Author Archives: xcharles

Affirmative Action

On Tuesday, the Supreme Court decided to continue Michigan’s decision in ending affirmative action at its public universities. It was a 6-2 ruling, however the justices were very strong in their opposing opinions- suggesting that there is still uncertainty lingering over the topic. The ruling means that racial preferences will not soon return to the University of Michigan- or any other public university in states that have chosen to end affirmative action as well.

Eight states have ended affirmative action since 1996. However, affirmative action is still used by many selective universities to promote diversity within the student body. Some Ivy League schools, the US military academies, and flagship public institutions such as the University of Texas at Austin and the University of North Carolina at Chapel Hill.

On Tuesday, the fact that the opinions of the justices were so far left and right brings up the idea that the issue of affirmative action may come back to the table in the future. The closest consensus were spearheaded by the opposing opinions of Justice Kennedy, Chief Justice John Roberts, and Justice Samuel Alito. Justice Kennedy held a more moderate opinion and acknowledged that the US has had a painful history of racial exclusion, which indeed still serves many repercussions that can still be seen today. It was interesting to read his opinion- “The electorate’s instruction to governmental entities not to embark upon the course of race-defined and race-based preferences was adopted, we must assume, because the voters deemed a preference system to be unwise on account of what voters may deem its latent potential to become itself a source of the very resentments and hostilities based on race that this nation seeks to put behind it”.

I understand either part of the situation. I understand that one side claims that affirmative action is like fighting fire with more fire. The way to end racism is not with more racism. I also understand the side of the argument that claims that not all opportunities in America are created equal- structural differences are the ones that we were born with and have no control over, but yet account for how we live our lives. Having the privilege of attending a competitive high school, I was given very good guidance from my high school counselor who also helped lead me through the college application process. The school also provided help with standardized tests. On the other hand, my dad teaches at an inner-city high school in Detroit. The differences are vast. The students are not provided with very good high school counselors nor do their counselors even have expectations that they will attend college. Frequently I would hear my dad complain that the school hadn’t provided his classes with enough books, so many times it wasn’t even feasible for him to assign homework. Differences like these definitely add up over a four year span, and take a toll on the student when the time comes to apply to college. But honestly… I feel that socio-economic status and high school location play a more dominant role in the affirmative action argument than race. Solely focusing on race can create the scenario in which an exceptional non-minority student attending a predominantly minority-populated institution would be overlooked on college applications. I believe the affirmative action situation will later be refined… it seems inevitable. I think differences like these should be accounted for in some shape or form because the fact that I was sent to a high quality high school was inherently for reasons outside of my control. That is of course not to say that students who work hard and come from privileged backgrounds do not deserve to be admitted to certain universities. At the end of the day, the student (“privileged” or “unprivileged”) needs to show that he or she exhibited an exceptional work ethic in comparison to their peers.

Latest from the Fed

Some have been questioning projections made by Janet Yellen on whether or not rates will actually rise in 2015. Apparently, her last speech left investors questioning when the central bank plans to raise short-term interest rates. The Fed is still on track to reduce their monthly bond buying to $45 billion at their meeting this month, but some investors still feel that Yellen gave her audience a vague projection last month.

At the Economic Club of New York last week, Yellen commented, “While monetary-policy discussions naturally begin with a baseline outlook, the path of the economy is uncertain, and effective policy must respond to significant unexpected twists and turns the economy may take”. The vagueness of this statement has left many confused, given that the Fed usually tries to provide concrete information about the outlook of short-term interest rates.

However, now that she has switched to a more mysterious approach, this seems to suggest that slow economic growth, low inflation, and poor measures of unemployment are beginning to slip back into the picture. This contrasts with her statement last month that the Fed may wait six months after the bond-buying ends before raising rates. In regard to the trading markets, investors have reacted relatively calm to the news. Yields on 10-year Treasury notes have remained between 2.5 and 3%. A possible reason that they haven’t moved is because the Fed hasn’t announced any bad news- just somewhat neutral news. As long as a definite position isn’t taken, I don’t think that we should anticipate too much movement.

