fourth quarter to fourth quarter, would average 3.5 percent in 2010 and 4.4 percent in 2011. Unemployment was supposed to fall to 7.7 percent by the end of 2010 and to 6.8 percent by the end of 2011.
The reality has turned out not nearly as rosy. Growth was only 2.8 percent last year, and the first quarter of this year came in at a meager rate of 1.8 percent. Unemployment, meanwhile, lingers well above 8 percent, and according to Ben S. Bernanke, the Federal Reserve chairman, is expected to keep doing so throughout this year.
Economists will long debate whether President Obama’s policies are to blame or the patient was just sicker than his economists realized. But there is no doubt that the pace of this recovery will come nowhere close to matching the one achieved after the last deep recession, when President Ronald Reagan presided over a fall in the unemployment rate from 10.8 percent in December 1982 to 7.3 percent two years later.
Looking ahead, an open issue is whether the recession will leave scars that prevent a return to jobless rates that were considered normal just a few years ago. A striking feature of today’s labor market is the rise of long-term joblessness. The average duration of unemployment is now almost 40 weeks, about twice what it reached in previous recessions. The long-term unemployed may well lose job skills and find their future prospects permanently impaired. But because we are in uncharted waters, it is hard for anyone to be sure.
How long will inflation expectations remain anchored?
In 1967, Milton Friedman gave an address to the American Economic Association with this simple but profound message: The inflation rate that the economy gets is, in large measure, based on the inflation rate that people expect. When everyone expects high inflation, workers bargain hard for wage increases, and companies push prices higher to keep up with the projected cost increases. When everyone expects inflation to be benign, workers and companies are less aggressive. In short, the perception of inflation — or of the lack of it — creates the reality.
Although novel when Professor Friedman proposed it, his theory is now textbook economics, and is at the heart of Federal Reserve policy. Fed policy makers are keeping interest rates low, despite soaring commodity prices. Why? Inflation expectations are “well anchored,” we are told, so there is no continuing problem with inflation. Rising gasoline prices are just a transitory blip.
They are probably right, but there is still reason to wonder. Even if expectations are as important as the conventional canon presumes, it isn’t obvious what determines those expectations. Are people merely backward-looking, extrapolating recent experience into the future? Or are the expectations based on the credibility of policy makers? And if credibility matters, how is it established? Are people making rational judgments, or are they easily overcome by fear and influenced by extraneous events?
Mr. Bernanke and his team may learn that, in turbulent times, expectations can become unmoored more easily than they think.
How long will the bond market trust the United States?
A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms, despite a huge budget deficit, a fiscal trajectory that everyone knows is unsustainable and the failure of our political leaders to reach a consensus on how to change course. This can’t go on forever — that much is clear.
Less obvious, however, is how far we are from the day of reckoning.
Winston Churchill famously remarked that “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.” That seems to capture the attitude of the bond market today. It trusts our leaders to get the government’s fiscal house in order, eventually, and is waiting patiently while they exhaust the alternatives.
But such confidence in American rectitude will not last forever. The more we delay, the bigger the risk that we follow the path of Greece, Ireland and Portugal. I don’t know how long we have before the bond market turns on the United States, but I would prefer not to run the experiment to find out.
•
So those are the three questions that puzzle me most as I read the daily news. If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.
http://www.nytimes.com/2011/05/08/business/economy/08view.html
Now, if you follow economic commentary in the newspapers or the blogosphere, you have probably not run into many humble economists. By its nature, punditry craves attention, which is easier to attract with certainties than with equivocation.
But that certitude reflects bravado more often than true knowledge. So let me come clean and highlight three questions that perplex me. The answers to them may well shape the economy in the years to come.
How long will it take for the economy’s wounds to heal?
When President Obama took office in 2009, his economic team projected a quick recovery from the recession the nation was experiencing. The administration’s first official forecast said economic growth, computed from fourth quarter to fourth quarter, would average 3.5 percent in 2010 and 4.4 percent in 2011. Unemployment was supposed to fall to 7.7 percent by the end of 2010 and to 6.8 percent by the end of 2011.
