State of the Union

North Carolina’s Lessons for Unemployment and the GOP

Despite the recent words of Paul Ryan, Marco Rubio, and Mike Lee, the GOP currently has little credibility when it comes to improving the lot of the poor and downtrodden. In the last election, Mitt Romney lost four to one among voters whose most important perceived candidate quality was who “cares about people like me.” This represented a fifth of the electorate, a share that may only increase as our economy limps through a tepid recovery. By transforming “limited government” from the means to an end to an end itself, Republicans lost the vocabulary of human flourishing—and what stale budget talk and appeals to principles remain won’t rebuild conservatives’ appeal to the economically anxious.

The recent debate over extending unemployment benefits is a case in point. Republicans mostly dropped the argument about the potential trade-offs between helping individuals and serving the long-term health of our economy—a welcome development given the depressing statistics economists like AEI scholar Michael Strain have compiled: of all unemployed workers, over a third have been unemployed for more than 27 weeks, double the share we saw during the recession of the early 2000s. Today there are approximately three unemployed workers for every available job opening. No wonder more than 350,000 workers opted to leave the workforce, making today’s labor force participation rate the lowest since April of 1978.

Then the debate moved to the cost—$18 billion, or approximately one-half of one percent of overall federal spending in 2013, then to procedural objections and the perfidy of Harry Reid. Yet at no point has a substantial majority of Republicans rallied behind a set of policies that would address the plight of the long-term unemployed.

Admittedly, part of the problem is the inherent challenge for a party out of power to rally around a substantially new, coherent agenda. Ryan and company are helping to fill that vacuum with their own policy solutions, and one can imagine that with a Republican in the White House, a similar agenda could get passed.

But the experience of my home state of North Carolina should give one pause. With control of both houses in the General Assembly and the Governor’s Mansion, the GOP passed many far-reaching reforms ranging from the tax code to education, none of which grappled with the structural problems facing the state’s economy. Rhetorically, GOP leaders and their surrogates stuck to abstract financing issues and small government talk. They rarely defended policies by appealing to a vision of the good life for North Carolinians that resonated with anyone outside the conservative fold.

Their strategy hasn’t panned out. The unemployment benefits reform was already controversial, since state leaders could have continued the benefits for the current long-term unemployed even as they reaped the same fiscal benefits had they just been willing to seek a mere six-month delay and a waiver from the Department of Labor. The unemployment rate has decreased six months later, but the drop appears to stem more from marginally-attached workers leaving the workforce than from unemployed workers finding jobs. Voters aren’t pleased. Governor McCrory hasn’t recovered in the polls, and likely GOP Senate nominee Thom Tillis is trailing Senator Kay Hagan even as President Obama’s unfavorability rating sits at a solid 55 percent.

Fiscal responsibility is important, but small government talk alone won’t cut it. Like it or not, the federal and state governments can target some of the root causes of poverty and economic hardship. Republicans need to start taking cues from Ryan, Rubio, and Lee to thoughtfully confront the challenges our society faces today: the decline of institutions like the family and local communities and the continuing struggles of segments of the workforce still grappling with our post-manufacturing age. Addressing the needs of the long-term unemployed would be a good place to start—lest some Congressional Republicans find themselves out of a job this November.


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Social Conservatives Attacked for Soft Paternalism

Slate’s Matt Yglesias sees the attempts of Ross Douthat and other social conservatives to incentivize marriage as analogous to Arizona’s SB 1070, a law meant to make the lives of illegal immigrants so awful that they would up and self-deport. He writes:

The big problem with this idea, however, is that it involves deliberate cruelty to innocent people, which is morally wrong. So wrong that you never see conservatives explicitly avow it. Because it’s really obviously wrong to be deliberately cruel to innocent people.

So beyond that, you’re left with … what? Marco Rubio’s idea is that we should reallocate EITC funds to make the program more generous to married parents and less generous to single ones. But per Rubio’s own analysis of the situation, the one-parent families he’s penalizing are worse-off!