Another piece of the puzzle related to productivity level- “U.S. output-per-hour worked, a standard measure of productivity, grew just 0.5% in 2013 and appeared to grow slowly again in the first quarter”. The bad thing about slow productivity is that it makes it harder to calculate the amount of slack in the economy level. Slack is a key part of measuring uncertainty, and without the ability to measure of uncertainty it is clearly more difficult to predict the right time to raise interest rates.

In my opinion, I don’t think there’s anything wrong with the projections that Janet Yellen has given. Many keep pressing her to give a concrete date of when to expect rates to rise, but at the end of the day there really are too many factors that control the outcome. Ms. Yellen is not clairvoyant, she’s really doing the best that she can as far as looking into the specific elements that may cause rates to change. We can see this through her decision to drop the unemployment rate target because she believed there were many other forces at hand. In sum, I believe that those doubting Ms. Yellen should sit back and realize that if she were to give a concrete date and then unforeseeable measures caused her to re-adjust her position, the public would be even more displeased. Naysayers need to realize that we have slowly been inching our way out of the recession, the future still looks promising.

(Revised) Learning from the Bull Market

Many investors have suppressed the reality of the stock market crash of March 9, 2009. In March 2014, five years after the crash, investors have been pouring their money back into stocks. $172 billion has been added to U.S. stock mutual funds and exchange-traded funds- more than had been withdrawn from 2008 to 2012 combined. Another $24 billion has been added in 2014.

According to this Wall Street Journal article, it has taken an average of 3.3 years for stocks to surpass their high set before the typical bear market began. “Unless you think the next bear market and subsequent recovery will be worse than average, sticking with stocks is the best response to the certainty that, sooner or later, the current bull market will come to an end”. This being said, it is necessary to look at the entire picture. After the 1929 stock market crash, the Dow didn’t surpass its 1929 pre crash peak until 1954- 25 years later. Therefore, the Dow paints a distorted picture of recovery. Firstly, it only represents 30 stocks (the stock must be a leading, widely held stock in its industry). Second, it doesn’t include dividends- this was a big portion of stocks’ total return in the 30s. Third, a big portion of declines in the Dow disappears after adjusting for deflation.

Even though the average has taken 3.3 years, it is understandable as an investor to be complacent. This WSJ article suggests that investors need to reflect on how a bear market affected their behavior in the past and factor that into how it should affect their thinking now. What is a bear market? WSJ defines it as when stocks fall 20% from a peak. A bull market is defined as when stocks rise 20% off a low point. In sum, this article cites stock market events that have happened in the past and suggests how these past actions may affect investors decisions in the future. Advice is suggested regarding being skeptical of experts, remembering what the recession felt like, limiting risk-taking, being wary of the labels “bull market” and “bear market”, and questioning performance figures.

To sum up these arguments, in terms of being skeptical of experts- pick the ones who seem aware of the uncertainty of their predictions and are willing to change their minds. An “expert” who once had a correct prediction won’t necessarily be right the next time around. In terms of remembering what the recession felt like- if an investor stayed put during the crisis, then he or she should stay put now. If an investor sold during the crisis, then this investor will almost certainly sell again if the market takes another steep fall. Limiting risk taking- investors are better off keeping a smaller amount in stocks and sticking with this allocation in good times and bad. Being wary of labels- as implied earlier, an average is not a very good measure of performance. It’s better just to look at whether or not stocks are valued more highly than in the past. Now, stocks are trading at about 25 times average earnings. The historical average is 16.5. Lastly, questioning performance figures- “Research by finance professor Raghavendra Rau of the University of Cambridge and his colleagues has shown that investors flock to funds whose five-year returns improve when a bad month drops out of the beginning of the sequence.” Fund companies often raise fees and take advantage of “improved” performance by dropping the month of February 2009 and starting at March 2009. Clearly, skipping this pivotal month makes returns seem much more appealing.

