Category Archives: Economy

Curmudgeon Junction: Short Term Thinking Long Term Losses

Halloween Pumpkin Want something to be afraid of this Halloween week?  No, it’s not Ebola, nor is it ISIS, nor is it that some undocumented person will cast an “impersonation ballot” at some polling station… it’s Short Term Thinking.  Today’s rant from Curmudgeon Junction is a general grouse about the lack of foresight intrinsic in our economic and political institutions. 

The Economics of Myopia

The whole artificial edifice of Shareholder Value would collapse in a heap if the Management Interests would take a longer view of their corporate health.  When one’s interests are aligned with quarterly earnings reports, and the effect on stock market prices, then what we will get are executives who place cost cutting measures above the long term interests of the corporation.  It will be necessarily more important to lay off expensive workers than to promote long term corporate loyalty.  It will be necessarily more important to engage in stock buy backs than to allocate resources to research and development.  It will be necessarily more important to invent ever more exotic tax treatments and financial products than to invest in corporate expansion.  It will be necessarily more important to conflate the interests of trade with the interests of financial markets.  It will necessarily be more important to accumulate a profitable financial product revenue stream than to invest in modern plants and equipment.  And, this is a recipe for a witch’s brew for short term “results” and long term losses.

What U.S. steel industry?  Yes, U.S. Steel is still in business, but it’s no longer producing 67% of this country’s steel. [USX] Did anyone notice when U.S. Steel was removed from the Standard and Poor 500 Index? [NYT] Yes, the company has diversified, but it also moved in and out of some very risky propositions in the process, and simply surviving isn’t a particularly impressive item in comparison to actually thriving. 

VWonder Bread is back on the shelves, but why did the process have to be such a mess?  Let’s start with what financial writers are pleased to call a “highly leveraged capital structure with little room for error.” [Forbes]  And, we can add in an obsolete line of products – where was the investment in product research and development? And,  we can add in relatively high labor costs – which were cut in return for a promise (unkept) that the management would allocate resources into more efficient plants and equipment… So, the Twinkies got the axe, (rather later than perhaps that product line should have in the face of changing consumer trends), and the whole jerry-built private equity backed operation couldn’t take the strain of having to turn a mismanaged company around in the face of immediate capital needs.

Chevron made much of its prowess in developing alternative energy, it even created a renewable power group (CVX) and then shut the lights down.

“In January, employees of Chevron’s (CVX) renewable power group, whose mission was to launch large, profitable clean-energy projects, dined at San Francisco’s trendy Sens restaurant as managers applauded them for nearly doubling their projected profit in 2013, the group’s first full year of operations. But the mood quickly turned somber. Despite the financial results and the team’s role in helping launch more than a half-dozen solar and geothermal projects capable of powering at least 65,000 homes, managers told the group that funding for the effort would dry up and encouraged staffers to find jobs elsewhere, say four people who attended the dinner.” [Bloomberg]

The renewable power group created a net profit of $27 million in 2013, well above the $15 million target, so why did Chevron pull the plug? 

“When you have a very successful and profitable core oil and gas business, it can be quite difficult to justify investing in renewables,” says Robert Redlinger, who ran a previous effort at Chevron to develop large renewable-energy projects before he left in 2010. “It requires significant commitment at the most senior levels of management. I didn’t perceive that kind of commitment from Chevron during my time with the firm.” [Bloomberg]

Translation: OK, the renewables were making money just not enough money to get the attention of top management.  More translation: the Renewables group wasn’t making enough money in the short term to get management support in the long run.

How many investments banks are there in the United States? If you guessed Zero you got it right.  None, zilch, zip. We now have Bank Holding Companies, as the former high flyers on Wall Street sought the protection of the Federal Reserve to avoid financial oblivion in September 2008. [MotleyFool]  After running, ever so willingly, into the arms of the government in their debacle of 1002-2008, the bankers now want to revert to playing by their own rules – Repeal Dodd Frank – and re-engage in the same short term behaviors which brought on the collapse of the financial sector in 2007 and 2008.

The Politics of Myopia

There’s never been a shortage of self-serving myopia in politics. Ever.  Nor has there been a surfeit of times in which there was less costuming going on in political campaigns than there were little goblins out seeking confectionary items to put in their pillow cases.  However, turning the politics of fear into an art form, is to emphasize the fear and trivialize the long term prospects of hope.

So, we have politicians ginning up fear of a virus – of which we now have ONE case in the entire country  of 330 million people – to secure short term votes based on “Did the administration do enough?” Has the administration been strong enough?”  Probably – given that we have ONE case in a population of 330 million.   Notice, we’re not talking about (1) What should U.S. funding priorities be for the research and development of vaccines for relatively rare viral diseases which occur primarily in third world nations? or, (2) What should be the U.S. contribution to world wide efforts to eradicate viral infections?  Those would be long term questions – and we seem to have the attention span of fruit flies when it comes to politics.

