The economics of potato salad

A pair of better-than-expected earnings reports in the financials sector was balanced against mediocre gains in retail sales and comments from Fed Chair Janet Yellen about stretched valuations in certain corners of the markets. The major indexes ended the day mixed.

Helped by its financials components, the Dow gained 5 points, with 14 of its 30 components advancing; the S&P 500 Index lost 3; and the Nasdaq was the index most affected by Yellen’s valuation comments, closing lower by 24. Decliners led advancers by just under two to one on the NYSE and five to two on the Nasdaq. The prices of Treasuries were mixed, with the 30-year strengthening and the 10-year flat. Gold futures dropped $9.60 to close at $1,297.10 an ounce, and the price of crude oil lost 95 cents to settle at $99.96 a barrel, the lowest in two months.

In Earnings News:

  • JPMorgan Chase & Co.’s second-quarter profit dropped 8% to $6 billion, or $1.46 a share, while revenue fell 3% to $24.45 billion. The decline was due to lower trading revenue, which fell 14% (a less severe drop than the 20% decline the bank had previously forecast), and a 66% decline in mortgage originations compared with a year ago. Its shares (JPM) gained 3.52%.
  • Profit at Goldman Sachs was up 5% on stronger-than-expected investment banking revenue, which rose 15% from the prior year. Net income was $2 billion, or $4.10 a share, on net revenue of $9.1 billion, up from $8.6 billion in the year-ago quarter. Net trading revenue fell from $2.4 billion to $2.2 billion. Goldman’s shares (GS) gained 1.30%.

In Other Business News:

  • Retail sales rose 0.2% in June, down from a 0.5% pace the month before, according to the Commerce Department. It was the slowest pace in five months, although the slowdown wasn’t broad-based, centering around auto sales and home improvement sales. Excluding auto sales, retail sales rose 0.4%. Year over year, sales were 4.3% higher.
  • In congressional testimony today, Federal Reserve Chair Janet Yellen said that there were signs of bubbles in some asset classes—including high-yield bonds and some tech companies, according to a Fed report released along with her testimony. However, according to the Fed report, valuations in much of the rest of the market were “not far above their historical averages.” Yellen said the Fed would likely stay on its current course of ending its bond-buying program in October and waiting until 2015 to begin raising interest rates, as inflation was still too low, long-term unemployment still too high, and the housing market is showing signs of slowing.
  • Reynolds American Inc., maker of Camel brand cigarettes, will buy Lorillard Inc. in a $25 billion cash-and-stock deal that will create the second-largest tobacco firm. Lorillard owns the Newport brand, among others. The combined company will be closer in size to U.S.-industry leader Altria, which makes Marlboro. Reynolds’ shares (RAI) dropped 6.87% and Lorillard’s (LO) sank 10.49% on concerns about antitrust obstacles and a possible Food and Drug Administration action against menthol cigarettes, the overwhelming majority of Lorillard’s business.
  • Manufacturing activity in the New York area significantly picked up its pace in July. The Federal Reserve Bank of New York’s Empire State Manufacturing Survey rose from 19.3 in June to 25.6 in July; a reading above zero indicates expansion. The shipments and prices-paid components improved significantly, while expectations for six months out cooled from an elevated 39.8 to 28.5.


We may have reached peak crowdsourcing. Zack “Danger” Brown from Ohio started a Kickstarter fundraising campaign so he could make some potato salad. He wanted to raise about $10, as it was his first time trying to make the apparently complicated dish. It turns out the internet really, really wanted this guy to make some potato salad, so thousands of backers funded his campaign to the tune of $50,000 (and growing).

The potato salad project is a perfect illustration of modern economics and thus could serve as the introductory chapter for all future Economics 101 textbooks.

Competition: First, no sooner had Brown’s project shown a degree of success than a slew of potato salad crowdsourcing copycats cropped up to compete with Brown. There were some variations. One person’s Kickstarter wanted funding to eat potato salad, offering as an introductory reward the fact that he will “inaudibly whisper your first name during the consumption of the potato salad.” The project was successfully funded with $45 in donations, but it sadly pales in comparison with $50,000 to make potato salad. Still, the potato-salad-making industry would be nothing without the potato-salad-eating industry, a classic example of the forward progress of one bold industry carving out room for others in its wake.

Barriers to entry: Another person tried to horn in on the action but with a twist—they offered to make macaroni salad instead. However, as is often the case in economics, the barriers to entry in this cutthroat game are high, and the macaroni project founders estimated they would need a ridiculously high $25 for successful completion of the project. Obviously, they couldn’t count on the price efficiencies available to the more established players like Zack “Danger” Brown, making their entire project seem like a long shot and scaring off backers. They’ve raised only $10 so far, or 40% of what they need.

Taxes: And finally, all revenue-generating projects need to keep a close eye on their tax obligations. According to Kickstarter, all donations to Kickstarter projects are considered income for U.S. citizens. The nonprofit Tax Foundation  ran the numbers (at the time assuming he made $70,000; about $20,000 of fake donations have since been removed), and estimated that, as a single filer in Ohio, Brown would owe $21,000 or so in state, local, federal, and payroll taxes, assuming he makes it to $70,000 over the next few weeks.

One way project creators can reduce the tax burden, according to Kickstarter, is to “offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year.” We here at Daily Advantage are not tax professionals, however, so please consult a tax attorney for the implications of crowdsourcing your next Reuben sandwich.

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