In recent news, there have been comparisons of the current stock market to that of the 1990s– especially the mid nineties. The mid-nineties showed big gains in stock despite slow growth in the economy. Compared to the stock market right now, we can see that the economy has been sluggishly making its way back to pre-crisis levels. Job creation has been picking back up slowly, but steadily. Also, Janet Yellen projects short-term interest rates to increase in mid 2015. The Nasdaq and Dow Jones haven’t faired as well as the S&P 500 this year, but losses in these indices haven’t been extreme. Some say the bull market is showing signs of fatigue, but the S&P 500 has rose nearly 30% and is up .89%. Back in ’94, stocks fell but then quickly recovered when the Federal Reserve rose interest rates. We can see the same similarity today as stocks were down shortly after the recession but are now starting to pick back up. It is not unreasonable to claim that these gains will also extend to the future even as the Fed expects to raise interest rates in the middle of next year.

On the other hand, there are still differences between the current stock market and the stock market of the 90s. The most notable difference is the magnitude of the damage from the recent financial crisis. This may very well cause a more uncertain outcome. Although stocks may pick up when the Fed raises rates, the Fed itself is not completely certain of whether or not it will have the ability to raise them from near-zero levels in just about a year from now. A couple more big similarities between now and the 90s is that there weren’t many pullbacks (until the tech bubble) and we are also in a post-financial-crisis period with a ‘jobless’ disinflationary recovery. From ’95 to ’98, the S&P 500 rose an average of 28% per year. Now that we’re seeing 30% gains, the situation is somewhat similar.

I feel that the situation is definitely similar, but we cannot forget the difference in crisis that led to this bull market. The crisis of the late 80s was much less of a shock than the recent great recession. This makes it harder to predict how stocks will perform in the future because stocks tend to move in line with economic improvement. However, safer comparisons that we can make between now and the 90s are the condition of the job market and the relatively slow growth- I wrote a post about the current slow economy growth earlier this week (click here). Connecting these two posts, I believe that we should still anticipate stock gains in the future. Even though the job market is not doing as well as expected, I think the economy will recover further and further away from recessionary levels as long as the Fed guides inflation back up to 2% and stays course with the bond-buying program. As I mentioned in the other post, business profits are up and businesses have been investing. This is a good sign for consumers because it indicates that businesses and consumers are both more confident that each will do their part to benefit the other. Therefore, along with business profits we can project stock market gains.

(Revised) Rising Grad School Debt

Much of student-loan debt has recently been driven disproportionately by grad students. In what is now not the strongest economy, it is growing harder and harder to resolve these debt burdens. The typical debt load of a student leaving master’s, medical, or doctoral programs jumped 43% between 2004 and 2012. The point at which half of borrowers owed more and the other half owed less (median) was $57,600 in 2012. These increases were higher for social sciences and humanities degrees compared to professional degrees such as MBAs or medical degrees, which yield greater long-term returns. For example, a master’s in education rose 66% to $50,879 and a master of arts rose 54% to $58,539 (see graph).

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Debt has generally been concentrated among a minority of students. “In the 2012-13 academic year, graduate students accounted for about 1 in 6 student-loan recipients but between 30% and 40% of student debt extended by the federal government”. Recently, the Obama administration has been taking steps to reduce student-debt and investigate the for-profit schools with exceptionally high rates of students defaulting on loans. There has been a strong correlation between high student debt and rising costs at for-profit and graduate schools. Featured in this article is a study by Jason Delisle. He comments, “”Graduate schools have essentially found a way to capture more of someone’s future income and future spending than what would probably occur if we had some sort of underwriting standards and loan limits.” If the amount of debt held by students at for-profit and graduate schools were excluded, the nation’s student debt situation wouldn’t seem so alarming.