The reality has turned out not nearly as rosy. Growth was only 2.8 percent last year, and the first quarter of this year came in at a meager rate of 1.8 percent. Unemployment, meanwhile, lingers well above 8 percent, and according to Ben S. Bernanke, the Federal Reserve chairman, is expected to keep doing so throughout this year.
Economists will long debate whether President Obama’s policies are to blame or the patient was just sicker than his economists realized. But there is no doubt that the pace of this recovery will come nowhere close to matching the one achieved after the last deep recession, when President Ronald Reagan presided over a fall in the unemployment rate from 10.8 percent in December 1982 to 7.3 percent two years later.
Looking ahead, an open issue is whether the recession will leave scars that prevent a return to jobless rates that were considered normal just a few years ago. A striking feature of today’s labor market is the rise of long-term joblessness. The average duration of unemployment is now almost 40 weeks, about twice what it reached in previous recessions. The long-term unemployed may well lose job skills and find their future prospects permanently impaired. But because we are in uncharted waters, it is hard for anyone to be sure.
How long will inflation expectations remain anchored?
In 1967, Milton Friedman gave an address to the American Economic Association with this simple but profound message: The inflation rate that the economy gets is, in large measure, based on the inflation rate that people expect. When everyone expects high inflation, workers bargain hard for wage increases, and companies push prices higher to keep up with the projected cost increases. When everyone expects inflation to be benign, workers and companies are less aggressive. In short, the perception of inflation — or of the lack of it — creates the reality.
Although novel when Professor Friedman proposed it, his theory is now textbook economics, and is at the heart of Federal Reserve policy. Fed policy makers are keeping interest rates low, despite soaring commodity prices. Why? Inflation expectations are “well anchored,” we are told, so there is no continuing problem with inflation. Rising gasoline prices are just a transitory blip.
They are probably right, but there is still reason to wonder. Even if expectations are as important as the conventional canon presumes, it isn’t obvious what determines those expectations. Are people merely backward-looking, extrapolating recent experience into the future? Or are the expectations based on the credibility of policy makers? And if credibility matters, how is it established? Are people making rational judgments, or are they easily overcome by fear and influenced by extraneous events?
Mr. Bernanke and his team may learn that, in turbulent times, expectations can become unmoored more easily than they think.
How long will the bond market trust the United States?
A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms, despite a huge budget deficit, a fiscal trajectory that everyone knows is unsustainable and the failure of our political leaders to reach a consensus on how to change course. This can’t go on forever — that much is clear.
Less obvious, however, is how far we are from the day of reckoning.
Winston Churchill famously remarked that “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.” That seems to capture the attitude of the bond market today. It trusts our leaders to get the government’s fiscal house in order, eventually, and is waiting patiently while they exhaust the alternatives.
But such confidence in American rectitude will not last forever. The more we delay, the bigger the risk that we follow the path of Greece, Ireland and Portugal. I don’t know how long we have before the bond market turns on the United States, but I would prefer not to run the experiment to find out.
•
So those are the three questions that puzzle me most as I read the daily news. If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.
http://www.nytimes.com/2011/05/08/business/economy/08view.html
Sunday, March 27, 2011
It’s 2026, and the Debt Is Due
The following is a presidential
address to the nation — to be
delivered in March 2026.
MY fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.
For many years, our nation’s government has lived beyond its means. We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.
The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security. They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embraced health care reform with subsidies for middle-class families.
But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.
Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.
Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.
If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.
Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.
This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.
For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.
But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk. Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.
As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.
So where do we go from here?
Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.
This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.
We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.
We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.
We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.
We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.
We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.
We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.
AS I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.
If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.
What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.
address to the nation — to be
delivered in March 2026.
MY fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.
For many years, our nation’s government has lived beyond its means. We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.
The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security. They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embraced health care reform with subsidies for middle-class families.
But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.
Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.
Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.
If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.
Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.
This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.
For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.
But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk. Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.
As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.
So where do we go from here?
Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.
This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.
We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.
We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.
We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.
We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.
We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.
We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.
AS I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.
If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.
What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.
Tuesday, March 22, 2011
Continuing the Conversation on Free Trade
My previous posts on free trade opened a lively conversation among readers on its pros and cons. Today I’d like to wrap up these exchanges with a coda.