The Media and Myopia

While we’re on the topic of viral diseases – has it occurred to anyone in the management end of public media that Wolf! is not to be carried to extremes, or have we missed that point from the kindergarten reading list?  How many times have we been told that Swine Flu!  Avian Flu! West Nile Virus! MERS! SARS! was going to be the End of Humanity! Or, close to it.   Now, it’s Ebola – and the media circus begins once more.  Has it not taken hold in the imaginations of media management that there may come a time when something like the Spanish Flu – a real pandemic – may creep up on us and because the “Wolf!” cry has been offered up so often and in such a dramatic way, that health care professionals will have trouble convincing the public that “This time it’s REAL?”  Are the monthly, or weekly, ratings really so important in the short run that we’d take this risk in the long run?

How many editors across the nation are assigning people to cover stories for which the reporter is simply unqualified?  That’s not ‘on’ the reporter.  If a reporter turns in a story about race relations in a mid-western city based on impressions made during a few nights of protest, with little or no background knowledge of the historic context, do we blame the superficiality of the reporting on the writer – or on the management which decided to cut back on the number of writers in order to “increase shareholder value?”  How many media outlets retain the services of several persons with a background in economics or finance to craft articles about our economy?  How many media outlets hire individuals with a background in history/sociology to write about race and ethnic relations?   How many can afford to?

It’s one thing to blast the banality of much political reporting – and another to remember that national pundits aren’t reporters.  The pundits are time fillers.  It’s expensive to send reporters to New Hampshire, Colorado, or Nevada. It’s more expensive to send them to Ukraine,  Burkina Faso, and China.  It’s cheaper to keep a pool of reporters in central locations and send “teams” out to cover events – whether or not the team members have any expertise in the regions to which they are sent.

In return for short term economies we get a long term prospect of sensationalized reporting on the dramatic and very little contextual information about subjects of greater long term impact ( such as, the efforts of Middle Eastern nations to come to terms with the historic impact of post World War I boundaries).  Are we hearing about what mega-studies of student learning models tell us about how children actually learn, or are we getting packaged news about how children in one city measure up against children in another on a high stakes standardized test?

Are we hearing about how most bridges in the United States are designed to last 50 years, and the average age of bridges in this country is 43?  Do we know that in just ten years one out of every four bridges in this country will be over 65 years of age, that would be some 170,000 of them. [BridgeReport pdf] Or, do we wait until another one collapses and more lives are lost? 

And so it goes. We’ll shove more and more eye-catching events with less and less context into the great maw of 24 hour news cycles until the information is granulized into particles about which the Time Fillers will offer interminable speculation because that’s what they’re paid to do – speculate. In the short term it’s entertaining – in the long run it isn’t conducive to a well informed electorate.

Worse still, we’ll probably keep doing this until the old song lyrics are true: “I get all the news I need from the weather report.”

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Filed under ecology, Economy, Infrastructure, media, Politics

The Halloween Campaign Season

Halloween House It’s always great fun when Halloween and Mid Term Elections converge.   Or, as comedian Jon Stewart puts it, “We’ve got nothing to fear, but fear itself, so we’re going with fear.”   If I were really getting into the spirit of the campaign/Halloween season I’d put the Halloween candy up on the roof, take down the ladder and lock it up in the shed, and then tell the kiddies that if they are patient, hard working, diligent, and patriotic some day the candy will trickle down to their eager little mitts.

However, since I’m definitely not a Republican, the candy will stay on the porch where everyone gets a shot at it.   So, what’s scary this season?

Halloween Pumpkin

It’s three pumpkin scary that there are still a large number of voters who are clinging to the failed and long debunked hoax that what is good for Wall Street is necessarily good for Main Street.   Wall Street, and the financialists therein,  love the witches brew of mergers and acquisitions – whether the companies involved are actually improved or gutted – and tales of layoffs, off-shoring, and other devices to reduce costs and improve “shareholder value.”  Anything which reduces the expenses is received with joy, such as not paying their share of taxes by using accounting tricks and the ever popular Inversions.  

So, when faced with the probability that they might have to contribute their fair share or face their responsibilities, the corporate shills resort to dragging out their well rehearsed talking points – taxes cost jobs, the wealthy create jobs, taxes make us less ‘competitive,’ and regulations are a burden.  These lines are just so much mush in the core of an over-ripe pumpkin.

The good folks on Main Street and Elm Street are left holding the bag, every time a multi-national corporation plays games with the tax system Main Street and Elm Street have to foot the bills for roads, infrastructure, education, national defense, and health services.  

Halloween Pumpkin

Another three scary pumpkins for a political system so cynical that cheating is required to win.  There’s NO epidemic of voter impersonation fraud in this country.  An analysis of 2,068 cases of fraud in the entire nation since 2000 revealed that there were only 10 cases of voter impersonation fraud. There are approximately 146,000,000 registered voters in this country.  Do the arithmetic.  Your calculation should result in an answer of 6.84e-8.  (If that “e-8” is throwing you, just remember to move the decimal point place 8 places to the left.)