A large factor of what is driving this debt is that many households lost savings and other assets during the recession- thus making it more likely for students to borrow. To make the situation worse, schools raised prices because of cuts in state aid. Also, a greater number of students are pursuing advanced degrees than in previous generations because of the pressure to adapt to the modern economy. In addition, there was a law in 2006 passed which removed the cap on how much graduate student may borrow from the federal government. Before the change, the cap (excluding med students) was $138,500. Now, students may borrow up to the “cost of attendance”.

I believe that the recent student-loan situation is a blessing and a curse. It is a blessing in that lifting caps on loans incentivizes undergraduates to pursue higher education. It is a curse in that the debt burden has been continually growing over time, even through the recent recession. However, there is an upside to the situation. Cited in the WSJ link- people with graduate degrees degrees default on their loans at lower rates than those with lower education. They are also more likely to earn higher salaries and are less likely to be unemployed. The incentive is definitely still there, but the reality worsens for the students who are not able to find a job after grad school.

In recent news, student-debt forgiveness plans have been becoming more and more popular. These are federal programs that forgive some student debt after making payments on the loan for a certain amount of time. However, these plans encourage colleges to push tuition even higher. Enrollment in these plans has surged nearly 40% in only 6 months, which has left about 1.3 million Americans owing around $72 billion. Although this aid opens the possibility of highly subsidized or even free graduate degrees, it is at the expense of the taxpayers. The plan enacted by President Obama requires borrower to pay 10% a year of discretionary income in monthly installments. After 10 years of payments, the balance for a worker in the public sector or a nonprofit is forgiven. Debt for those working in the private sector is forgiven after 20 years of payments. The aim of the program is to have no one paying on their student debt for their entire working life. Just recently, the Obama administration proposed to cap the debt forgiveness at $57,500 per student. As there is currently no limit on the debt, I believe this cap was put into place because the government is starting to realize that it is becoming more and more costly to maintain.

There are many drawbacks to the program. As we have learned throughout our economics classes- this brings up the issue of moral hazard. Promising to forgive these debts may incentivize borrowers and schools to become less disciplined about costs. Specifically, colleges will start to charge more and students will borrow more. I believe that the program is very well-intentioned, however I do not see it extending very far into the future without facing some major revisions. Under the current program, it is likely that schools will increase the cost of tuition, while forgiven debt to borrowers places a burden on taxpayers. I believe that a harmony in the program needs to be reached where students do not end up paying loans during their entire working life- while also there is no incentive for colleges to inflate costs. The program definitely needs to be capped because even though the debt is “forgiven”, these costs do not simply disappear into thin air. Graduate school professors still need to receive the correct amount of compensation for their services. So the cost itself still remains, but the taxpayers are the ones who actually see it. In sum, the program itself is very well-intentioned, but just needs to be refined.

Banks Increase Commercial Lending

Big Banks have been increasingly extending more lending to businesses. The intended purpose of the increase in lending is to help companies increase spending on workers and equipment as the economy improves. The increase in lending is good for both banks and companies. Banks benefit from being able to make up for the current low demand in consumer borrowing. Companies also benefit from acquiring more capital to expand and start on new investment projects.

Earnings results from JP Morgan, Citigroup, Bank of America, and Wells & Fargo showed an “8.3% increase in commercial loans outstanding in the first quarter from the same period a year earlier”. This implies that companies are becoming more confident to borrow now that we are climbing our way out of the recession.

Companies are taking advantage of banks’ loosening their lending standards by borrowing from banks to increase investments. For example, Craig Freedman- CEO of a public transportation company, Freedman Seating Co., has been borrowing more from Wells Fargo for capital purposes now that the economic outlook is starting to look up. It is also a win-win situation for banks because the increase in commercial lending helps them offset the low demand for mortgages and other related loans. Consumer borrowing is still slow to pick back up given that reckless lending by banks was the cause for the recent financial crisis. Consumers have lately more cautious to take on new debt.