Public discussions on foreign trade sometimes convey the impression that China and the rest of the world make everything, as the United States sits idly by, importing their stuff and going to hell in a handbasket, to use the vernacular.
This is simply not so. Goods and services produced here still represent the great bulk of gross domestic product in the United States.
Our gross domestic product consists of:
Imports are subtracted because they are contained in the other spending categories and do not represent goods and services produced in the United States. Without subtracting spending on imports, one would overstate gross domestic product by close to 14 percent.
What is often overlooked in our debate on foreign trade is that American exports – about $1.6 trillion in 2009 — create millions of jobs for Americans. That is part of the foreign-trade picture, too.
To be sure, American imports in the last several decades have tended to exceed American exports. The difference between these is called net exports. They are positive when exports exceed imports, and negative when the opposite is the case.
As the next chart shows, net exports were positive in the 1960s to the mid-1970s, when much of the world was still recovering from World War II or was highly underdeveloped. As the rest of the world sought to catch up with the United States, net exports turned negative — in some years (2005-6), close to 6 percent of gross domestic product.
Economic Report of the President, 2011, Table B-1In plain English, Americans have become used to spending more on themselves than their own gross domestic product year after year and enjoying themselves as they’ve done that.
When net exports are negative, how do Americans pay for the excess imports?
Ultimately, they pay with financial paper, namely, I.O.U.’s in the form of Treasury bonds, corporate bonds sold to foreigners, ownership claims on American corporations (stock certificates) or legal titles to real estate sold to foreigners.
Americans have taken full advantage of this external financing facility in the last several decades. Until about 2008, American households saved less and less of their disposable income, falling to 1 percent of gross domestic product by 2006, although recovering somewhat thereafter (see next chart).
Economic Report of the President 2011, Table B-32Through the politicians they have elected, Americans have granted themselves a series of generous tax cuts, all the while driving up government spending. Unable to finance the resulting federal deficits fully from domestic savings, borrowing from foreigners, as described above, was used to fill the gap.
Thus, the much lamented trade deficit — more accurately, the current account deficit — enabled Americans to spend more than their own gross domestic product.
The tax-cut theme still sells well among the electorate and undoubtedly will be dangled before voters again in 2012, abetted no doubt by some economists, while even cuts of $100 billion (or about 2.5 percent) of a federal budget of close to $4 trillion face serious political hurdles.
Home-grown fiscal mismanagement at many levels, however, does not make the case against the benefits of free trade. It merely cries out for more responsible fiscal management at home –- which, at some point, might come. In principle, a nation can both be fiscally responsible and enjoy the overall benefits of free trade.
As I noted several weeks ago, the basic proposition of economists on free trade is:
In this regard the United States is not, of course, exactly a saint, especially in agriculture. A glaring example is the American quota on sugar imports with a truly dubious –- one might even say ugly –- redistribution of income. And as the libertarian Cato Institute has remarked, even President Reagan, widely thought of as a devoted free trader, often enacted or supported protectionist policies.
Criticism of unfair trade restrictions do have validity, especially in periods of global recession, during which trade restrictions imposed by one nation can help it export its unemployment to other nations. The proper policy response to trade barriers, however, is not the abandonment of free trade but efforts to eliminate these barriers.
After all, imagine what life would be like in the United States in the absence of foreign trade, with all products we use daily made domestically –- many would be far more expensive than they currently are, and many would be likely to be of inferior quality to those now available.
One can only imagine what American cars would be like if domestic auto makers had not been exposed to stiff price- and quality competition from Europe and Asia.
Most of those who commented on my posts did recognize that a liberalization of foreign trade, while it is beneficial over all to a nation, can lead to significant redistributions of economic privilege within that overall national benefit. That is a valid concern, which naturally pushes the issue into the political forum.
My argument is that economists, in making the case for free trade, should be more understanding of this political dimension than they often are. That might make their message more effective.
In making their case, economists can, of course, point out that international trade is not the only and probably not the major source of economic disruptions in a dynamic economy. The renowned economist Joseph Alois Schumpeter viewed such disruptions as an outcome of the process of “creative destruction” in a dynamic economy.
