Buy Now, Pay (or regret) Later

Usually on Black Friday I write about perspective – that any deal on electronics is not worth the life of the person trampled in the stampede. Another aspect of perspective is appreciating what we have and not constantly yearning after more or bigger or newer. The problem is that understanding the difference between wants and needs is only a first step. It must be followed by the discipline not to ignore reality by buying something anyway, especially something you can’t afford.

What seems to be catching on today is a new gimmick called point-of-sale installment loans. “This holiday season, it's not enough to spot a great Black Friday deal on a big screen TV or a sweater. You need to consider whether you want to take out a loan at the checkout, too.” 

That’s right; shoppers no longer need to go to a bank for a loan to buy something they can’t pay for. An installment loan at checkout breaks the cash register receipt into a number of easy monthly payments. That service is now available at Wal-Mart and at many other retailers, both brick-and-mortar and on line. And installment loans are expected to be “hot this holiday season, as retailers attempt to drive sales and shoppers demand easy-to-understand credit.” Retailers are partnering with finance companies to give shoppers these loans, even to people who might not qualify for regular credit cards. Instead of paying at the time of purchase, shoppers can take the items home and pay in 3, 6 or 12 monthly payments.

This is not a new idea, but was usually limited to big-ticket items. Furniture stores have used it for years. The problem is that the eventual monthly payments add up to more than the original price – sometimes 20% or 30% more. 

Not paying cash at checkout is not new either. Credit cards made that possible years ago, and both arrangements involve interest. But shoppers generally ignore the interest in light of the convenience and recognize some advantages over credit cards. Installment loans have no late payment fees, which are a big revenue source for credit card companies, and people tend to like the idea of a predictable, fixed amount each month.

It really is the same idea as a mortgage or car payment, but now the idea is moving downstream to less expensive purchases. Another source says installment plans have a “wide appeal but resonates most strongly for debit users. Four-in-ten would consider using an installment plan for everyday purchases like groceries and household items.”

An American Banker article has another explanation for the trend; “many younger Americans are uncomfortable carrying credit card balances, partly because they saw their parents struggle with debt during the financial crisis and prefer the more certain repayment terms of installment loans.”

This brings up a few issues. First, the financial problems of the parents of younger Americans were not the fault of the credit card. They were problems of discipline and perspective. Going into debt in a different way is no guarantee of success. Since installment plans have no late fee, what do they do instead, send debt collectors or repossess the sweaters and Christmas toys? (This is not addressed in any of the stories.)

In effect, this is just another marketing ploy to get people to spend money they don’t have. The example in one of the articles was of a woman who bought tires from Wal-Mart. She was all right with paying the $644 in three monthly payments of $224, but she “doesn't remember the interest rate.” (It’s about 18% APR.) In this case, tires were probably a necessity, but sweaters, purses and toys?

All this is happening while U.S. household debt, according to Motely Fool, reached $13.54 trillion earlier this year, “an amount that has risen for 18 consecutive quarters.” 

Wake up America; debt is debt! Have a happy Black Friday, but don’t do anything foolish.

Can You Trust Your Pharmacy?

A recurring comment in the script of an episode of an old TV Western (Maverick, 1958) was the line, “If you can’t trust your banker, who can you trust?” The modern day equivalent of that could well be, “If you can’t trust your pharmacy?” This is nothing against the pharmacists, who studied hard to be licensed. There is no evidence of them not giving accurate advice. The displays in the store itself along with some other corporate and industry practices, on the other hand, can and do imply things that aren’t true. Two recent news items act as a good reminder.

The first is about an on-line survey of 1000 Americans published in August, sponsored by the Center for Inquiry (CFI) and conducted by Lake Research Partners. The survey centered on people’s general trust in their pharmacy at Wal-Mart and CVS, and more specifically their feelings regarding homeopathic medicines at those pharmacies.

They chose these pharmacies because both corporations face a lawsuit over their practice of selling homeopathic medicine side by side with science-based remedies. CFI believes it is deceptive to imply that they are as effective as regular OTC cough, cold and other remedies, when they have “no medical benefits beyond that of a placebo.”