The fact that companies are starting to acquire long-term fixed-asset loans and increase their equipment stock is definitely a good sign. My second blog post of the semester was a post on how business investment had more or less stayed the same given that rates were low. Thus, interest rate is not the sole factor in investment decisions of most companies. Now, as business investment is picking up, it is easy to see that other economic factors are relevant for businesses decisions to invest. Compared to early January, there is much more optimism in business expectations of profits, higher stock market expectations, and more of a realization that the economy is able to see the ‘light at the end of the tunnel’ in regards to the recession. It is true that consumer spending is a leading indicator of business investment, but in this case I think that the opposite even holds true. When the public sees that businesses have more optimistic expectations and start investing more for their future, businesses will require more workers to get started on investment plans and more hours will be given to the existing workers that are given new projects. Indirectly, business expansions will provide the public with more job opportunities thus boosting income and allowing for higher consumer spending.

The Economic Recovery continues

Recovery has turned out to be far from predictable since the recession, however it is proving to be one of the longest. The National Bureau of Economic Research (NBER) judges that the US economy began expanding again in June 2009- about 58 months ago. This means that this current stretch is bound to surpass the average for post-WWII recoveries.

Although the economy is recovering, this has been one of the slowest recoveries we’ve seen. The 6.7% unemployment rate is the highest that we’ve seen compared to recent expansions. Also, GDP has grown only 1.8% a year on average since the recession, which is about half the growth of the previous three expansions.

What are potential reasons for such slow growth? Big surprise- the Republicans are blaming the Democrats and the Democrats are blaming the Republicans. Republicans argue that Obama and other Democrats in congress are slowing growth with tax increases and regulations such as the Affordable Care Act, which they argue has supposedly drawn businesses away from investing and hiring. Democrats blame the Republicans for “withholding support for stimulus spending at precisely the moment the economy needs a boost and for brinkmanship during fiscal battles”. On a more optimistic note, chief US economist at JP Morgan Michael Feroli proposed that slow growth may just imply that the economy isn’t completely out of fuel. Essentially, he believes that this is a signal that the expansion still has room to grow.

Other economists posit that the weak growth is due to the continuing effects of the recent financial crisis. After recessions, it is always hard for both banks and consumers to get back to stable financial conditions. Another hypothesis says that the sluggish economy is due to ‘secular stagnation’- “The theory claims that the labor force and productivity, growing more slowly than in the past, along with reduced consumption and increased savings, prevent the economy from returning to prior growth levels”. This was the same fear of economists in the 1930s after the Great Depression.

Although unemployment is high, job creation is below optimum, and economic growth is below average- business profits are still continuing to climb. In terms of future growth in the economy, it is definitely a good sign that consumers are still spending and supporting businesses. I feel that there is definitely still room for the current recovery to expand. A key indicator that this article failed to mention is that business investment has recently been increasing. The fact that businesses are increasing investments and capital levels means that banks are now more willing to lend. It also signals a 2-way street between businesses and consumers that both are more confident that each will do their part to benefit the other.

Foreign Auto Makers look to China

Given that China’s economy has been slowing, the biggest growth engine that it has been pursuing is to get reluctant customers into the market. The price of owning a car in China extends well beyond just the monthly payment. Along with this payment comes heavy taxes and parking costs, which are a major reasons for customers’ reluctance.

China has remained a crucial sales and profit region for global giants like Volkswagen, General Motors, and Toyota. However, the problem lies in the fact that Chinese consumers’ interest in cars is slowing along with economic growth in China. Another barrier adding to this problem is the growing number of Chinese cities that are curbing auto sales in order to fight traffic congestion and pollution. Despite these complications, “many foreign car makers remain optimistic, pointing to the number of new buyers coming to the market. Three out of four new cars are purchased by first-time buyers, according to research firm J.D. Power and Associates”. Optimism is key and in terms of these auto makers’ plans, strategy will go a long way. More growth in auto sales will come from targeting smaller cities that still have high demand for individual mobility.

