The Democratic primary is a crapfest because of its design. Time for some intelligent design.

Joe Biden has been the Democratic frontrunner for the entire 2020 primary until last when Elizabeth Warren surged in the polls and briefly became the frontrunner. Her momentum made it look like she was going to demolish all the other campaigns, so naturally, all the other campaigns started dumping on Warren and she became the victim of the circular firing squad that focuses on whoever looks like the most probably next leader of the party. That backlash predictably caused her polls to fall again and next week all the Democrats will probably rejoin President Trump in their focus on hurting Biden as frontrunner again.


Research shows that in our political system, the most effective way to win is not to tell what positive ideas you have for improving the country, but to go negative and bash whoever your biggest rival is. As a result, in our political primaries where most candidates are broadly similar, they all tend to gang up on whoever is in the lead to try to make the frontrunner look bad and it often works. The 2012 Republican primary was particularly striking in how each underdog candidate briefly rose to take his turn as the frontrunner in the polls only to be torn down by the rest of the pack and then to be replaced by another top dog who had seemed pure by comparison only because he had yet to be assaulted with mud from the rest of the pack yet.


First it was Romney, then Perry shot up and plunged, followed by Cain whose meteoric rise and fall was echoed by Gingrich and then Santorum until finally Romney finally rose above the fray as the failed candidates dropped out and gave him their support (perhaps in hopes of gaining a cabinet nomination). This kind of campaign structure benefits candidates who can withstand a lot of mud because they really are remarkably candidates, but it also benefits the kind of candidate who is really good at schoolyard taunts, dirty campaigning, and those who can whip up a base of support that likes mudslinging more than policy because in a crowded primary, you can win the election with only a third of the vote because it doesn’t matter if 2/3 of voters hate you. If their votes are divided among seven other candidates, then they will each average 10% of the vote, 1/3 of the vote is a landslide of popularity by comparison as shown in this final Real Clear Politics poll for the 2016 Republican primary.

Trump had the highest negative poll numbers of any candidate among Republicans during the primaries. People don’t remember how much the median Republican disliked him because that changed after he got the nomination and Republicans didn’t have any other viable choice. Republicans are much more loyal to their party than Democrats and so most Republicans came around and warmed up to him. But they would have warmed up to any candidate and most would have preferred a more mainstream Republican like Bush or Rubio. Trump should not have gotten elected to be the Republican nominee because the majority of Republicans would have preferred one of the other candidates. But our electoral system does not elect the person the majority wants, we elect the person who gets the plurality of votes.

In a plurality voting system like ours, voters can only express their preferences about one and only one of the candidates and the candidate with the most votes (the plurality) wins. This works fine when there are only two candidates because then the majority of the people get their way. It is often criticized as being a dictatorship of the majority who can dominate the minority that loses, but the reverse would be worse: Nobody thinks a dictatorship of a minority is better. But that is what a plurality electoral system usually produces when there are multiple candidates. When the vote is split among three or more candidates, the winning plurality is usually a minority of the voters and so we end up with a dictatorship of a minority. Not good.

Fortunately there are lots of other electoral systems that allow voters to express their preferences for more than one candidate so that we can collectively select the most popular candidate who can get approval from more than a small plurality: approval voting, range voting, instant runoff voting (IRV), a Condorcet method, etc. Whereas voting reform theorists disagree about what the best system is because they all have different advantages, everyone universally agrees that any of these methods is better than our plurality system.

So if there are lots of alternatives that everyone agrees are vastly superior to the one we have, then why don’t we change our system?

