Category Archives: Economy

Who’s Happy Now?

DBeacon128E As of Friday, August 29, 2014 the S&P 500 stood at a healthy 2,003.37, increased by 6.63 from the day before.  This figure is good news since the S&P was a pathetic 676.53 on March 9, 2009. [WSJ]  S&P uses a weighted average market capitalization to calculate its index, so this must be the most accurate measure of the state of the economy?  Maybe.   Feeling all comfy right now?  Maybe not.  Not to be too much of a bear dancing through the bullishness of the stock market reports, but there’s something troubling about the numbers.  Perhaps we should begin at the beginning.

The Truism of Yesterday Transformed into A Corporate Facade Today

In those days of yesteryear, before the late 1970s, corporations retained most of their earnings and invested them in new technologies, expanded facilities, more employees, or even – pay increases. [WP]  Indeed, in those ancient times the argument worked: If corporations could hold on to more of their earnings then plants would expand, and more workers would be hired.  What our numbers keep telling us now is that this old line is being applied to a new and quite different reality.

Not to put too fine a point to it, but it is as though the Captains of Corporate America are asking us to cling to the old reality while they saw the props out from under average Americans, creating a more profitable system for themselves.   And they have been sawing away vigorously, fueled by the new corporate reality since 1980  which  holds that the primary purpose of a corporation is to maximize shareholder value.

It is one thing to seek to enhance corporate profitability if the  old line is true, and quite another when the goals have changed, and the new line is “Corporate profits are important because they make shareholders richer.”   The pre-1980 truism is now a corporate facade covering a structure which places the demands of shareholders above customers, workers, and almost everyone else.

In some instances the facade is a very real false front inadequately covering the hollowing out of American industry.  Remember  Endicott, NY, the home of IBM?  Some 10,000 employees of IBM worked there in the 1980s, by 2013 employment at IBM was down to 700, and the vacant storefronts in the community bore witness to the diminishment of the real American economy.  [WP]

Since, Ferguson, MO has been in the news of late it’s appropriate to look at the moves made by Emerson Electric  to enhance shareholder value by offshoring  its operations – with its $44.68 billion market cap, and return on equity of 24.38% [YahFin]  Emerson was praised in at least one financial journal for its long term strategy of “transferring costs to a basket of low-cost countries,” yielding the accolade: “Emerson is well known among its peers to have benefited considerably from being earlier and bolder in its pursuit of cost mitigation.”  

That cost mitigation came with a price, but not for Emerson’s shareholders.   On January 18, 2002 Emerson announced it was closing 50 of its plants and offices in the United States and moving the jobs to China, India, and the Philippines. No sooner was the announcement made than Emerson’s stock price increased by 3.4%.  [SunSent]  The Emerson plant in Kennett, MO closed in 2005.  [DDD]  Another plant, in Columbus, NE, closed in 2009. [WOWT]  If it seems counter-intuitive to have share prices increase as people (consumers) are laid off that’s because most people have missed the point: It’s not how many people a corporation employs or how much their wages bring to our economy – it’s how costs can be “mitigated” so that shareholders get an increased portion of the pie being served.

Keeping the Shareholder Satisfied

If a decreasing number of people are enjoying an increasing share of the American economic pie, then why wouldn’t current stock market reports be indicating weakness in the economy?

Same answer.   Shareholders are happy.  One of the reasons for their happiness is that corporations are “mitigating costs” and propping up stock values.  One way to prop up the old shareholder value is to engage in stock buybacks.  Does Corporation X have lots of cash on hand?  The best way to keep those shareholders happy is to use it in a stock buyback which results in a decrease in the number of outstanding shares and drives up the price of the ones which are on offer.   [Forbes]  Yes, that cash could have gone into research and development? Or, plant expansion? Or, even increased wages?  However, those don’t make the shareholders happy, and since 1980 it’s been the primary job of corporations to make the shareholders happy, happier, and happiest.