Many global auto executives met this weekend at the Beijing International Automotive Exhibition with the plan of offering lower-priced vehicles to the young, professional Chinese population- thus, aiming to bring a new demographic into auto sales. Honda aims to release a new sedan at 70,000 yuan ($11,272). GM plans to release a new version of the Chevrolet Cruze with a smaller engine in order to meet China’s energy efficiency requirements. Also, China’s largest car maker, Volkswagen, will release five models for Chinese consumers.

However, some feel that the odds are still against foreign car makers targeting the Chinese population. Analyst Lin Huaibin from consulting firm IHS commented that “It’s almost certain growth in car sales will slow. When people feel the pinch of economic slowdown, they will cut spending”. I feel that auto demand in China has the potential to expand, but some areas are more plausible for growth than others. In big cities like Beijing, regulations on air pollution are tightening and there are also caps being placed on the amount of licensed vehicles in the city. The amount of time it takes to actually obtain a license plate is definitely another force acting against foreign car makers. On the other hand, if these car makers target Chinese cities with smaller populations and strong economic performance, they will see more success.

Tax Cuts in Italy

Italy’s government recently cut income taxes in order to boost the economy. The intended purpose of these tax cuts are to get more of the middle- and lower- income households spending. The cuts will go into effect next month and are expected to give up to €80 a month in extra income to three-quarters of the workforce. As foreign demand in Italy has been slowing, these tax cuts are meant to boost domestic demand and shift less dependence growth from exports.

Prime Minister Matteo Renzi intends for these tax cuts to be structural tax cuts, not just a one-time basis tax cuts. These tax cuts are much needed, as Italy’s economic output (measured in GDP per capita) has contracted even more than the output in Greece. Specifically, “Italy’s economy was growing at a 3.7% annual rate, the budget deficit was 0.9% of gross domestic product, and the public debt was 109% of GDP. Today, Italy’s economy has just begun a modest recovery after a five-year crisis that has eroded economic output by 9% and pushed the debt level up to 133% of GDP.” As debt levels are rising and Italian exports are becoming less attractive, Mr. Renzi believes that these cuts will shift resources to people most likely to spend it. Thus, maximizing economic impact.

However, some economists believe that an even more effective intervention was overlooked. This group of economists recommended that cutting business taxes levied on payrolls would have been more effective (Italian employees face pretty steep tax rates- about 50% and higher when payroll contributions are included). These economists feel that lowering the business tax on payrolls will lower Italy’s labor costs and increase job creation in the medium-run. To the contrary, Prime Minister Renzi feels that at the marginal level, targeting tax cuts at the medium and lower end of the income distribution will have a larger positive effect on consumption. Additionally, he is not opposed to the view of the other economists as well. He plans to focus on lowering business taxes by a small margin this year and then later focus more heavily on this issue in 2015.

I think that Mr. Renzi’s current proposal of tax cuts will have a positive effect in that they are structural tax cuts. Although some economists doubt the effect of the proposal at the moment, I think that strengthening the domestic reliance of Italy’s economy will prove beneficial in the long-run– maybe 15 or 20 years from now. I also think it was smart of the prime minister to address the opposite side of the argument. The main counterargument of cutting taxes is that it favors the rich because cuts can lead to reductions in government services that lower-income households generally rely on. Since the cuts only apply to workers with salaries of up to €28,000 a year, I believe that Mr. Renzi is efficiently targeting the correct demographic.

Yellen at the Economic Club of NY

In Janet Yellen’s speech to the Economic Club of New York on Wednesday, she assured investors that low interest rates would continue and also focused on low inflation and economic slack. This was a follow-up to her meeting in March that left investors with the impression that interest rates would rise in the near future.

During the speech, Ms. Yellen made sure to point out that the economy is an uncertain place, and the Fed cannot lose sight of this as they propose monetary policy. However, she did give a more concrete prediction of when she expects to rise rates. She intends to keep interest rates low until at least the middle of 2015, given that the economic outlook allows the US to maintain low interest rates.

