Tuesday, April 22, 2008

Saving the Economy

Pennsylvania is the next state "up for grabs" in the Presidential "competition", and all three candidates are revising their plan to revive the country's faltering economy. On this day of the democratic primary in Pennsylvania, I have a suggestion for the candidates on how to improve the economy. It is not a novel idea, nor a difficult idea to realize. It will reduce the amount of taxes that are collected by the government, but not enough that it cannot be recouped through some other venue. So here it is.

Make interest paid on educational loans tax deductible across all income levels.

It's hard to imagine why this would improve the economy, but if you bear with me, I'll explain. We need to start with some basic facts. First, when adjusted for inflation, Americans make more money today than in 1970. But, when corrected for level of education, Americans make less now than in 1970. Second, more and more Americans have college diplomas, and having said diploma is becoming more and more necessary to find a secure job. In 1970, a college diploma set you apart from many other job applicants. Nowadays, not having one sets you apart from other job applicants. Third, obtaining a college degree has become more expensive, even when adjusted for inflation. Witness the blowup from partnerships just short of collusion between universities and tuition loan companies. Fourth, college graduates earn more money than high school graduates. Fifth, people who make more money generally spend more money, and for any number of reasons--more expensive products, greater number of items purchased, etc. And lastly, people who earn more money pay more taxes. People who are in the top 10% of income pay 50% of the tax collected by the government.

Put those six facts together, and what you have is a growing population of higher income earners who are more educated, but also carrying larger education loans. This group is covering a greater percentage of tax dollars and is also spending more for the health of the economy. The problem is the income limit for tax deduction of student loans, which creates a catch-22. You want people to spend more money. You want people to be better educated. You need the taxes these people pay. But because of the disproportionate level of student loans (like the hosing bubble), the equilibrium that is created hinders many people from getting that higher education. Creating an incentive like tax deductible student loan interest will work as an incentive. The reduction in taxes will be minor, since we are only talking about deducting interest payments and not principal payments. But the potential change in thinking about education could be enormous.

I don't disagree that education of children is important. If you can't get into high school, you can't get into college. Certainly. But if paying for college in not in your long term financial interest, you'll end up with a country run by high school graduates, which will not turn out well for the United States. If we are serious about reclaiming some of the educational and academic ground lost to European and Asian countries over the years, we need to make it not only sensible and practical but advantageous to earn that degree. Other countries may not have the same degree of wealth disparity, but education is still a revered benefit that is a worthwhile investment.

Wednesday, April 9, 2008

Web Ads

I was watching television last night--not any particular show, just the food network to have something in the background. There was a V8 commercial where a man is avoiding vegetables everywhere. He has a shish kabob with only cubes of meat while his wife has a classic kabob. He looks to get shredded cheese at the salad bar, but realizes he's in the shredded carrots bowl. It was hilarious, but it got me thinking, who watches commercials anymore? Pretty much everyone I know owns a TiVo or a DVR or uses on demand or Netflix. You either fast forward through the commercials or get content without commercials. There aren't too many occasions where people watch advertisements on television anymore. You have the Superbowl, New Year's Eve, and maybe holiday programming, where Christmas Story is replayed over and over again. And even then, people have a tendency to change channels to avoid commercials. So even though more people are watching television, fewer people are watching commercials. This has given many advertisers pause, since the classical thinking of advertising is based on exposure--the bigger your audience, the bigger the impact of the advertisement. And for the most part, exposure was seen to parallel the exposure of the television show. With the advent of DVRs and on demand, exposure is now likely overestimated.

But wait, you say. the VCR has been around for a very long time. people could just tape their shows and fast forward through commercials in the 1980's. While that is true, VCRs were only able to record one show at a time, and required more user input to program. Sure, there was VCR+. And sure, there was the ability to set a weekly recording schedule. But it was simply a pain in the ass, and being home for your favorite show was easier. Now you can set up season passes in a flash, record two shows at once, get your shows on demand, or get last year's season on dvd before summer begins. And with people multitasking more and more, there is less time to be spent watching commercials. Thus the last true haven for commercials is the big ticket sports event--the Superbowl, the NCAA tournament, the World Series, the Bowl games, etc. Sometimes if you have a hot enough show, you can get people to watch it in real time with the commercials, so they can talk about it the next day with their coworkers and friends, but even then all you have to do is watch it an hour later and you'll be able to skip the commercials.

So what are television advertisers to do? Some have tried heavier marketing for product placement within shows. There was even a brief attempt to create a seamless transition into a commercial by using the cast of the sitcom. It seems the future of television advertising is not in commercials. It will be in product placement within the shows. Commercials will still be watched by many people, but they will reach a much smaller audience and be less effective because of that. We may see a transition to greater advertising with movies and dvds. These two media platforms still retain some control over what you watch before the feature. If you get to the theater early, you watch trailers and commercials. If you put in a dvd, you cannot fast forward past the piracy warning, and now possibly, several commercials as well.

The web is facing a similar dilemma. There are millions and millions of website in the great ether that earn a great deal of money from advertising. And it is the same faulty logic that was carried over from television advertising. The exposure of the user (or viewer) to the advertisement is paralleled to the exposure of the user to the content (or show). But instead of fast forwarding past the advertisement, users simply ignore the advertisement. One survey estimates that only 0.02% of advertisements are "clicked through". That may mean millions of "click throughs" given the trillions or more advertisements one the millions of web pages out in the ether. But given the millions of products that are advertised, it seems an inefficient method of advertising. This is because most of the web advertisers are advertising for their internet business. And shopping on the web isn't like shopping at the supermarket. You can't walk down an aisle and notice the new granola bar that you saw advertised on a billboard when you drove into work. Business on the web takes a great deal more exposure to harness customers. Web ads are the equivalent to the impulse candy rack at the checkout lane or the bright neon signs above the buildings in Vegas.

Of course, I don't work for the large conglomerates that advertise through web ads, so why do I care how they waste their money? I actually don't care how they waste their money. But if perchance one day I can reap the benefits of this system, I will gladly join the crowd.