Economy

Breaking the Tech Chain to Slow the Growth of Single-Family Rentals

April 17, 2022
Antitrust, Artificial Intelligence, Competition, Data, Discrimination, Economics, Economy, New Technology

Sarah Bauer, MJLST Staffer

For many of us looking to buy our first homes during the pandemic, the process has ranged from downright comical to disheartening. Here in Minnesota, the Twin Cities have the worst housing shortage in the nation, a problem that has both Republican and Democratic lawmakers searching for solutions to help both renters and buyers access affordable housing. People of color are particularly impacted by this shortage because the Twin Cities are also home to the largest racial homeownership gap in the nation.

Although these issues have complex roots, tech companies and investors aren’t helping. The number of single-family rentals (SFR) units — single-family homes purchased by investors and rented out for profit — have risen since the great Recession and exploded over the course of the pandemic. In the Twin Cities, black neighborhoods have been particularly targeted by investors for this purpose. In 2021, 8% of the homes sold in the Twin Cities metro were purchased by investors, but investors purchased homes in BIPOC-majority zip codes at nearly double the rate of white-majority neighborhoods. Because property ownership is a vehicle for wealth-building, removing housing stock from the available pool essentially transfers the opportunity to build wealth from individual homeowners to investors who can both profit from rents as well as the increased value of the property at sale.

It’s not illegal for tech companies and investors to purchase and rent out single-family homes. In certain circumstances, it may actually be desirable for them to be involved in the market. If you are a seller that needs to sell your home before buying a new one, house-flipping tech companies can get you out of your home faster by purchasing the home without a showing, an inspection, or contingencies. And investors purchasing single-family homes can provide a floor to the market during slowdowns like the Great Recession, a service which benefits homeowners as well as the investors themselves. But right now we have the opposite problem: not enough homes available for first-time owner-occupants. Assuming investor-ownership is becoming increasingly undesirable, what can we do about it? To address the problem, we need to understand how technology and investors are working in tandem to increase the number of single-family rentals.

The Role of House-Flipping Technology and iBuyers

The increase in SFRs is fueled by investors of all kinds: corporations, local companies, and wealthy individuals. For smaller players, recent developments in tech have made it easier for them to flip their properties. For example, a recent CityLab article discussed FlipOS, “a platform that helps investors prioritize repairs, access low-interest loans, and speed the selling process.” Real estate is a decentralized industry, and such platforms make the process of buying single-family homes and renting them out faster. Investors see this as a benefit to the community because rental units come onto the market faster than they otherwise would. But this technology also gives such investors a competitive advantage over would-be owner-occupiers.

The explosion of iBuying during the pandemic also hasn’t helped. iBuyers — short for “instant buyers” — use AI to generate automated valuation models to give the seller an all-cash, no contingency offer. This enables the seller to offload their property quickly, while the iBuyer repairs, markets, and re-sells the home. iBuyers are not the long-term investors that own SFRs, but the house-flippers that facilitate the transfer of property between long-term owners.

iBuyers like Redfin, Offerpad, Opendoor (and formerly Zillow) have increasingly purchased properties in this way over the course of the pandemic. This is true particularly in Sunbelt states, which have a lot of new construction of single-family homes that are easier to accurately price. As was apparent from the demise of Zillow’s iBuying program, these companies have struggled with profitability because home values can be difficult to predict. The aspects of real estate transactions that slow down traditional homebuyers (title check, inspections, etc…) also slow down iBuyers. So they can buy houses fast by offering all-cash offers with no inspection, but they can’t really offload them faster than another seller.

To the degree that iBuyers in the market are a problem, that problem is two-fold. First, they make it harder for first-time homeowners to purchase homes by offering cash and waiving inspections, something few first-time homebuyers can afford to offer. The second problem is a bigger one: iBuyers are buying and selling a lot of starter homes to large, non-local investors rather than back to owner-occupants or local landlords.

Transfer from Flippers to Corporate Investors

iBuyers as a group sell a lot of homes to corporate landlords, but it varies by company. After Zillow discontinued its iBuying program, Bloomberg reported that the company planned to offload 7,000 homes to real estate investment trusts (REITs). Offerpad sells 10-20% of its properties to institutional investors. Opendoor claims that it sells “the vast majority” of its properties to owner-occupiers. RedfinNow doesn’t sell to REITs at all. Despite the variation between companies, iBuyers on the whole sold one-fifth of their flips to institutional investors in 2021, with those sales more highly concentrated in neighborhoods of color.

