Month: March 2019

Senator Warren and Big Tech

Presidential candidate Elizabeth Warren is proposing anti-trust action against major tech firms including Google, Facebook, Apple and Amazon.   This proposal if enacted would increase prices and reduce options to consumers.   The main beneficiary of rules restricting Big Tech would be Walmart, other larger brick and mortar stores, Cable Television firms, and large established brands.   Smaller companies that are attempting to enter markets and compete with larger older firms with the assistance of Google, Amazon or Facebook will have fewer opportunities and higher costs.

One element of her plan designates on-line firms with more than $25 billion as Internet Utilities.   These Internet Utilities would be prohibited from selling both their own products and products of their competitors on the same web site.   This would most immediately impact Amazon, Google and Apple but could also in a very short period of time impact Netflix.

A second element of her plan involves reversing mergers, which have contributed to the growth of the tech giants.    These mergers include Amazon’s purchase of Whole Foods and Ring, Google purchase of Waze, Nest and Double Click, and Facebooks purchase of Instagram and WhatsApp.

Let’s start our discussion by observing that Walmart has larger revenues than Amazon.  In 2018 Walmart revenue was around $500 billion compared to around $233 billion for Amazon.   Amazon obtains a larger percent of revenue by partnering with third-party businesses. Partnerships with small firms are less important to Walmart than Amazon.

Amazon purchased Whole Foods sparking fears that Amazon would take over the grocery sector.   There are at least five firms with grocery sales larger than Whole foods.     Walmart has the largest market share of the U.S. grocery market with a 14.5 percent market share.   Kroger is second with market share around 7.2 percent.   The market share for Whole Foods — around 1.2 percent.

https://www.cnbc.com/2017/06/21/dont-worry-wal-mart-amazon-buying-whole-foods-is-just-a-drop-in-the-bucket.html

Amazon is now actively promoting its own private label groceries on line, a strategy which would be hampered by Warren’s new rules.   What firms are threatened by the Amazon private label?  According to Wall Street research firm Bernstein (no relation to me) J.M Smuckers and Mondelez are the two firms most threatened by Amazon’s private labels.

https://www.cnbc.com/2019/01/28/bernstein-smuckers-mondelez-are-most-unprepared-for-amazon-in-food.html?&qsearchterm=impact%20of%20amazon%20on%20campbell%20and%20kraft%20heinz%20and%20mondoleze

I suspect that Amazon may purchase and fund small jam and snack producers to bolster their private label.   Explain to me why this is anti-competitive.

Bernstein finds e-commerce makes up around 1 percent of packaged food sales.   This may rise to 5 to 6 percent in a few years.   This does not strike me as anti-competitive.  Really bad news for some older established firms but hardly anti-competitive.

The Apple app store serves to provide updates for many items that are sold with a phone, computer, or IPAD.  I doubt that direct sales of Apple products in the App store are a large source of profit for Apple.  Apple might respond to the mandate for separate third-party and Apple-only App store by increasing purchases of third-party apps from developers or increased in-house App development.

Many people come to the Amazon site or the App store to either buy products sold directly by the sponsor of the site but end up buying a product or service created by a third party.  The creation of separate web sites for the big tech firm and for third parties could decrease traffic towards third-party offerings.

Google has purchased Nest giving this product a potential advantage over its several competitors including Carrier, Ecobee, Honeywell and several other smaller firms.   Is this a big problem?  There are several smart thermostats available in the market.  I haven’t seen a case made that Nest has market power over its rivals. Any case for divesting Nest from Google should be based on actual evidence monopoly power, which may not exist.

Amazon and Apple may both enter this field because home thermostats can connect with Alexa and Siri.   Should entry by Apple and Amazon be prohibited because their Alexa and Siri give Tech firms an advantage over older non-Tech competitors?

Amazon buys ring and hooks it up to Alexa, gaining an advantage of existing security companies.   This is all good news for consumers.    Any existing problems could be solved with modest regulations rather than a broad anti-trust action.

Google owns both Google Maps and Waze creating a challenging situation for Apple Maps.  Does Apple really need government help?