And who else loves making shareholders happy? Bain Capital Management, which extolled the virtues of corporations which do the hard work of making shareholders, like Bain Capital, happy:

“In studying the offshoring practices of major industrial companies, we’ve found that Continental’s highly modular approach is shared by other supply-chain leaders like General Electric, Honeywell, Siemens International, and Emerson Electric. Rather than think in terms of entire factories when they make offshoring decisions, these companies focus on individual functions and products. They optimize, in a coordinated fashion, the location of every module of their supply chain, capitalizing on regional differences not only in costs but also in skills. As a result, they’ve been able to move quickly and with great agility, shifting activities among a wide array of regions and countries in a way that optimizes the cost and effectiveness of their entire operating system.”  [BainInsights 2005]

It’s worth noting that when Bain speaks of “optimizing costs” it means reducing production and service costs, as in closing factories and offshoring jobs.   Hence, the formula continues: Shareholder Happiness = Cost Mitigation + Propping Up the Stock Price.

The danger in not heeding this formula is the dreaded Takeover.  Should some shareholders find their yields too low, the vultures begin swarming over the still warm victim.

There is a reminder of the perils of the dreaded  takeover in north St. Louis.   The old Rexall Drug Company plant stands at the corner of San Francisco St. and Kingshighway, now the site of an automobile auction company.   The quick part of the  demise began in 1977:

By 1977, Dart Industries had sold all of its Rexall business, including franchised drug stores. A group of investors, including Howard K. Vander Linden, president of Rexall at the time, formed the Rosshall Corporation and bought the manufacturing laboratories in St. Louis and other facilities. [NYT]

As part of the process the Rexall Drug Store franchises were spun off, a familiar drug story could retain the name but now had no affiliation with the parent company.  It didn’t take long for the scheme to fall apart.  The retailers were under pressure from chains like Eckerd, the manufacturing under pressure from various manufacturers, and the grand experiment failed. The St. Louis factory closed, and the Arlington neighborhood lost another industry. Rexall wasn’t the first, nor the last takeover victim, brands like Sunbeam and Singer also changed dramatically in the face of both friendly and hostile takeovers.  The brand most closely associated with recent takeovers which have decimated a corporation remains Hostess, which was destroyed, not by its employees, but by the vulture capitalists who plucked it. [Salon]

True, there are unresponsive companies which fail because of a lack of vision, firms that falter because of poor management, and corporations which are takeover targets because there are some few valuable assets among a conglomeration of acquired flotsam and jetsam.   However, the end game should be the improvement of a company such that it can be profitable, not merely the M&A gamesmanship which too often plays strip and run, leaving little but debris in its wake.   However, those games will continue as long as there is a profit to be made by the investors – how much greater the danger to U.S. corporations in the prospect of upsetting those private investors than of disappointing the shareholders? 

This isn’t our parents (or grandparents) economy.  The days of cash allocation into research and development, plant expansion, higher wages, better facilities is as out of date as a Pontiac Firebird.   These are the days of the F-150, and the maxim: “If the shareholders ain’t happy, ain’t nobody happy” – unless you’re a taxpayer, consumer, salaried or wage worker? 

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Stripping Doesn’t Have To Happen In a Bawdy House

Stripping is associated in most people’s minds with one of two things, either dancing while steadily removing garments accompanied by music by David Rose, or taking layers of paint and varnish off some surface.  In the financial world it means roughly the same thing, only better – for the bottom line. And since we’re not talking our our bottoms, but those of U.S. corporations with overseas affiliates, or those which want to shape themselves that way, let’s try to understand the language they are speaking.

The financial definition of Earnings Stripping is:

“A method of avoiding taxes by paying excessive amounts of interest to another party. For example, an American subsidiary of a foreign company might reduce its taxable income by paying an excessive amount of interest to its parent. The IRS has developed regulations that are intended to limit earnings stripping.”

Yes. the Internal Revenue Service is trying to do something about this highly dubious practice, in Section 163(j) of the law.  Implementing Section 163(j) means the IRS would require adherence to the “arms length” standard in intercompany indebtedness.  In one example, if 60% of an affiliated  firm’s assets are financed by debt, then the deduction for interest is limited to 50% of the firm’s operating profits. [TaxTR]

In order to carry out the law, the IRS has to be able to do two things. First, it has to evaluate whether or not there’s an arms length interest rate.  The key to arms length transactions is that neither side has any incentive to act against his or her own interest.  If I’m the banker I’m going to try to charge the highest interest rate for a loan I can, and if you are the borrower you are going to smile nicely, threaten to go to another bank, and work to get me to reduce the interest rate for the loan.  But, how to evaluate the arms length status of a loan made from the parent company to an affiliate?