REITs allow firms to pool funds, buy bundles of properties, and convert them to SFRs. In addition to shrinking the pool of homes available for would-be owner-occupiers, REITs hire or own corporate entities to manage the properties. Management companies for REITs have increasingly come under fire for poor management, aggressively raising rent, and evictions. This is as true in the Twin Cities as elsewhere. Local and state governments do not always appear to be on the same page regarding enforcement of consumer and tenant protection laws. For example, while the Minnesota AG’s office filed a lawsuit against HavenBrook Homes, the city of Columbia Heights renewed rental occupancy licenses for the company.

Discouraging iBuyers and REITs

If we agree as a policy matter that single-family homes should be owner-occupied, what are some ways to slowdown the transfer of properties and give traditional owner-occupants a fighting chance? The most obvious place to start is by considering a ban on iBuyers and investment firms from acquiring homes. The Los Angeles city council voted late last year to explore such a ban. Canada has voted to ban most foreigners from buying homes for two years to temper its hot real estate market, a move which will affect iBuyers and investors.

Another option is to make flipping single-family homes less attractive for iBuyers. A state lawmaker from San Diego recently proposed Assembly Bill 1771, which would impose an additional 25% tax on the gain from a sale occurring within three years of a previous sale. This is a spin on the housing affordability wing of Bernie Sanders’s 2020 presidential campaign, which would have placed a 25% house-flipping tax on sellers of non-owner-occupied property, and a 2% empty homes tax on property of vacant, owned homes. But If iBuyers arguably provide a valuable service to sellers, then it may not make sense to attack iBuyers across the board. Instead, it may make more sense to limit or heavily tax sales from iBuyers to investment firms, or the opposite, reward iBuyers with a tax break for reselling homes to owner-occupants rather than to investment firms.

It is also possible to make investment in single-family homes less attractive to REITs. In addition to banning sales to foreign investors, the Liberal Party of Canada pitched an “excessive rent surplus” tax on post-renovation rent surges imposed by landlords. In addition to taxes, heavier regulation might be in order. Management companies for REITs can be regulated more heavily by local governments if the government can show a compelling interest reasonably related to accomplishing its housing goals. Whether REIT management companies are worse landlords than mom-and-pop operations is debatable, but the scale at which REITs operate should on its own make local governments think twice about whether it is a good idea to allow so much property to transfer to investors.

Governments, neighborhood associations, and advocacy groups can also engage in homeowner education regarding the downsides of selling to an iBuyer or investor. Many sellers are hamstrung by needing to sell quickly or to the highest bidder, but others may have more options. Sellers know who they are selling their homes to, but they have no control over to whom that buyer ultimately resells. If they know that an iBuyer is likely to resell to an investor, or that an investor is going to turn their home into a rental property, they may elect not to sell their home to the iBuyer or investor. Education could go a long way for these homeowners.

Lastly, governments themselves could do more. If they have the resources, they could create a variation on Edina’s Housing Preservation program, where homeowners sell their house to the City to preserve it as an affordable starter home. In a tech-oriented spin of that program, the local government could purchase the house to make sure it ends up in the hands of another owner-occupant, rather than an investor. Governments could decline to sell to iBuyers or investors single-family homes seized through tax forfeitures. Governments can also encourage more home-building by loosening zoning restrictions. More homes means a less competitive housing market, which REIT defenders say will make the single-family market less of an attractive investment vehicle. Given the competitive advantage of such entities, it seems unlikely that first-time homebuyers could be on equal footing with investors absent such disincentives.

#IsTheShipStillStuck?

April 4, 2021
Economy, Litigation

Schuyler Troy, MJLST Staffer

The Ever Given, a massive four-hundred-meter-long cargo ship weighing over two hundred thousand tons and carrying over eighteen thousand cargo containers, ran aground in the Suez Canal on March 23, 2021. Wedged between the edges of the canal, the ship blocked all transport through the canal for just over six days. Trade routes were brought to a screeching halt as a backlog of hundreds of ships were left stranded in Egypt’s Great Bitter Lake waiting for passage through the canal, which serves as a conduit for about thirty percent of daily global shipping container volumes, including roughly one million barrels of oil a day. After days of round-the-clock work, the Ever Given was finally pried loose on March 29, allowing traffic to flow again through the canal. The precise cost of the trade stoppage is still unclear, but data from Lloyd’s List showed that the ship held up an estimated $9.6 billion in trade each day that it was stuck—roughly $400 million per hour. The canal itself generated $5.6 billion for Egypt in 2020.

What exactly caused the Ever Given to run aground is currently under investigation. According to an article from Business Insider, initial theories suggested that sudden strong winds caused the hull to deviate from its course and hit the bottom of the canal. Human error is also suspected to have played a part in the fiasco, with reports that the ship was traveling faster than the canal’s speed limit and that its crew opted not to utilize a tugboat escort through the canal. Investigators are also likely to scrutinize the performance of the Ever Given’s two Egyptian canal pilots, both senior chief pilots with more than thirty years of experience.