The question is whether those who gain from what we celebrate as “disruptive innovations” owe the losers compensation for their loss.
Suppose the Jones family is hurt financially by low-cost imports from abroad, while the Smith family is hurt equally by home-grown disruptive innovation – such as the displacement of travel agents by online booking of airlines and hotels or of airline ticket-counter personnel by online check-in. Should only the Jones family be compensated for its loss because it involves foreign trade?
A far better approach would be to have in place a solid, general economic safety net that helps all families whose economic base is disrupted through forces beyond their control, whether such disruptions originate in foreign trade or domestic developments.
Unfortunately, too many economists decry that approach as a welfare state –- and that makes selling the case for free trade that much harder.
http://economix.blogs.nytimes.com/2011/03/21/continuing-the-conversation-on-free-trade
Public discussions on foreign trade sometimes convey the impression that China and the rest of the world make everything, as the United States sits idly by, importing their stuff and going to hell in a handbasket, to use the vernacular.
This is simply not so. Goods and services produced here still represent the great bulk of gross domestic product in the United States.
Our gross domestic product consists of:
1. spending by American consumers on goods and services produced in the United States and abroad (70.8 percent of G.D.P.)From which we then subtract imports – that is, spending by Americans on foreign-produced goods and services (13.9 percent).
2. government spending in the United States, at all levels, on goods and services produced in the United States and abroad, excluding government transfer payments (20.6 percent)
3. spending by American companies on equipment, structures and inventories and by American households on residential construction, some of which may be on foreign-produced goods and services, lumped together as gross private investment (11.3 percent)
4. American exports – that is, spending by foreigners on goods and services produced in the United States (11.2 percent)
Imports are subtracted because they are contained in the other spending categories and do not represent goods and services produced in the United States. Without subtracting spending on imports, one would overstate gross domestic product by close to 14 percent.
What is often overlooked in our debate on foreign trade is that American exports – about $1.6 trillion in 2009 — create millions of jobs for Americans. That is part of the foreign-trade picture, too.
To be sure, American imports in the last several decades have tended to exceed American exports. The difference between these is called net exports. They are positive when exports exceed imports, and negative when the opposite is the case.
As the next chart shows, net exports were positive in the 1960s to the mid-1970s, when much of the world was still recovering from World War II or was highly underdeveloped. As the rest of the world sought to catch up with the United States, net exports turned negative — in some years (2005-6), close to 6 percent of gross domestic product.
Economic Report of the President, 2011, Table B-1When net exports are negative, how do Americans pay for the excess imports?
Ultimately, they pay with financial paper, namely, I.O.U.’s in the form of Treasury bonds, corporate bonds sold to foreigners, ownership claims on American corporations (stock certificates) or legal titles to real estate sold to foreigners.
Americans have taken full advantage of this external financing facility in the last several decades. Until about 2008, American households saved less and less of their disposable income, falling to 1 percent of gross domestic product by 2006, although recovering somewhat thereafter (see next chart).
Economic Report of the President 2011, Table B-32Thus, the much lamented trade deficit — more accurately, the current account deficit — enabled Americans to spend more than their own gross domestic product.
The tax-cut theme still sells well among the electorate and undoubtedly will be dangled before voters again in 2012, abetted no doubt by some economists, while even cuts of $100 billion (or about 2.5 percent) of a federal budget of close to $4 trillion face serious political hurdles.
Home-grown fiscal mismanagement at many levels, however, does not make the case against the benefits of free trade. It merely cries out for more responsible fiscal management at home –- which, at some point, might come. In principle, a nation can both be fiscally responsible and enjoy the overall benefits of free trade.
As I noted several weeks ago, the basic proposition of economists on free trade is:
Relative to a status quo of no or limited international trade, permitting full free trade across borders will leave in its wake some immediate losers, but citizens who gain from such trade gain much more than the losers lose. On a net basis, therefore, each nation gains over all from such trade.Many of those who commented on my previous posts did not dispute this proposition, which is, in fact, hard to dispute either at the theoretical or empirical level. Rather, these readers note, the main problem with free trade is that many countries merely pay lip service to its principles but breach them through a variety of trade restrictions.