Judging by his indignation over Senator Rubio’s tax policy and Ross Douthat’s ideas in Grand New Party, Yglesias seems to view any attempt to penalize an undesired behavior or reward a desired one as necessarily punitive or vicious.

But these policy recommendations resemble the tactics of former Mayor Bloomberg and Nudge author Cass Sunstein. The goal isn’t to punish people for making a bad choice, but to tweak their incentives so far fewer people wind up making the sub-optimal choice in the first place.

Of course, it’s possible to describe any paternalist law as an act of retribution (Cigarette taxes are a deliberate attempt to be cruel to people who are already addicted to a drug, so you wind up using their dependency to take away more of their money and make them worse-off!), but this ignores the fact that cigarette taxes are as much about discouraging potential or casual smokers from taking up a heavy habit as they are about squeezing the drug budget of the two-pack a day set.

When soft paternalists go after quantifiable goals like obesity and sodas sizes, educational attainment and preschool, and retirement savings and tax-sheltered 401(k)s, the modest penalties and incentives usually pass without scandal. But when politicians and pundits try to monkey around with the social and economic costs of a lifestyle choice, the backlash can be enormous.

In his internet-infamous anti-pot column, David Brooks didn’t propose any civil or criminal costs for using marijuana. He tried to marshall the softest kind of paternalism: social censure. Whether or not the current drug laws need reform, he argued, we shouldn’t be approving about more people using marijuana.

But the online backlash seemed to have read a different column, where he had endorsed the Rockefeller drug laws, just as Yglesias seems to think that Douthat favors re-criminalizing adultery, or bringing back the term “bastard” for illegitimate children.

Social conservatives turning to Sunstein-style nudges could help culture war fights approach détente. Negotiating over incentives and pricing externalities means negotiating over the height of the barrier to some questionable activity, not access to the activity altogether. Thus, neither side need treat the question as an existential threat such as in the all-or-nothing legalization/criminalization dichotomies.

Yglesias et al. should welcome this shift in tactics, and recognize it from their own playbook as a moderate way of shaping culture. They should give Douthat and Brooks a small reward for good behavior, rather than trying to delegitimize and disincentivize their approach.


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Big Banks Score a Win in Switzerland

J.P. Morgan strikes a photographer with his cane. Library of Congress
J.P. Morgan strikes a photographer with his cane. Library of Congress

Over the weekend, a small committee gathered in the small city of Basel, Switzerland, to propose policies governing the largest and most powerful financial institutions in the world, all in the hopes of averting another financial cataclysm like that of 2008. The measures they announced were discouraging.

First some context is in order. In 2010, Basel III, as the latest international agreement is called, proposed for the first time a minimum capital reserve requirement for global systemically important banks, those Too Big to Fail. As Anat Admati and Martin Hellwig explain in remarkable layman’s terms in their 2013 book The Banker’s New Clothes, minimum capital requirements are both the simplest and most effective way of shoring up our financial system by bluntly forcing banks to become more failure-resistant. Admati and Hellwig call for a 10 percent reserve requirement to shore up the biggest banks, but Basel III only set a 3 percent limit.

To use the apt metaphor of The Banker’s New Clothes, this is roughly equivalent to buying a house with 3 percent down, the rest financed by debt, a mortgage in this case. One only has to ask homeowners who weathered (or didn’t) the 2007-2008 real estate crash to realize how little a home’s value has to fall in order to send a property purchased with a mere 3 percent down underwater. Still, it was a start. Unfortunately, the 2010 committee went on to water that 3 percent down further by giving banks a variety of ways to reduce the denominator involved in calculating the amount of which they had to hold some in reserve, for instance by not counting many of the riskiest derivative assets that U.S. banks in particular keep off their books.

In June 2013, the Basel Committee proposed guidelines that kept the paltry 3 percent reserve requirement, but stiffened the drink of that denominator. The committee bravely floated guidelines that would require banks to count their off-sheet assets, such as derivatives, among the liabilities they would hold equity assets against. Then the banks’ lobbying began. Over this past weekend, the final guidelines were released, containing an array of weakening measures, allowing the banks to once again reduce what they would have to count. For those interested in the particulars, I highly recommend Mayra Rodriguez Valladares for the inside baseball, or Matt Yglesias’s fine account for the general reader.

