Our Limping and Unknowable Economy

Gross Domestic Product Growth Slows

A few days ago, the quarterly UCLA Anderson economic forecast estimated that this year's domestic GDP would be 2.7 percent greater than last year's.  The report also left open the possibility that GDP growth could be as low as 1.7 percent.  Six months earlier, in December 2015, Anderson was forecasting 3.3 percent growth for this year.

As Yogi Berra would say, it's hard to predict the future.

The forecast also noted that one trend is likely to continue -- a general slowdown in annual growth.

Between 1965 and 2005, average GDP growth in the U.S. was 3 percent.  Since 2010, annual GDP growth has been about 2 percent.  Economists now think 2 percent growth, or a little more or a little less, is the new normal.

We see reflections of this in various ways.  Gallup tells us economic concerns in this election year rank second only to (understandable) dissatisfaction with government.  We learned recently that more 18- to 34-year-olds live with their parents than with partners or spouses, a reversal of what had been the traditional circumstance for generations.


Job Growth Slows


Recent history also has made people worried about employment.  There were seven financial recessions between 1960 and 2008.  In the first six, the jobs lost were replaced in 2.5 years or less.  After the Great Recession, employment did not return to its pre-recession level for almost 6.5 years.

Last week, the Bureau of Labor Statistics released the report on new jobs in May.  Economists were expecting about 160,000 new jobs.  Instead there were only 38,000.

There was a big Verizon strike last month that meant 35,000 who otherwise would have been working were off the job.   If we add those people back, then the jobs report looks a bit better -- about 73,000 more people at work.

Still, that is not much.  Let's look at recent job trends, net of downward adjustments also announced last week.

       March new jobs:  186,000
       April new jobs:     123,000
       May new jobs:       73,000

 In 2015, new jobs averaged 221,000 per month; in 2014 the average was 260,000.

Interestingly, even with the low level of job creation, unemployment dropped by 0.3 percentage points, to 4.7 percent.  This is because the labor pool has been shrinking.  One reason for this is the retirement of baby boomers, which was to be expected.

Another reason is that people have given up looking for work.  This notion is supported somewhat by the increasing numbers of workers who have gone on disability since the Great Recession.  While this also may correlate with the aging of the workforce, there is some evidence that people who have lost jobs and cannot find new ones have been seeking disability payments (private and public) to replace at least some of their incomes.

And then, I believe, there is a third reason.


The Underground Economy

This is a great big unknown, and one that probably grows each year.  Because of its very nature, it is not reflected in government reports.  It has several elements.

One is the unknown number of undocumented or illegal (your choice) immigrants.  It was said at the turn of the millennium that the number of these was 11 million; we still read the 11 million number, but the likelihood is that many more economic immigrants have crossed the border since 2000.

Without green cards or other documents, these immigrants cannot be employed in the traditional economy.  We have no idea how many construction workers, housekeepers, landscapers, restaurant workers and others without papers are making their livings in the US.  There is no way to quantify how many are in the labor pool and how many are working.

In addition, more Americans are working off the books, at least partly because of government incentives.

If you can can generate $500 a week doing odd jobs and you don't report the income to the IRS, you can keep an extra $306 a month in self-employment (Social Security and Medicare) taxes.  That's real money when your income is $24,000 a year.

If you are one of the many people who now can find only part-time work and you supplement your income with $200 by walking dogs or babysitting, you can save $31 in self-employment taxes.  Even small marginal increments matter if your income is low.

If you live in California and start a small LLC (limited liability corporation), which is a good idea if you have a small services company, you pay a minimum of $800 each year to register your LLC with the state, plus the 15.3 percent federal self-employment rate, plus federal and state income taxes, which in California are relatively high.  These things add up, and I'm betting lots of masseuses and party planners and one-person consultancies don't report their income, or at least not all of it.

A side benefit of managing your income downward is that you may qualify for Earned Income Tax Credits and government-subsidized health insurance.

Then there is the matter of illegal work.  Drug dealers and sex workers are expected to report and pay taxes on their incomes just like the rest of us, but my guess is that most of them do not do so.  It is true that Al Capone was jailed for income tax evasion, but that was a long time ago; I don't hear much about it these days.


What Do We Know?

As more people move out of the formal economy, we lose track of the size of the economy itself.   We don't really know how many people are working, and the monthly jobs growth figures become less relevant.  Because many informal businesses don't report incomes,  there is some part of GDP that is not captured in federal reports.

There is some evidence to believe this is happening.  In recent years, for instance, consumer spending has ticked up more than would be suggested by employment and income reports.

The Hamilton Ticket Problem

If someone had told me five years ago that the hottest ticket on Broadway today would be a hip hop musical about the first U.S. secretary of the treasury, I would have laughed out loud.

But that is what happened.  I have seen Hamilton, and it is great.  I think everyone should see it.

