The Urban/Rural Divide

 

Our mid-year elections in the United States are finally over and a careful look at results once more shows the stark differences in attitudes, voting preferences and lifestyles among people who live in large cities and suburbs as opposed to those in most rural areas.

 

I have seen this trend growing stronger over the years. And, some of it has been with my own two eyes. I am somewhat unusual in that I have actually set foot in all 50 US states and both career travel and some vacations have taken me to all major US cities but also a number of rural outposts. I remember vividly driving through one city as a teenager and now find that this oasis has one third of the population that it had five decades ago. Thousands of homes are vacant.

 

Rural life is getting harder. They are not high paying jobs for many locals and while most of the western countries are aging, many rural areas in America barely have minimal infrastructure left. Rural hospitals have been closing, an ambulance driver might be in his early 70’s and schools in small towns often cannot field a football team anymore.

 

Conversely, as the “knowledge economy” has boomed, then Austin, Seattle, New York, Boston, Washington, San Francisco and even Boise have boomed causing sharply rising real estate prices and serving as a magnet for ambitious young adults.

 

Take a look at a map of the recent congressional elections in America. If you look simply at geography, it appears that Republicans dominated in a huge way. Yet, actually, their majority is paper thin. Democrats tend to win in urban and many suburban areas while Republicans dominate in less populated areas.

 

A good example was the reelection for a third term of the controversial Dr. Rand Paul, Senator from Kentucky. A “landslide” is generally defined as an election where the winner garners more than 60% of the vote. Dr. Paul won easily with 61.8% of votes cast. Break the results down by county and you see that the Bowling Green ophthalmologist won all but three counties in the state. The three that he lost were highly populated jurisdictions housing Louisville, Lexington, and state capital Frankfort.

 

Rural voters appear to feel left out and ignored by politicians. A few upsets have occurred in recent years where the winning candidate made sure to spend time in EVERY county in a state or congressional district despite very low populations. Rural people felt somewhat genuinely cared about them and the presence, even brief, of the insurgent helped.

 

This urban/rural divide has had many theorists to consider the revamping of the composition of the United States Senate. A widely used argument is that rural states have way too much power in US politics. They ask why should California with 39 million people have 52 members in the House of Representatives but two senators while Wyoming with 580 thousand people have one member of the house but two senators? (The only reason that we have a Senate is that the founders wanted to make the smaller states feel comfortable by giving them equal representation in the upper chamber. Little Delaware was the first state to ratify the Constitution while my home state of Rhode Island, the smallest state, was the last of the 13 states to join. Interestingly, we did not have direct election of US Senators until 1913 when the 17^th amendment was passed. Prior to that, state legislatures chose who would represent their state in the Senate).

 

Do these reformers have a case? Maybe but it is a hopeless dream in my view. Changing the makeup of the Senate would require a constitutional amendment and 38 states would have to approve it. Would the smaller states say yes, it is only fair for us to lose a Senator and for California, Texas, Florida and New York to pick up another one or two? Would sitting Senators from smaller states cheerfully encourage people at home to extinguish them out of existence? Ain’t going to happen.

 

So, it appears that rural areas will have disproportionate political clout compared to their populations and economic strength. They have also picked up strength in Republican controlled legislatures with a tactic known as Gerrymandering. Elbridge Gerry was a Massachusetts congressman, governor, and Vice President under James Madison. He is credited with a tactic of “creative redistricting” which is still used to this day. There are two approaches---Cracking and Packing. Cracking divides a district up in some bizarre ways (on a map) but spreads strongholds of the opposing party across several districts. Packing puts as many of your opponents in a single district as possible making other districts more competitive for your party. The GOP has gerrymandered districts in Wisconsin, North Carolina and Texas while Democrats have been guilty recently in New York state and Maryland. Reformers are asking that district lines not be set up by state legislatures but by independent commissions. Right now, rural areas benefit in GOP states and Urban in Democratic strongholds.

 

Some say rural voters have a chip on their shoulders. Young people leave in droves as job and social prospects tend to be much better in major metropolitan areas. A few 20 something MR readers wrote to me saying it was fun to return home to their tiny hometowns during the height of Covid 19 and work remotely. Fun, for a few weeks. All said they could not wait to get back to New York and Boston as they felt socially stymied.

 

Under our present political system and with an aging population and other demographic shifts moving forward, I do not see how this urban/rural divide can be remedied.

 

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

Economic Illiteracy

 

Hardly a day goes by when I am not surprised by how little people know about basic economics. It may be in conversation with someone but more often is a guest commenting on politics during a news program. They reveal how little they understand basic economic principles.