The last point I want to make here is one that Yglesias also harps on, because it is one of the most common and misleading arguments the banks and their media sympathizers use to try and fend off fairly common-sense regulations. Banks will argue that they should not be subject to increased capital requirements, because holding more capital means they will have less to lend, slowing economic growth in a particularly weak economy. This is nothing more than slight of hand. Increased capital requirements merely demand that they finance their liabilities with cash or equity, rather than money they themselves borrowed that exposes them to further risk. For a more extensive and thorough explanation, I cannot recommend Admati and Hellwig’s book The Banker’s New Clothes highly enough. It manages to explain the situation without any more math than looking at a mortgage.

As Yglesias says, the next fight happens in the coming months as our domestic financial regulators decide how to adopt or implement the Basel guidelines. Let’s hope they show more mettle than the Swiss committee.

EDIT: Now that Noah Millman, our resident former Wall Street derivatives man and theatre critic, has weighed in, you should go read him now.


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Why Farmers Can’t Eat Their Own Kale

In November, I wrote a piece about modern farmers’ struggle to keep business afloat. Now, Modern Farmer continues the saga on agrarian woes with a January 2 piece titled “Why Many Farmers Eat Crap,” explaining why farmers end up eating junk food. “The primary source of the tension between what farmers grow and what they end up eating is time,” writes author Leah Koenig. “During the planting and harvest seasons the days can get extreme, stretching as long as 12 to 16 hours.” Rachel Kaplan, a Massachusetts farmer, told Koenig, “At the height of the season, it is a feat in and of itself to sustain the energy to work let alone come home and start preparing food.”

It’s a frustration similar to those expressed on SadDeskLunch.com—but significantly more ironic, considering the work these farmers are doing. Most don’t even have the time to eat their own produce. Why? How has farming become so arduous, it eliminates the time to eat well? This particular frustration seems to go back to family structure and the economy’s effect on vocational roles:

Historically, the social ecology of a family farm included systems to accommodate the harvest season time-crunch. Some members of the family, traditionally the father and brothers, worked in the fields while others, typically the women, were tasked with preparing and, when necessary, packing up, breakfast, lunch and dinner. They also spent hours canning, pickling, preserving and otherwise stretching the life of the season’s crop. … Brad Wilson, 60, of Fireweed Farm in Iowa, says falling crop prices over the last half-century have eroded the traditional family structure on many farms: “The wives had to get jobs in town, which takes away the home garden and vegetables at dinner. After my mom died, with my wife working in town, I asked my dad to bring out food for the workers. Instead of sandwiches, he went to town and bought high sugar, artificially flavored junk food in packages.” Meanwhile, today’s growing crop of young farmers – the ones who left urban life in order to farm – often find themselves lacking that critical support network. “My friends sometimes joke that they wish they had a ‘farm wife’ or ‘farm husband,’” says Kaplan.

Koenig’s sources experience a twofold frustration. All workers want to enjoy the fruits of their labor, but modern farmers finds themselves bound by time restrictions, a lack of help, and steep economic difficulty. Historical American farms were family-run. The entire family chipped in to make everything work, and they were pretty successful (read Farmer Boy, and your idea of an “average dinner” will never be the same). But most modern American families are two-career homes—either by choice or desire. Of course every family should have that choice. But in the midst of those 12 to 16 hour days, who has time to prepare a dinner from scratch, to can peaches or freeze corn?

Many of Koenig’s farmers are finding creative ways to make do: Greg and Cari Horning, 3rd generation potato and onion farmers in Washington, have started their tractor as an oven: “I wrap a spud in foil, or just put it fresh from the ground onto the exhaust manifold,” says Greg. “The manifold can be extremely hot, so it doesn’t take long to cook.” Sometimes he even packs “a little butter or bacon to eat with it.”

