Must Reads: This could be a good model for philanthropists and crowdfunders: In the New Yorker, Vauhini Vara looks at the Occuply Movement's focus on using debt collectors' tactics, buying student debt for pennies on the dollar, but instead of collecting it for the full amount, forgiving it. In this excellent piece also in the New Yorker, William Finnegan looks at the growing fast food worker movement. In the New York Times Sunday Review, Nicholas Kristoff and Sheryl WuDunn discuss the yawning gap in opportunities for the U.S. poor and say progress on poverty is failing because "our interventions come too late." Lastly, this New York Times Room for Debate roundup looks at whether corporations are investing enough in their businesses or paying out too much in dividends.
A recent U.S. Census Bureau report finds the number of children living in poverty fell by 1.4 million and the overall poverty rate dropped, reports the New York Times. "But at the same time, it said, there was no statistically significant change in the number of poor people or in income for the typical American household." Meanwhile, the NYT's Neil Irwin looks at how bad the GDP has become as an economic measure for workers and the middle class, check out this chart:
In the last 15 years, median income has been more or less flat while there was far sharper growth in, for example, per capita gross domestic product. There are various potential reasons. Evolving technology favors those with the most advanced skills and allows companies to replace formerly middle-class workers with machines. Declining union power gives workers less power at the bargaining table over wages. Cultural norms have shifted such that top executives and financiers are paid much more compared with regular workers than they used to be. But there really is no mystery as to why public opinion has been persistently down on the quality of the economy for years. You can’t eat G.D.P. You can’t live in a rising stock market. You can’t give your kids a better life because your company’s C.E.O. was able to give himself a big raise.
Meanwhile, the Center for American Progress has a pair of reports looking at the middle class and poverty data. Check out this chart on the middle class:
Here is what CAP concluded on policies needed to further alleviate poverty:
While the past decade has left low- and middle-income Americans behind, there are policy solutions that can reverse these trends. Raising the minimum wage to $10.10 per hour and indexing it to inflation would lift up to 4.6 million people out of poverty. Expanding the EITC for childless adults and lowering its eligibility age would allow more young workers to achieve economic stability. Policies such as paid family and medical leave, paid sick days, investments in child care and early education, and criminal justice reform would help close persistent racial, ethnic, and gender disparities while improving our economy.
This Pew report shows that while people born between 1965 and 1980 have higher incomes than their parents had at the same age, they have far less wealth thanks to high debt rates. Who's also on the hook for increasing student debt? Elderly Americans, reports Bloomberg/Businessweek:
More and more employers are requiring bachelors degrees for positions that years ago wouldn’t have needed them, shutting off access for the unmatriculated... Burning Glass was able to break down the reasoning that might be at play, by comparing the actual job descriptions of those listings that required college degrees with those that did not, as well as how job descriptions change over time. In some fields, like electrical drafting, the job has generally gotten more complex and requires a broader skill set as technology changes; there’s also more demand for drafters overall, and salaries have increased accordingly. In others, like tech support, jobs that required bachelors degrees differed not at all in their essential functions from those that did not. In those cases, Burning Glass suggests, employers might be using the BA simply to narrow the pool — every new listing is answered with a flood of applications, and it seems as good a criterion as any to conduct a version of HR triage.
Careful big spenders cautions the Wall Street Journal you can go bankrupt on a six-figure salary.
Thanks to all the minimum wage protests in fast food, a good deal of attention is focusing on the franchise business model. In Seattle, the International Franchise Association is fighting the new minimum wage law because it lumps all franchises under their umbrella business, and owners went to the Washington to fight a new National Labor Relations Board ruling that holds McDonald's jointly responsible for worker treatment. Here's a cartoon from Milt Priggee:
Classically, small business is a big employer and a path for owners for real upward mobility. So what's happening these days? Well it seems like parent companies make out like bandits, but some of the franchisees, which have very little say in how their business is run...maybe not so much. Let's check out this cartoon from Blue MauMau:
[F]ranchisees of those 10 brands have left taxpayers on the hook for 21% of all franchise-loan charge-offs in the past decade, collectively failing to pay back $121 million in SBA-guaranteed loans from 2004 through 2013. That finding comes as franchising is booming in popularity, in part because many people see it as an easier route to entrepreneurship in an uncertain economic landscape. For prospective buyers faced with a growing number of options, it has become more difficult to size up a franchise chain because of the limited information available. The chains aren't required by law to disclose their franchisees' first-year average sales and failure rates, for example, although the Federal Trade Commission does require them to share recent bankruptcy filings and prior litigation, among other basic information.
Over at Bloomberg/Businessweek, Patrick Clarre offered this analysis:
Why does Uncle Sam keep guaranteeing loans for franchises that so often go bad? The agency’s inspector general found little attention paid to default rates in a report (PDF) last year: “The SBA continued to guarantee loans to high-risk franchises and industries without monitoring risks,” the watchdog reported. That lax oversight makes the government partly responsible for allowing people to invest in risky franchises, says Keith Miller, chairman of the Coalition of Franchise Associations, a franchisee group: “Banks wouldn’t have made the loans if it wasn’t for the guarantee.”