With so much money on the line, attention will surely turn to who will be left liable for the losses, and the complex structure of ownership and operation of the Ever Given has revealed a tangled web of potentially liable parties. The ship is owned by Shoei Kisen Kaisha, a Japanese subsidiary of Imabari Shipbuilding. At the time it ran aground in the Suez Canal, it was chartered and operated by Evergreen Marine, a Taiwanese container line. The Ever Given is registered in Panama, and is technically managed by the German ship management company Bernhard Schulte Shipmanagement. The crew was comprised of twenty-five Indian citizens, and the ship was insured in part by the UK P&I Club, a United Kingdom based insurance group.

Aggrieved parties are likely to raise claims arising not only from delays in shipment of the goods aboard the Ever Given, but also from cargoes on other ships that were delayed due to inability to transit the canal and from ships which diverted their course around the Cape of Good Hope, a longer and costlier route. There could also be claims for damage to the canal itself, as diggers were required to remove earth and rock from the canal’s banks around the areas where the ship ran aground.

Litigation over the Ever Given’s grounding will likely take years to sort out. In the meantime, we will always have the memes that the fiasco spawned.

Robinhood Changed the Game(Stop) of Modern Day Investing but Did They Go Too Far?

February 21, 2021
Antitrust, Class Action, Corporate Ethics, Economy, Financial Law, Internet, Litigation, Trade, Video Games

Amanda Erickson, MJLST Staffer

It is likely that you have heard the video game chain, GameStop, in the news more frequently than normal. GameStop is a publicly traded company that is known for selling, trading, and purchasing gaming devices and accessories. Along with many other retailers during the COVID-19 pandemic, GameStop has been struggling. Not only did COVID-19 affect its operations, but the Internet beat the company’s outdated business model. Prior to January 2021, GameStop’s stock prices reflected the apparent new reality of gaming. In March 2015, GameStop’s closing price was around $40 a share, but at the beginning of January 2021, it was at $20 a share. With a downward trend like this, it might come as a shock to learn that on January 27, 2021, GameStop’s closing price was at $347.51 a share, with the stock briefly peaking at $483 on the following day.

This dramatic surge can be accredited to a large group of amateur traders on the Reddit forum, r/WallStreetBets, who promoted investments in the stock. This sudden surge forced large scale institutional investors, who originally bet against the stock through short positions, to buy the stock in order to hedge their positions. Short selling involves “borrowing” shares of a company, and quickly selling the borrowed shares into the market. The short seller hopes that these shares will fall in price, so that they can buy the shares back at a potentially lower price. If this happens, they can return the shares back that they “borrowed” and keep the difference as profit. The practice of short selling is controversial. Short selling can lead to stock price manipulation and can generate misinformation about a company, but it can also serve to check and balance the markets. The group on Reddit knew that short sellers had positions betting against GameStop and wanted to take advantage of these positions. This caused the stock price to soar when these short sellers had to repurchase their borrowed shares.

This historic scene intrigued many day traders to participate and place bets on GameStop, and other stocks that this Reddit group was promoting. Many chose to use Robinhood, a free online trading app, to make these trades. Robinhood introduced a radical business model in 2014 by offering consumers a platform that allowed them to trade with zero commissions, and ultimately changed the way the industry operated. That is until Robinhood issued a statement on January 28, 2021 announcing that “in light of recent volatility, we restricted transactions for certain securities,” including GameStop. Later that day, Robinhood issued another statement saying it would allow limited buying of those securities starting the next day. This came as a shock to many Robinhood users, because Robinhood’s mission is to “democratize finance for all.” These events exacerbated previous questions about the profitability model of Robinhood and ultimately left many users questioning Robinhood’s mission.

The first lawsuit was filed by a Robinhood user on January 28, 2021, alleging that Robinhood blocked its users from purchasing any of GameStop’s stock “in the midst of an unprecedented stock rise thereby depriv[ing] retail investors of the ability to invest in the open-market and manipulating the open market.” Robinhood is now facing over 30 lawsuits, with that number only rising. The chaos surrounding GameStop stock has caught lawmakers’ attention, and they are now calling for congressional action. On January 29, 2021, the Securities and Exchange Commission issued a statement informing that it is “closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices” and expressed that it will “closely review actions taken by regulated entities that may disadvantage investors.” Robinhood issued another statement on January 29, 2021, stating they did not want to stop people from buying these stocks, but that they had to take these steps to conform with their regulatory capital requirements.