However, that infinitesimally small number hasn’t stopped candidates from advocating Photo ID laws, the purpose of which  is to reduce the number of the elderly, the young, the ethnic minorities, and the women at the polling stations.   We even have our very own Vote Suppressionist running to be the chief election officer (Secretary of State) in Nevada.  Voting suppression bills are enacted because voters buy into the fear-mongering about fraud, and the utterly illogical personalization talking point, “Would you want your vote to be canceled out by a fraud?”   The answer, of course, is “no,” but the odds against this actually happening are literally astronomical.

Halloween Pumpkin

It’s also three pumpkins scary we have media outlets which cater to the least attractive  human characteristics – like, fear and what it does to otherwise rational beings.   Yes, what the Islamic State proposes to do in Iraq and Syria is serious stuff, but remember the odds of being killed in a terrorist attack are 1:20,000,000.   The terrorists would no doubt like to get us sufficiently agitated so that we’d agree to send troops to their region, which would make it ever so much easier to kill Americans. 

And yes, the Ebola virus is a nasty little bug. However, it tends to thrive in places where medical facilities are both rare and not well regulated.  It seems to prefer places with inadequate sanitation infrastructure.  Thus far that does not describe the public health systems in North America and western Europe.  What should concern us more than the incidents are questions about how our privatized health care delivery services are to regulated in order to prevent outbreaks of any infectious disease.

There is an old bit of business advice which says, “You can’t control what you don’t own.”  We can apply the adage to public health care facilities.  Government standards can be enforced in public facilities, whereas under the current system of corporate health care standards come in the form of guidelines – the implementation of which may not be as uniform as we’d like. One relatively recent report says that public hospitals declined by 27% in major suburban areas from 1996 to 2002, and by 16% in major cities.  [AmMedNews]  Are standards of accreditation strong enough to maintain a level of health care practices in which the environment is safe for both the patients and the medical staff?  This question leads to our next set of pumpkins.

Halloween Pumpkin There ought to be three scary pumpkins awarded to the advocates of de-regulation.  The exploiters, polluters, and “shareholder value” advocates have been beating drums about “burdensome regulations” since the corporate interests organized their campaigns to repeal any law which impinged on their profits.  For example, since January 2011 the House of Representatives have voted 297 times to weaken public health and environmental protections. [CWA]  

Though the Enron Debacle seems a distant memory from 2002, the Republicans are still trying to repeal the Sarbanes-Oxley Act which sought to curb the abuses that allowed the scam to spread through the financial sector.  Opponents of financial regulation are still calling for the Act’s amendment or outright repeal in spite of the benefits stemming from its enforcement.   The Dodd Frank Act, enacted in the wake of yet more financial sector abuse, and the cavorting in the Wall Street Casino leading to the Housing Bubble disaster,  passed its 4th anniversary with more calls from the GOP to repeal it.

It would be remiss not to mention the REINS Act again.  This bit of legislation from the House is a de-regulator’s wet dream, and everyone else’s nightmare.  Congress would have to approve any and every regulation set forth by any agency of the federal government – environmental, financial, and (compliments of the Smith Amendment) public health. [See H.R. 367] Representative Jason T. Smith (R-MO8) offered amendment #450 which included all regulations under the Affordable Care Act.  This is as good a time as any to see what Representative Smith’s amendment would do in terms of hospital regulations.

Section 3025 of the ACA outlined a “readmission reduction program” which penalizes hospitals which have readmission rates higher than acceptable.  The idea was to get hospitals to use Best Practices (pdf) to reduce the readmission rate for cardiac patients, those who were at risk of being readmitted because of a lack of resources, and those who might show signs of infections after initial hospitalization.   Now, imagine the members of the House of Representatives “de-regulating” hospitals which have high readmission rates by refusing to approve the CMS standards.   That’s more money in the coffers of the 81% of Alabama hospitals which have been penalized; 82% of the hospitals in Arkansas which have been penalized; 89% of the hospitals in Illinois which have been penalized; and the 153 hospitals in Texas (out of 322) which have been penalized. [Kaiser]

Want to get scared again?  There’s credible research suggesting that hospital acquired infections affect the readmission rate [AmMedNews] and hence the regulations from Section 3025 relate to hospital sanitation practices and the prevention of hospital acquired infections.  Now, grab the remote and try to find a cable news channel that isn’t overloading the airwaves about Ebola. Quiver again, while thinking that Representative Smith’s little amendment could remove the incentive for corporately owned hospitals to literally clean up their acts.

