Do We Really Want Democratic Socialism in America?

 In recent years, I have spoken to many young adults, most of whom are college seniors. Some approach me after my spiel and ask me why I bother to discuss marketing or investment issues? What we need, they say, is democratic socialism. Keep in mind, many of these earnest young people are business majors.

The term democratic socialism began to get some traction when Senator Bernie Sanders of Vermont ran for president in 2016. Bernie was clever enough to not throw the market system totally out. What he suggested was that the U.S emulate Denmark and other Scandinavian countries and have a mixed economy rather than a relatively free market model.  Education and health care and some old age benefits are strong in these countries. He also made some scathing remarks about Wall Street excesses, some of which even I agreed with.

It sounds great on the surface, but have you ever investigated what really happens in Denmark, Norway and Sweden? Let’s look at some facts.

Personal income taxes in Scandinavia are much higher than in the U.S. Denmark’s top tier pay 55.9%, Norway 39.6% and Sweden 52.4%. Why is Norway’s so much lower than the other two democratic socialist paradises? Well, to me they got lucky but were also VERY smart. When the North Sea oil was developed decades ago, Norway set up a permanent fund for both education and healthcare for their citizenry. Then they did something brave and ingenious in my view. The oil bonanza was largely invested in global index funds that excluded Norwegian securities. They realized that they were a small nation so looked outside of their home to invest the gigantic windfall (can you imagine Wall Street’s reaction if the US tried even a modified version of Norway’s approach?).

The top income tax rate in the US is technically just over 40% but virtually no one pays it. The super rich pay capital gain taxes at a much lower rate and a handful of serious players use the carried interest loophole to lessen their tax burden. Inheritance taxes in the US largely exist in name only as the well-heeled and genuinely rich place their funds in trusts that work around a death tax. Also, remember that while all US workers’ pay Social Security taxes, some 47-48% pay no federal income tax at all.  Lower income Scandinavian citizens still pay but not at the confiscatory top rates mentioned above.

Also, these nations have a Value Added Tax of 25% on most purchases which is, in essence, a national sales tax. We do not have a national sales tax, and several states such as New Hampshire, Delaware, Montana, and Oregon do not have one at all. Sales taxes are regressive and are felt the most by the lower income groups, so the Value Added Tax does not strike me as very socialistic. 

To sum up, the free education and healthcare provided in these northern European countries is not free. The tax burden on the lower and middle class is much higher than on Americans and on their big earners as well.

Do Americans really want democratic socialism? Mayor Mandami in New York city shrewdly suggested a special tax on non-US citizens having vacation residences in his city. This would raise some revenue but not affect citizens at all. 

Right now, many Americans earning $150,000 or so may only pay 11-15% in Federal Income Taxes. To emulate the Scandinavian model, their taxes would at least double plus a national sales tax (value added) would also have to be employed to cover the social benefits that Denmark, Sweden and Norway enjoy.

Also, can you imagine the army of accountants, tax lawyers and lobbyists for a variety of groups that would descend on Washington if Congress tried to implement a Scandinavian solution? I agree that income inequality is out whack, but authentic tax reform is what is needed.

A few Congressional democrats have suggested busting the trusts that the well to do have and all inheritances would be taxed at normal tax rates. That would face tough sledding in Congress but such imaginative ideas need to be considered in some form.

If you would like to contact Don Cole directly, you can reach him at doncolemedia@gmail.com or leave a message on the blog.

Musings on the Netflix/ Paramount Skydance Bids for Warner Bros.

 Over the last six weeks, friends and many Media Realism (MR ) readers have contacted me asking for my opinion on the Netflix/Paramount tango over the Warner Bros. buyout.

I hesitated to respond as I wanted to look at it carefully and there were a great many moving parts in the deal. 

Early on, some said that this was a win/win for both contesting parties. I was not sure but after a month has passed, I now see Netflix as the clear winner by walking away from the deal.

Paramount is now committed to taking on a huge amount of debt. Some estimates go as high as 80 billion dollars. Yes, Larry Ellison of Oracle has the financial muscle to back up his son David at Paramount but that is a staggering amount of money that may limit content development. I would not be surprised if the new Paramount/Warners combo shoots for new films that are almost formulaic. There may be some sequels or prequels of existing successes that may not be blockbusters but will have limited downside risk. 

Talent of all kinds (actors, writers, directors et al) may not be thrilled as there are now fewer people giving the thumbs up to projects. Consolidation means fewer slots for young talent and ideas to break through.

Also, my crude analysis of the financials shows that much of the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) comes from cable channels that are struggling right now and on a downward curve.

Also, how will this play with European regulators? They are almost certain to be more difficult that Washington has been so far with Paramount.

By sidestepping this deal, Netflix can focus on many things, and they received a $2.8 billion termination fee by bowing out of the bidding war.

Netflix is a global player and much of their new growth is coming from outside North America. They have approximately 320 million subscribers. Think about that for a moment. Eash month on their VISA bills, 320 million subscribers pay Netflix. Yet Netflix knows what each subscriber is watching. If they package it up and sell targeted advertising based on viewing, they can slice and dice the data and put a spike in advertising revenues. I would not be surprised if Netflix advertising doubles in the next couple of years.

Are there any clouds on the horizon for Netflix? One big one that all players will face. You guessed it—AI.