The frenzy has since calmed down but left many Americans with questions surrounding the legality of Robinhood’s actions. While it may seem like Robinhood went against everything the free market has to offer, legal experts disagree, and it all boils down to the contract. The Robinhood contract states “I understand Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.” Just how broad is that discretion, though? The issue now is if Robinhood treated some users differently than others. Columbia Law School professor, Joshua Mitts, said, “when hedge funds are going to lose from a trading suspension, they don’t face any lockup like this, any suspension, any halt at the retail level, but when retail investors find themselves locked in, they find themselves unable to exit the trade.” This protective action by Robinhood directly contradicts the language in the Robinhood contract that states that the user agrees Robinhood does not “provide investment advice in connection with this Account.” The language in this contract may seem clear separately, but when examining Robinhood’s restrictions, it leaves room to question what constitutes advice when restricting retail investors’ trades.

Robinhood’s practices are now under scrutiny by retail investors who question the priority of the company. The current lawsuits against Robinhood could potentially impact how fintech companies are able to generate profits and what federal oversight they might have moving forward. This instance of confusion between retail investors and their platform choice points to the potential weaknesses in this new form of trading. While GameStop’s stock price may have declined since January 28, the events that unfolded will likely change the guidelines of retail investing in the future.

When Divides Collide: How COVID-19 Has Further Exposed the Link Between the Digital Divide and the Education Gap

November 15, 2020
COVID-19, Economy, Education, Social Welfare

Schuyler Troy, MJLST Staffer

As we enter what public health experts warn will be the worst phase yet of the coronavirus pandemic, many Americans have been forced to reckon with the world of remote work—as of June 2020, 42 percent of the U.S. work force was working from home full time. Zoom, the now-ubiquitous video teleconferencing platform, saw an increase in meeting participation from approximately 10 million daily participants in December 2019 to at least 200 million by the end of March 2020. Zoom snafus have taken their place in the cultural zeitgeist, ranging from relatively harmless and even humorous technical snafus to more serious issues like “Zoombombing” and privacy concerns.

Among the more serious problems coming into sharper focus is the effect that remote learning has had on school-aged children, their parents, and their teachers. Without a national strategy regarding how to reopen schools for in-person instruction, states and localities were left to devise what ultimately became a patchwork of solutions. As of September 2, 2020, 73 percent of the largest school districts in the United States had chosen to offer only remote instruction at least to start the year, affecting more than 8 million students.

Early data from this massive shift to remote instruction has revealed some worrying signs. A majority of teachers across the United States report that fewer than half of their students are attending remote classes; 34 percent of teachers report that only 1 in 4 students are attending remote classes. Perhaps more distressing is the data showing stagnation in academic progress. Researchers at Brown University and Harvard University analyzed data gathered for over 800,000 students across the United States and found that through late April 2020, “student progress in math had decreased by about half in classrooms located in low-income ZIP codes, [and] by a third in classrooms in middle-income ZIP codes” as compared to a typical school year. An analysis by McKinsey & Company indicates that the effects on Black and Hispanic students could be even more pronounced.

While racial and socioeconomic education achievement gaps are not new, the shift to remote instruction nationwide appears to have exacerbated them. Pew Research data provides some clues as to one factor that may be driving this phenomenon: lack of access to reliable, high-speed Internet that is necessary for videoconferencing and online coursework. As of 2019, 61 percent of Hispanic Americans and 66 percent of Black Americans used broadband to access the Internet, as compared to 79 percent of white Americans. Only 56 percent of Americans making under $30,000 per year had access to broadband Internet at home, as compared to 92 percent of Americans making over $75,000. Rural communities, which tend to have higher poverty rates than urban and suburban communities, are also less likely to have access to broadband Internet; only 63 percent of rural communities had access to broadband Internet, as compared to 75 percent of urban communities and 79 percent of suburban communities.

Taken together, the data paints a clear and rather sobering picture: remote instruction is leaving some of America’s most vulnerable students even further behind than before.

Congress has taken action in recent years to address the broadband access disparity with the Digital Equity Act, introduced in the Senate in 2019 but not yet passed, which would require the National Telecommunications and Information Administration to establish grant programs promoting digital equity and inclusion, and building capacity for state governments to increase adoption of broadband by their residents. President-elect Joe Biden also pledged throughout the 2020 presidential campaign to expand access to broadband Internet through infrastructure plans and subsidies to low-income Americans who cannot afford broadband. With seeming bipartisan agreement, a rarity in today’s polarized Congress, the United States may be on track to begin closing the digital divide. How that affects the education gap is yet to be seen, but there is good reason to believe closing the digital divide will help narrow the education gap as well.

