I just want to thank everyone that has done the following since I started writing:
It’s clichéd, but the support does make it so much more worthwhile.
PS: and for some shameless self-promotion… Carry on – especially with the sharing!
Last night, I went to a Roundtable for Accountability hosted by the Helen Suzman Foundation. It all sounds very snooty – and I got to use the word “hobnob” in more than one conversation.
One of the speakers at this event was Dr Mamphela Ramphele, the founder of South Africa’s newest opposition party Agang. And she is magnetic, as far as medical-doctor-social-anthropologist-former-managing-director-of-the-World-Bank-political-activists go*. But what I found really interesting was the curious incongruity in her message.
Let me backtrack a second. The spokesman for the DA was also in attendance – and in between the well-couched generalities and the snide remarks about “particular planes landing in particular airports”, his dominant theme was the impossibility of good governance in a one-party state. Now that sounds reasonable – until you look at the United States and realise that having two parties doesn’t really help with good governance either. And if you want to take it further, you can look at Italy, where any joker can have a party and get elected. And frankly, for all its parties, Italy is no shining beacon of accountability.
Dr Ramphele’s point, on the other hand, was:
Which I found fascinating: because patronage is surely the ultimate goal of any political party that wishes to stay in power. The incentives behind the political process don’t benefit from an empowered voting public; unless of course you’re the opposition. But even then, you are not asking for support – you’re asking voters to remain helpless, place their helplessness in your hands, and rely on you to get their voices heard.
Now I’m sure everyone is wondering where I’m going with this, so let me give you a headline:
“World Bank pledges $1 billion to aid peace in Africa’s Great Lakes.“
Let’s talk about “Dead Aid”
The world of aid policy is cleanly split into two camps:
The empirical (and intuitive) evidence does seem to suggest that, poverty trap or not, foreign aid can be a real hinderance – the incentives for corruption and entrenchment-of-the-status-quo are just too high. And if you really want to be entertained for a morning, this website has the running to-and-fro debate via public articles between Sachs, Easterly and Moyo. Nothing like academic punches!
In all seriousness though, I hear where Mr Sachs is coming from – something ought to be done. But unfortunately, I think that you can drill the debate down to: give the man a fish (because shame he’s so hungry!), and teach the man to fish (because he’ll still be hungry tomorrow if you don’t).
One approach is empowerment; the other incentivises him to beg better. The latter is the opposite of helpful. Also: if you’re trying to feed lots of hungry people – handing around fish causes a riot; and there’s always someone with a gun that sees a profitable opportunity when he’s left in charge of the refrigerator.
So let’s go back to the World Bank aid situation. What it’s offering is $1 billion in foreign aid to the Great Lakes countries if they adhere to the Peace Accord brokered by the UN. They’re calling it a “peace dividend” – so, to paraphrase: “we’ll pay you to stop fighting”.
What kind of precedent is that setting?
“When you run out of money – just restart fighting so that we can pay you to stop again“?
Madness! And that’s in addition to the arguments against this kind of systemic assistance.
I think that Dr Ramphele and Dambisa are talking about the same thing
To me, the real issue with foreign aid, as with a political system of patronage, is that it turns the recipients/voters into victims. And when you’re a victim – then in a sense, you’re a captured market. It doesn’t matter how upset or hurt you are, the abuser can continue to do what he wants because you’re already trapped.
If there is a reasonable alternative to empowerment through claiming responsibility, then I don’t know of it. Sure – it doesn’t seem fair for a victim to take on blame for their current state. But the alternative is to continue as is…
Sadly, of course, it does mean that Dr Ramphele isn’t going to be winning any elections.
But maybe she’ll make a difference anyway.
*PS: for the South African folk, here is a link to her petition for electoral reform. You should sign it – surely it makes sense to have constituencies? How can a party be held accountable if there is literally no one accountable… Names and faces. Those can be shamed.
**Systematic Foreign Aid is money given by governments, the IMF and the World Bank to other governments. It just needs to be distinguished from “emergency aid” and “charity-based aid” – which are certainly not the same thing (even if those too can have their problems).