 

Admittedly, I majored in economics in college and loved it. Also, I set aside time virtually every day to study history through the lens of economic conditions at some point in time.

 

One area that I feel deserves some of the blame for the lack of understanding of the economy is in economic departments of American colleges and universities. Very few schools appear to properly merchandise to students the obvious merits of a free market economy.

 

What they do is bore students in introductory courses with endless supply/demand curves. And, they are injecting high level math into courses which many students find challenging.

 

As an undergraduate, I was a history major. I signed up for an economics course entitled, “History of Economic Thought” taught by a man who would become a great mentor to me. I was hooked. The next semester I took Economic History, Money and Banking and Microeconomics for majors. By the end of my senior year, I was doing an independent study with a young Monetarist and I was on fire academically. Looking at graduate schools, my mentor sat me down and asked me about the strength of my math. I told him it was acceptable.

 

He said that graduate schools were getting enormously math based and unless I was a math whiz, I could never get a PHD in economics (remember this was over 50 years ago!). So, I pursued an MBA and life turned out just fine.

 

I stayed in touch with both of my favorite economics professors for decades. The younger one, the Monetarist, told me that he was getting great results from a course entitled, “Economics of Everyday Life”. Instead of supply/demand iterations and the infamous ISLM curve, he talked 100% in terms of issues students could relate to easily. So, instead of focusing on Federal Reserve policy regarding interest rates, he discussed how interest rates influenced car loans, home mortgages and student loans. The response was terrific and he picked off a few students each semester to become economics majors.

 

Many schools do not seem to grasp that very few students will ever pursue graduate study in economics. So introductory courses need to be more user friendly and get across basic concepts such as scarcity, what causes inflation and how free markets work better than collectivism. Also, the old saw about “the rich get richer and the poor get poorer” is not true if the pie keeps getting larger in a growing economy. Yes, how the pie is divided remains an issue but tax or political policy could resolve some of that.

Please do not misunderstand me. I am not attacking academic rigor but hitting 19 year-olds with high level math leads to confusion and fear rather than understanding some concepts that can largely be explained verbally with real world examples.

 

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

 

 

 

$31 Trillion and Counting

 

The 2022 U.S. Midterm elections are now largely over. Over my entire adult life, I have always been a huge consumer of business and political news and this fall was no exception. I read news accounts and stump speeches and especially viewed much of the advertising in most states and congressional districts via You Tube.

 

Most of the issues raised by candidates of all stripes were valid and included inflation, general economic conditions, crime, reproductive rights, climate change and threats to democracy. To me, there was one glaring omission---the growing national debt.

 

As I write, the national debt is at $31 trillion dollars. Remember, a trillion is a thousand billion. In recent years, I have tried to bring up the looming problems that this will cause and 95% of the people to whom I speak do not care. A few have told me something along these lines—“Why should you care? At your age, you will be dead before it really hits.” Maybe so.

 

It appears that I am one of the few deficit hawks left in America. It does not matter whether a Democrat or Republican is in office; the debt continues to spiral. The media does a rotten job of coverage of this issue. Some will say look how the deficit had gone down this year. The deficit did not go down-- it increased! What they are saying is that the increase in the deficit is lower than it was the previous year. Also, with interest rates popping from virtually zero to about 4%, the debt service will go up dramatically as much of our borrowing is short term.

 

Let me be clear. I am not one of those who argues why can’t the Federal government manage their money as families do sitting around the kitchen table. Governments have the power to tax and print money that citizens do not. At times, governments need to deficit spend. Yet, sooner or later, the Federal government’s credit card will hit its limit and they will not be able to make interest payments. It may be due to a long economic downturn, a dollar crisis, or international tensions where foreigners cease to buy our long-term debt. Indeed, it could be many years away but it seems that virtually almost everyone in government is content to “kick the can down the road”.

 

Recently, I found an ally. Steve Rattner is a financier, a Democrat, and a frequent guest on Morning Joe on MSNBC. He and I do not share many political opinions but I love the data based charts that he often presents on air. In a guest editorial in the November 4^th, 2022 NEW YORK TIMES he wrote a wonderful piece entitled “The Huge Problem That Nobody Cares About.”

https://www.nytimes.com/2022/11/04/opinion/national-debt-spending.html

 

Rattner reported that the Congressional Budget Office projects that the debt will jump to $45 trillion in a decade.