Pandemics are fairly rare, but they are near impossible to predict, either in frequency or severity. The world was caught off-guard by COVID-19, but the lessons learned, including the lessons on remote instruction, can and should endure. Further, remote instruction is now another metaphorical “tool in the belt” for school districts; many districts are now considering eliminating snow days and replacing them with remote instruction. The sooner there is action on bridging the digital divide, the better the chances that students have to maintain their learning goals.

Ad Astra Per Aspera – “To the Stars Through Difficulties”

November 1, 2020
Economy, Space Law

Carlton Hemphill, MJLST Staffer

With upcoming elections and the ongoing pandemic on the minds of many, it’s easy to get lost in the negatives of 2020. However, one shining star of a historic event took place on May 30, 2020, NASA astronauts once again launched from U.S. soil, and for the first time on commercially produced and maintained spacecraft. The mission to the International Space Station (ISS) went as well as anyone could have hoped for: uneventful. It sounds ironic to describe such a monumental moment as being “uneventful,” but in the context of strapping humans to the tip of a rocket and blasting them into space, “uneventful” is good. It is also a testament to how far the privatization of space exploration has come. SpaceX, the company responsible for the successful launch of NASA astronauts to the ISS, did not start out with success. Many of their early launch attempts of the Falcon 1 ended in disaster, nearly putting the company out of business. However, with the help of government contracts SpaceX was able to continue researching and developing their rockets to the point of being an industry leader.

What about the economy? Good news for the U.S. economy and taxpayers alike.

Besides allowing for this milestone of American science and engineering to occur, government contracts for commercial space exploration prove to be economically beneficial. Prior to the May 30^th mission, NASA was paying a premium to launch astronauts on Russian spacecraft, and virtually all commercial satellite launches had been outsourced to Russia and China. It appeared as if the United States was out of the space game. With the then existing technology, domestic aerospace companies were unable to match the prices offered by foreign competitors. The economic incentives provided by government contracts to domestic companies such as SpaceX, have reversed this trend. They have allowed companies to invest in research that has led to tremendous cost savings, such as a reusable first stage rocket engine, and increased reliability and safety. Domestic companies are now able to offer safe and reliable space travel cheaper than foreign competitors. This has once again shifted power back to the United States, with SpaceX controlling the market for commercial satellites, as well as the future launches of NASA astronaut missions. NASA plans to continue using commercial spacecraft for its next mission to the ISS. The mission, named SpaceX Crew–1, is slotted for November 14, 2020, and will bring three NASA astronauts and one Japanese mission specialist to the ISS. So, stay tuned, and stay excited!

Is there more to commercial space exploration than satellites and astronauts? Sure there is.

The idea of sending paying customers into space is nothing new and has been talked about since space travel first became a reality. The recent success of commercializing space has reignited talk about profiting from those curious to venture out of this world (especially with the way 2020 has gone). NASA has even gotten on board with economizing space and is planning on allowing “private astronauts” to spend up to 30 days on the ISS for the low cost of $35,000 per night, plus shipping and handling (i.e. launch costs for commercial spacecraft). It seems that the end goal of both the government and private companies is to stimulate a space economy. While this concept might initially seem hard to imagine, one need only look to the evolution of the aviation industry for a reality check.

Of course, when a space economy becomes reality, there will be a pressing need for increased laws and regulations. While space travel has been around for over half a century, and a good body of laws pertaining to space already exist, the concept of commercialized space travel is still relatively new and uncharted territory. Lawmakers will most likely turn to the aviation industry for guidance on how to regulate this growing field. As technology advances and propels people further into previously uncharted territory, the law must follow hand in hand and evolve to the changing circumstances.

It’s a Small World, and Getting Smaller: The Need for Global Health Security

October 10, 2020
COVID-19, Economy, Health, Healthcare, Public Health

Madeline Vavricek, MJLST Staffer

The word “unprecedented” has been used repeatedly by every news organization and government official throughout the last several months. Though the times that we live in may be unprecedented, they are far from being statistically impossible—or even statistically unlikely. Based on the most recent implementation of the International Health Regulations released by the World Health Organization (WHO) in 2005, more than 70% of the world is deemed unprepared to prevent, detect, and respond to a public health emergency. The reality of this statistic was evidenced by the widespread crisis of COVID-19. As of September 29, 2020, the global COVID-19 death toll passed one million lives, with many regions still reporting surging numbers of new infections. Experts caution that the actual figure could be up to 10 times higher.

The impact of COVID-19 has made pandemic preparedness paramount in a way modern times have yet to experience. While individual countries look inward towards their own national response to the coronavirus, it is apparent now more than ever that global issues demand global solutions. The ongoing COVID-19 pandemic indicates a need for increased resiliency in public health systems to manage infectious diseases, a factor known as global health security.