In fact, just about everyone wants to see it.  A few months ago I read a commentary by a New York professional who felt not just out of the loop but personally ashamed when forced to admit to associates that she had not yet seen Hamilton.  The sentiment seemed a bit over the top -- oh, the agonies of the upper middle class! -- but the wish to see the play is widespread and keen.

Hamilton opened at the Richard Rodgers Theater last August.  The theater has 1,319 seats, and every single one of them is sold out for every performance through January 2017.

When you combine huge demand with virtually no supply, interesting things happen.  Here are some of them.


Fraud

By September last year, people were arriving at the Richard Rodgers Theater with credible looking tickets that turned out to be forgeries when run through the entrance scanning machine.

In October, Lin-Manuel Miranda, the show's creator and star, posted this warning on Twitter:

           I have friends who have been scammed on Craig and his so-called List.
           Don’t buy Hamilton tickets off there please.

By December, it was reported that people with counterfeit tickets, or with copies of actual tickets that had been "lost," were being turned away at almost every performance.

In February, a Manhattan man responded to a Craigslist offer of two Hamilton tickets, which he purchased at a meeting on a street corner for $300 cash.  Naturally the tickets were denied at the theater.  The man's wife went to Manhattan's 17th Police Precinct and made an issue of the case.   She also offered to set up a sting to catch the fellow who had taken their money.  The police agreed, the phony ticket seller was arrested and the police found two additional bogus Hamilton tickets in one of his pockets.  Later the Manhattan district attorney announced that the bad guy, who was on parole for weapons and drug convictions, had been indicted on 10 charges.

This made for a feel-good story that was reported by news outlets across the country and even in parts of Europe.  Unfortunately, it was almost certainly a one-off.

I just looked on Craigslist and found two offers of center orchestra Hamilton seats for $220 and $350 each.  I'm pretty sure that anyone who buys those tickets is going to be refused admission to the theater.

In fact, Craigslist is not the only source for fake tickets.

A couple weeks ago, a California billionaire who also appears on the CNBC Shark Tank show was surprised to find that the Hamilton tickets he had purchased on StubHub were fake.  He threw the usual rich-guy hissy fit --  "Do you know who I am!" -- but still was not allowed into the theater. (StubHub probably refunded the guy's money, but he surely would have preferred to see the show.)

Hamilton ticket buyers are urged by everyone from the show's promoters to the NYPD to purchase tickets only from reputable sellers.  But this introduces another problem.


Cost

Hamilton tickets, when you can find them, are priced from $67 to $177 (and $549 for "premium" seats), plus facility fees and markups by Ticketmaster.com, which handles the transactions.

(People hate Ticketmaster, by the way.  Consumer sites are filled with complaints about bait-and-switch seat locations and 30-minute wait times to speak to employees who refuse to fix problems.  Personally, I think the company's fees are unusually steep.)

After Hamilton opened and drew rave reviews, its run was extended two times and months' worth of tickets were released in two batches.

In one case, it was estimated that "bots," computerized telephone buying programs, purchased as many as 20,000 tickets, presumably for resale at much higher prices.  (People who attend Bruce Springsteen concerts have complained for years about rigged ticket purchases like these, but it seems to be a new problem on Broadway.)

One person who traveled to the theater's ticket office observed a similar action on the ground.

           One day last October, a new block of Hamilton tickets went on sale; I was there on
           line a half-hour before the box office opened. I got TO the box office THREE HOURS
           LATER. Why? Because the front of the line -- about 90 people in all that day --
           consisted entirely of young people (age 16-20) who were working for scalpers. The
           scalpers made no attempt to conceal what they were doing; I watched them peel off
           $100 bills from a large wad. They give the $$ to one of the young people, told the kid
           how many tickets to buy and in which location of the theater, then the scalpers stood
           outside the theater door to take possession of those tickets as soon as the kid finished
           at the box office.

I just looked on StubHub, which is regarded as a reputable reseller, and found tickets to the Saturday matinee performance priced between $450 and $850 per seat.

And Ticketmaster offers a resale programs whose tickets will not be turned away at the theater door.  Its prices for the Saturday matinee were higher, however -- $625  to $3,429 a seat.


Fairness

The people who invested early in Hamilton have made out very, very well.  Lin-Manuel Miranda is getting plenty of money for originating and developing this show.  Recently, it has been reported that cast members will share in the profits of this enterprise.   All of this is fine with me.  We should hope for more such projects.

I find it more difficult to justify the scalpers' profits, including those of the legal scalpers on StubHub and Ticketmaster.  They exist only to maintain the integrity of the tickets they sell and to harvest the highest possible prices for access to a play whose success owes nothing to them.

In fact, there is a developing resentment among the proles -- black families and low-income high school students, among others  -- about the exorbitant cost of access to a piece of art that validates their ancestors' participation in the founding of our country.

Over time, of course, even everyday people will get a chance to see Hamilton.  At this point, ironically, it has become a feel-good entertainment for celebrities and rich people who need its message least.