Currently, Google appears to have a monopoly or near monopoly on search and Facebook has a monopoly or near monopoly on social networks.  Both industries and both firms are young.  Both monopolies are contestable.   A new superior search engine could give Google a run for its money.   A new social network with a different look and policies could do the same to Facebook.

Google and Facebook and Amazon, while in different narrowly defined industries, are all in competition.   All three firms are competing for ad revenue from businesses who are marketing their goods and services to the world.   It may be tempting to stop Facebook from purchasing Instagram and other Apps to level the competition between Facebook and other social networks like Snap.   However, this could adversely impact the ability of Facebook to get advertisers and compete with both Amazon and Google, two much larger powerful firms.

The clearest potential harm caused by Warren’s proposal involves the possibility that Netflix and maybe Hulu would be treated as utilities and prohibited from producing their own content.   Netflix revenue could soon rise above 25 billion and become subject to Warren’s rules on Internet utilities.   Netflix is the main competition to cable companies, an industry that exerts monopoly pricing power in local markets.   The availability of Netflix allows people to cut the cord and save hundreds of dollars a month.  Netflix is an example of private industry fixing an anti-competitive situation.   This could all be undone by Senator Warren’s proposal.

Senator Warren is a highly skilled lawyer and candidate who has made useful contributions to discussion of several issues including bankruptcy reform, the safety net, taxes, inequality health insurance and student debt.   I admire her and readers of my blog and my books know that I share her much of her outlook and priorities.  However, her attack on Big Tech is not supported by economics and may derail her candidacy.

Author Notes:   The Trump Administration is accelerating its war on student borrowers.  It had previously proposed the elimination of subsidized student loans and the public service loan program.   The new budget proposes the elimination of income contingent loan programs and loan forgiveness programs.

The Democrats seem fixated on free college a proposal that most experts believe is unaffordable.  My book Innovative Solutions to College Debt Problems considers benefits and costs of making the first year of college free.   The book also proposes several different ways to assist overextended borrowers that are more sustainable than Income Contingent Loan Programs.

Innovative Solutions to the College Debt Problem:

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

Liberals appear to be dominating the contest for new ideas for the Democratic Presidential nomination.  Amy Klobuchar gets some points for honesty, an attribute that used to be expected.  However, honesty does not by itself solve problems.   Centrists need to put forth bold proposals that will reduce student debt, improve health insurance, and expand retirement income.

Pragmatic centrist solutions to these problems are outlined in my book.

Defying Magnets: Centrist Policies in a Polarized World.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X

A final note:   I would love to do some consulting work on these topics.  Contact me through linked in.  https://www.linkedin.com/in/dbecon/

 

 

 

 

 

 

 

 

 

 

 

Is long term care insurance a viable product?

Many financial planners maintain that long term care insurance (LTCI) is an essential purchase.  Many policy makers and politicians believe that the Medicaid long term care benefit needs to be reduced and that private long term care insurance is a viable substitute for Medicaid.  Let’s agree that the political issue of how to reform Medicaid is separate from the personal decision on how you should prepare for retirement.  In my view, private LTCI is not a suitable investment for most individuals preparing for retirement.  Furthermore, private LTCI may not be a viable product.

Many households have insufficient levels of liquid asset and insufficient savings in their retirement accounts.  Studies conducted before the financial crisis indicated that only around one half of the baby generation were adequately preparing for retirement.  These households need to focus on increasing their saving rate rather than divert savings towards an illiquid asset.

Comprehensive multi-year LTCI insurance with inflation protection is extremely expensive.   Ironically, even most LTCI purchasers have only a few years of coverage and must rely on Medicaid for long stays in the nursing home.

LTCI almost always costs more than anticipated at the time the policy is purchased.    Insurance firms cannot raise premiums on a policy simply because a person claims benefits.  However, an insurance company can raise premiums on an entire class of policies if actuaries determine that the sum of premiums and investment income will not cover benefits.    Premium increases, even among the strongest and most conservative firms, are now commonplace only a few years after a policy is issued.

Premium increases are in part attributable to poor investment returns and low interest rates.    Perhaps premium increases will be less prevalent in the future.  However, current premium increases are occurring when individuals can least afford them, when their own portfolios are down in value.