Meanwhile, chains have a lot of incentives to sell new franchises. Franchisors themselves get upfront payments for selling new units, as well as a share of franchisees’ revenue. If a store goes bust, the franchisor can resell the license and collect a new fee.
In the Boston Globe, this story about a couple of Dunkin Donuts operators who have multiple stores and take in millions, seems like a success story, but your editor was struck by this paragraph:
A few lessons in Dunkinomics and it becomes clear why. Lots of Dunkin’ leases are structured as “triple net.” That means the tenant (in this case, the franchisee) pays for everything — utilities, snowplowing, replacing the roof, even real estate taxes. If the tenant doesn’t do a good job with upkeep of the property, the Dunkin’ brand — not the landlord — is the one that plays the heavy. (As part of their agreement with the Dunkin’ brand, franchisees are required to keep up the condition of their stores.) All the landlord has to do is sit back and collect, usually 10 percent of that store’s gross sales for the month.
And earlier this summer, there was a story in the LA Times about 7-Eleven owners allegedly being forced out of business as part of a profit-making strategy. Meanwhile there is also lots of discussion about contract work. In the Washington Post, Lydia DePillis offers a rough diagnostic of whether a worker is an independent contractor. In New York Magazine, Kevin Roose looks at the Silicon Valley generated 1099 economy:
For start-ups trying to make it in a competitive tech industry, the benefit of opting for 1099 contractors over W-2 wage-earners is obvious. Doing so lowers your costs dramatically, since you only have to pay contract workers for the time they spend providing services, and not for their lunch breaks, commutes, and vacation time. Contract workers aren’t eligible for health benefits, unemployment insurance, worker's compensation, or retirement plans. And contractors don’t have to be fired if they mess up, since they were never employed in the first place. Instead, they’re simply removed from the network, and life goes on...
Start-up workers generally "fit into three buckets,” explains Josh Felser, a venture investor at Freestyle Capital. “There’s the control-your-hours contractor. That group seems to be very happy with where things are. There’s the full-time employee. And then there’s the middle group — where they’re acting like full-time employees and being paid like contractors. That group is disenfranchised.”
On the robot vs jobs front, you might want to check out this story in Business Insider about a new machine that can flip 360 burgers an hour.
Can philanthropy and impact investing get along? In the Stanford Social Innovation Review, a group of authors argue new thinking is needed:
When you shift the dialogue to one of tools, basic logic applies. For example, when it comes to implementing progress in the commercial space, there are hundreds of financial tools available. To name a few, there are personal loans, small business loans, home equity loans, bank loans, crowdfunding, angel investors, venture capital, private equity, and initial public offerings (IPOs). And once there are enough players hitting the IPO space, a whole new set of financial tools open up—from index trading to mutual funds to exchange traded funds, from asset backed securities to credit default swaps. In contrast, the philanthropic space has four tools: donors, foundations, endowments, and a burgeoning area known as donor-advised funds. Some forward-thinking foundations are building small consortiums such as Big Bang Philanthropy, a group of foundations that assist one another in certain aspects of diligence, reporting, and metric-gathering. In short, the financial tools of philanthropy are quite limited and pale in comparison to the commercial space.
Similarly, you may want to check out this piece from Heron president Clara Miller, who offers lighthearted thoughts on how two groups interested in poverty solutions can better get along: those in impact investing and the traditional development finance. The MacArthur Foundation announced this year's genius award winners,where winners each get $625,000 over the next five years. Past winners have included Mauricio Lim Miller, founder of our grantee Family Independence Initiative. Over at Inside Philanthropy, David Callahan discusses the criticism of what some others see as "lotto philanthropy":
Actually, these fellowships are great. For the well-established superstars, a big Mac sack of money is just desserts after long years of hard work. It often lands on their doorstep around the same time that college tuitions bills are coming in and retirement jitters are surfacing. Remember, even for those creative class or save-the-world types who do reach the tops of their professions, the monetary rewards are meager compared to what certifiable meatheads pull down on Wall Street or pimpled pipsqueaks make in Silicon Valley. So you gotta love a foundation that does its small part to remedy our society's totally upside-down hierarchy of compensation. But the bigger value here is the extra rocket fuel that rising stars get from the grants. While the impact of the fellowships is hard to pin down, we know anecdotally that MacArthur has placed a huge number of winning bets over the years through this program.
In the CFR's Renewing America blog, Rebecca Strauss says focusing on tax inversions, which may cost the United States $2 billion a year, misses the bigger game of "profit-shifting" when corporations "fiddle with their profits so that they appear to have been earned in low-tax countries," costing as much as $60 billion in lost U.S. revenue. In the Wall Street Journal, Stanford's Stephen Haber and UC Berkley's Ross Levine argue that "while the Fed is largely independent of politicians, it is intimately connected, and even answerable, to the financial institutions that it is supposed to regulate."