Other Opportunities

Every Hamilton performance is preceded by a raffle of 21 first-row seats.  Winners pay $10 each to see the show.  Given the interest in the play, the odds of winning one of these raffles are not good, but the gesture is a nice one.

New productions of Hamilton are planned next year -- Chicago and San Francisco in March, Los Angeles in August. There also is talk of a London opening.

The Hamilton soundtrack is available on Amazon Prime, as an MP3 album, an audio CD, and even on vinyl.  It's worth a listen before or after you see the play.

Taxis and the Next New Thing

New York City's taxi system, like many others, has been for generations a well-protected one.  Periodically, the city auctions off small numbers of taxi medallions -- essentially the right to operate a single cab -- at prices of $1 million or more.

Over time, this has resulted in less than ideal results for taxi customers.  There have not been enough taxis in the city -- particularly in the outer boroughs -- and a politically motivated group, the medallion owners, have fought to keep things that way.  Who needs competition?

One example of the problem has been the sad fact that there are 20 percent fewer taxis on Manhattan streets during evening rush hour than at any other time of the day.

In 2004, the city attempted to address the situation by adding a $1 surcharge to taxi fares between 4 p.m.  and 8 p.m. on weekdays.  Seven years later, a New York Times article explained that this had not worked:

     "The hour from 4 to 5 p.m. has long been considered the low tide of taxi service, the maddening
     moment when, in apparent violation of the laws of supply and demand, entire fleets of empty
     yellow cabs flip on their off-duty lights and proceed past the outstretched hands of office
     workers seeking a ride home."

It turned out that cab drivers worked 12-hour shifts and changed shifts in the late afternoon, dropping their cars at stations located outside expensive Manhattan.  When it was suggested that the shift could be changed earlier -- say at 2 p.m. -- second-shift drivers objected because they did not want to miss the lucrative 2 a.m. rush of drinkers seeking cabs after bars closed each night.

So when taxis were most needed, the industry preferred not to be there.

There were other problems -- reluctance to pick up minority passengers, the illegal adjustment of rate calculators to assess higher charges, drivers taking naive tourists on roundabout routes from airports into the city -- that were just accepted as part of the system.

In short, you could say the taxi industry was not customer-facing.


Destructive Innovation

So in came ride-sharing companies that offered an alternative to traditional taxicabs.

Using well-designed cellphone apps, rideshare companies allow would-be taxi patrons to hail private cars.  When riders contact these rideshare companies, the apps locate nearby drivers, specify where riders want to go, negotiate and collect fees for trips and notify riders when their cars will arrive, even tracking the cars as they approach.

The rideshare companies are very lean operations.  They do not own cars but merely match private drivers with those seeking rides.  After deducting a portion of each fare, they transfer money to the driver, who receives a 1099 for tax purposes at the end of the year.  The companies also track and make available passengers' and drivers' ratings of each other, providing some quality-control information before rides are signed up.

There are now a number of these companies -- DiscountCab, Sidecar, Gett, Zimride, Ridejoy, Hailo, Uber and of course Lyft, which is best known for placing silly pink mustaches on the grills of its cars.

Not surprisingly, the traditional taxi regimes are fighting back.  City taxi regulators raise safety and liability concerns, all in the interest of protecting the riding public.  Taxi companies have tried to enlist government in banning rideshare companies.  Taxi drivers in Europe have been particularly aggressive in fighting the new operators.

Change is never easy.



The Battle for Market Share

The rideshare industry is new, but it already is consolidating.  Hailo recently pulled out of the North American market altogether after two years of failing to establish significant market share.

Various of the companies are fighting to get governments to grant them exclusive rights to send cars to airports to pick up and drop off passengers.

In January, the small rideshare company Gett charged that Uber employees had ordered and then cancelled 100 Gett rides in a three-day period and that Uber had tried to convince Gett drivers to join the Uber network.

Several months ago Lyft charged that Uber employees engaged in a similar effort involving false credit card numbers and the ordering of 5,500 rides that were then cancelled, often after a Lyft driver had arrived to pick up a passenger.

Uber has countercharged that Lyft has done the same thing.

These companies aren't competing for customers.  Each is trying to drive the other out of the market and to create a monopoly.

So far, Uber is the biggest company in the rideshare space.  It is valued at $18 billion and probably is looking to mount an IPO.  Pretty good money for a cellphone app.

It also is getting involved in government, as taxi companies used to do.  Recently it hired David Plouffe, who previously worked as a congressional aide and campaign strategist. NPR's story on the hiring carried the headline, "Uber Greases the Wheel with Obama's Old Campaign Manager."

The Washington Post  explained why Uber hired an expensive fixer.

     "Uber is the latest Silicon Valley heavyweight to discover that tech disruption requires
     overcoming political and regulatory barriers.  The past 20 years have been littered with
     examples of companies, from Microsoft to Apple to Facebook, learning, often late, that
     they must play in politics to continue to grow."


Plus ca change, plus c'est la meme chose.