First off, I am no tax expert. And secondly, this topic definitely requires more than an off-the-top-of-head blog post on a Wednesday morning.
However, the news of late has been dominated by much political outrage over the low taxation paid by the big multinationals: Starbucks and Apple and so on. Only yesterday, Tim Cook was testifying in front of Congress; and to commemorate that event, some staff writer at Bloomberg Businessweek wrote this wildly opinionated article:
Tim Cook, Taxes, and Avoiding the Right Thing
Now I love a good and well-argued opinion. But I have no patience for an opinion built on rhetoric, platitudes, and general exhortation. This article was the latter. I don’t think that the writer had even read the Apple statement to Congress. So after I’d spent 20 minutes arguing with people in the comment section – not over opinion, but because they clearly didn’t even know the facts of the story – this post began writing itself.
Why Do Governments Get To Tax Us?
If I were a libertarian and believed that Governments are the root of all evil, then I would say that Governments get to tax us because they’re bullies. And that taxation is actually theft. But I’m not a libertarian, so I get to believe that taxation is appropriate and a moral necessity. Here is why:
At this point – the argument usually descends into one of whether you should be taxed to pay for services that you’re not using*. For example – I don’t get to have public housing built for me – so why should I pay for it?
That’s a whole different debate – and one for which there are no easy answers. But my general response would probably sound like: “everything is inter-connected – you could argue that the housing of the poor frees up some of their discretionary income, which means that they’ll start consuming more products, which means that there will be more trucks on the road distributing products, which allows for economies of scale in logistics, which lowers the overall prices of goods that you buy at Woolworths.”
There is also the argument for the appropriateness of using taxation as a transfer mechanism to redistribute income from the rich to the poor. But even in that scenario, I’d probably go back to the counter of inter-connectedness.
Putting these arguments aside, if we can accept that the primary intention behind taxation is to fund the supply of public goods, then that has some implications for where I should pay the tax.
Who Gets The Tax?
Normally – this answer is easy. Let’s say I work for a bank in London. If I live in London, then I am getting British public goods. I have the benefit of their police force alongside the national protection provided by the British Army. I get to watch the Queen’s jubilee regatta in person and enjoy the streets festooned with taxpayer-funded garlands. There is an inefficient immigration office to prevent non-EU foreigners from coming to take my job; the highways get speed limits to prevent general chaos; and someone puts up signs to advise me of “snow ahead” to prevent unexpected death.
So I pay tax to Her Majesty’s revenue collection service.
But now, let’s say that I get sent on a work assignment to Kenya to help establish a new bank branch in Nairobi, and I am there for six months. Which tax authority should I be paying?
Some might say “both” – but politicians generally agree that it would be unfair for a person to pay both British and Kenyan tax on the same salary. So most governments will enter into Double-Taxation Agreements (DTAs) where they decide, in advance, who should get to collect the tax in situations where the answer is unclear. And in the case of the Kenyan assignment, given the duration of my work visit, I’d probably pay Kenyan tax on six months of salary, and UK tax on the balance**.
And this does make sense. Because for half the year, I get the (arguable) benefit of Kenyan public goods, and the rest of the year, I have the benefit of British public goods. Sure, it doesn’t entirely balance out – but the principle seems pretty fair.
Which is Why It’s No Different For Multinationals
Multinationals are not a single company in the legal sense of the term. Multinationals are usually made up of multiple companies that are all owned and controlled via a group holding company. It’s almost like having clones of myself with slight cultural variances working in both Britain and Kenya all year through – receiving general instructions about spending habits and hygiene from my original self here in Johannesburg.
So with Apple, for example: the main Apple holding company is an American corporation (the original). And that Apple corporation will own an American “operating” company (a clone) that will do all of the research and development, distribution and sales of Apple products in the US. But Apple won’t use an American company to run its British operations. It makes much more administrative sense for Apple to start a British company to do that. And that applies to almost all of Apple’s overseas operations.
