Let’s Have a National Referenda on Key Issues

July 10, 2013Danny Vinik Leave a comment

Gallup is out with a poll today on political reform. Here are the results:
Obviously, a national referenda isn’t going to happen. But if we did, it would clearly show that the vision most Americans have for their government is not realistic.

For instance, a Pew poll in February found that 70% of Americans, including 65% of Democrats, wanted the President and Congress to act on deficit-cutting legislation this year. But another Pew poll released just a day (PDF) later found that Americans don’t want to cut any individual programs except foreign aid (to the right).

Of course, it’s not that surprising that no one wants to cut any of those programs. They all sound very useful. But how are we going to reduce the deficit – as voters say they want – if we don’t cut anything. Well, how about we raise taxes? I’m very confident in saying that if we put tax increases up for a national referenda, it would lose badly.

Here we get to an impasse. Voters don’t want to cut individual programs, don’t want higher taxes but want to reduce the deficit. Those three things together are not possible. In the mean time, voters get angry when spending cuts pass (they don’t like the sequester), hate higher taxes (remember how hard it was to raise taxes on the richest Americans?) and are demanding cuts to the budget deficit. One party demands spending cuts, the other wants higher taxes and both clamor about the budget deficit. This all stems from a fundamental misunderstanding of the capabilities of the US government.

Maybe a national referenda is just what we need – at least then Americans would have a better understand of what its government can and cannot do.

Yes, Barnes & Noble is in Trouble

July 10, 2013July 14, 2013Danny Vinik Leave a comment

Wonkblog’s Lydia DePillis pushed back against Matt Yglesias that Barnes & Nobles is in a failing business. She cites a couple of reasons that the industry’s decline is not inevitable. Here’s a quick summary:

1. Barnes & Noble retail posted a tidy $374 million profit for FY2013 (not last quarter as DePillis writes, but still strong). That’s a rise of 16% compared to 2012.

2. The company runs around 700 college bookstores across the country.

3. Publishers dislike Amazon and may offer B&N discounted prices to fight the online giant.

Let’s pick these apart a bit.

First, about the profit. B&N retail had a solid performance in 2013, but those figures mask the structural problems the company faces. Over the past two years, the firm has closed 30 stores and opened just one new one. At the same time, retail sales have been falling. A couple of things to bear in mind here. Books are a leisure item that people easily cut back on when times are tough. Thus, it’s no surprise to see sales dropping after the recent recession. But the combination of the recent recovery and the closure of B&N’s main competitor (Borders) should have given its revenue a boost. Instead, sales dropped 6% last year. That $374 million profit is not a result of growing revenue, but of closing stores and cutting costs. That’s great for a company, of course, but it masks the realities of the bookstore retail business. Readers are still turning to e-books and Amazon over the regional bookstore. At some point, B&N is only going to be able to cut costs so much. This can be seen in the company’s fourth quarter profit of $51 million, a 24% drop from 2012.

In Barnes & Noble’s college bookstores, there’s more hope for the company, but still major issues. These stores are a lucrative business. Students have to buy textbooks for class and publishers jack up the prices, leaving everyone with a nice profit and students with holes in their wallets. Reading a textbook is unlike reading a normal book. Students take notes, active read and solve problems in the margins. It’s very helpful to have a physical copy of the book and not a digital one. This means that revenues for these stores may stay strong. That’s what we see in the company’s recent filings, where sales from college bookstores rose slightly to $1.643 billion (although that’s still below the FY2011 level). Overall, the firm’s college stores had profits of $111 million, slightly below 2012 levels but that was mostly due to digital investments the company made. The firm has increased its digital textbook footprint and is offering textbook rentals as well. Sounds like a solid business, right? Well, maybe not.

The problem is that the landscape for college bookstores is changing as well. It just hasn’t shown up in the numbers yet. More and more students are turning to online textbook stores or are starting to rent books instead. The National Association of College Stores recently released a report that noted that the college textbook market is basically unchanged since 2006 even while college enrollment has increased nearly 25%. The graph below shows the story:

The monopoly power that textbook stores once had over students is rapidly disappearing. Local bookstores and online retailers have seen the opportunity to undercut school stores and offer students a lower price for the same books. Students, many of whom are on scholarship and are less attentive to textbook prices, are realizing that they can save a lot of money by shopping off-campus. So while the firm posted increased revenue in 2013, don’t expect that to continue. B&N itself expects bookstores sales to decline slightly next year.

As for DePillis’s last point, I don’t know much about it. She offers it as a hypothetical and maybe she’s right. But if the company is relying on publisher’s hatred of Amazon to survive, that’s not a sustainable business model.

This doesn’t mean that the retail bookstore industry is entirely dead. Local stores can certainly survive and prosper as the big retail giants fade away. As DePillis notes, the community franchise model is certainly a possibility for Barnes & Noble. Selling off the failing Nook business, taking the company private, reducing store size and offering a local bookstore with a national supply chain could be a very profitable business. But the end of giant retail bookstores is rapidly approaching. If Barnes & Noble doesn’t want to follow Borders into bankruptcy, it better act fast.

Increase the IRS’s Funding

July 9, 2013Danny Vinik Leave a comment

The recent IRS scandal is not a reason to cut the agency's funding.

The IRS scandal is not a reason to cut the agency’s funding.

After the IRS scandal broke in early May, there was no doubt that Republicans would use it as a reason to drastically reduce the agency’s budget. As expected, House Republicans are doing just that. A new bill looks to cut the department’s funding from $12 billion to $9 billion a year – a 25% reduction. This is in contrast to the $1 billion raise that the President outlined in his budget.

There is no doubt the IRS screwed up. It targeted both Tea Party and progressive groups for more intense scrutiny in the approval process for (c)(4) status than it should have. Even worse, the agency singled out Tea Party groups more than progressive groups, making it harder for those organizations to gain 501(c)(4) status. None of that is okay and we need to correct it.

But that has nothing to do with the IRS’s budget. Subtracting money from the agency does nothing to correct the approval process. It just strains the department’s resources and creates the potential for more mistakes. What makes the House Republican’s bill most foolish though is that we should be increasing the IRS’s budget as the President has called for. In fact, increasing its funding saves the country money. The Treasury estimated in May (PDF) that its proposed budget increase would bring in six times that amount in additional revenue!

Certainly the IRS needs to combat waste within the agency – such as the $49 million it spent on conferences from 2010-2012. But squeezing the budget does nothing to directly combat this waste. The department can still fund those lavish conferences and just relax its enforcement. In the end, taxpayers lose (and those who skip out on their taxes win). If House Republicans really want to make the IRS more efficient, it needs to increase its oversight – as should be done anyways given the recent scandal. But don’t slash the budget simply because people hate the agency. After all, these are the same people who’ve been screaming about our budget deficit the last five years. Even though the IRS’s budget proposal reduces the deficit, I don’t hear them clamoring about it anymore.