  1. Most people are simply ignorant and don’t realize there is any other way to run elections. That is a failure of our education system that might be explained by the fact that powerful people don’t want Americans to know about alternatives because they don’t want change.
  2. Any political change creates winners and losers and changing our electoral system would redistribute political power away from some very powerful people in our duopoly party system. Although America’s founding fathers despised political parties and hoped our new nation would avoid them, they accidentally designed an electoral system that concentrates political power into a two-party duopoly. Our current system gives tremendous power to behind-the-scenes power brokers to decide who gets to be on the ballot and who gets to appear in political debates. These unelected party bureaucracies also control the vast majority of political resources (political donations and volunteers) that help determine who wins and who loses. These insiders would lose power if we moved beyond our plurality system because that would break up our party system into numerous less-powerful parties. In most of the world’s best democracies, there are more than two party which typically include a party for Christian Democrats (a common name for social conservatives in other countries), Libertarians (or some other party for business priorities), Greens (for environmentalists), Labor (for people whose identity prioritizes unions), and many others. That splintering of resources would reduce the power of our two generic parties for liberals (Democrats) and conservatives (Republicans).
  3. Even if the majority of Americans realized that we could easily improve the machinery of our elections, our entire political system is designed for gridlock so it would still be hard to get anything done. The constitution is hard to change. Any change can be vetoed by the checks and balances of four centers of federal power: the House, Senate, Executive, and Supreme Court, and it only takes 40% of Senators to block everyone else. Our decentralized federal system makes change difficult since power is divided between federal, state and local jurisdictions. And finally, America’s large geographic size and diverse population makes it harder to come together on decision-making than in smaller, more homogenous nations.
  4. Although there is broad agreement that our plurality voting system is the worst possible method of voting, the very fact that there are dozens of good alternatives for replacing it makes it hard to pick which one. It is like a van full of bored people driving through prairie on a winter night who all agree that it would be more fun to watch any move together on the van’s movie system, but there are 100 great options and every person in the van has a different favorite. It can take a long time of driving along bored in the darkness (the worst option) to come to an agreement about which movie to select. The choice of multiple possible improvements creates a status-quo bias due to gridlock. If only one of the hundred movies had been available, everyone would immediately agree that it is better than driving in darkness because any movie is much better than that, but because there are many possibilities which all have different advantages and disadvantages, it is harder to come to agreement about which one to select and darkness rules. Similarly, the small community of people who is aware that our system sucks is divided into competing camps that each propose a different system because there isn’t one voting system that is clearly the one best of them all.

Ironically, the voting reform advocates are stuck because they cannot agree upon which system to choose. You would think that voting experts could just take a vote and all commit to throw their unified support behind the winner, but because they can’t agree upon what voting system to use, they can’t even take a vote to decide which system should replace plurality voting. Pathetic.

Donald Trump won the Republican primary because he was a master at negative campaigning and he had the enthusiastic support from a plurality (minority) of supporters who didn’t care about Trump’s scandals that would sink most candidates. In a plurality system you win by tearing down everyone else and you don’t need to appeal to the majority of voters. Whereas plurality voting creates divisiveness between multiple candidates as demonstrated in our nasty presidential primaries, any of the other voting systems encourage focusing more on commonalities because candidates must get the approval of a majority, not just the biggest plurality. That means they need to avoid pissing off all the supporters of their rivals. This is exactly what happened in the 2018 San Francisco mayoral election which uses instant-runoff voting. There was a frontrunner who had a large plurality versus the second and third-place candidates who were distant underdogs, but instead of merely attacking everyone else, the two underdogs banded together because they were both more liberal than the frontrunner. They campaigned together and asked their supporters to rank the two of them together ahead of the frontrunner and one of them won because a majority of voters wanted one of these two more liberal candidates who were only behind the more conservative frontrunner in the polls because the polls were asking voters the plurality question of which one candidate they liked best.