Thus, the American company will pay tax in America, the British company will pay tax in Britain, the Irish company will pay tax in Ireland.
So Where Is The Debate
Apple, as a group of companies, does not pay very much tax. It has constructed its overseas operations so that they get to benefit from low tax rates in countries like Ireland.
But Apple’s American company (the one that does all the selling and distribution of Apple products in the States) pays an effective tax rate of 30.5% to the US Treasury. Which is a very high company tax rate. And fun fact: for every $40 collected by the IRS last year, $1 of that was Apple cash.
But the public opinion discontent seems to say that the low tax rates paid by the overseas operations of Apple are somehow robbing the American public of their just due.
What rubbish.
The overseas profits of Apple should be taxed overseas because that is where those sales took place – and it was in those jurisdictions that Apple got to benefit from their public goods (in the form of regulation and rule of law, etc).
You can’t have it both ways
Even if America wanted to play this card: on the basis that somehow, because Apple has its headquarters in Cupertino, then all of its profit earned anywhere should be taxed in the US… Then the same logic must apply to China. And India. And the Middle East. And every other country that exports goods to America for sale.
And the United States, that mass importer, will have to allow the tax on those goods to be collected by Beijing. Which is a bit counter-productive, don’t you think?
I am all for making American residents (companies, individuals, etc) pay their taxes in a manner that makes sense. So is Apple (Tim Cook said so). But chasing after the taxes that are rightly being collected by other governments?
Now is the appropriate time to talk about bullies. And, possibly, theft.
*Well – it also turns into a rant about corruption and inefficiency. But again that’s not really an argument about principle – it’s an argument about implementation. So I’m choosing to delicately step around it.
**In order to correct for differences in tax rates, it usually works by the British Revenue Authority saying to me: “declare your full year’s worth of income, calculate the full tax owing, and then we’ll reduce that amount owing by the any foreign tax that you’ve already paid in Kenya – AKA the foreign tax credit”
Yesterday, Ryanair was delighted to announce that it had increased its profits by 13%. But the really interesting part of this story is that they only had 5% more flyers. So the question becomes: where did all this profit come from?
Ryanair is famous for its unexpected charges. You constantly read these horror stories about people forking out enormous sums of money in airports for having breathed too deeply at check-in and arriving at the gate two minutes after their row allocation was meant to board (even though they were standing in the queue the entire time and the delay was caused by the ground-staff trying to fine the gentleman in front of them for attempting to board in a wheelchair when he had paid to board on crutches).
Which I honestly thought was a bit exaggerated. Until I read the Ryanair General Terms and Conditions.
But more of those in a moment.
So it comes as no surprise that when you look at the Ryanair Income Statement, you see “ancillary revenues” up by over 20% and counting for almost a QUARTER of all revenue. Just to clarify: Ryanair splits its revenue streams into “scheduled” and “ancillary”. It’s not clear what they mean by the split (that would be telling), but they do love to talk about “improved product mix” in relation to the ancillary side of things.
My guess is that “ancillary” refers to anything that the customer didn’t anticipate. So if you booked your flight from London to Dublin (£20) on a low season special, and paid to check-in one bag (£20), then you’d fall into the scheduled revenue category. But if you had to change your flight (£75), and replace your boarding pass (£70), and book on additional luggage (£120), then you’re squarely into “ancillary territory”.
The Important Point
Without the ancillary revenue, Ryanair would be deeply loss-making. Also, doesn’t it seem absurd that so much of an airline company’s sales come from things that aren’t plane tickets?
So Why Are Passengers Paying These “Optional” Charges?
As any good astrology would tell you, we have some pretty basic beliefs about ourselves. You know, in the same way that 96% of all drivers think that they’re above average? And when it comes to travel plans, we generally reckon that:
Here is the Ryanair value proposition: if you’re right, then you’ll get a really cheap flight and the best end of the deal!
I strongly dislike budget value propositions. They play off our loss-aversion bias. Because when you book a more expensive flight with a more lenient airline (£79 to Dublin on British Airways), what you’re saying is: “I’m not good enough to take the Ryanair bet: so I’ll have to take the loss (the higher ticket price) up front.”