The Centers for Disease Control and Prevention (CDC) defines global health security as “the existence of strong and resilient public health systems that can prevent, detect, and respond to infectious disease threats, wherever they occur in the world.” Through global health security initiatives, organizations such as the Global Health Security Agenda focus on assisting individual countries in planning and resource utilization to address gaps in health security in order to benefit not only the health and welfare of the individual countries, but the health and welfare of the world’s population as a whole. The Coronavirus has been reported in 214 countries, illustrating that one country’s health security can impact the health security of dozens of others. With the ever-increasing spread of globalization, it is easier for infectious diseases to spread more than ever before, making global health security even more essential than in the past.

Global health security effects more than just health and pandemic preparedness worldwide. Johnson & Johnson Chief Executive Officer Alex Gorsky recently stated that “[g]oing forward, we’re going to understand much better that if we don’t have global public health security, we don’t have national security, we don’t have economic security and we will not have security of society.” As demonstrated by COVID-19, failure to adequately prevent, detect, and respond to infectious diseases has economic, financial, and societal impacts. Due to the Coronavirus, the Dow Jones Industrial Average and the Financial Times Stock Exchange Group saw their biggest quarterly drops in the first three months of the year since 1987; industries such as travel, oil, retail, and others have all taken a substantial hit in the wake of the pandemic. Unemployment rates have increased dramatically as employers are forced to lay off employees across the majority of industries, amounting in an estimated loss of 30 million positions in the United States alone. Furthermore, Coronavirus unemployment has been shown to disproportionally affect women workers and people of color. The social and societal effects of COVID-19 continue to emerge, including, but not limited to, the interruption of education for an estimated 87% of students worldwide and an increase in domestic violence rates during shelter in place procedures. The ripple effect caused by the spread of infectious disease permeates nearly every aspect of a nation’s operation and its people’s lives, well beyond that of health and physical well-being.

With a myriad of lessons to glean from the global experience of COVID-19, one lesson countries and their leaders must focus on is the future of global health security. The shared responsibility of global health security requires global participation to strengthen health both at home and abroad so that future infectious diseases do not have the devastating health, economic, and social consequences that the coronavirus continues to cause.

Boeing Bailout: 737 Max Crashes and the Coronavirus

March 25, 2020
Economy, Public Health, Transportation

Bernard Cryan, MJLST Staffer

Boeing Overview

Boeing plays a major role in the aerospace industry—both domestically and internationally. Boeing employs over 160,000 people worldwide and had a revenue of $76 billion in 2019. According to Forbes’ 2019 Fortune Global List, Boeing is ranked as Fortune 100 company. In fact, Boeing is America’s largest manufacturing exporter. Boeing’s business operations are organized into three units: Commercial Airplanes; Defense, Space & Security; and Boeing Global Services. Boeing’s Commercial Airplanes division is responsible for producing “almost half the world fleet” with more than 10,000 Boeing-built jetliners in service worldwide and “about 90% of the world’s cargo is carried onboard Boeing planes.”

737 Max Crashes

Boeing’s popular commercial airplane—the 737 Max—was recently involved in two deadly crashes. In October 2018, 189 passengers were killed on a Lion Air flight taking off from Indonesia. Again, in March 2019, 157 passengers were killed on an Ethiopian Airlines flight just minutes after takeoff. In response, Boeing grounded all 737 Max airplanes around the world and created a $100 million relief fund “to meet the family and community needs of those affected by the accidents.” Nevertheless, Boeing has received harsh criticism and scrutiny over deficiencies in its product and training. The 737 Max airplanes are still not cleared to fly causing Boeing customers to revise or even cancel orders. Certain airlines have also demanded compensation from Boeing for flight cancellations that resulted from the grounding of 737 Max airplanes. Boeing’s stock price fell after the crashes and Boeing’s revenue fell from $101 billion in 2018 to $76 billion in 2019. Boeing even replaced its CEO after he was unable to stabilize the company following the crashes. In sum, the 737 Max crashes have forced Boeing into a vulnerable financial position.

Coronavirus

The recent COVID-19 outbreak has posed additional challenges for Boeing and the entire aerospace industry. Boeing has publicly acknowledged the struggles of the entire industry caused by the coronavirus. For example, coronavirus’ impact on travel has forced American Airlines to fly its first cargo-only flight in 36 years. Boeing is directly impacted by the coronavirus because struggling airlines are not currently in the position to place orders for new airplanes.

Government’s Response

Although there is fierce competition amongst airlines, there is little competition in the manufacture of commercial airplanes. Boeing and Airbus, a European company, are the two main global suppliers of large commercial aircraft and have almost complete market power. President Trump has recognized Boeing’s indispensable role in keeping America competitive in the global industry and has recently stated, “Yes, I think we have to protect Boeing. We have to absolutely help Boeing.” Boeing has publicly expressed support for the government’s plan to bailout the aerospace industry.