Halloween Pumpkin

Instead of being fearful, let’s enjoy the Halloween season with thoughts of increasing the minimum wage and adding about $22 billion to our gross domestic product. [TP]  Or, we could think about further reducing our dependence on foreign oil by encouraging more solar power research, and ending the $4 billion annual subsidy paid by taxpayers to highly profitable Giant Oil Companies.  Or, we could think of reducing the burden on college students by allowing them to renegotiate or refinance student loans.  We could start by insuring students aren’t required to repay more than 10% of their annual income. [WH] We could improve the Voting Right Act and insure that everyone, in every state has an equal opportunity to cast his or her ballot.  We could enact legislation to require equal pay for equal work, improving family financial situations across the country.  We could employ people in our construction sector by starting to work on our infrastructure issues – our airports, dams, bridges, water lines, wastewater facilities, and  levees could all use some work.  [ASCE]  We could enact reasonable gun safety legislation.  And we could enact legislation to insure there’s no discrimination of any kind in American commerce.

The scary part is that none of these things will get started, much less accomplished, with Republicans sowing fear and discomfort – belaboring spooky apparitions like “Benghazzziiiii,” or “IRSssssss,” or “ISISssssss,” or other specters, wraiths, and spirits.   It’s Halloween after all, and  those are manufactured phantoms, nor more material than the costumes available at any big box store.   Instead of focusing on the Spooks of October, we ought to be enthusiastic about the opportunities in November, such as electing people to state and national offices who aren’t afraid of their own shadows.

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Filed under Economy, financial regulation, Health Care, Iraq, terrorism, Vote Suppression, Voting

Thinking Minimum and Waiting For Yes

The minimum wage in Nevada is $7.25 per hour if the employer sponsors group health insurance policies, or $8.25 if health insurance is not part of the compensation package.  This doesn’t mean a person will automatically receive those wages because some employers are taking advantage of loopholes in current statutes [LVRJ] There are other elements which are the subject of FAQs on the Labor Commissioner’s web site. 

However, the bottom line is still that the minimum wage in Nevada is not a living wage.  The point is driven home in the realm of fast food operations, and there is talk of a bill in the upcoming session of the state legislature to raise the minimum wage to $15.00 per hour.   Because minimum wage levels are a topic inserted in the state constitution, the raise would have to pass in two sessions and go to the voters. [LVRJ]  The second important point is that Nevada job growth is showing in sectors which employ a high number of minimum wage workers – in the sector we are pleased to call “leisure and hospitality.”

Nevada Job Growth 2014

The median wage for a fast food cook in Nevada is $18,890 per year.  [DETR]  A counter attendant can expect median annual wages of $20,990. [DETR]   Now, look at the 2014 Federal poverty guidelines:

Federal Poverty lines 2014

Obviously, there’s ample evidence from the charts above to support the contention that if employers pay sub-living level wages, then the state and local governments must make up the difference in the form of social safety net programs. In short, the taxpayers are subsidizing the businesses. 

But, but, but…  Spare me the noble story of How I Started Mowing Lawns in the 7th Grade And Worked Up To….  Only about 7% of the low wage work force in this country is composed of teenagers.  This means 93% of low wage workers are adults.  Women make up about 60% of the low wage work force, and a growing number of low wage workers are men. [LWW]

But, but, butgranted that wages are low in retail and fast food sectors but this is insufficient to raise the minimum for everyone… yes, fast food work considered nationally makes up about 5% of low wage employment.  However, we’re forgetting about data entry operators, bank tellers, child care workers, teachers’ aides, home health care providers, maids, cooks, porters, cashiers, pharmacy assistants, parking lot attendants, ambulance drivers, dry-cleaning workers, hotel receptionists, and a plethora of other low wage occupations.   The median annual wage for a home health care provider is $26,170; for a bank teller $24,940; for a grocery cashier about $21,370.  None of these jobs would get a person with a family of four above the federal poverty line.

But, but, butif we raise the minimum wage that will actually destroy jobs… this bit of mythology has been around since time out of mind.  It’s purely theoretical, rising from the minds of well paid lobbyists from the United State Chamber of Commerce, and at least five academic studies have debunked it:

“A significant body of academic research has found that raising the minimum wage does not result in job losses even during hard economic times. There are at least five different academic studies focusing on increases to the minimum wage—including increases ranging from 7 percent to 12.3 percent made during periods of high unemployment—that find an increase in the minimum wage has no significant effect on employment levels. The results are likely because the boost in demand and reduction in turnover provided by a minimum wage counteracts the higher wage costs.

Similarly, a simple analysis of increases to the minimum wage on the state level, even during periods of state unemployment rates above 8 percent, shows that the minimum wage does not kill jobs. Indeed the states in our simple analysis had job growth slightly above the national average. [...]

All the studies came to the same conclusion—that raising the minimum wage had no effect on employment.” [emphasis in original] [TProg]

But, but, butthink of the Mom and Pop store… which we would except for the fact that 2/3rds of low wage workers don’t work at the corner bodega. 2/3rds of our low wage workers labor for large corporations.  For example, WalMart has seen profits grow by 23% since the Recession, Yum! Brands by 45%, and McDonalds by a hefty 130%, with help from U.S. taxpayers supporting their personnel.  [TP]  From the April 15th edition of Forbes we learn that WalMart workers cost U.S. taxpayers approximately $6.2 billion in public assistance.  One certainly wouldn’t want to disparage the efforts of the Walton’s to create a successful business – but on the other hand there’s no reason to give the ultra-rich family gifts from the taxpayers.  McDonald’s cost the U.S. taxpayers some $1.2 billion in public assistance. [HuffPo]  A billion here, a billion there, and soon, as the late Senator Everett Dirksen opined, it starts to add up to real money.  That would be real money Mom and Pop are paying in taxation to support their competition.