 

The article concludes with “But a nation in which debt is growing faster than the economy will eventually be brought to its knees.” Well said, sir.

 

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

Netflix vs. Disney and the New Ad Tiers

 

Over the last two weeks, many media analysts and stock market touts have been falling all over themselves to praise the tactics used by Netflix in their embracing an advertising model as of 11/3/22.

 

Long an opponent of advertising, Netflix co-founder Reed Hastings has finally accepted it. The new deal is that, if you accept advertising on Netflix, you no longer are required to pay approximately $16 per month for the service. The new ad supported Netflix will only set you back $6.99 per month. Sounds too good to be true, doesn’t it? Well, this crusty curmudgeon has some questions:

 

1)  The appeal of streaming besides some great content was that there were no commercials. Many of us have been spending an increasing amount of time with streaming options and are getting “spoiled.” You watch what you want, where you want, on the device that you want and there were no commercials. Anecdotally, several people have told me that they will happily pay the freight to NOT see commercials. Also, HBO thrived for years as many people basically bought it for SEX IN THE CITY or THE SOPRANOS. No commercials but 1^st rate content that seemed to elude traditional broadcasting and most of cable. So, how many people will enjoy paying less after being conditioned for some time to not have commercials on their favorite viewing venues?

2)  Will Netflix cannabilize itself? If the recession that pundits say is either already here or surely coming in 2023 is a doozy, will millions paying $16 now for commercial free Netflix, jump to the new $6.99 tier? If you lose your job or a spouse does, entertainment options are limited, so many may go with the low-cost version of the streaming service.

3)  Some analysts are saying no problem to item #2. Netflix may be able to garner a higher C.P.M. (cost per thousand) than other video options as they can offer pinpoint targeting in many niche vehicles. The ad dollars will more than make up for lost revenue on subscriber fees. This may be true, but the jury will be out for a while.

4)  Netflix’s ad tier will NOT have all content. In press releases they used the somewhat murky (to me) term of “licensing restrictions” preventing using their full library on the new tier. Perhaps they can work that out quickly.

5)  The commercials will be a mix of :15’s and :30’s (longer units may find a home at some point) and will be seen in series and older films. Importantly, and I think wisely for all new Netflix films, commercials will run ONLY before the movie starts.

6)  Netflix has a fabulous database. They have been tracking their viewers for years and their recommendations for programming that a subscriber may like are very good. This is a big positive as they put together advertising packages.

 

Okay, a few comments on the Disney approach. Back in 1996, Bill Gates wrote an article for the Microsoft website entitled “Content is King.” His argument was that it was content not the distribution channel that would dominate the Internet. Even today he is widely given credit for coining the popular Content is King term. Actually, Sumner Redstone used the term many years before that and, as an old media hand, I assure you that he popularized it. Regardless, the statement is absolutely true. So, to me, Disney is the content king in entertainment. They appear to be keeping their focus there and are releasing programming frequently with a built-in audience. It is not just for families with small children. Disney + raised prices a buck a month recently and I could have seen them easily doing that for some time to come. When their ad tier launches soon, the charge will be $7.99 per month with 4-5 minutes of advertising per hour and the ad-free plan will jump to $10.99 per month. I do not seeing them losing many subs with the $10.99 price point.

 

Who will win? I believe there is room for both in the streaming world. Amazon and Apple could buy either company, but the FTC would surely quash the deal. There will be a consolidation for sure among minor players in the coming years.

 

Netflix was built on content—good content. Now they have shifted gears to focus on subscriptions and ad support. Perhaps they had to as for years they borrowed billions to produce or buy the rights to programming. To me, Disney still is working on the premise that Content is King and focusing there.

 

Somewhere, Sumner Redstone is probably smiling.

 

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

$1,000 Car Payments?

 

Some 35 years ago, I put together a presentation entitled “The Real American Consumer.” I used it internally at my various jobs to make sure that staffers understood that there is a world beyond their own nose and that of their family and friends.

 

For decades, I updated it every six months and once took a copyright out on it (long since expired). It basically covered income, net worth, education figures and stressed how a median was a far more meaningful statistic to a marketer than an average was. If you were to be a successful marketer, you needed to know the pulse of the people to whom you were selling. Sadly, many at ad agencies thought that they were “Everyman” and all of America were as comfortable financially as they were.

 

One statistic that I always used often generated a big surprise  reaction and sometimes disbelief from my audience. It stated that most of the time in the U.S. some 30 of the 210 Nielsen Designated Market Areas (DMA’s) had many households where their car payment was higher than their mortgage payment!