The fragmentary evidence that I have seen shows that there will be a great deal of AI generated content that is of high quality in the next few years. Netflix will need to address that quite strongly or face some stiff competition. They have clearly won the streaming war to date and made it profitable but, in a market economy, innovators will always create challenges.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Europe’s Uncertain Future

 For a number of years, I have kept an eagle eye on demographics. Trends in demography often remind me of compound interest. Once they get going, they are virtually impossible to stop. With the drop in birth rates across the Western world, Europe could be in for some difficult times going forward.

With many people marrying later than in the past and women experiencing significant self-actualization in the workforce, it is no surprise that birth rates have declined. One powerful way that the trend could be altered quite a bit is with immigration. Allowing others to settle in your fair land eases demographic pressures significantly. Without it, virtually the entire continent of Europe’s native population will fall very sharply for the rest of this century.

The United States has often been described by political scientists as a “center-right” country. Europe’s political mix is a great deal more complicated and many countries (due to the relatively large number of political parties) rule with a coalition government comprised largely of center-right and center-left parties. My reading of what these coalitions seem to be favoring is a need to ease long term demographic realities with an increase in immigration.

This consensus is under pressure in several countries where some right-wing parties (a few extreme) are insisting on big cuts in immigration. They whip up bad feelings against immigrants and ignore that, over the long run, the economy will be stronger with more working-age immigration.

Today, most European countries have what we Americans refer to as “the provider state.” A few disparagingly refer to it as “the nanny state.” 

In the U.S., healthcare costs are a big worry for most Americans as is paying for college tuitions. In Europe, life is largely a less precarious existence as healthcare tends to be universal and college is often free or with very low fees (far fewer Europeans attend university than in the US, however). To cover costs for healthcare and education, Europeans may income taxes at significantly higher rates than Americans.

So, in the decades to come, much of Europe will face a huge problem. With no or few immigrants and a low native birthrate, the working population will grow much older. How can the provider state be maintained? Put simply, it cannot.

Right now, Eurostat, the official statistics agency of the European Union, projects that the EU will see a population drop from 447 million today to 419 by 2100. Eliminate immigration (admittedly extreme), and the population is projected to fall to 295 million by the turn of the next century.

The biggest declines would likely be in Germany, France and Italy where anti-immigration politicians are currently getting significant traction. 

As I type, some 21% of Europe’s population is 65+. Depending on the degree of limits on immigration that figure will soar to 32-36%. 

Taxes as a percentage of GDP tends to be high NOW in those three large European countries but will have to soar to keep the provider state relatively intact. 

Older people will often require care. Some are saying that, with fewer children, you need fewer teachers, so there will be job shifts over time from caring for children to assisting the elderly. 

Europeans, at present, want to have their cake and eat it too. Politicians have gotten a hostile reception when they try to raise retirement age or streamline transfer payments to the elderly.

Clearly, something will have to give. 

Why do I bring this up as an American citizen? We have a longer fuse than much of Europe has regarding dealing with elder programs (Social Security and Medicare/Medicaid). If we do not reform those programs soon, our problems will hit a wall much like Europe will before us.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Forecasting

 The late Sam Goldwyn was a major film producer in the golden age of Hollywood studios. He was famous for making very funny comments about a variety of topics. One of the most frequently quoted is: “Forecasts are difficult to make—particularly about the future.”

As witty as that comment seems to be, the great producer put his finger on a very serious topic. 

The standard definition that I have seen for the last 50 years goes something such as this: “Forecasting is the systematic process or creative estimates about future conditions, relying on historical and current data.”

Short term forecasts rely on historical patterns and current data and are used to forecast the stock market over the next week, outcomes of imminent elections and sporting events. It amazes me that media outlets such as CNBC and Bloomberg Business give airtime to “analysts” who provide remarkably short-term estimates covering only a week or a month. They are generally wrong. I am always willing to hear forecasts of a financial heavyweight looking out over a few years, but very near-term estimates are worth very little.

Long term forecasting is a VERY tricky business. Some look at past trends and do direct mathematical extrapolation which is generally not reliable. The more sophisticated players add qualitative issues to the mix and often provide several multiple futures. Others use the Delphi method which solicits opinions from a panel of experts and often publishes a consensus of the opinions and promises anonymity to participants. Such averages have a rather weak batting average. 

Whenever I have looked at long term projections I have noticed they do not consider external shocks which forecasting models cannot see. Such Black Swans, popularized by Nassim Taleb in several books, upset the applecart of almost all projections.

Today, in finance, many people have put their savings in index funds. They do not try to pick individual winners among securities. The whole market is purchased. Your never do better or worse than the total market performance.  And, fees are extremely low which over a lifetime make a huge difference to long term performance.

Another huge factor in my view that limits long term forecasting is that the rate of change in today’s world is much faster than in the 20th century.  Look at the media business where many MR readers have spent their careers. It was clear that advertiser supported cable channels were going to grow but streaming video caught many of us alleged futurists flat footed. I remember spending quarter after quarter breaking down the balance sheets and income statements of Netflix and wondering how and when they were going to become very profitable. Google’s You Tube has become something of a stealth bomber taking up more usage than futurists could have seen a decade ago.

With the emergence of Artificial Intelligence (AI), change will be more sweeping than we have seen in the past. Yet my feeling is that the growth may not be as quick as some people are now forecasting. It will, however, come and it will be huge.

Okay, I just made a forecast using the Delphi method. Check back in 5 years and see if I was correct!

I started this post with a Sam Goldwyn quote about forecasting. Here is a great one to end with— “Ninety percent of the art of living consists of getting along with people you cannot stand.”

If you would like to contact Don Cole directly, you may reach him at www.mediarealism.blogspot.com or leave a message on the blog.