In a less literal sense, many of us experience difficulty enjoying the “fruit of our labor.” One commenter on Koenig’s article noted: “After a 10-12 hour work day, with a 2 hour commute on either end, you just don’t have several hours to shop for produce, cook, sit down to eat, and still have time to catch the evening news and unwind for an hour or so before you have to go to bed only to do the same thing all over again in the morning.”

How do we combat the insanity of modern work hours in order to preserve health and flourishing? Maybe Horning’s tractor-oven will inspire us to be inventive, as well.


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Is Inequality a Problem—or a Power Play?

When President Richard Nixon arrived in Beijing in 1972, Chairman Mao Zedong—with his Marxist revolution, Great Leap Forward and Great Proletarian Cultural Revolution—had achieved an equality unrivaled anywhere. That is, until Pol Pot came along.

There seemed to be no private cars on Beijing’s streets. In the stores, there was next to nothing on the shelves. The Chinese all seemed dressed in the same blue Mao jackets.

Today there are billionaires and millionaires in China, booming cities, a huge growing middle class and, yes, hundreds of millions of peasants still living on a few dollars a day.

Hence, there is far greater inequality in China today than in 1972. Yet is not the unequal China of today a far better place for the Chinese people than the Communist ant colony of Mao?

Lest we forget, it is freedom that produces inequality. Even a partly free nation unleashes the natural and acquired abilities of peoples, and the more industrious and talented inevitably excel and rise and reap the greater rewards. “Inequality … is rooted in the biological nature of man,” said James Fenimore Cooper.

Yet for many people, from New York Mayor-elect Bill de Blasio to President Barack Obama to Pope Francis, income inequality is a curse in need of a cure, as there is today said to be an intolerable measure of such inequality. Read More…

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Remembering the Retail Worker After Christmas

I hope each of you had a very merry Christmas if you celebrate, and excellent Chinese food should you not. Many of us will be climbing out of a coma induced by a combination of hearty dinners, abundant presents, and omnipresent family, pulling back up to work or sifting through the shattered remains of domestic order that our relatives left in their wake. Before we move forward at full speed, however, and confirm our New Year’s Eve plans, the always worth reading Conor Friedersdorf offered an insightful peek into the ghosts of Christmases present and past.

While we may often think of the mall-packing and frantic last-minute shopping as one more sign of our culture’s recent descent into commercialized madness, standing in stark contrast to those virtuous days of yore “Where the tree tops glisten/ And children listen/ To hear sleigh bells in the snow,” Friedersdorf came in to tell us that just isn’t so. Instead, retail mania goes back to those heady days of change around the turn of the last century. In the crusading spirit of those Progressive times, voluntary associations sprang up across the country to come to the aid of the downtrodden sales girl, and the worn down delivery man. Seeing the crushing crowds that descended upon their stores in the mad rush to get the last gifts bought before the shops closed (quite a familiar sight), “The progressive reformers of a century ago would’ve pinned the blame on a selfish public’s failure to conscientiously complete their Christmas shopping early, so as to spare the nation’s workers from the horrors of an annual holiday rush.”

The Consumer League of New York took out magazine advertisements calling for “Consideration for the Shop-Girl,” and the Outlook magazine lectured that “the crowding of the shops by late purchasers of Christmas gifts is a crude and obvious denial of the Christmas spirit.” The “Shop Early” movement framed shopping as a moral issue, whereby the customers were responsible for the welfare and treatment of the sales staff serving them, and guilty of intemperance should they not be able to discipline their gift buying earlier in the holiday season

As Friedersdorf rightly notes, the working conditions in 1913 and 2013 are scarcely comparable. Having worked the holiday season in retail, our mandatory breaks were strictly enforced, and you could be fired for doing any work on your lunch. Overtime laws are in effect, as are child labor laws sparing the most vulnerable among us from being pressed into employ. Delivery men use trucks, and OSHA-approved lifting techniques.