There is, in fact, broad agreement on this point. “After a thorough and extensive review of over 200 research papers on the subject, the National Health and Medical Research Council (NHMRC) [of Australia concluded in 2015]:  “There are no health conditions for which there is reliable evidence that homeopathy is effective.” (For a thorough explanation of homeopathic medicines click the link.)

That survey of Wal-Mart and CVS customers asked them about how they make their purchasing decisions for cough, cold, and flu remedies at the two stores “and about their general knowledge of the basic principles of homeopathy, an 18th-century pseudoscience that has been utterly disproven.” The survey showed that exposure to this new information about the failures of homeopathy in so many independent studies led consumers to have to negative feelings about the products and the companies selling them. More than 4 in 10, “described their feelings about the purchase of a homeopathic remedy in deeply negative” terms.

Remember, one of the companies, CVS, still talks about how proud they are of the decision to discontinue tobacco products five years ago and believe it shows their concern about the health of their customers. Tobacco sales were profitable, but ultimately stood in the way of them being considered “a trusted health care provider.” According to their CEO, they strive to be in the same class of business values as TOMS shoes (which donates shoes to African countries providing unfair competition to African small businesses trying to survive by selling shoes – but that kind of unintended consequence is a topic for a different time). If they value their reputation for being a healthcare resource, one would think they would be as concerned about the accurate representation of their products.

But if you can’t trust your pharmacy about the product displays, what about the prices?

That leads to the second news item. A lawsuit filed in August by PharmacyChecker.com accuses “The National Association of Boards of Pharmacy (NABP), LegitScript, and three Pharma front groups [of] operating a coordinated campaign to suppress market competition, artificially inflate the price of prescription drugs, and spread misinformation to scare consumers away from international online pharmacies.” 

PharmacyChecker.com verifies the reliability of international online pharmacies and compares their drug prices to allow consumers to be confident about their on-line purchases and to inject competition into the prescription drug market. They allege in the lawsuit that those organizations have conspired with Google, Microsoft and others to lower their page on search results and in some cases to display a warning box when the page is opened.

Companies and industries do many things to protect their business and to make a profit. Consumers have to do many things to protect themselves. Mostly it involves research and critical thinking, especially when health and healthcare costs are concerned.

Another Look at Lawsuits

In the past I have objected to unusually high judgments or settlements from legal action as behavioral failures in economic understanding and responsibility.

A plaintiff experiences a relatively minor injury, often because he was not paying attention or taking adequate care.  Examples abound:  “A man police call a Good Samaritan may face a lawsuit after injuring the alleged robber he thwarted;” a $200,000 settlement for bites from bedbugs in a hotel; $95 million to an employee for being “groped, teased, talked dirty to, and poked by her manager;” or a California man at a fast food restaurant who won $1.5 million because he heard the manager mumble what he thought was a discriminatory comment when he asked for a second napkin.  Certainly some of these people deserved some compensation, but the outcomes are often far out of proportion to the injury, real or imagined.

In these cases the lawyers move in to convince the injured party that someone else must be forced to pay.  Legal representation is done on a contingency fee – if you don’t win, you don’t pay.  It’s free money.  The injured party, weak in the dimension of responsibility, agrees.

After the trial, the jury, weak in the dimension of economic understanding, doesn’t consider that the outcome of the lawsuit reflects not only on this case but also on future cases and future actions of many parties.  It portends similar actions from similar juries, which causes all insurance companies, not just the one involved, to assume higher risk.  Their customers, all of us, cover this higher risk by paying higher premiums.  Likewise any other companies in the same industry as the one being sued must think about changing practices, which adds cost to their operations, cost that again turn into higher prices for customers.  One obvious cost is printing or stenciling those ridiculous warning labels I’ve written about before.  The outcome has a cumulative effect, plus money is transferred from one party to another (with the lawyers taking their cut) with no overall benefit to society – nothing is produced, improved or made more efficient.

But when I saw the story about the Alabama man who “was awarded $7.5 million in a lawsuit against Walmart after he tripped while buying a watermelon,” I had a different idea.  Back in 2015, the 59-year-old man apparently caught his foot on a pallet where the watermelons were on display and broke his hip.  Now a broken hip is painful and makes life more difficult for a time, but the store reports that the same display continues to be used.  It’s hard to imagine that the store was at fault if other customers have negotiated the watermelon pallets for the last two years without further problems.