Whenever there are three or more candidates, the plurality system fails and it becomes increasingly important to avoid plurality voting as the number of choices increases because the size of the plurality needed for victory shrinks with more candidates. In an election with ten candidates, in theory one can win with only eleven percent of the vote. Minneapolis had an election with eight candidates and if they had used a plurality system, it would encourage a crapfest like we have in our presidential primaries. Fortunately Minneapolis also uses instant-runoff voting for mayor and that helped their mayoral candidates become extremely civil with each other. It gives candidates the incentive to be kind and gentle to most of their rivals for the reason that you need their supporters to like you as well because you want everyone to vote for you as well as for your rivals and if you piss off the all the other candidates and their supporters, you won’t get elected. In 2013, the candidates literally put their arms around each other and all sang Kumbaya together at the end of their final debate. You gotta listen to Radiolab to hear what it was like. It is a great story that shows how much of a difference a better voting system can make.

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Posted in Pence2018, Public Finance

Best place to work: McDonald’s France

French people like to do things their own way. When they brought McDonald’s to their country, they customized it right down to the famous yellow on red logo that we have in the United States. In France, they like a more subdued green in the background.

Although the French are justifiably proud of their national cuisine, they have also become quite taken with perhaps that most American of foods: McDonald’s. The American fast-food giant has been so successful in France that until recently it was the second most profitable market for McDonalds in the world after the United States. McDonalds achieved success in France partly by adapting their restaurant to local tastes. For example NPR’s Elenor Beardsley reports that McDonald’s in France provides a much more elegant atmosphere.

Even in these harried times, the French spend more than two hours a day at the table. Sitting down to a meal is a cornerstone of French culture, and McDonald’s seems to get that. French McDonald’s are spacious, tastefully decorated restaurants that encourage people to take their time while eating. And the cozy McCafe’s with their plush chairs and sofas have become an extension to many restaurants.

The food is different too. In France McDonald’s uses mostly locally-sourced, high-quality ingredients like cheeses that include chevre, Roquefort, cantal and blue cheese, rather than the “homogeneous plastic mass” which is the legal term for the “American cheese” used in America. One reason French McDonald’s have better food is due to activists like José Bové who went to jail for destroying a McDonald’s as a symbolic protest against low-quality globalized food.

In the long run, this may have helped McDonald’s achieve much greater success than it’s arch rival Burger King which didn’t adapt to French tastes.  McDonalds started serving McBeer and produced local dishes designed by French chefs such as gallette des rois cakes and the McBaguette with artisanal jams.  A Wharton analysis cited a 2009 study that found that more than 70% of the sandwiches eaten in France were baguette sandwiches.

Unlike their Anglo-Saxon counterparts, French consumers rarely snack between breakfast, lunch and dinner. As a result, French meal times also last longer, and more food is consumed through multiple courses, creating unique opportunities and challenges for fast-food dining…

McDonald’s has capitalized on the French cultural preference for longer meals by using surplus labor to provide table-side service, particularly in taking orders from lingering diners inclined to order an additional coffee or dessert item. Thanks to such initiatives,  the average French consumer spends about US$15 per visit to McDonald’s — four times what their American counterparts spend…
the French spent an average of 38 minutes per meal in 2005, down from an average of 82 minutes in 1978.

Of course, McDonalds has brought many of its American features to France like the familiar Big Mac and spotless free bathrooms. That is a true gift of American cultural imperialism. Free bathrooms are hard to find in this country of pay toilets except in American fast-food chains. But because McDonalds France is run as a semi-independent subsidiary, it not only has a unique menu, ambiance, and logo, but a unique corporate culture too.

NPR’s Rough Translation tells the story of a McDonalds in a low-income Muslim neighborhood in the seedy city of Marseille that is known for gangs and crime. The McDonalds franchise’s slogan is “Come as you are” and it saw its mission as being part of each community. This tradition was shaped by stories they heard from America such as during the LA riots of 1992 after the Rodney King beating, the rioters who were trashing and burning entire blocks of restaurants and stores spared McDonalds because they felt like McDonalds was more of a part of their community than the other businesses. Unlike most businesses, McDonald’s mostly hired local people and because it was owned by a local franchisee who was invested in the local neighborhood, McDonalds gave out free food and other local philanthropy to help the local neighborhoods. Most other businesses didn’t do that and they got burned.

