Red and Black Cafe closes: Lessons in capitalism from a socialist coffee shop

Portland’s Red and Black Cafe recently announced its closing via Facebook with a sad kitten photo.

Red and Black sounds like a coffee shop straight out of a Portlandia episode or an article in The Onion. It’s an all-organic, wheat-free, vegetarian coffee and food shop. It’s run as a collective, it’s employees are represented by the IWW union, and was once a popular hangout of the Socialist Party USA’s candidate for president.

So, naturally, there was a bit of schadenfreude at the news that an anti-capitalist business would fall victim to market forces.

But, instead of focusing on the cafe’s failure, let’s take a look at it’s success …

Red and Black Cafe stayed in business for 15 years.

In a world where 95 percent of small businesses fail in the first year, Red and Black’s 15 years in business is a major achievement.

And, that’s the lesson in capitalism from Red and Black Cafe. A free market has room for a wide range of businesses with a wide range of business models. Some succeed and some fail. In a world of Starbuck’s and Stumptown, Red and Black carved out a niche and succeeded for a decade and a half.

Another lesson in capitalism from Red and Black is that diversity rules—one size does not fit all. Just because one coffee shop has union employees doesn’t mean all coffee shops should have union employees. But we see this play out over and over: One business who offers generous paid sick leave will testify before politicians pushing a law saying all businesses should offer generous paid sick leave. But what if the employees want bigger paychecks with less-generous sick leave?

Next time you sip your non-fat soy latte, think about the amazing world of capitalism where a socialist cafe can survive for 15 years.

You can learn a lot from a one-dollar peanut

Every summer, Portland hosts MusicFest NW which is, believe it or not a big music festival.

This year the festival got bigger and the MBAs took over. They decided that the best way to extract dollars from concert goers was to forbid food vendors from selling water.

That’s right … Citing safety reasons (naturally), concert goers could not bring in their own water. Even worse, a vendor couldn’t sell you a Coke to go with your hot dog.

The only place they could buy water was by waiting in the long beer lines, and shelling out $2 for a little bottle of water.

But, the problem was solved by a $1 peanut.  And, it’s a lesson for businesses and policymakers—no matter how clever you think your policies are, someone else thinks they’re stupid and will work to get around them.


More mixed messages from the housing market: Prices up, sales down


The housing market provides more mixed messages about the economic recovery.

On the one hand, home prices, as measured by the Federal Housing Finance Agency House Price Index, are up just under 7 percent over the same time last year. Increasing home prices may boost consumer confidence and help accelerate economic growth.

On the other hand, existing home sales, as reported by the National Association of Realtors are down 7.5 percent since the same period last year. Weather can’t be blamed as the bad weather is now behind us. The U.S. housing market saw strong growth in 2012 and the first half of 2013. Existing-home sales hit a seasonally adjusted peak last July and have fallen in seven of the past eight months. High prices, stringent lending standards, and a rise in borrowing costs have been blamed for the slowdown, which could slow the overall recovery.

A lesson from the worst paper of the year and a Turing test for economists

The popular press loves marijuana research. Even more so because much of it is dreck.

I was reading a review of what has been called the worst paper of the year in marijuana research:

I noticed that the principal investigator Hans Breiter was claiming to be a psychiatrist and mathematician. That is an unusual combination so I decided to take a closer look. I immediately found out the claim was a lie. In fact, the totality of math credentials of Hans Breiter consist of some logic/philosophy courses during a year abroad at St. Andrews while he was a pre-med student at Northwestern. Even being an undergraduate major in mathematics does not make one a mathematician, just as being an undergraduate major in biology does not makes one a doctor.

I’d like to add another one:  Being an undergraduate major in economics does not make one an economist.

And with that, I propose a Turing test for economists:  When someone claims to be an economist, ask them (1) which statistics package they use and (2) when was the last time they used it.

Higher education: You might get what you pay for, but probably not

College is expensive and it’s getting more expensive every year. Over the past five years, according to the College Board, in-state tuition and fees at Oregon’s public universities has increased 30 percent, while private institutions have seen a 19 percent increase. Over the same period, average student debt in the U.S. has increased 31 percent to more than $27,000.

The rapidly rising cost of higher education has left even the smartest researchers and the wonkiest of wonks wondering what’s happening and where’s all that money going. More and more, prospective students—and their families—are asking: Is college worth the cost?

Over the past few years, the salary comparison website has collected salary data from its users and ranked U.S. colleges and universities based on which schools deliver the best bang for the buck, measured by Payscale’s calculation of the net return on investment (ROI). They measure ROI as the difference between a typical graduate’s earnings over 20 years and subtract out the cost of attending the school. The data are far from perfect, but there are enough data points to make some broad generalizations.

The figure above turns Payscale’s rankings into a scatterplot. The green dots represent in-state tuition and fees for Oregon public universities, excluding Portland State University. The red squares represent Oregon’s private colleges and universities.

Two things stand out:

  1. There is a negative relationship between an institution’s costs and the return on investment: Bigger bucks yield a smaller bang. For example, on one extreme, University of Virginia cost about $26,000 for in-state tuition and fees and its 20 year ROI is 17.6 percent. At the other end, a student at Ringling College of Art and Design is expected to shell out almost $165,000 to end up with lower earnings than someone who did not go to college.
  2. The dots are all over the place. In other words, although there is a downward trend, in fact, there really is not much of a relationship between a school’s cost and its graduates’ earnings. This is highlighted by two Georgia schools that cost about $40,000 to graduate. On one end, Georgia Tech grads get a 17.1 percent return on their investment, while Savannah State University grads have a negative return on their investment. Oregon’s public universities have roughly the same cost to graduate, but have a wide range of returns on investment.