And then there’s the concept – repeated to the point of redundancy – that increasing wages increases aggregate demand, and increased demand produces increased sales, and increased sales yield increased profits – for any business, large or small.

We should be asking Nevada politicians who are out seeking our votes this season: Do you support raising the minimum wage in Nevada to $15.00 per hour?  If what comes back is a “No” qualified by the standard talking points – it’s just kids, or it’s just a few jobs, or it’ll kill employment – then the politician in question is simply regurgitating the corporate line, the big corporate line.  The big corporate lie.

We’re waiting for Yes.

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Filed under Economy, Nevada economy, Nevada politics

Profits Without Prosperity

If there’s just one item which ought to be remembered from Vice President Biden’s recent  speech in Las Vegas it’s this – If the minimum wage were to be raised to $10.10 per hour this would add $19 billion into the national economy.  For 256,000 minimum income earners in Nevada that would pay for 19 months of groceries and three months worth of rent.  [LA-AP] So, if we really are “pro-business” then this information should be well received?

Once yet again to the point of unmentionable redundancy, here’s how we measure the growth in our national economy:

GDP formula

Consumer spending + business spending + government spending + the difference between imports and exports = the GDP.  So, why all the gnashing of teeth and tearing of hair over spending?  Why not promote that which will increase consumer spending? And why the inordinate attention to national spending?   Because the tail is wagging the dog.

The titans of finance – the banking sector – are wary of inflation.  That which puts more money into the hands of middle and working class families may cause inflation – the banker’s big bug-bear.  However, they’ve not mentioned the other side of the ledger; if income levels are dropping or if they remain stagnant those same bankers might be looking at deflation.  “The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.”

In other words, for average families the income will be spent.  Increasing the minimum wage would put more money into local businesses – furniture, appliances, groceries, clothing, entertainment, food service, hardware and home improvement, and so on.  However, for the top .01% whose income is primarily derived from investment earnings, increasing the minimum wage is of relatively little interest.  They are more interested in The Market (read Stock Market) than in the grocery market, the furniture market, the home improvement market, or the clothing market.

Not sure how this works?  Witness the plans for Hewlett-Packard to split up:

A close follower of the company’s stock price, Ms. Whitman may have also decided that the two separate companies would be worth more on Wall Street. Since Ms. Whitman became chief in September 2011, HP shares have risen about 50 percent. [NYT

HP also confirmed the split will result in the loss of another 5,000 jobs, in addition to the 45,000-50,000 layoffs announced with the company’s second quarterly earnings report for 2014 back in May. HP plans to invest the money saved in research and development, and projects full year non-GAAP (Generally accepted accounting principles) earnings of $3.83-$4.03 per share in 2015, not including one-time tax costs of the split. The companies will each have more than $57 billion in annual revenue.” [SDTimes]

There are structural reasons for the split, but the bottom line is that investors have decided the corporation would be more profitable split into at least two entities. And those 5,000 jobs lost?  The layoffs announced in May 2014?  The Market won’t be bothered by those at all; the value of the stock will increase whether or not the former employees are able to find new jobs, or have money to spend on housing, food, clothing, entertainment, furniture, etc.   The value of the stock is the pinnacle of success in the “Shareholder Value” construct of modern American capitalism.  There’s really nothing dramatically new about this – when share value for the sake of share value becomes the primary force in management then other considerations are necessarily secondary.

Hewlett-Packard’s focus on shareholder value isn’t unique either. Remember how the old Trickle Down Hoax was supposed to work? Corporations were supposed to have more revenue to invest on research and development, more to spend on expansion and hiring, more to spend on marketing and product sales?  Not. So. Much.

“Instead of investing in new plants, equipment and products, instead of paying their taxes and giving a long-overdue raise to their employees, big corporations are spending their record profits — plus gobs of newly borrowed money — to buy back their own shares and those of other companies.” [WaPo May 2014]

And we’re not speaking of just a few corporations, and the arithmetic is fairly simple:

“Meanwhile, the corporations of the Standard & Poor’s 500-stock index spent $477 billion last year (2013)  buying back their own shares, a 29 percent increase over 2012 and the most since the peak year of 2007. The idea behind buybacks is that they are a tax-advantaged way to return profits to shareholders by boosting the market price of their shares. Since the stock market tends to value companies by multiplying the profits per share times the number of shares, reducing the number of outstanding shares has the arithmetic effect of boosting the stock price. [WaPo May 2014]

During 2013 this “tax advantaged way to return profits to shareholders” was applied by 80% of the companies on the S&P 500.  This is precisely how Wall Street and the Corner Offices can see profits without prosperity. What we need to observe is the interplay between value creation and value extraction.  The Harvard Business Review explains:

“For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call “sustainable prosperity.”