In this regard the United States is not, of course, exactly a saint, especially in agriculture. A glaring example is the American quota on sugar imports with a truly dubious –- one might even say ugly –- redistribution of income. And as the libertarian Cato Institute has remarked, even President Reagan, widely thought of as a devoted free trader, often enacted or supported protectionist policies.
Criticism of unfair trade restrictions do have validity, especially in periods of global recession, during which trade restrictions imposed by one nation can help it export its unemployment to other nations. The proper policy response to trade barriers, however, is not the abandonment of free trade but efforts to eliminate these barriers.
After all, imagine what life would be like in the United States in the absence of foreign trade, with all products we use daily made domestically –- many would be far more expensive than they currently are, and many would be likely to be of inferior quality to those now available.
One can only imagine what American cars would be like if domestic auto makers had not been exposed to stiff price- and quality competition from Europe and Asia.
Most of those who commented on my posts did recognize that a liberalization of foreign trade, while it is beneficial over all to a nation, can lead to significant redistributions of economic privilege within that overall national benefit. That is a valid concern, which naturally pushes the issue into the political forum.
My argument is that economists, in making the case for free trade, should be more understanding of this political dimension than they often are. That might make their message more effective.
In making their case, economists can, of course, point out that international trade is not the only and probably not the major source of economic disruptions in a dynamic economy. The renowned economist Joseph Alois Schumpeter viewed such disruptions as an outcome of the process of “creative destruction” in a dynamic economy.
The question is whether those who gain from what we celebrate as “disruptive innovations” owe the losers compensation for their loss.
Suppose the Jones family is hurt financially by low-cost imports from abroad, while the Smith family is hurt equally by home-grown disruptive innovation – such as the displacement of travel agents by online booking of airlines and hotels or of airline ticket-counter personnel by online check-in. Should only the Jones family be compensated for its loss because it involves foreign trade?
A far better approach would be to have in place a solid, general economic safety net that helps all families whose economic base is disrupted through forces beyond their control, whether such disruptions originate in foreign trade or domestic developments.
Unfortunately, too many economists decry that approach as a welfare state –- and that makes selling the case for free trade that much harder.
http://economix.blogs.nytimes.com/2011/03/21/continuing-the-conversation-on-free-trade
Wednesday, March 16, 2011
Is Groupon Ruining Retailing?
Recently, a 30-year-old woman came into my custom framing business with a designer purse and a question, “What kind of coupons do you have out there?”
It is indeed a new world. Thanks mostly to Groupon, which is based about two miles from my framing business, this social coupon craze has become a big thing. For retailers, the question is whether it’s a good thing or bad thing. The coupons can drive an awful lot of people into your store, but not every store is prepared for the onslaught. And there’s another issue, one that has gotten less attention: the daily-deal sites are also training people to expect that they can get a coupon for almost anything.
Groupon didn’t invent this problem. There have been coupons all over the Internet for years, but it’s getting worse. As Jessica Bruder wrote in The Times last week, there are hundreds of companies chasing Groupon, many hoping to create a regional niche or a product niche. I suspect there will soon be a shakeout among these Groupon clones, but for now, the upshot is that most small businesses that sell a product or service are getting deluged with offers to partner with one or more of the coupon sites. Those offers are producing a lot of confusion and anxiety for businesses. To deal or not to deal, that is the question.
In a previous post, I emphasized that Groupon is advertising and while you don’t pay anything up front, it can be very expensive advertising. I went through the math that I suggest small businesses use to try to figure out whether social coupons make sense for them. There are many variables, including whether a customer spends more than the face value of the coupon, how many existing customers purchase a coupon, what percentage of the discount customers become regular customers, how many coupons are sold to each customer and the true cost of delivering the additional sales driven by the coupons.
The difficulty is in determining — or in some cases guessing — what these numbers will be. It’s been two years since I used Groupon at my frame shop. Few of the sales have turned into repeat customers, which is not typical of my business — we have a percentage of repeat customers. And that’s one reason I am concerned about the potential damage a daily deal can do to a company’s brand. The deals are a threat to what I call price integrity.