NPR tells the story about how McDonalds in Marseille took that principle up to a level that engendered loyal fanaticism among its employees culminating in an event where one of them doused himself with gasoline and threatened to immolate himself in protest to prevent a local store from being shut down. Now McDonalds in France does pay better than in the US, but it starts at their minimum wage which is only about $11 per hour, so it wasn’t the pay that makes employees love their job so much.

If you didn’t click on the link above, you gotta click now to listen to the whole story.  It isn’t everyday that you’ll hear a story about fast food workers that makes you swell with emotion.

They love their job partly because McDonalds gives them a chance and respect that most other employers don’t give. Men’s Warehouse had a similar strategy of hiring employees who might even be shunned by other employers because that engenders loyalty.

Men’s Wearhouse founder George Zimmer has been an outspoken advocate of providing felons with a second chance. As a result of this Men’s Wearhouse does not conduct criminal background checks for employees or those interviewing for positions.”

My third longest job in my life was at McDonald’s and I wouldn’t say that it was a place I liked to be, and most of us were not particularly loyal to it, but I did respect how well they inculcated a culture of hard work and many of my co-workers really did get a feeling of accomplishment from doing good work there. Even though I was always a McDonald’s cynic who grew up in an anti-fast-food, anti-big-business family and I disliked the idea of McDonald’s–even I sometimes had a tinge of envy or competitiveness when I saw how much better some of my co-workers could perform than I.

Posted in Medianism

This month may be the best time in history to look for a job!

One of the oddities of the macroeconomy is the fact that GDP falls wildly every year in the beginning of winter. That means that there is a kind of recession every winter. It isn’t an official recession because everyone expects it and plans for it so there isn’t the same kind of economic pain that an official recession produces. Economists avoid calling every winter a recession in two ways. First, we have officially defined a recession as a downturn in GDP that lasts two or more quarters. The annual winter slump only lasts one quarter, so that simply defines the issue away. Secondly, statisticians “seasonally adjust” our GDP data to try to smooth out the seasons to pretend that they don’t exist! That makes the annual winter slump disappear from the official data that we ordinarily use, and the intent is to make the long-term trends more visible by smoothing out the short-term seasonal “noise”, but the seasonally-adjusted data is less realistic if you are concerned with the short-run state of the economy which is certainly important when studying short-run phenomena such as recessions. 

For example, here is a comparison of the seasonally-adjusted data in blue versus the original data in red.

As you can see, the magnitude of the fall in the raw GDP data (red line) from the last quarter of each year (with the busy Christmas season) to the first quarter of each year (when there is little outdoor work in much of the country due to freezing temperatures) is about as big as the official seasonally-adjusted (blue line) recession of 2008–the biggest recession since the great depression. 

Unemployment also fluctuates seasonally, and unemployment data shows more seasonal detail than with GDP data because unemployment data is collected monthly whereas GDP data is only collected quarterly. Here is the raw GDP data compared with the raw unemployment data (where I’m calling it “raw” data because it is the original, non-seasonally-adjusted data):


The unemployment graph (blue line) shows two spikes per year—one in January when retailers lay off workers and one in June when there is an influx of new graduates and students looking for work. The two spikes are probably caused by different factors. The January spike is probably caused by a drop in demand as employers need less help and the June spike is caused by an increase in supply when more people are looking for work.  

The January unemployment spike has been getting smaller over the decades as the percent of the labor market that is engaged in seasonal work like agriculture has been gradually declining and more and more of the labor market has shifted into services like healthcare that have steadier demand. 

Because both employers and workers expect this kind of fluctuation in the labor market however, you actually see more workers getting discouraged and dropping out of the labor market in January, so it probably isn’t the hardest time to get a job according to data on the number of unemployed people per job opening. This is probably the best measure of how hard it is to find a job at any given time:


By this measure, now could be the best time in recorded history to look for a job. (Note that our historical record only goes back to the year 2000 for this data, so ‘best in history’ isn’t as dramatic as it sounds, but given the overall state of the labor market, I’d guess that this is about the best time in at least a half century.)