Many of the better-run insurance companies are currently leaving the industry altogether.   (MetLife left the industry and I believe Prudential stopped selling on the individual market.)    This is what Fitch had to say about LTCI in a recent report.

“In addition to higher than expected claims, historically low interest rates have negatively affected LTC results.  We believe the long-tail nature of the product and future renewal premiums make the LTC business more vulnerable to interest-rate risk.  Low rates continue to curb investment income needed to help fund LTC benefits.

We believe mispricing of the LTC product will continue to weigh on the insurers’ earnings and capital, but we note the current in-force individual LTC business accounts for less than 2% of industry reserves and premiums.”

There is one LTCI product that intrigues me.  Many states participate in the LTCI partnership program.  Individual who purchase a partnership policy can keep assets equal to their amount of coverage and still qualify for Medicaid.

It is highly likely that if you live long enough you will need long term care.  You need to prepare.  However, for most of us the purchase of LTCI is not the appropriate option.  More on my views on LTCI can be downloaded on Kindle.  The article can be purchased for $4.99 or borrowed for free.

http://www.amazon.com/Things-consider-purchasing-insurance-ebook/dp/B008N5QO8G/ref=sr_1_1?s=books&ie=UTF8&qid=1342917035&sr=1-1&keywords=thing+to+consider+before+purchasing

Overview of Student Debt Issues

My view on student debt problems is somewhere between Bernie Sanders and Hillary Clinton.  I don’t believe that free college is economically feasible but my evaluation of statistics on the growth of student debt, the growth in overextended borrowers, and the growth in the number of elderly with unpaid student loan balances convinces me the college debt problem cannot be solved with minor adjustments.  

My book “Defying Magnets:   Centrist Policies in a Polarized World” attempts to find progressive centrist (not an oxymoron) solutions in three areas — student debt, health insurance, and retirement income.    

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized-ebook/dp/B07NLLWH1H/ 

The analysis in this book leads me to propose substantial increases in financial assistance concentrated on first-year students, changes to student loan contracts, and changes in programs and policies designed to assist overextended student borrowers.   The overview of the student debt section of my book is below.

Overview of Student Debt Issues

The Republicans and Democrats are far apart on their approach to student debt and the increasing cost of college.

The Trump Administration and many Republicans in Congress are more interested in reducing taxpayer costs than assisting students borrowing for college.  Their current proposals include — the repeal of subsidized student loans, the elimination of the public service loan program and major modifications to income contingent loan programs.   Their administrative actions and enforcement decisions almost always favor loan servicers and for-profit schools over students.

The Democrats have been advocating free-college or debt-free college at public universities.  Democrats also favor the Income Contingent Loans, a program that links loan payments to income and offers to forgive unpaid loan balances at the end of the loan term.

The analysis presented here indicates that Trump Administration proposals would adversely impact many students.   Proposals by Democrats to offer free or debt-free college are expensive and inefficient.  Moreover, Income Contingent Loan programs are not the most effective way to assist overextended borrowers.

Proposals are presented for additional financial assistance, which are designed to reduce the growth of student debt.  These proposals include:

  • Provision of additional assistance for first-year students.
  • Allocation of a modest sum to a program that funds college internships at start-up firms.

Proposals are offered to assist overextended borrowers and reduce the reliance on Income Contingent Loan programs.  These approaches include:

  • Interest rate reductions on student loans after 15 years of payments
  • Limits on increased student loan interest rates when general interest rates rise.
  • Limits to the liability of parents on PLUS loans and cosigned private student loans and other alterations to the PLUS loan program.
  • Provision of priority to student debt over consumer loans in chapter 13 bankruptcy
  • Allowing discharge of private student loans in bankruptcy
  • Revisions to the Public Service Loan Program

The proposals presented here have the potential to expand access to education and improve the financial condition of student borrowers entering the workforce.  Additional subsidies are carefully crafted to assist people who might not otherwise try higher education or would experience severe payment problems.

The proposals presented here also will be less costly to taxpayers than many current policies and policy proposals.