Another main point that Yellen stressed was the inflation rate target. She said that she was more worried about inflation becoming too low rather than too high. Later she added that the Fed’s focus should be on lifting inflation to the 2% target, not holding it down. During the speech, she commented, “The Fed is “well aware” that inflation could shoot above its 2% goal, she said. ‘At present, I rate the chances of this happening as significantly below the chances of inflation persisting below 2%.’” Low inflation is a problem because it signals weak economic demand. Also, not leaving a large enough inflation threshold can lead to deflationary problems in the future. Deflation is detrimental to the economy because it leads to many painful outcomes- the combination of falling prices, consumers’ reduced likelihood of spending, and falling wages depresses the economy and sets it into a deflationary trap. This triggers a vicious circle because rising debt leads to less spending, which leads to further deflation… and repeat.

The problem comes into play when the Fed tries to dictate certain economic issues like long-term unemployment and income inequality. The Fed mentioned that it would like to see wage inflation because this would indicate that slack in the labor market is starting to disappear. Hence, they don’t want discouraged workers to get dropped out of the labor force permanently. Decreasing slack in the labor market will later get job creation back on track. However, the problem is that it’s hard for the central bank to influence these policies. At the end of the day, the central bank is chartered by congress as an independent agency within the government- not to be a policymaker itself. I think that in terms of the trade off between inflation and unemployment, the Fed has more control on the economy through dictating stable inflationary levels. As we have already seen, the Fed has abandoned the unemployment target because there are too broad of measures included that make up this target- many of which the Fed can only indirectly control, if at all. Although the two issues are interrelated- short-term unemployment is relevant for inflation, I believe that the Fed would get the most out of rising inflation back to the 2% target.

Sink or Swim, Barnes & Noble

Barnes & Noble has been holding on to its dwindling market share. As we have seen in many of our hometowns and also here locally in Ann Arbor, Barnes & Noble has had to close down many stores- 63 in the past five years, to be exact. The shrinking market for print books has caused Barnes & Noble to close down many critical stores in locations such as Georgetown, Greenwich Village, and a main college store in Manhattan’s flatiron district.

Barnes & Noble is a prime example of an industry that has been taken over by internet competition. Competition from Amazon and the costs of investing in its own e-reader and tablets has led to three straight years of losses. The WSJ article featured the Chairman of B&N, Leonard Riggio, and also disclosed the fact that he has sold nearly a quarter of his stake in the company- reducing his interest to 20% from 30% last year.

Barnes & Noble is really looking forward to higher sales this Christmas season. However, I believe that this situation is feasible for the company only if they have something new up their sleeves in regard to innovation. In 2013, B&N consumer stores experienced better-than-expected Christmas sales. This was due to widening its offerings in educational toys, games, and similar non book categories- which carry higher profit margins.

I think that Barnes & Noble is an accurate example of the saying in business- innovate or die. While reading this article, it became clear that B&N would have been better off if it had not waited as long as it did to invest in digital books and devices. For example, when Amazon was first expanding, this is when B&N should have jumped in the online book selling market. As a result, Amazon was able to offer more convenience, a larger selection, and cheaper prices to a larger audience of consumers. It wasn’t until 2 years after Amazon introduced its Kindle and digital bookstore that B&N decided to launch its own digital bookstore and Nook e-reader. If B&N had not waited around for two years, they most likely would not have faced huge losses on the Nook. Also, after personally using the B&N digital bookstore, I actually regret not going to Amazon for a cheaper price. In my opinion, I think it’s sad that America in general is reading less books (in paper form). With the switch to almost everything digital, not as many people read books. What’s sad is that we can even see this in the younger generation as mentioned earlier- B&N had better-than-expected Christmas sales in non-book related categories. Less Americans reading can also be illustrated through the fact that B&N has had to cut back on inventory by on average about 35,000 books, according to SEC filings. Although unfortunate, I think B&N has two moves that would buy time to avoid major liquidation in the near future. They could either operate privately or take the first move and release a new, innovative product in the digital bookstore market that would offer convenience, a wide variety, and cheaper prices.