But with Wal-Mart’s reputation as promoted by the media, it’s easy to portray them as evil in this case too.  This is a further case of poor economic understanding.  As this source (among others, including Forbes) reminds us:  “Ideologues who rant against Wal-Mart do not understand economics. In a market economy, success goes to those businesses that best and most efficiently serve consumer needs.”

My latest idea is that most juries don’t even get to economic considerations due to the concept of survivor guilt.  The rough definition from Wikipedia is “a mental condition that occurs when a person believes they have done something wrong by surviving a traumatic event when others did not.”  In this case, the traumatic event is life itself.  They see a person with a broken hip or other injury, physical or psychological, and think of how lucky they are for two reasons - first, lucky not to be in his shoes and second, lucky to be in a position to help out (with someone else’s money) to assuage their own guilt.  Economic understanding never enters the conversation.

The more I think about this idea of survivor guilt, the more it explains many of the other seemingly non-critical-thinking behaviors in our society.  Someone else is always worse off and needs defending or bailing out.  And it’s especially easy to support a cause when other people’s money, efforts or rights are sacrificed.

Outrageous CEO Pay

One of the biggest issues being debated on and off the campaign trail is the growing gap between the rich and the poor along with the shrinking of the Middle Class.  A main target of many of the protests and disparaging remarks is the ratio of CEO pay to that of the average worker in the company.  It is one of the statistics invariably mentioned when discussing the disturbing growth of income inequality.

CEO pay is a popular topic among candidates because almost everyone agrees that CEOs are paid outrageous amounts.  “According to the Economic Policy Institute, from 1978 to 2013, CEO pay at American firms rose a stunning 937 percent, compared with a mere 10.2 percent growth in worker compensation over the same period, all adjusted for inflation. In 2013, the average CEO pay at the top 350 U.S. companies was $15.2 million.” Every other week we see headlines like these:  “JP Morgan CEO gets 35% pay raise to $27M amid cutbacks” and “Viacom CEO Pay Rose 22 Percent in Year Stock Tumbled.”

Ordinary citizens have trouble even grasping the size of these pay packages, so a convenient way to talk about it is to use this ratio of CEO pay to the pay of the average worker in the company.  One source gives this ratio as “20-to-1 in 1965 and 29.9-to-1 in 1978, growing to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013.  (In most news reports and political speeches the drop since 2000 is not mentioned, nonetheless it still has grown by a factor of 15 times for no apparent reason.)  Other sources have the ratio as high as 475-to-1.

There seems to be nothing to be done short of government intervention, but perhaps there is another solution!  Americans can wait around until the big companies’ lobbyists and our representatives decide what action, if any to take, or they can take some action on their own, immediately – voting with their dollars.

Take business away from some of the top offenders until they get the message.  But is anyone willing to do it?

From another source I got a list and arbitrarily set a ratio of 150:1 as the cutoff.  Of the top 100 companies in US, the worst offenders are:  AFLAC (157), Altria (175), Boeing (198), CVS (422), Deere(150), Goodyear Tire (322), Honeywell (211), Twenty-First Century Fox (268) and Walt Disney (273).

The big question is:  Are enough people really upset enough about high CEO pay to do something about it, or is it something they just like to complain about?  Would we find another insurance company (even if we think the duck is amusing), take our prescriptions to a different pharmacy (even if we admire them for banning tobacco products), buy a different brand tire or – and here’s a big one – stay home from movies like The Revenant and Star Wars, or tell the kids no trip to Disney World and no Frozen or Star Wars memorabilia until the CEO takes a paycut?  I think not.

Just as we don’t mentally group our favorite sports heroes, movies stars, television personalities and music entertainers in with the hated one-percent, I think we would give many of these CEOs a pass and continue to patronize their companies.

Note:  Some of the biggest offending companies listed elsewhere include Discovery Communications, Chipotle, Walmart, Target, Macy’s and Starbucks.  It’s just a matter of who is doing the calculations, but these are a few more to consider.