 

People on the east and west coasts often blurted out “impossible” or some other negative comment. In smaller markets in the Midwest or South, the seasoned players tended to nod and smile.

 

Well, recent events in the automotive market and a growing softness in real estate in some DMA’s has led to an actual increase in this little-known phenomenon.

 

Last week Phil Lebeau, the excellent automotive analyst on CNBC, provided a brief segment on the average car loan in the U.S. had a payment of $730 per month and some 16% were over $1,000 per month. Watch it here --https://www.youtube.com/watch?v=7x1PCA2qAbk&t=8s (if you cannot open it on your laptop, go to You Tube and ask for "$1,000 car payments, CNBC).

 

Also, the three year car loan is becoming something of a relic as struggling middle class buyers have in recent years stretched payments out to seven years and a few are incredibly doing 10 year vehicle loans.

 

With supply chain problems regarding computer chips and a shortage of used cars exacerbated by Hurricane Ian’s flooding, this situation could last for some time.

 

Many of us forget that there are many markets in the back-roads of America. The cost of living, particularly housing is lower there, but jobs are scarce, and pay is far below what we earn in major markets. Yet, car prices are relatively the same everywhere. So, if you have been in a home for several years in Waterloo, Iowa or Cumberland, Maryland or any number of smaller markets, your mortgage is often less and now substantially less than your current car payment.

 

Is $1,000 as a car payment just a psychological barrier in an inflationary era? Yes, to a certain extent, but a 10-year car loan gives me pause.

 

Also, if we move into a recession as many are forecasting for 2023, will there be a flood of repossessions as increased unemployment will make it impossible for many to continue to pay the hefty auto payments? Yet, if you do not have a car, you cannot get to work easily in most of America. So, a Catch-22 could emerge for a few million Americans next year.

 

I applaud CNBC for devoting time to this issue. It could implode in the next 6-12 months.

 

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

 

 

 

Crony Capitalism

 

Increasingly these days, one reads or hears about how the capitalistic system is failing, dying or totally unjust. These are not new comments but, with the rise of social media, they are becoming louder.

 

Clearly, I do not embrace such thinking. The fault to me lies not in the capitalistic (free market) model but rather with the growing scourge of Crony Capitalism.

 

Let us define the term. Crony Capitalism is hardly a new phenomenon in the contemporary world but it occurs when there are very close ties between leading business people and politicians. The political class does favors for their friends in business via special tax breaks, government grants, and eliminating regulations that stifle their activities of their pals in specific fields. Many critics single out the United States these days as large political contributors appear to get special consideration from members of both major political parties. This tends to lead to more income inequality over time.

 

Now, over the years, I have mentioned in MR that any country that has a semblance of a free-market orientation will have evidence of income equality. Some people work harder, others are cleverer than most of us, some are in the right place at the right time, and yes, some are just plain lucky.

 

Yet, things seem to be getting more extreme. A few years ago, it was noted that the three wealthiest Americans has a net worth equal to the bottom 50% of the population.

 

This skew to a few appears to cause more than simple jealousy and envy. Canadian economist Miles Corak has done detailed work illustrating how as income inequality increases in a nation, upward mobility decreases. This idea gets a good bit of traction when polling indicates that many young adults do not see themselves ever living as well as their parents.

 

Others sarcastically call the current wealth skew “The Great Gatsby Curve”, an illusion to F. Scott Fitzgerald’s 1920’s novel about the elegant lifestyle of Jay Gatsby and his acquaintances.

 

Some examples of Crony Capitalism are:

 

1)  Inversions—large American companies with a high volume of international sales change their headquarters to a foreign jurisdiction with much lower taxes. Or, they run a subsidiary in the tax friendly location and attribute U.S. sales to that subsidiary. Their taxes due to the IRS plummet. Legal, yes but ethical, highly unlikely. International legislation is pending to combat this.

2)  The Carried Interest Trade—this one really gets my blood boiling. Carried Interest is “a share of profits earned by general partners of private equity, venture capital and hedge funds.” This is especially beneficial to hedge funds as their normal fees are baked into carried interest so they may pay only 20% tax vs. the 37% that we poor normal slobs pay for our income. Warren Buffett and hedge fund chief Bill Ackman have been strong supporters of ending this loophole. Buffett has claimed that a fund can hold shares for only a minute and the tax is only 20%. You or I would pay a much higher rate for such a short-term trade. It strikes many as ridiculously unfair and only applies to a tiny group of people among the 330 million Americans. In the recent “Inflation Reduction Act”, an early draft had the elimination of the carried interest loophole baked into the cake. Krysten Sinema, an Arizona Democrat, would only support the bill if the Carried Interest provision was left intact.  Her vote insured the passage of the bill. It turns out that she has received substantial donations from investment banks and hedge funds.