It bears considering, though, whether all these laudable improvements in immediate working conditions have taken the edge off of our responsibility to those serving us. For those packing the Belks, Wal-Mart, and Target Thanksgiving night, was any consideration given to the inability of their cashiers to have Thanksgiving dinner, since “Black Friday” is the one truly unacceptable absence of the retail year? When Amazon announced that they would be filling orders running right up until Christmas Eve, how many last minute clicks were made with thought for the warehouse workers shoveling pallets while their extended families filled their homes?

The true costs of consumerism may not come from the seeking of happiness in material goods. That is a story as old as time, and most of us come to grips with its emptiness at one point or another. Instead, it may be the impressing of the whole world into the service of our desires and convenience, reducing the people we rely on to a mere means of our satisfaction.


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The Promise and Peril of “Big Data” in the Workplace

The age of analytics is upon us. As Andrew Leonard details over at Salon, the old ways of interviewing job candidates and evaluating prospective employees based on a healthy mix of gut instinct, signaling, and the good old human touch is well on its way out the door, displaced by the rise of online assessments that can be fed through the machinations of “big data.”

In his excellent December Atlantic article on the rise of “people analytics” in the workplace, Don Peck goes through the history of evaluations evaluations and the cutting edge of what the marketplace offers today, in the hiring process and on through the workday. Peck closes his piece by reflecting on the explosion in evaluations and people sorting he spent 8,500+ words recounting, and explains that while he had gone into the piece expecting to conclude that people analytics “would only widen the divergent arcs of our professional lives, further gilding the path of the meritocratic elite from cradle to grave, and shutting out some workers more definitively,” he came out of the reporting “cautiously optimistic”; in fact, now he believes it more likely “that we’re headed toward a labor market that’s fairer to people at every stage of their careers.”

You see, judging people by the ol’ gut instinct turned out not just to be inefficient, but discriminatory. Famously (in social science circles), job applicants with an African-American-sounding name on their resume have to send out many times the resumes or have up to eight years of additional work experience in order to receive the same number of job interviews as an applicant with a white-sounding name but otherwise identical credentials. Moreover, while being out of a job for six-plus months has a severely negative impact on one’s chances of getting another chance (often from prospective employers presuming there is some skeleton in the closet causing the unemployment that is not apparent on the resume), the numbers found no negative impact in job performance among the once long-term unemployed. Most interestingly, ex-cons turn out to have better attendance and performance in hourly-wage jobs than average, rebutting an otherwise understandable reluctance to hire the formerly criminal. The analytics not only allowed employers to get a better return on their payroll, but opened job opportunities to categories of people who had previously been shut out of jobs without reason.

Leonard is more skeptical. He recounts that many of these questionnaires may run afoul of the Americans with Disabilities Act by implicitly acting as a test for psychological disorders. That may serve the interests of employers, in Leonard’s view, but ”if you game out people analytics far enough, with companies only hiring the perfect workers for each, you end up with a lot of unemployed imperfect workers.” I have broad concerns about the excessive use of quantitative metrics in humane enterprises (including work), but analytics well understood have the potential to help break one of the more pernicious myths in employment: that very “perfect” candidate.

Read More…

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Plowing It Alone: The Difficulties of Farming in the Modern Age

With the locavore movement rapidly expanding, many urbanites are seeking a farming lifestyle. But as Whitney Light points out in her Monday Narratively feature, these aspiring agrarians may find their new vocation harder than anticipated. She tells the story of married couple Dan and Kate Marsiglio, who left their teaching jobs in 2005 to start an organic farm. The couple has made great improvements over the years—but like many, they’ve found the idyllic pastoral life more evasive than hoped:

In mainstream food magazines and agricultural journals alike, tales of city kids and hedge fund managers trading suits and ties for overalls have many forecasting a future of yeomanry in America. To be sure, new farmers remain hopeful that moment will come. But they’re also the first to report that in beginning farming, the honeymoon period is brief. It is almost a matter of course that regardless of how mentally and physically prepared a new farmer is for long, sweaty days of toil and winters of debt, farming will deliver more stress and heartache than expected.