At the same time, it plays off our over-confidence bias – which is our tendency to over-estimate our abilities around time-management and self-restraint.
So, reluctant to miss out on a good deal, and confident that we can be relied upon not to ruin it, we roll the dice and book the twenty pound special on Ryanair. At this point, we’re about to be the victim of an even more serious bias: refusing to alter the flight plan, even when it costs an obscene amount of money. We’re officially a captured market.
Example: you’d rather pay to replace the boarding pass you lost somewhere in duty-free, even though it would be far cheaper to buy a new ticket, because you can’t stand the thought of staying in the terminal any longer. In other words, the budget airline is forcing you to place a price on your inconvenience and discomfort.
It’s so very clever.
Here are some charges from the Terms and Conditions:
All of the above? Moments where it would probably be cheaper to turn around and re-book yourself onto the next British Airways flight. Or, even, the next Ryanair flight (ie. rebook, don’t change your booking).
But none of these options is nearly as cheap as it would have been to just book onto BA in the first place.
The Greater Implications
Every finance decision that we make is framed within those same biases. And plenty of others (check out the wikipedia list!).
It’s extraordinarily difficult to be objective when making the big decisions (and even the small ones, as Ryanair is proving). We’re human: we don’t like to believe that we’re wrong; and we like to believe that we know better. And the only solution to that is getting some advice from an experienced professional, and spending a bit of time every week thinking about the way that you think.
Disclaimer: I’m about to sound like a hippy.
In all seriousness, I genuinely believe that the best financial decision you can make is to invest in regular weekly appointments with a good therapist*: so that you can get to know yourself, and your biases, a bit better.
It’s just good for business.
PS: I’m proud to say that this is one of those rare situations where the practice and the preaching are not at odds.
*A Cognitive Behavioural Therapist. Not such a fan of the psychodynamic crew. But that’s, um, a personal bias…
Not so long ago, I was a lowly article clerk earning a lowly salary. Of course – I still feel like I sit in the “lowly salary” segment – but then, much as now, it was because my idea of “life” involved going to awesome restaurants* and being able to buy climbing shoes because I’d decided to take up wall-climbing that week. Which is beside the point – except perhaps to emphasize my slightly-twisted embrace of the carpe diem principle.
During that lowly-paid time, part of my contract terms included an automatic 12.5% contribution to a Provident Fund. I could elect for that amount to be higher – but never lower. And I became relatively famous (in my eyes) for making the following argument:
So when I left my articles time behind me, I was first in line to cash in that provident fund and use it to continue “maximising my quality of life”. Whether or not that was the right decision (for me), I can point out some psychological impulses that helped me make it:
I was also guilty of an arithmetical bias – an inability to see the cumulative compounding effect of small sacrifices (please read this post: “Have you really done the math?**”).
I have since listened to a Richard Thaler lecture
Richard Thaler is one of the pioneers of behavioural economics – a field that combines psychology and economic observation***. And for the record, he is a highly entertaining speaker – if you’re looking for a way to utilise your time spent in traffic, you should have him on your playlist.
Here are some links:
What We Should Know About the Way We (Don’t) Save
And this is actually quite concerning in a lot of ways. Especially because many employees will no longer have defined benefit retirement plans – which is more significant that it sounds.
Under a defined benefit plan, a company would have taken some of your salary each month, added in an equal amount of its own money, and put it into the company’s pension fund on your behalf. You would then have been entitled to a pension of a certain amount (ie. your benefit was defined as your pension) – and if the company’s pension fund hadn’t performed as well as it needed to, then the company was obligated to put more money into the fund in order to make sure that you get your defined benefit. From the company perspective, this was all a bit awkies: uncertain cash flows and the like.
As a result, there has been a dramatic shift away from defined benefit plans into defined contribution plans.