We are in a remarkable time in history in which for the past year and a half there have been more job openings than people looking for work!

The data in this graph only goes up to last August, but every year the graph falls in October which is the second best month to look for a job after the month of April.

This graph shows the average number of workers who are looking for a job per the number of job opening for each month in the data series that we have from 2000 to the present. Given that October is one of the best months to look for a job, and the labor market is extremely tight, this could well be the best month in recorded history to look for a job.

As a result, real median wages have been rising:

Wages have only been keeping up with GDP growth for a couple years now, so it hasn’t been anything dramatic except by comparison with the stagnant wages we have had during the rest of the past half century.

Posted in Labor, Macro

NPR thinks the average American looks like the average Trump supporter

Planet Money and the New York Times’ Ben Casselman teamed up to try to demonstrate that, “Mode, not average, is a better way to find the typical American.” They are wrong.

Here is how they set up the issue:

MALONE: My issue is with this thing that people talk about, the average American. …Who is average, really? …I think people don’t mean average American. I think what they actually mean is, who is the person – if I walk outside into America, who is the person I’m most likely to run into?

JACOB GOLDSTEIN: Yes, the person who there’s more of that person than any other person.

MALONE: That ain’t the average. It’s not the median… If you actually want to figure out what human beings exist outside your door, you need to run the mode.

Instead of demonstrating how useful the mode is, they actually do a pretty good job of demonstrating why nobody uses it: it sucks for describing most data.

What is the mode? It is simply the most common value in a set of data. For example, suppose you have a room full of people and their annual incomes are:

$1,000; $1,000; $30,0000; $40,000; $50,000; $60,000; and $100 million

The mode is $1,000 because there are two people with that income and only one person at every other income. The median is the most useful statistic for understanding the central tendency of this group’s income because it is the value in the middle, $40,000, which is the most central value. The mean is $14.4 million which is much closer to the one rich outlier than to anyone else, so it is also a poor measure of central tendency for the group.

The median does the best here because it is the least sensitive to outliers. If another person with $100 million walks into the room, then the mean would nearly double, and the mode would be both $100 million and $1,000. Both of those statistics are unrepresentative whereas the median would still be near the center of the numbers and hardly affected at all.

The mode is only the best measure for categorical data like color. For example, if we have seven colors:

red, red, orange, yellow, green, blue, ultraviolet

In this case, it is impossible to take the mean and if we don’t care about the order of the colors, then we cannot take the median either so the mode is the best possible measure simply because the other two options are impossible. The best you can do is say that red is the most common color which is the same thing as saying that it is the modal color.

But for quantitative data we can calculate the mean or median and the mode is rarely as useful as either of them. Planet Money demonstrated how ridiculous the mode is for numerical data when they determined that the modal income is $30,000 to $75,000.” That is such a big range, it is laughable. It ranges from the poverty line for a family of five up to the upper-middle class. Nearly a third of US households (29%) are in this “modal” range.

Why did they get such a huge range? Well, there are probably a very similar number of households that earn between $30,000 and $75,000 so the mode might be multiple measurements just as with the example above with two modes at both $1,000 and $100 million. There is always some uncertainty in data collection because measurements aren’t always perfect. For example, if a household says they earn $30,000, they might be a little off and they might actually earn $31,000 or $29,000, so the real number could be plus or minus a thousand or more. Given modest uncertainty in the data, there is usually a large range in the possible true value of the mode and perhaps in this case the NPR authors could not give any more precision than that the true modal values must be somewhere between $30,000 and $75.000!