Boeing is requesting a bailout of the aerospace industry in the amount of $60 billion. Boeing has suspended paying dividends and CEO Dave Calhoun has given up his pay temporarily. Additionally, United Airlines has threatened to cut jobs if the bailout relief is not passed by Congress. The aerospace industry wants help from the government. Some, however, caution against using the term ‘bailout’ for this type of situation because the airlines did not cause the hardship resulting from the coronavirus. Although Boeing and the airlines are not responsible for the coronavirus, they are at least partly responsible for their current inability to survive through these challenging times—Boeing and the airlines have spent billions of dollars in recent years buying back their own stock. For example, airlines have spent $42.5 billion on buy backs between 2014 and 2019 which is almost identical to the amount the industry is now requesting from the government.

The Bailout and The Takeaway

A government bailout can be in the form of legislation providing money or resources to a company or even an industry to help that company or industry avoid bankruptcy. For example, Congress approved a $15 billion bailout to the airlines in response to the 9/11 terrorist attacks. Another example is the Emergency Economic Stabilization Act of 2008 where the government provided bailout relief to banks after the mortgage crisis. AIG initially received an $85 billion loan (later receiving more money totaling $150 billion) from the Treasury in exchange for 79.9% equity in AIG. The loan was to be repaid with interest; the U.S. government and taxpayers eventually made $22.7 billion from interest payments.

A government bailout of the aerospace industry appears imminent. Boeing is likely to be considered “too big to fail.” The main questions are how much money will go to Boeing and the aerospace industry, in what form, e.g., debt or equity, and what strings will be attached to that money. Will the government acquire some ownership of Boeing as they did with AIG? Boeing CEO has said Boeing may reject any relief from the government if the government demands stake in the company. Will Boeing be required to change any of its Commercial Airplane division business practices? Will there be more government oversight of Boeing’s operations? Will Boeing be required to cut emissions from its planes to help protect the environment? The aerospace industry bailout will be interesting to monitor as things should come together quickly in the next few weeks, or even days.

The Music Modernization Act May Limit Big Name Recording Artists’ Leverage in Negotiations With Music Streaming Companies

October 28, 2018
Business Law, Competition, Copyrights, Economics, Economy, Intellectual Property, Property Law

By: Julia Lisi, MJLST Staffer

Encircled by several supportive recording artists, President Trump signed the Music Modernization Act (“MMA”) into law on October 11, 2018. Supporters laud the MMA as a long overdue update for U.S. copyright law. Federal law governs roughly 75% of recording artists’ compensation, according to some estimates. The federal regulatory scheme for music license fees dates back to 1909, before the advent of music streaming. Though the scheme has been tweaked since 1909, the MMA marks a major regulatory shift to accommodate the large market for music streaming services like Spotify and Apple Music.

Prior to the MMA, streaming services virtually had two options for acquiring music catalogs: (1) either acquire licenses for each individual song or, (2) provide music without licenses and prepare for infringement suits. Apple Music adopted the first strategy and as a result initially suffered from a much leaner music catalog. Spotify went with the second strategy, setting aside funds to weather litigation.

The MMA offers a preexisting mechanism, the mechanical license, on a broader scale. Once the MMA takes full effect, streaming services can receive blanket licenses to entire catalogs of music, all in one transaction. The MMA establishes the Mechanical Licensing Collective (the “Collective”), a board of industry participants, which will set license prices. The MMA is, in part, meant to ensure that more participants in the music industry will be paid for their work. For example, music producers and engineers can expect to receive more compensation under the MMA.

While the MMA may broaden the pool of industry participants who get compensation from streaming, the MMA could weaken big name artists’ bargaining positions with streaming services. Recording artists like Taylor Swift and Adele have struggled to keep their albums off streaming services like Spotify. Swift resisted music streaming based on her conviction that streaming services did not fairly compensate artists, writers, and producers. While Swift may have come to an agreement with Spotify and allowed her albums to be streamed, there are still holdouts. More than two years after its release, Beyoncé’s Lemonade still is not on Spotify.

With the Collective controlling royalty rates, big name artists might not have the holdout power that they wield now. If Swift’s music had been lumped into a collective mechanical license, she may not have had the authority to withdraw or withhold her albums from streaming services. The MMA’s mechanical licenses are compulsory, indicating the lower level of control copyright owners may have. Despite this potential loss of leverage, the MMA is widely supported by artists and industry executives alike. Only time will tell whether the Collective’s set prices will make compensation within the music industry fairer, as proponents suggest.

And Then AI Came for the Lawyers…?