Under this approach, the company defines how much money it will contribute into a fund of your choosing (hence: “defined contribution”), and you get to decide how much money you’ll contribute/save as well. Which means that you no longer have the same guarantees that your parents/grandparents had; and it also means that a lot more of the control now rests with you, under the influence of all the biases and the consequent procrastination.
The Saving Solution: Save More Tomorrow™
The Thaler/Bernatzi solution was to use the above “negatives” to saving in a fairly transformative way. Here is the theory:
When these employees were first approached about just increasing their savings rate based on their current salaries, 72% of the staff opted to keep things the same. But when they were given the three month’s time option, 78% committed to the change. Furthermore, 98% of those employees stuck with the plan through two future pay-rises (ie. they increased their savings rate every time they got a raise). And even then, the people that opted out didn’t go back to their initial savings rate – they just didn’t want the savings rate to increase any more.
In the end, over the 28 month experiment period, the average savings rate of the employees went from 3.5% to 11.6%.
What We Should Take From This
When I look at the reasons why the Save More Tomorrow™ plan worked, I see the following:
In many ways, it gives me faith in South African law, which already caters for the fact that we procrastinate by enforcing some kind of savings regime through compulsory retirement contributions.
But here is what everyone should be doing anyway:
Incidentally – I invested my Provident Fund payout almost as soon as I got it. Oh – it wasn’t a traditional investment: it was in the art/antique/valuable-book class of asset.
So I think that the moral of my story is: only cash in your provident fund if you find something more awesome to invest in.
And don’t stress about feeling lazy. Sometimes, if you manage it correctly and call it “inertia”, it’s a good thing.
*Incidentally, I’ve since come to realise that I have this absurd expectation that everything I eat should be delicious, otherwise it’s just a waste. Which, if I was looking for a reason behind unexpected weight-gain, seems like the obvious answer. That is – I can handle about one bowl of plain Bulgarian yogurt before I’m “full, thanks”. But bowls of custardy warmth can go on for ages. Also, like, who knows when I’ll be able to eat custard again? #InstantGratification
**Maybe it’s just me – but every so often, there is a small section of a chapter in a book that radically shifts my paradigm. Something that instantly becomes part of my intuition – like belief at first sight. And this discrepancy between logarithmic and arithmetical thought (which I talk about in that post) was, for me, one of the more profound moments.
***Today, that link seems somewhat self-evident. Economics is the study of human behaviour. Human behaviour is psychologically-motivated. Ergo… Yet somehow, up to the 1970s/1980s – economics was a “science” that made observations “empirically” and built mathematical models to explain economic behaviour, on the assumption that almost everyone fits “the rational man” mould.
The Businessweek Article:
I mean – how could I resist? It’s a ready-made soapbox to stand up and make a counterargument about counterfeiting. And also, there are the condoms.
About six months ago, I listened to Loretta Napoleoni give a lecture at the LSE* about her book “Maonomics”. And she made the most fascinating observation about China’s fake good industry – it may, or may not, have rocked my world view. I’ve mentioned it before in passing, but with a segue like dodgy durex, it gets a post all of its own.
Have you heard of ACTA?
The Anti-Counterfeiting Trade Agreement is one of those much-campaigned-for international treaties (like the Kyoto Protocol) – and this one is meant to deal with the enforcement of international intellectual property rights. And by “international” what we mean is: the US, Europe and Japan. The rest of the world looks happy to stay in their grey area:
Of course – if we were to redraft that map to emphasize principal targets and offenders, it would be CHINA and SOUTH ASIA with a few small islands representing Nigeria and Latin America. Of course China won’t be signing on – the counterfeit good industry makes up 8% of their GDP by official numbers.
Which may make ACTA a bit moot; but it does make it obvious how absolutely disgusted the West is with this blatant thievery of intellectual property.
Why The Outrage Bores Me
Integrity is expensive – it means that you have to buy the DVD boxset. So let’s talk about DVDs.