The median income is much easier to pin down. In this case we would just find the observation in the middle, which was about $63,000 in 2018, and if there is uncertainty of plus or minus $1,000 then we would know that the true median is between $62,000 and $64,000. That is much more precise and useful.

UPDATE: In their methodology description, Planet Money explains that they just arbitrarily lumped households into four income groups. This is even worse than I had originally thought. With this methodology, it would be possible to say that the modal income is nearly anything. For example, I could say that the modal income is between $1 million and $1 billion simply by splitting up all the lower-income categories into smaller buckets.

Planet Money’s search for the modal American gets even more bizarre after that. They determine that, “The modal American, based on our criteria, is in fact, a child.” But then because they really wanted the modal American to be an adult, they threw away their criteria. Even though their methodology determined that the modal American is a child, they just changed their criteria to get what they had originally wanted all along.

So they threw out their statistical methodology and just looked at adults and then they arbitrarily divided Americans into buckets according to ethnic categories which happened to clump people from Portugal, Ireland, Russia, and many from Latin America into the “white” category so that they could claim that identity as being “central” to “average” America.

Then they arbitrarily decided that Gen X is more “central” to America even though Gen X is far from the mode. There are both more Baby Boomers and more “echo boomers” (millennials) than members of Gen X, but they don’t really care about the mode and wanted someone who is “middle age” which would be the median age (38). They lamented that this is “one of the least common ages” and instead of staying with the modal age (26), they just switched their criteria and picked someone from Gen X anyway, perhaps by arbitrarily arranging their age buckets to get what they wanted.

In the end, they seemed to arbitrarily pick what they had probably had as their preconceived notion of the average American. Someone who is:

  • Gen X (even though the modal American is age 26)
  • “upper-middle-class income. The household income is between $75,000 and $165,000 a year. ” (Even though this is way higher than either the modal income or the median and is closer to mean household income.)
  • married (Even though the modal American is unmarried)
  • male (Although they admit that the modal American is female, they only interview men and talk about the “average guy” and focus on the “homogeneous experience” of, ” white, Gen X men“)
  • employed (Even though there are more Americans without a job than with a job)
  • no college degree
  • lives in the suburbs
  • white
  • wears plaid shirts! (I think this part was their attempt at a joke.)

Although I only have minor quibbles with the last four criteria, if I didn’t know better, I’d think Planet Money started out with a picture of the kind of guy that they consider to be the most essentially American and then picked arbitrary categories and tortured the statistics until they got what they wanted. They completely ignored the modal value for most of their criteria.

This ‘analysis’ is a good demonstration why nobody uses the mode with this kind of data. Even when Planet Money tried to use the mode, they couldn’t stick with it because it didn’t give them the preconceived results that they were looking for and so they just kept changing their rules until they got… demographics that look like something pretty close to the median Trump supporter. You know, “real Americans“.

Posted in Metrology

Big land

Bloomberg investigated the people that own the most land in America and this map of Maine speaks for itself:

The report found that:

 The 100 largest owners of private property in the U.S., newcomers and old-timers together, have 40 million acres, or approximately 2% of the country’s land mass, according to data from the Land Report and reporting by Bloomberg News. Ten years ago, the top 100 had fewer than 30 million acres.

Many of these individuals own more land area than the entire state of Rhode Island and altogether, these 100 landowners control an area about as big as the entire state of Florida. If anything this investigation understates the concentration of land ownership because a lot of properties is held by private corporations whose owners are hard to identify and sometimes the corporations are owned by other corporations as in the case of President Trump’s holdings. Trump owns approximately 500 business entities (although the exact number is unclear) that are collectively known as the Trump Organization and only about half of them use the Trump name. Even though Trump’s holdings have gotten much more scrutiny than other wealthy people, even here we don’t know exactly what he owns, how wealthy he is, nor how many companies he actually controls. And there are hundreds of Americans who are wealthier than Trump and whose holdings are probably even more complicated and secretive.

Here is a zoom in on another part of the USA that is particularly popular with the biggest 100.