When you charge some customers full price and others half price, you make some happy and others unhappy. Worst of all, you make the wrong customers happy! The regulars are unhappy because they feel they overpaid; the discount customers are happy — but they’re probably not coming back because they’re used to shopping at half price. When you decide to do a daily deal, you are training your existing customers to wait for the next coupon. Does that sound like a recipe for success?
It has been noted that this kind of promotion works best for a business that has big fixed costs but low, if any, variable costs — a yoga class, for example. Whether there are 5 people in a class, or 20, the cost of delivering the service is basically the same. There is, however, a potential for conversion. You risk converting an existing customer into a coupon customer. Or, you may even replace a full-price customer with a coupon customer because you have exceeded capacity.
Let’s do the math on a simple example. A yoga class charges $20 per person and can take 20 students. The class has been averaging 14 people at $20 each, or $280 per class. The owner decides to run a daily deal to fill the class and attract new customers. It works splendidly.
The class is now filled. There are now 10 people paying $20 each (two regulars bought coupons and two regulars signed up too late and got bounced). Ten people pay $10 each, revenue that is split 50/50 with the deal site. That means the total for the class is $200 from the full-price customers plus $50 from the coupon customers, which equals $250. The studio is busier, the parking is lot is full, but the cash drawer holds fewer dollars — 30 fewer in fact. That might not sound like a lot but that’s 10 percent of sales, which might represent the company’s entire profit. What’s good for the customer could prove fatal to the business.
The scary thing about this scenario is that it’s something of a best-case scenario. The coupon sales didn’t generate additional expense for the yoga business (the way they would for, say, a restaurant); the numbers could be far worse for a business that is selling a product or service. Busier does not necessarily mean more profitable.
Of course, the deal could still pay off if the new customers turn into repeat customers. Will they? Maybe. But a typical new customer is gained because a business is near the customer’s home or office, or because the customer heard something good about the business, or because the customer needed the product or service. These sales were generated because of a deal. Maybe the customers will move on to the next yoga studio that offers a coupon deal — or maybe they will decide not to try yoga again, especially not at full price. And how many existing customers did the yoga studio lose by doing the deal?
I recently spoke to about 150 retailers at a trade convention. One of the board members of the trade association asked the retailers if they had used Groupon. One person in the audience said he had used a competitor and was satisfied with the results. No one in the room asked the important follow-up question, so I asked it: “What was your average sale to the coupon customers?” He said it was a good bit higher than the face value of the coupon, which is probably why he came out O.K. on the deal. But how many times can he do it without damaging his brand?
The board member then asked the crowd, “Who thinks that Groupon will be out of business in three years?” Almost every hand went up. They are wrong. Groupon is here to stay. Daily deal coupons are here to stay. I’m sure they work for some businesses. Lots of businesses will try them at least once — and there are lots of businesses out there. But all of us, even those of us who never try a daily deal, will have to accept that we are training customers to believe that the next discount coupon is always an e-mail away.
Over time, I think the competition from all of the Groupon clones may force the deal sites to let the retailers keep a higher percentage of the coupon split. Perhaps the discount to the customers will go down, as well. And then maybe daily deal sites will work for more businesses as well as for the customers and the coupon sites.
http://boss.blogs.nytimes.com/2011/03/16/is-groupon-ruining-retailing/?partner=rss&emc=rss
It is indeed a new world. Thanks mostly to Groupon, which is based about two miles from my framing business, this social coupon craze has become a big thing. For retailers, the question is whether it’s a good thing or bad thing. The coupons can drive an awful lot of people into your store, but not every store is prepared for the onslaught. And there’s another issue, one that has gotten less attention: the daily-deal sites are also training people to expect that they can get a coupon for almost anything.
Groupon didn’t invent this problem. There have been coupons all over the Internet for years, but it’s getting worse. As Jessica Bruder wrote in The Times last week, there are hundreds of companies chasing Groupon, many hoping to create a regional niche or a product niche. I suspect there will soon be a shakeout among these Groupon clones, but for now, the upshot is that most small businesses that sell a product or service are getting deluged with offers to partner with one or more of the coupon sites. Those offers are producing a lot of confusion and anxiety for businesses. To deal or not to deal, that is the question.