Since I was blessed with the means; it somehow felt ungenerous, or unsupportive, not to buy DVDs from an outlet store. In my head, the argument has gone “Well I like the cast, so I don’t want them to stop making the movie/series. And I like being able to visit music stores, so I don’t want them to go out of business. Let me just buy it rather.“
And then I’d get home, and put the dvd into the player, and press play. Immediately, and un-move-past-ably, I’d be bombarded with the PIRACY IS STEALING advert. And the sound would boom across the room at a volume far above the normal setting on my TV (how do they do that?). And it would happen every single time I wanted to watch it.
Then. Then maybe I would try and play the series on my lap top while I was travelling. And it would be rejected out-of-hand by the optical drive with a small little error message about “being set to the wrong region”. Because of that one time that I was in Paris and bought a french movie and clicked “yes” to the change-region notification. AND COULD NEVER CHANGE IT BACK. And was told, by Mitsusomething’s website, that I would have to replace the drive if I wanted to go back to watching Region 2.
Dear DVD makers. I don’t care about your outrage. Because you’re already outrageous. Selling me product that I can’t use, and getting all preachy when I was already converted.
Honestly – thank God for iTunes. It just made everything so much easier.
But I’m not blind – I know that not every counterfeit good is a DVD. Some of them are condoms. And that leads me to Loretta Napoleoni’s awesome point:
Why Counterfeiting is Good for the Original
Here are two articles about two studies:
Let me give you the summarised version. Here is what the lobbyists in favour of ACTA are saying:
I realise that some may read that as me mocking the pro-ACTA argument from the get-go. Oh! How deceived you would be. I paraphrased point 3 a bit – but that was really the extent.
Here are the counterpoints:
Where Counterfeiting is Legitimately a Problem
Counterfeit drugs sound serious. As do counterfeit airplane parts. And counterfeit food items (although, by my understanding, that’s usually just horse).
Oh yes – and counterfeit condoms.
Which brings me neatly back round to the original article. Police in the Fujian province just confiscated more than 2 million “incorrectly-labelled” condoms. The enterprising individuals concerned had purchased condoms from one factory, packaging materials from another, and had appointed themselves as “assemblers” in the supply chain. And, I guess, adders of brand value?
No word on whether the condoms were faulty.
But ultimately, faulty condoms, unlike fake handbags, can have a real impact on a confused consumer: death, disease and/or unexpected offspring.
So regulate those guys. And let the DVD retailers take care of themselves.
*via iTunes U, naturally: the audio lecture link.
**Ermagherd. Lerst sehrles!!
***Could this argument be any more emotionally-manipulative?
In the BBC newsfeed this morning:
“Eurozone recession continues into sixth quarter.“
The headline made me think about how most of us know the words “recession” and “depression” as interchangeable jargon used by the business news anchor. Also: “contraction”.
It’s the kind of language that floats ominously around the TV room while you’re tweeting an instagrammed photo of the cup of hot chocolate that you just made. And maybe I should try it with that vintage filter. And if I just fiddle with this light/dark thingie… Perfect. Looks retro but not like I tried too much. Send. Oh. The business news. Where’s the remote?
And then you flip over to The Good Wife where you watch Diane Lockhart announce that “this economy is about to enter a triple dip recession”… And even as Christine Baranski layers her character’s line with hushed seriousness, you can see her eyes glaze over and the proverbial blank speech bubble popping up on the side of her head.
But before we can get to recessions, depressions, contractions and triple dips, I need to backtrack a bit by asking the fundamental questions. Starting with:
What is an Economy anyway?
This question is a bit like asking “why is water wet?” – we may know what it is empirically; but theoretically, it’s complicated.
If you look at the root of the word “economy”, it derives from the Ancient Greek word for “household management*”. Which gives a great starting point: because any household more or less functions as an semi-independent ecosystem:
And an “economy” – as we understand it – is more of a collective noun for all of the households (micro-economies) contained within a geographical region (the macro-economy).