Here is where all of it is located. They haven’t bought much in agricultural Midwest.

In contrast, the government still owns a lot more land than the 100 biggest private landowners:

This map shows the distribution of federally owned land.

Because this map only shows federal ownership, it leaves out vast territories owned by the state governments. For example, this map shows that the federal government owns nearly 3/4 of Alaska and then the state government owns another quarter of the state of Alaska leaving less than 1% of Alaskan territory that is owned by private citizens.

There is a lot more land in the east that is owned by state and local governments including roads, parks, schools, and rivers…

The expensive publically-owned road system connects all of the most important places together as you can see in this a map of nothing but the roads in Florida. The most valuable regions pop out visibly because they have more roads. (This map and many other states are available for purchase from Fathom).

Local government ownership is much more valuable than most privately-held real estate because roads are extremely valuable, particularly in urban areas where road density is concentrated. A newly paved road costs anywhere from a minimum of about $2 million per mile in rural areas to more than $10 million in urban areas. Maintenance is also very expensive. Resurfacing a 4-lane road costs about $1.25 million per mile.  Despite this cost, we call our most expensive roads freeways.

Posted in Public Finance

The occupation that tops them all

Claire Cain Miller at the New York Times gets the key issue with the gender pay gap:

Flexible, predictable hours are the key — across occupations — to shrinking gender gaps, according to the body of research by Claudia Goldin, an economist at Harvard.

Although in most respects women have made dramatic progress towards equality over the past half century, there is one trend that has counterbalanced the other wins:

Jobs increasingly require long, inflexible hours, and pay disproportionately more to people who work them. But if one parent is on call at work, someone else has to be on call at home. For most couples, that’s the woman — which is why educated women are being pushed out of work or into lower-paying jobs.

The fact that medical doctors have high scheduling flexibility is why…

Female doctors are likelier than women with law degrees, business degrees or doctorates to have children. They’re also much less likely to stop working when they do.

High pay, growing demand, rewarding work, high respect from the rest of society, and flexible scheduling. Not bad if you can stomach it.

Posted in Health, Labor

Amazon as a nonprofit

For most of Amazon’s history it made zero profit. That changed a couple years ago, but although its gross profit margin on revenues is now positive, it is still pretty negligible today.

Amazon is a huge conglomerate these days, but roughly speaking, its businesses can be divided into a boring retail business that everybody  knows well and a technology business that almost nobody knows unless you are a CFO or CIO because it operates server farms and provides technology services to other businesses. The technology business has been wildly profitable for most of this history in contrast with the retail business that usually loses money. Although most stand-alone retail businesses are different than Amazon’s in that they can’t constantly lose money every year, most retail businesses have very low profit margins, particularly if they are competing with Amazon, so Amazon’s lack of profits isn’t too far from normal.

So if Amazon’s profits have been zero or negative for most of its history and are negligible today, why is it the third most valuable corporation on the US stock exchange, almost three times more valuable than its competitor Walmart?

Cap Rank

Company

Market Cap 

on 8/20/19

1 Microsoft

1,048.0

2 Apple

950.7

3 Amazon.com

891.1

4 Alphabet

820.4

5 Facebook

524.4

6 Berkshire Hathaway

485.9

7 Alibaba

461.4

8 Visa

389.5

9 Johnson & Johnson

344.7

10 JPMorgan Chase

343.1

11 Walmart

319.9

The reason is that Amazon is using its high cash flow to invest in itself and grow its businesses. Investors are betting that Amazon’s businesses will become highly profitable someday in the future and that is elevating its stock market capitalization. Below is another way of looking at Amazon’s business with adds another line of data for its free cash flow.

Free cash flow is an alternative measure of profitability and one of the big differences is that it includes spending on equipment and assets and changes in working capital. By this measure, it isn’t hard to see that Amazon has had a lot of business success in recent years.

Posted in Managerial Micro

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