In a previous post, I emphasized that Groupon is advertising and while you don’t pay anything up front, it can be very expensive advertising. I went through the math that I suggest small businesses use to try to figure out whether social coupons make sense for them. There are many variables, including whether a customer spends more than the face value of the coupon, how many existing customers purchase a coupon, what percentage of the discount customers become regular customers, how many coupons are sold to each customer and the true cost of delivering the additional sales driven by the coupons.
The difficulty is in determining — or in some cases guessing — what these numbers will be. It’s been two years since I used Groupon at my frame shop. Few of the sales have turned into repeat customers, which is not typical of my business — we have a percentage of repeat customers. And that’s one reason I am concerned about the potential damage a daily deal can do to a company’s brand. The deals are a threat to what I call price integrity.
When you charge some customers full price and others half price, you make some happy and others unhappy. Worst of all, you make the wrong customers happy! The regulars are unhappy because they feel they overpaid; the discount customers are happy — but they’re probably not coming back because they’re used to shopping at half price. When you decide to do a daily deal, you are training your existing customers to wait for the next coupon. Does that sound like a recipe for success?
It has been noted that this kind of promotion works best for a business that has big fixed costs but low, if any, variable costs — a yoga class, for example. Whether there are 5 people in a class, or 20, the cost of delivering the service is basically the same. There is, however, a potential for conversion. You risk converting an existing customer into a coupon customer. Or, you may even replace a full-price customer with a coupon customer because you have exceeded capacity.
Let’s do the math on a simple example. A yoga class charges $20 per person and can take 20 students. The class has been averaging 14 people at $20 each, or $280 per class. The owner decides to run a daily deal to fill the class and attract new customers. It works splendidly.
The class is now filled. There are now 10 people paying $20 each (two regulars bought coupons and two regulars signed up too late and got bounced). Ten people pay $10 each, revenue that is split 50/50 with the deal site. That means the total for the class is $200 from the full-price customers plus $50 from the coupon customers, which equals $250. The studio is busier, the parking is lot is full, but the cash drawer holds fewer dollars — 30 fewer in fact. That might not sound like a lot but that’s 10 percent of sales, which might represent the company’s entire profit. What’s good for the customer could prove fatal to the business.
The scary thing about this scenario is that it’s something of a best-case scenario. The coupon sales didn’t generate additional expense for the yoga business (the way they would for, say, a restaurant); the numbers could be far worse for a business that is selling a product or service. Busier does not necessarily mean more profitable.
Of course, the deal could still pay off if the new customers turn into repeat customers. Will they? Maybe. But a typical new customer is gained because a business is near the customer’s home or office, or because the customer heard something good about the business, or because the customer needed the product or service. These sales were generated because of a deal. Maybe the customers will move on to the next yoga studio that offers a coupon deal — or maybe they will decide not to try yoga again, especially not at full price. And how many existing customers did the yoga studio lose by doing the deal?
I recently spoke to about 150 retailers at a trade convention. One of the board members of the trade association asked the retailers if they had used Groupon. One person in the audience said he had used a competitor and was satisfied with the results. No one in the room asked the important follow-up question, so I asked it: “What was your average sale to the coupon customers?” He said it was a good bit higher than the face value of the coupon, which is probably why he came out O.K. on the deal. But how many times can he do it without damaging his brand?
The board member then asked the crowd, “Who thinks that Groupon will be out of business in three years?” Almost every hand went up. They are wrong. Groupon is here to stay. Daily deal coupons are here to stay. I’m sure they work for some businesses. Lots of businesses will try them at least once — and there are lots of businesses out there. But all of us, even those of us who never try a daily deal, will have to accept that we are training customers to believe that the next discount coupon is always an e-mail away.
Over time, I think the competition from all of the Groupon clones may force the deal sites to let the retailers keep a higher percentage of the coupon split. Perhaps the discount to the customers will go down, as well. And then maybe daily deal sites will work for more businesses as well as for the customers and the coupon sites.
http://boss.blogs.nytimes.com/2011/03/16/is-groupon-ruining-retailing/?partner=rss&emc=rss
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