While Payscale accounts for the variation in the time it takes a student to complete a degree across institutions, it misses some key costs of higher education. For example, the typical student graduates with about $27,000 of debt. Interest payments on this debt reduce take-home pay and reduce the return on investment for higher education. More importantly, Payscale misses the fact that, in most cases, full-time students give up full-time employment. In addition to spending money on tuition and fees, student are giving up money from four or more years of employment.

The figure above adds some very back-of-the-envelope estimates to account for interest payments on student debt and the opportunity cost giving up employment while in school.  It assumes the average amount of debt and that a student would give up full time work at the federal minimum wage. Yes, I know that’s not very realistic, but it’s pretty conservative and you’ll get the idea.

As with the ROI scatterplot, the dots are all over the place. In fact, there is hardly any relationship between the opportunity cost of higher education and future earnings.

What is most striking, however, is how small the net benefits are—even for students paying in-state tuition. Students at Southern Oregon University and Western Oregon University just about break even on their college educations. If it took them a little longer than average to graduate, or if they incurred a bit more student debt, these students would have been better off skipping college altogether.

Keep in mind that the data presented here looks only at the “average” student. The benefits and costs of education are unique to every individual. Having the right test scores, choosing the right major, and having a supportive network of family and peers can make huge differences in the payoff to higher education.

Nevertheless, a look at previous Payscale studies shows that over the past few years, the return on investment in higher education is declining. Students seem to be paying more, but getting less. Research suggest new administrative positions—particularly in student services—have driven a 28 percent growth in the higher-ed work force from 2000 to 2012. At the same time, universities have shifted to a growing army of part-time instructors and full time faculty salaries have barely kept pace with inflation. The result is a set of institutions that have shifted their focus away from research, education, and training and more toward providing social services to employees and students.

Unfortunately, I don’t see this trend ending soon. It will take a major student debt crisis for policy makers and educational institutions to refocus their direction away from growing the university bureaucracy and back to providing an education that is valuable to students and employers.

Originally published at Oregon Business.

Employment situation stagnating in developed countries


The rate of unemployment across the 34 nations that are members of the Organization for Economic Cooperation and Development rose in February. After three months of slowly declining unemployment, the recent uptick is viewed as a setback for the global economic recovery.

The OECD reports the unemployment rate for its members—made up mostly of countries with developed economies—rose to 7.6 percent from 7.5 percent.

The number of people without jobs increased to 46 million from 45.8 million.

The rise in the jobless rates suggests economic growth in developed economies isn’t yet strong enough to generate a rapid increase in employment, which would in turn boost the recovery by supporting consumer spending.

Ups and downs in Oregon employment

First, the good news: In 2013, Oregon outperformed the nation in job growth.

Add to that, the good-but-don’t-too-excited news: U.S. employment is now back to where it was before the recession.

And finally, the news that makes the first piece of good news look pretty weak:  Despite last year’s growth, it’ll likely be nine months to a year before Oregon is back to the job levels seen in early 2008.

The jobs and profits connection: Does it exist?

Under the headline of Soaring Profits but Too Few Jobs, the Wall Street Journal’s William Galston complains that “Companies have not boosted hiring in line with revenues, or wages in line with productivity.”

This somewhat new line of thinking seems to ignore the observation that productivity gains have allowed businesses to increase sales without adding workers. In addition, with millions still out of work, companies face little pressure to raise salaries.  

First, let’s take a look at the long run relationship between corporate profits and employment.

The figure below shows the quarter-over-quarter change in corporate profits against the quarter-over-quarter change in U.S. employment.


Casual observation supports the association between corporate profits and company hiring: Generally speaking an increase in profits is associated with increases in hiring and decreases in profits are associated with reduced hiring or layoffs.

Casual observation also shows that the relationship is not very strong.

Looking more recently, the graph below shows that since the beginning of the Reagan administration to the present, there really has been no relationship between corporate profits and employment.


So what gives? Is Galston living in the post-World War II boom years where employment boomed and corporate profits rolled in?


The figure below shows that the Reagan administration should be Exhibit A as an example of soaring profits coexisting with strong employment growth.


George H. W. Bush oversaw the recession that sent me to grad school. His administration was marked by small profits and a languid job market, and no real relationship between the two factors.


While the booming economy during the Clinton administration saw strong employment growth and decent corporate profits, there wasn’t really much of a relationship between the two: A 14 percent increase in corporate profits was associated with the same employment growth as an 11 percent decrease in corporate profits.


The George W. Bush administration continued the trend of no real relationship between corporate profits and employment. (By the way, I took out the last quarter of Bush’s term because it completely overwhelmed the chart.)


Now things get interesting … And we get a peek at why Galston and others are wringing their hands so hard.

During the Obama administration, the relationship got turned on its head. Under Obama, increasing corporate profits are associated with reduced or declining employment. (By the way, I took out the first quarter of Obama’s term because it completely overwhelmed the chart.)

That makes the “Greed is Good” of the Reagan administration look not so greedy after all.


As Columbo would say, “Just one more thing …”

The Obama trend line seems to be driven by the four quarters with employment declines that occurred at the beginning of his administration (the red dots). If we take out those observations, we see that we return to the modern phenomenon of no real relationship between corporate profits and employment.

What’s the takeaway?

Over the quarter century there has been no relationship between corporate profits and employment. The line of thinking that argues that corporate profits should be spent to boost hiring seems to have been pulled out of thin air (or at least out of the first five quarters of the Obama administration). Perhaps our energies would be better spent on figuring out ways to boost profits and employment simultaneous would be a more productive effort.