This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality.”

Does that last sentence sound familiar?  So, we know that stock buybacks were popular as of 2013, how about 2014 – it’s now reported (Bloomberg) that 95% of the S&P 500 have engaged in the activity – of value extraction rather than value creation.   The Economist chimes in on the subject:

“Over the past 12 months American firms have bought more than $500 billion of their own shares, close to a record amount. From Apple to Walmart, the most profitable and prominent companies have big buy-back schemes (see article). IBM spends twice as much on share repurchases as on research and development. Exxon has spent over $200 billion buying back its shares, enough to buy its arch-rival BP. The phenomenon is less extreme in other countries, but is becoming popular even in conservative corporate cultures. Led by firms such as Toyota and Mitsubishi, Japanese companies are buying back record amounts of their own shares.”

Yes, stock buybacks can artificially elevate share prices, and give quick bucks to the short term investors.    Someone needs to flash on a yellow caution light.

“In 2013, 38% of firms paid more in buy-backs than their cashflows could support, an unsustainable position. Some American multinationals with apparently healthy global balance sheets are, in fact, dangerously lopsided. They are borrowing heavily at home to pay for buy-backs while keeping cash abroad to avoid America’s high corporate tax rate.” [Economist]

Yet when we have a corporate compensation system which rewards share value why would the CEO of Hewlett-Packard, or IBM, or any other major corporation NOT focus on share prices? Even if they are in peril of having lopsided ledgers. Even if they are extracting more value than they are creating?  Even while they are avoiding America’s corporate taxes? The GAO calculates the actual tax rate paid by these corporations at 12.6%. [CNN]

So, instead of creating value (building new plants, new equipment, new products, paying taxes, or raising wages and salaries) the companies are busy trying to extract value at the risk of making themselves uncompetitive. The financialists, focused as they are, on short term investments, in debt incrusted corporations, are far more interested in value extraction than in value creation, and that’s how we get profitability without prosperity.

Capitalism requires value creation, a balance of consumers and producers, and the accumulation of assets. Financialism is focused on value extraction, feeds on the notion that one firm’s debt is another M&A firm’s asset, and demands that “costs” whether for plant upgrades, employee wages, or research and development not impinge on the “tax advantaged ways to return profits to shareholders.”   The Economist closes the argument: “shareholder capitalism is about growth and creation, not just dividing the spoils.”

The creation of value means investing in more products, better products, more goods, better goods, more services, better services – and now we’re back to the point at which we need to restart the conversation about how to increase aggregate demand for these goods and services – by increasing the minimum wage.

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Filed under Economy, financial regulation

Bankers Bank On Economic Amnesia

Occupy Wall Street bankers Zillow reports that the current median home value in Nevada is $189,700, up some 16.4% over the past year, and another increase of 6.2% is predicted. The median listed price of a home in Nevada is now $215,000, and the median selling price is now $198,475.  [Zillow] This is good news for Nevadans in Clark County because the median list price as of July 2011 was $118,500. [Movoto]  Bankrate posts mortgage interest rates ranging from 4.1% to $.4% in the Reno area, and a range of 4.05% to 4.4% in the Las Vegas metropolitan region.  [Bankrate]  There’s another factor to consider, especially in southern Nevada, home resale inventories have stabilized, and there’s been no major increases in distress sales (foreclosures and short sales) as a percentage of the total housing market in September. [Movoto]

Mortgage interest rate trends are also interesting because there’s been a decline since January 2005.  The interest rate for a 30 year fixed rate mortgage was about 5.71% in January 2005, 6.15% in January 2006, and 6.22% in January 2007 as the Housing Bubble was about to burst all over everyone.  As the Bubble started to splatter in January 2008 the interest rate was 5.76%, dropping to 5.05% in January 2009. Fast forward to January 2012 and the interest rate had dropped to 3.92%, going down to 3.41% in 2013, and then increasing again in January 2014 back up to 4.43%. [FredMac]

Why are these numbers of any interest?

(1) When homebuyers can get credit they are able to pay prices closer to the original asking price. (2) It’s no longer a buyers’ market when sellers are getting better prices. (3) Someone must be doing a bit better because there seems to be more competition for mortgage money, given that in a free market commodities (in this instance mortgage money) are slightly more costly the higher the demand.  (4) These numbers also highlight the Big Lie that the Wall Street casino operators are trying to sell across the country.

David Dayen, writing for Salon caught the Big Fib and described it as follows:

This is part of a larger myth, blaming government’s efforts to clean up the mortgage market for the slow housing recovery and sluggish economy. This idea that banks are so petrified about burdensome regulations that they’ve decided to scale back their business model of lending to people seems far-fetched.