That Thanksgiving Shopping Thing

Anticipating another fuss about people having to work at Wal-Mart (and other stores) on Thanksgiving, I remind everyone of my comments several weeks ago:  companies don’t create jobs and governments don’t create jobs – although governments can make the environment more favorable for jobs to be created.  No, customers create jobs.

It follows that if someone objects to people having to work at Wal-Mart on Thanksgiving, don’t be customers.  They wouldn’t open a store and pay a lot of workers to stand around at vacant cash registers waiting for the business to happen.  For that matter, if you object to Wal-Mart’s business practices, don’t shop there at all.  Remember, though, there are some people who are very happy to have a job at Wal-Mart and even some people who are willing and able and happy to give up Thanksgiving to make a little extra needed money.

No, if you don’t want to see people working at retail stores on Thanksgiving, stay home and watch the football games.  Don’t be the least concerned about the number of people it takes to participate in and broadcast a game, many of whom are not only working, but working far away from their homes on Thanksgiving.  And if you are lucky enough to attend one of these games and would like to buy a hot dog and a beer, keep in mind that it would be impossible if the people who worked in the concession stand insisted on having Thanksgiving off.  You also may hope that a gas station is open on the way home.  Many people like to be righteous, but only when it fits their lifestyle and convenience.

Face it, many people have to work on Thanksgiving and some of them have jobs that pay little more than working at Wal-Mart.  Wal-Mart seems to be a sort of symbol for this kind of protest – big, evil Wal-Mart.  Personally I wouldn’t care if the Wal-Mart down the street from me just disappeared, but I know there are many people who are glad to work there and many people who are glad to shop there so for their sakes I hope it doesn’t.

Remember the economy is not just a bunch of numbers reported in the news.  The economy is you and I making choices every day, choices that affect many other people.  In turn the choices of others can come back to help us or haunt us.

Economic Reality

What can we learn from the oil boom in North Dakota, the protest movement to raise the minimum wage and robots in California? – Maybe something about jobs, pay and the economy.

Start with the protesters.  The Huffington Post reports that the fight for a $15 minimum wage is heating up.  The protesters and organizers represent it as a fight for social justice.  With demonstrations in over 230 cities and on college campuses, they hope to pressure fast food companies into giving their employees raises.  McDonald’s has promised an increase, but the corporation controls wages only at owned stores, while the majority of their outlets are run by franchisees.

Perhaps the protesters will get their way, not the whole $15 but some concession.  As they wait, they should ask themselves a few questions.  When I get on an elevator, why is there just a row of buttons on the wall and not someone standing there all day whose job it is to drive the elevator?  When I make a phone call, how can I contact anyone in the world by just dialing a number without having to ask one or more switchboard operators to plug the wires together to make the connection?  When I call customer service, why must I negotiate past the mechanical voice to speak to a live human?  When I buy gasoline and groceries, why am I expected to do work once assigned to an employee?

These questions are relevant, because as MacDonald’s promises a small pay increase, they are testing order kiosks at restaurants to take the place of workers at the counter.  Of course, they will still need people to make the burgers, won’t they?  Not according to this Reason article about that robot company in California.  The company, Momentum Machines, claims that their equipment can replace “all of the hamburger line cooks in a restaurant,” doing “everything employees can do except better.”  That should not come as a surprise; it was just a matter of time.

That brings us to an important economic point.  Over the long run you can’t secure higher pay by protest.  Higher wages come to those who have developed or were born with superior skills and who are willing to work hard applying those skills.  Just as rare gems are more valuable than costume jewelry, rare skills are more valuable than common ones.  As a dramatic example, near the oil fields in North Dakota where the unemployment rate is about 1%, one Wal-Mart store offering $17.40 per hour to attract entry-level workers.  A similar situation exists near the oil sand in Western Canada.  But in New York City where employment choices are few and low skills are common, workers are forced to resort to coercion. 

The dispute is not about justice; it’s about economics.  This is an important lesson.  It’s too late for those workers who chose to have a family of four before developing the skills and ability to support a family of four -- but it’s not too late for our children.