But even if we know what it is, this leads to an even more difficult question. That is: how do you know if a economy is a good one? Some options (and I’m sticking with the household analogy):
Gross Domestic Product (GDP)
GDP is the least of the measurement evils: we look at how much an economy is producing as an indicator of how well that economy is doing. Of course, there are some problems with it:
But let’s just accept that we can address some of those problems and come up with a reasonably reliable estimate of GDP. At that point, we can start comparing the change of GDP from year to year. And when a country produces more, it’s experiencing economic growth (AKA a boom period); and when it produces less, there is economic decline (AKA a bust period).
But this is all highly relative to time. For example – an economy naturally produces less in January – because people are still getting back from Christmas leave. Would we say that the economy just went through a bust period?
Seems a little extreme…
How Long is a Piece of Bad Time
Economists love to agree on conventions – especially in relation to time. And then, of course, disagree about whether the convention is appropriate.
But that aside – clearly, looking at GDP movements month-on-month is subject to seasonal distortions (like a strong Christmas period in December, followed by a slow month in January). So to smooth out those impacts, economists will talk about quarterly movements in GDP.
When GDP decreases from one quarter to the next, this is known as a “contraction“. But again – this need not necessarily be something dismal. If a country is very agricultural, the harvest Quarter will usually be splendid in GDP terms – followed by a less productive winter Quarter (ie. the economy undergoes a natural contraction).
But if an economy contracts for more than two quarters*****, that’s beginning to look less normal. After two quarters of negative growth, it is generally accepted that the economy is experiencing a “recession“. And in turn, a “depression” is usually declared when an economy has been in recession for longer than two years.
Now obviously, there are some interesting variations (or distortions!) that can take place. Let’s say that you have two really bad quarters (Q2 and Q3), but things recover a bit in Q4 because of Christmas spend and bonuses. But it was just a short term thing, so you go back into two even worse quarters (Q1 and Q2) of the following year. You’re now in a “double dip recession“. And if that cycle repeats itself, you can end up with ever increasing multiples of dips.
But I don’t think I can overemphasize how unusual it is for an economy to contract quarter in and quarter out for quarters on end. We’re not just talking about a “bad time” – because when you’re in a “bad time”, you expect to hit the bottom of the barrel, and then improve relative to the bottom of the barrel. It’s the problem with the phrase “recession” – it implies that you’re just in a funk, lazing around and refusing to get out of your pyjamas.
This headline up top – it’s the Eurozone getting progressively worse as the quarters go by. To extend the metaphor, the lazing around caused bedsores, which then started to smell, which attracted the rats, which drove away your mother, which stopped the chicken soup from being delivered.
If the cycle continues, Europe may end up in a depression. And at that point, the concern is that the atrophy will leave her trapped in the house indefinitely.
That headline is terrifying.
But try not to worry too much.
*goes back to tweeting his support for Angelina and her pre-emptive double mastectomy*
*For those interested in the etymology, the word is “οικονομία” – which is in turn derived from “οíκος” (household) and the verb “νεμω” (I manage).
**It’s why GDP is normally quoted two ways: once in US dollar terms, and once in “Purchasing Power Parity” terms – meaning that the GDP number is adjusted to reflect the fact that you can buy more for $1 in South Africa than in France.
***Most economists just ignore this. Part of the justification might involve: “if too much of a product is produced, then its price will go down, so we’ll get an accurate reflection”. Which is fine, unless you have a government determining the price of holes artificially… And/or you have a population that wants every person to own four houses on the premise that they can rent them out. But, like, to whom?
****Clever people making estimates do a lot of the work. As does the Tax Collection Authority…
*****The quarters:
On my last family holiday, I branched out on easyjet to visit Berlin. Whilst there, I suddenly realised that my camera simply could not do without a tripod – because, obviously, all my tourist photos of the Brandenberg Gate and Alexanderplatz were missing the most important part (me, waving). So I stepped into one of those giant discount electronic stores and searched for the cheapest, lightest, and most fold-down-able tripod available. I managed to find one that cost €4.99* – which delighted me no end, because South African debit card conversions had made for a very budgeted branching-out.
I arrived at the till and presented my debit card. At which point, the much-pierced teller took one look at it, handed it back, and wagged a tattooed finger at me. Turns out, they don’t accept Visa cards in that store. They, ah, only accept American Express.