Eight years after they launched their farm, the Marsiglios now have 30 cows, 25 sheep, 150 chickens, four pigs, a vegetable garden and greenhouse—but they’re still barely breaking even, and all thought of retirement remains in the murky unknown. Meanwhile, the gritty everyday work of farming grows more wearing with every year.

Out of all the young people and urbanites seeking out agricultural lifestyles, many will probably become disillusioned with the trade. The work is long, grueling, and often unprofitable (at least for a time). Those who hope to make a profit must, as a retired farmer tells Light, have “a sound business plan.”

But even more difficult, our age’s individualism greatly decreases a farm’s chance of long-term success. In historical America, the farm was a family-run enterprise. It was more of a generational lifestyle than a “full-time job.” Land was a highly coveted commodity, and a farmer’s children were expected to carry on the work after their father or mother was too tired or old to continue.

But today, children are no longer expected—nor are they usually encouraged—to follow in their parents’ footsteps. Children are not, modernism tells us, to be saddled with the burdens of their forbears. What does this mean for modern farmers? Simply that, unless one of their children takes a liking to the tedium of farm work, today’s agrarians are on their own. They must conjure up a successful, fruitful farm in their few decades of limber life, or else content themselves with a frugal, arduous future.

Of course, some farmers solve this problem by making their farms into large, capitalistic ventures. Wendell Berry wrote of these types in books like Remembering or Jayber Crow: he believed these individuals spoiled the land through their swelling greed, and poisoned small communities with their insatiable thirst for expansion. Small farmers, in his books, needed the next generations to survive: thus the old and wizened farmer Athey Keith in Jayber Crow tries to teach his farming methods to his son-in-law and grandson. While his son-in-law rejects such old-fashioned methods, Athey’s grandson Jimmy respects and loves his grandfather. It is Jimmy who cares for his grandparents when they grow too old and frail to care for themselves. He’s the one who tends their land and animals. Without him, they would not be able to survive.

What of the Marsiglios? They’re making do; they have combined their traditional farming with urbanite-catered events, and are thus diversifying and expanding their business. Perhaps these sort of ventures will help other modern farmers survive: by building up various sorts of modern salesmanship, they can make the old-fashioned art of farming profitable enough to live on. But if plans fail and retirement funds dissipate, there will always have to be a Plan B. Perhaps they will find a Jimmy.


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Companies and Conservatives Prepare for Oncoming Carbon Taxes

As the New York Times reported yesterday,

More than two dozen of the nation’s biggest corporations, including the five major oil companies, are planning their future growth on the expectation that the government will force them to pay a price for carbon pollution as a way to control global warming.

This information comes from a recent report issued by the Carbon Disclosure Project, a nonprofit that specializes in organizing environmental information. The CDP report finds major oil companies, Wells Fargo, Wal-Mart, Walt Disney Company, automotive supplier Delphi, General Electric, energy companies like Duke, and even technology companies such as Google and Microsoft all including a future carbon price in their planning. The internal company projections range across industries, but generally it appears that the oil companies are forecasting the highest carbon prices in their internal planning, with BP pricing $40 per ton of carbon dioxide, Exxon Mobil $60, and Royal Dutch Shell $40.

At least three companies, Disney, Microsoft, and Shell, already implement their own internal carbon taxes. According to the Guardian, these companies have been enforcing the price within their own organizations in order to drive down their carbon footprint and increase efficiency. Shell has the highest price of the three, and so only uses the price for planning purposes; no money actually moves around. Nevertheless, Shell officials told the Guardian that they have declined pursuing carbon-intensive projects that a $40 per ton price makes unattractive. Disney, on the other hand, prices and taxes themselves. The funds raised from the tax deposited in their “climate solutions fund.” Currently, they price approximately $10-20 per ton, and have raised $35 million. Microsoft has the most aggressive goal, of seeking zero net emissions this year, and has the correspondingly lowest price, approximately $6-7 per ton.