3)  Too Big to Fail—we heard a good bit about this after the 2008 financial debacle. It happens when government funds are used to socialize losses without any cost to those who caused the losses. In other words, management or their traders made very risky bets and got rewarded when they succeeded but were bailed out by hapless taxpayers when they failed. Some brass lost their jobs but no one went to prison.

 

There are many other examples including barriers to entry which government enacts to protect friendly entrenched players, government grants to key companies, coercive monopolies where anti-competitive measures are passed  by legislatures, and a blind eye that ignores existing regulations that applies to companies with solid political contacts.

 

The role of government in a free-market economy has long been said to get out of the way of business. Okay, but what about rule #2 which is to enforce the rules of the game and try for a level playing field that encourages competition?

 

Capitalism is not a perfect system but it is not nearly as flawed as its critics say. If it goes down in parts of the western world at some point in the future, to me it will be because Crony Capitalism not authentic Capitalism has ruined it.

 

You may reach Don Cole at doncolemedia@gmail.com or leave a comment on the blog.

 

 

 

 

 

 

The Post Covid World and The New Reality

 

While the Covid 19 pandemic is still very real, many feel that it is beginning to wind down although rational people do fear a resurgence at some point. Many of us plan to get booster shots later this year and perhaps annually for many years to come.

 

I receive a great deal of e-mails from readers commenting on how things have changed for them over the last 30 months. Some actually see it as a surprise positive. A few ad agency principals have written that they have negotiated lower rental costs for their shops and others have saved by moving to smaller digs. With fewer staffers appearing in the office five days per week, some companies of all stripes have given each staffer a locker to store necessary items. They have conference rooms and a few traditional offices for very senior team members. Everyone else comes in several days per month.

 

It sounds great at first blush. Yet, what is it doing to some cities? Yes, you save money on rent. Most of us would not shed many tears for landlords but commercial real estate is getting hit hard in many localities. Members of cleaning crews have been laid off as you do not need a big staff when you are nowhere near full occupancy. Some say office space can be converted to residential apartments. Yes, but that will cost millions and may take years to transition.

 

Many humble services have disappeared and not just in top 10 cities. Food trucks are fewer and scrappy street vendors have moved on as well. Delicatessens often cannot survive with fewer people in nearby offices daily and mid-priced restaurants are struggling more than ever. Retail has been savaged by Amazon but noon time shopping in major metropolitan areas is but a memory in most instances. Mass transit has to be losing more money than ever these days although accurate data has been hard for me to find. Uber drivers? A mixed bag market to market.

 

The financial media provides detailed coverage of Apple, Amazon, Microsoft, Alphabet (Google) Tesla, Meta (Facebook), Disney, Netflix, and Berkshire Hathaway. I devour it daily. Yet about 50% of all jobs come from small businesses and they account for 42% of Gross Domestic Product. What happens when these smaller businesses get hit hard and then find that the seismic change since the Covid outbreak is likely not to be temporary?

 

The new reality is about to arrive. And, there is a body block that is likely to add to the discomfort. Federal Reserve Chair Jay Powell came on strong during a brief but tough speech at the recent Jackson Hole wing-ding for billionaires. He sounded as if he were Paul Volker 2.0 (Volker was Fed chair in the late '70's up to the mid-1980’s who burst the inflation bubble with record high interest rates that triggered a deep recession. I admire his courage tremendously). Powell pledged to keep raising rates and admitted that the Fed’s stance would cause some pain in employment markets. Whether the Fed will stay the course or blink is above my pay grade and perhaps yours as well. Yet, a possible/likely recession on top of this shift in commuting and work practices could really hurt. My guess is that such a recession would be shallow but might linger for a long time as the economy would need extra time to adjust to this new reality.

 

Surprisingly, some ad agencies and other types of service and tech firms tried giving staffers a locker but no formal office 20+ years ago. Results were mixed but top management often felt that they could not monitor staff effectiveness well. Now, in a digital age it works well in many situations with the big bitch being that newcomers want to work remotely from the get-go without learning corporate culture or basics. Also, they do not know the personalities or real role of key players in leadership.

 

All of us know that the only constant is change. My opinion is that Covid 19 sped up the rate of change in many areas significantly.

 

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