At which point, I got properly annoyed. Up to that point, in my mind, the whole Visa/Mastercard/AmEx logo on my card was just luck of the draw. The guy issuing the card at the Enquiries desk would just pick one, hand it to me, and that was that. So how dare this German department store reject my purchase on the basis of a decision made by a bank clerk?!
Apparently, Germans don’t take too well to that particular kind of customer complaint. Especially when delivered in loud english. So I changed my face, handed over a €5 euro note, and left rather hurriedly.
But I have now nursed the anti-AmEx grudge. And seeing as the world of business is largely preoccupied with vagaries of Chinese economic data this morning, I thought that it might be a good time to do a bit of research into credit card companies.
What Do Credit Card Companies Actually Do: A History
It’s a good question. Because when you swipe your card (debit or credit), aren’t you just arranging for an EFT into the merchant’s bank account? I guess that’s always been my in-my-head explanation for what’s going on. But really, I had no idea.
So here is the fascinating story of how we suddenly arrived at credit cards:
The point is: Visa and Mastercard became centralised lines of credit. This allowed places that would never normally have sold anything on credit (like restaurants) access to a whole new market of credit-paying customer. And instead of each store doing background checks and collection – this service would be conducted by Visa or Mastercard through its card-issuing members (banks).
In return, the merchant would accept a small discount from the quoted purchase price: ye olde credit card charge**.
Where Does American Express Come In?
AmEx really became famous for inventing the traveller cheque, after AmEx president J. C. Fargo travelled to Europe with traditional letters of credit and got rejected everywhere but the major cities. Before that, AmEx was mostly an express mail service that offered money orders in opposition to the US Postal Service.
In the 1980s, American Express got excited about Investment Banking (it was the thing to be!), and acquired the investment bank Lehman Brothers Kuhn Loeb. Lehman Brothers was eventually spun off into its own entity in 1994, and went on to become famous for being the 2008 Financial Crisis and trying to steal money from nonprofits (see yesterday’s post).
But it was in the late 1980s that AmEx released its first proper credit card. And to gain market share, they went on a spree of offering special discount charge rates (which were pretty close to zero) to retailers that agreed to accept only AmEx credit cards.
Obviously -Visa and Mastercard complained. But they didn’t really need to. Probably because of that policy of zero-charges for exclusive merchants, American Express was forced to charge higher fees to places that weren’t exclusive (4% versus the 1.5%-2% being offered by Visa and Mastercard). So many non-exclusive merchants stopped accepting AmEx cards.
That was no good for a new card – so AmEx was forced to become a little more competitive and lower its fees.
Nevertheless, that perception of American Express bullying the small retailer that can’t afford to be an exclusive AmEx merchant has never really gone away. Which I guess is why more of us still have Visa and Mastercards. And it’s not entirely fair, because AmEx fees are significantly lower than those charged by PayPal (so I’ve read) – and yet we all love Paypal…
FYI though – AmEx charges are generally slightly higher than those of Mastercard and Visa (probably because the AmEx network is smaller, so there is less spreading of costs…).
Here’s a Basic Credit Card Charge Breakdown…
Whenever you swipe your card, or pay for something online, there is a fee charged. Some of that fee gets absorbed by you, some of that fee gets absorbed by the person you’re paying. But in any credit card transaction, there are usually three recipients of that fee:
Either Way, Just Remember
Whenever you’re in a discount electronic store in Germany, you need to pay with American Express.
For everything else, there’s Mastercard.
And Visa.
*And you have to love ze Germans – because I still have it, and it still works!
**Incidentally, realising this now fills me with rage. Once upon a time in my youth, I waitered at The Greek Fisherman in the V&A Waterfront in Cape Town. And every time one of my tables paid via credit card, the restaurant would deduct money from my tips – because of “insurance”. And they’d do it to all the waiters. I mean – could it be more wildly unethical – making the serving staff carry the credit card charge? No one eat there.