That’s because it is far fetched.  We can see the whole picture simply by sitting here in one of the states most hard hit by the collapse of Wall Street’s Housing Bubble, and looking at our own numbers.

First, if bankers were so insecure about lending then why have interest rates rebounded since the Bubble burst?  When no one is buying homes rates go down because there simply aren’t enough customers clamoring for loans.  However, in this ‘sand state’ the interest rates have gone up by about 1%.

Secondly, it’s obvious someone is buying something because  the Las Vegas housing market, almost obliterated when the Bubble Burst, has seen an increase in the median price of homes, up by an impressive 16.4%.

It’s a bit difficult to make the case that bankers aren’t lending (because of the icky government financial regulation reform) when median list prices and median selling prices have both increased.  If banks weren’t lending then we’d expect housing prices to flatten out because there weren’t enough bidders for the homes.  Again, Dayen sums up the bankers’ game: “The real motivation here is to roll back regulations and return to the go-go era where anyone who can fog a mirror can get a loan. We know how that turned out the last time.”

Just in case anyone catches the overt fibbing, spinning, and general mendacity of the bankers’ latest pronouncements, they’ve left themselves a bit of wiggle room.  The economic revival is “sluggish.” Translation: If you’d just let us get back to deregulated free for all casino operations we’d be richer. And, “the housing recovery has been slow.”  Translation: Want to get more, and more, and more, mortgages from ‘anyone who can fog a mirror’ to slice, dice, and tranche, into mortgage based securities – upon which we will get richer.

There’s a better reason to explain a sluggish economy and a slowly reviving housing market.  Ordinary people have to have incomes which support major purchases – like homes – and what has happened to the median income in Nevada since the Bubble Burst in 2007-2008 isn’t pretty.

The median HI for Nevadans in 2013 was $51,230, down 9.1% since the Housing Bubble burst in 2008.  The Mean HHI for the top 5% of Nevada income earners was $294,939, which dropped by 2% after the washout of 2007-2008. [Pew]

Given the precipitous drop in median earnings, the question might not be about how “sluggish” the recovery has been, but how we’d experienced any recovery at all.  We might dare to ask the same question about home sales.  Again, given the decrease in median household income it’s a wonder home sales have rebounded – especially if we consider that home values are now up 16.4% with more increases projected.

Once more, Wall Street has demonstrated very clearly it’s profound dependence on debt and volatility, while Main Street remains dependent on consumer spending and stability.   In this instance, as in so many others, it’s important not to conflate what’s good for Wall Street with what’s good for business in general.

It’s great for Wall Street to have bundles and bundles of unregulated mortgages, car loans, and lines of consumer credit to shovel into its deregulated  casino operations and Bubble Factories – it’s not so great for Main Street to have abandoned homes, foreclosures on every street, and too many unemployed construction workers in the community.

Caveat Emptor – the latest Big Lie would have us believe the investment bankers want the very best for all of us – after their last debacle the only way they’ll sell this notion is if the American public gets a bad case of economic amnesia.

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Filed under consumers, Economy, financial regulation, Nevada economy, Nevada politics

The Price Tag Plus $32: The economic cost of guns in America

Guns $32.00 – according to the author of a NIJ study on gun fire casualties that’s the direct societal cost per gun in the United States.   When the costs for drunk driving and gun related injuries were compared in 1994 the drunk driving costs were characterized as substantially higher.  Now that has reversed.  In 1992 medical care for a fatal shooting averaged $14,500. By 2010 the number was $28,700. [USAT]  More recent figures put the annual cost to American society at $214 billion, or $693 per person. [LeadersEdge] Where does this number come from?

“…societal cost figure includes medical costs incurred from firearms violence and the lost earnings of the victims—either the survivors of a firearms injury or costs to loved ones left behind in case of a fatal shooting. And it includes an estimated $11.9 billion in costs to government for such things as Medicare and Medicaid payments to victims. It also includes $1.5 billion in medical and mental health treatment, public services, adjudication, sanctioning and productivity losses for the perpetrator.”  [LEdge]

On the other side of the ledger, the firearms industry supports about 120,310 jobs in “supplier and ancillary industries,” and the manufacture and sale of firearms generates $33.3 billion to the economy.  This would include $10.4 billion in wages, $4.6 billion in federal and state business taxes, $460 million in excise taxes, and about $2.1 billion in federal and state taxes paid by the firearms industry and its employees.  [LE NSSF]  In short, we’re losing about $180.7 billion on this deal?

Other elements not under discussion are the secondary effects of gun violence, such as the loss of real estate value in neighborhoods which experience high levels of gun fatalities and injuries.  Nor are we taking into economic consideration the unwillingness of commercial and manufacturing firms to expand or site operations in neighborhoods which have high gun violence numbers.