While there are a variety of motivations for aggressive carbon pricing, the oil companies, such as Shell, are seeking to be prepared for increasing concern in industrial countries about the effect of carbon emissions on global climate change. As there are a variety of proposals circulating the globe, they are seeking a predictable program that will let them stay in business.

In the September/October issue of The American Conservative, R Street’s Andrew Moylan laid out the conservative case for a carbon tax. He looked at the manner in which conservatives consistently denied any problems in the health care industry, leaving the ball entirely in the Democratic court and allowing Obamacare to be passed in the first place. Moylan then laid out a plan for getting conservatives out ahead of the curve. By making the tax revenue neutral, he proposed being able to pursue other conservative policy goals, such as a more growth-friendly tax code, in exchange for addressing climate change.

Such a strategy learns the best lessons on practicing opposition politics from the Viscount Bolingbroke. By addressing a danger widely acknowledged by those of good faith, but in a manner consistent with their principles, conservatives have the chance to wrong-foot their opponents by pursuing positive policies, rather than political stunts.


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The Promise of Ebay’s Pro-Retail Same Day Delivery

RickChung.com / Flickr / (CC BY-NC-ND 2.0)

When Amazon rolled out its plan to offer same-day delivery, Farhad Manjoo (now of the WSJ) heralded the moment as the death of local retail. Who, after all, would take the time and effort to track down a purchase in the physical aisles of a superstore when “the everything store” would send it to your doorstep courtesy of FedEx? As the New York Times reported yesterday, there appears to be a third way.

Amazon has spent the past couple years laying out hundreds of millions of dollars to build distribution centers across the country to facilitate its expedited delivery program. As Manjoo described last year,

Amazon is investing $130 million in new facilities in New Jersey that will bring it into the backyard of New York City; another $135 million to build two centers in Virginia that will allow it to service much of the mid-Atlantic; $200 million in Texas; and more than $150 million in Tennessee and $150 million in Indiana to serve the middle of the country. … In total, Amazon will spend $500 million and hire 10,000 people at its new California warehouses.

All told, that’s $1.2 billion and change to establish warehouses coast-to-coast. It is also a dramatic shift in Amazon’s business model, as there is no way to get out of collecting sales tax when you have enormous business operations in a state, neutralizing one of its long-standing advantages over brick and mortar retailers. The “immediate gratification” push is thus more than an incremental step in services offered; it’s a bet on the future of the company.

Yet as Amazon starts to set up shop by concentrating stores of purchaseables in the proximity of major cities, others, including online auction giant eBay, are realizing that local concentrations of salable items already exist: namely, in stores. According to the logistics VP of same-day delivery start-up Deliv, “Organizations like Sears and Walmart have inventory within five miles of 95 percent of the American population via their brick and mortar stores.”

The NYT tells the story of Karen Horowitz, a Manhattan mother in need of fresh diapers and a new changing table pad while watching her 5-week-old baby sleep. Rather than waking her newborn up, dressing her, and dragging her downtown to buy the needed supplies, Ms. Horowitz logged onto eBay Now. For a $5 fee, eBay dispatched to Babies “R” Us a young courier who bought the supplies with a company card and biked them up to Ms. Horowitz’s apartment. All within one hour.

This business model has been tried once before, and it failed in spectacular fashion. Every story about this rising trend will reference Kozmo, the online delivery service (actually partly Amazon-funded) that rose in 1999 promising a new revolution in online shopping, and fell apart as one of the most prominent failures of the dot-com bubble. Kozmo could not find a workable business model in time, as it required no minimum purchase and charged no delivery fee, instead skimming a bit off the sale. Even with its $25 minimum purchase and (soon to be waived for the holidays) $5 fee, it is hard to imagine eBay is making any money off of the enterprise.

What’s more, even as Amazon’s sales tax dodging advantage disappears, it maintains a price advantage from a business model that doesn’t require profits. For the brick and mortar businesses of the retail sector, however, any hope of competing with the Bezos buzz saw makes for a welcome change of pace.


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