April 3, 2018
Artificial Intelligence, Economy, New Technology

Matt McCord, MJLST Staffer

Artificial intelligence’s possibility to make many roles redundant has generated no small amount of policy and legal discussion and analysis. Any number of commentators have speculated on AI’s capacity to transform the economy far more substantially than the automation boom of the last half-century; one discussion on ABC’s Q&A described the difference in today’s technology development trends as being “alinear” as opposed to predictable, like the car, a carriage with an engine, supplanting a carriage drawn by a horse.

Technological development has largely helped to streamline law practice and drive new sources of business and avenues for marketing. Yet, AI may be coming for lawyers’ jobs next. A New Zealand firm is working to develop AI augmentation for legal services. The firm, MinterEllisonRuddWatts, looks to be in the early stages of developing this system, having entered into a joint venture agreement to work on development pathways.

The firm claims that the AI would work to reduce the more mundane analytic tasks from lawyers’ workloads, such as contract analysis and document review, but would only result in the labor force having to “reduce,” not be “eliminated.” Yet, the development of law-competent AI may result in massive levels of workforce reduction and transformation: Mills & Reeve’s Paul Knight believes that the adoption will shutter many firms and vastly shrink the need for, in particular, junior lawyers.

Knight couches this prediction in sweetening language, stating that the tasks remaining for lawyers would be “more interesting,” leading to a more efficient, more fulfilled profession engaging in new specialties and roles. Adopting AI on the firm level has clear benefits for firms looking to maximize profit per employee: current-form AI, according to one study, AI is more accurate than many human attorneys in spotting contract issues, and vastly more efficient, completing a 90-minute task in 30 seconds.

Knight, like many AI promoters, claims that the profession, and society at large, should embrace AI’s role in transforming professions by transfiguring labor force requirements, believing AI’s benefits of increasing efficiency and work fulfillment by reducing human interaction with more mundane tasks. These words will likely do little to assuage the nerves of younger, prospective market entrants and attorney specializing in these “more mundane” areas, who may be wondering if AI’s development may eliminate their role from the labor force.

While AI’s mass deployment in the law is currently limited, due in part to high costs, experimental technology, and limited current applications, machine learning, especially recursive learning and adaptation, may bring this development firmly into the forefront of the field unpredictably, quickly, and possibly in the very near future.

Airbnb Regulations Spark Controversy, but Have Limited Effect on Super Bowl Market

January 29, 2018
Economy, Internet, Regulatory

MJLST Staffer, Sam Louwagie

As Super Bowl LII descends upon Minneapolis, many Twin Cities residents are hoping to receive a windfall by renting out their homes to visiting Eagles and Patriots fans. City regulations placed last fall on online short-term rental platforms such as AirBnB, which prompted an outcry from those platforms, do not appear to be having much of an effect on the dramatic surge in supply.

The short-term rental market in Minneapolis has been a renter’s market in the opening days since the Super Bowl matchup was set. There are 5,000 placements in the Twin Cities on AirBnB this week, as compared to 1,000 at this time last year, according to the Star Tribune. The flood of posted housing options has limited prices, as the average listing has cost $240 per night—more than usual, but much less than the thousands of dollars some would-be renters had hoped for. One homeowner told the Star Tribune that she had gotten no interest in her 4,000-square-foot, six-bedroom house just five blocks from U.S. Bank Stadium, and had “cut the price drastically.”

The surge in AirBnB listings comes despite ordinances that went into effect in December in both Minneapolis and St. Paul. The cities joined a growing list of major U.S. cities that are passing regulations aimed at ensuring guest safety and making a small cut of tax revenue from the rentals. Minneapolis’ ordinance requires a short-term renter to apply for a license with the city, which costs $46 annually. St. Paul’s license costs $40 per year. As of mid-December, according to MinnPost, only 18 applications had been submitted in Minneapolis and only 32 in St. Paul. That would suggest that many of the thousands of listings during Super Bowl week are likely unlicensed. The cities both say they will notify renters they are not in compliance before taking any enforcement action, but a violation will cost $500 in Minneapolis and $300 in St. Paul.

The online rental platforms themselves had strongly objected to the passage of the ordinances, which would require Airbnb to apply for a short-term rental platform license. This would bring a $10,000 annual fee in St. Paul and a $5,000 large platform fee in Minneapolis. According to MinnPost, as of mid-December, no platforms had submitted an application and it was “unclear whether they [would] comply.” Airbnb said in a statement that it believes the regulations violate the 1996 federal Communications Decency Act, and that “the ordinance violates the legal rights of Airbnb and its community.”

While the city ordinances created controversy in the legal world, they do not seem to be having a similar effect on the ground in Minneapolis, as Super Bowl guests still have a dramatic surplus of renting options.

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