Every instance of a gun related accident or homicide adds to the economic costs of relatively unregulated firearms in American society.  The logic is fairly simple:

“We have supported research for more than 20 years to better understand the problems of gun violence, the risk factors of gun violence and the policies that can prevent it,” says Nina Vinik, the gun violence prevention program director for the Joyce Foundation in Chicago. “One thing consistent in the research over the decades is the finding that where guns are more available, more readily accessible, there is a corresponding increase in levels of gun violence and injuries, in homicides, in suicides and in accidents.” [LEdge]

Arguments about the United States being a “violent society” stray from the essential point – it’s not that we’re necessarily more criminally inclined, but that the easy availability of firearms tends to make our adventures with guns more lethal – and more expensive. [HarvardMag]

Another point, about which we probably ought to be having more conversation is that the proliferation of firearms in this country is costing us more than their economic value in the total economy.  Capitalism works – but only if the market decisions made are rational.

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Filed under Economy, Gun Issues

Welfare Royalty and Nevada Taxpayers

There’s good economic news for northern Nevada – Tesla’s coming to town.  What might not be so delightful is the $1.25 billion tax deal Nevada gave to the corporation to get the factory. There’s a 20 year sales tax abatement ($725 million), a 10 year property tax abatement ($332 million),  another $120 million in transferable tax credits, $75 million in transferrable job tax credits, $27 million in modified business tax abatement for 10 years, and $8 million in discounted electricity for 8 years.   [RGJ]  A bit of quick calculation shows that if the plant generates 6,500 jobs and the tax abatements and credits cost, say, $1.2 billion, then the price tag for each job was about $184,615.  Granting that these costs are spread over a 10-20 year period, it’s up to the view of the beholder as to whether this is a bargain. What’s not a bargain are the other corporate subsidies Nevada is handing out every day to the New Welfare Queens.

For example, there are 4,281 Wal-Mart stores in the United States,  and the retail giant operates 30 stores, 2 discount stores, 11 neighborhood markets, and 7 Sam’s Club stores in Nevada. Its associates are paid an average of $13.59/hr.  for full time workers.  [WM]  That wage figure yields annual wages of approximately $27,180 per year.  The federal poverty line for a family of four is $23,850.  133% of that number is $31,720, the percentage is important because that’s the eligibility line for adults qualifying for Medicaid. [NVM]  Thus, the average worker with an average sized family is qualified for Medicaid coverage, and Nevada Check Up coverage, in this state.  Our average worker ($13.59) would receive about $2,174 per month, the SNAP gross income eligibility line is $2,498 per month. [NDW]

This doesn’t make Wal-Mart in Nevada unique, in fact as of last November it was reported that Wal-Mart employees made up the single largest block of Medicaid recipients.  [Bloomberg]

This state of affairs doesn’t make Wal-Mart unique among low wage paying employers.  The fast food joints, currently in the news for being the target of employee picketing, aren’t any better.  The median annual wage for a counter attendant at your local burger establishment is $18,930. [DETR] If the Wal-Mart employees are eligible for Medicaid, Check Up, and SNAP benefits, those counter attendants are truly in the eligibility category.  Additionally, let’s get rid of some silly myths about minimum wage jobs in the fast food industry.

The most common myth is that there’s no reason to worry about wages for fast food employees because most of them are teens earning their first paychecks, and working for pocket money.  No.  Half of all fast food workers are over the age of 23, and about 30% of all fast food establishment personnel are between the ages of 16-19. 36.4% are between the ages of 25 and 54.   [CEPR pdf]

The second bit of malarkey coming from the corporate lobbyists is that the picketing for higher wages is just a screen for union organizing.  Indeed, there are some labor union organization efforts going on – and why not? If workers are being paid minimal wages and aren’t seeing any prospects of advancement (only about 2.2% of fast food workers hold managerial positions) then organizing is an obvious option.   It’s an especially appealing option when the corporate financial statements are taken into account.

Your local McDonald’s franchise is part of a corporation with a $91.31 billion market cap, with an enterprise value of $103.09 billion.   It has a 19.48% profit margin, and a 30.12% operating margin.  To date it has reported revenue of $28.30 billion.  The corporation boasts a 35.19% return on equity. [YahFin]  Its top institutional shareholders are Vanguard, State Street, BlackRock ITC, Bank of America, Massachusetts Financial Services, Bank of NY Mellon, FMR LLC, Northern Trust, BlackRock Fund Advisors, and Wellington Management LLP. [YahFin

The point of serving all those burgers – composed of whatever they might be – is to enhance shareholder value.  What would better enhance ‘shareholder value’ than keeping costs as low as possible, including the cost of preparing and serving the Happy Meal?  If the taxpayers are willing to pick up the tab for the  employees’ health care and basic needs for food and shelter, then so much the better for those institutional shareholders who retain some 64.6% of the corporation.

It’s important to differentiate between welfare recipients – people who are trying to clothe, feed, and shelter their families – from the Welfare Queens who are trying to enhance the incomes of their institutional investors and keep those shareholders satisfied, while the taxpayers of the state have to subsidize their employees, provide their streets, roads, communication infrastructure, and their police and fire protection.  Nice deal, if you can get it?

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Filed under Economy, Nevada economy