Secondly, there has to be a way to determine if the operating profits truly reflect the “income attributable to the functions, assets, and risks incurred by the affiliate.” [TaxTR]  The affiliates credit rating helps determine if the interest rate is at least close to “arms length,” and the operating profits have to be such that the IRS can see that the intercompany interest rate at least has the appearance of propriety.*

And now the fun begins.  The current flap over corporate inversions plays is related to good old fashioned earnings stripping, the Wall Street Journal explains:

“When a U.S. company acquires a foreign firm, and decides to domicile overseas in a low-tax country like Ireland, it will often load the U.S. subsidiary up with debt that is “owed” to the foreign headquarters. Interest payments on this debt can often be deducted from taxable income. If the debt is considered “excessive,” the practice is known as “earnings stripping.”

The Bush Administration took a look at these dubious practices back in 2007.  The report (pdf) analyzed several proposals offered at the time to restrict the ability of foreign controlled domestic corporations to practice earnings stripping.  The report concluded that corporate inversions were associated with earnings stripping, and that the government needed to (1) look carefully at the arms length part of the problem, (2) update the regulations from those issued in 1968, and (3) new rules should be made to help determine the amount of income from a multi-national company is subject to U.S. taxation.

By August, 2014 not much movement had been made on restricting the global corporations from engaging in earnings stripping.  In what has become a familiar refrain,  the WSJ explains:

“The Obama White House has already proposed that Congress pass a law that would effectively end such earnings stripping arrangements, but Congress hasn’t acted. The Treasury Department could instead decide to act unilaterally to prohibit the practice, effectively by amending 163(j) in the tax code.”  (emphasis added)

The White House proposal is summarized by the analysts at CTJ:

“President Obama included two proposals in his most recent budget plan that would address the problem. The first would treat the entity resulting from a U.S.-foreign merger as an American corporation for tax purposes if it is majority-owned by shareholders of the original American corporation. The proposal would also treat the resulting entity as an American corporation if it has substantial business in the United States and is managed and controlled in this country.

The president’s second proposal would address earnings-stripping by barring American companies from taking deductions for interest payments that are disproportionate to their revenue compared to their affiliated companies in other countries.”

The issue was beginning to get some traction by August 14, 2014 when Senator Charles Schumer (D-NY), a member of the Senate Finance Committee, proposed a four part bill to end the earnings stripping game. Republicans were unwilling to move, saying it might make U.S. companies more attractive for foreign takeovers. [WSJ]

Opponents of restricting the stripping also cite the “high” U.S. corporate tax rate of 35%, however, large corporations – as in Fortune 500 – on average paid only 19.4% of their profits in federal income taxes from 2008 to 2012, and 26 companies in the Fortune 500 paid nothing at all during the five year period.  In other words, no matter how low the U.S. corporate income tax is set there will always be some entity lower, say at an inviting 0% – or Tax Havens. It doesn’t seem at all practical to allow U.S. corporations to pretend their profits are earned in Cyprus, Luxembourg, Bermuda, the Cayman Islands, Switzerland, or Singapore, [TW] when it’s perfectly clear for all to see their major business operations are in the United States.

Another argument for doing nothing, or even doing something worse, is that taxing overseas profits gives corporations an incentive to become foreign.  Fact checks are necessary at this point. U.S. taxes on foreign profits are minimal and American companies get “a tax credit equal to any taxes they pay to foreign governments, and are allowed to defer U.S. taxes until they officially bring their offshore profits to the U.S.” [CTJ]

If anything is done at all by the Do Less Than Nothing 113th Congress we might count it as miraculous.  One peek at the official calendar for the House of Representatives demonstrates the point. The House Majority Leader’s calendar illustrates the point that there are only five days on which votes are scheduled for the entire month of September. (pdf) No voting will take place in the House during the month of October, except for October 2nd, thereafter all days are labeled “district work week” – the district work being getting re-elected.    The Senate calendar isn’t much more full.

While Congress fiddles, or the band continues to play “The Stripper,” the list of U.S. corporations which have availed themselves of tax havens and possibly earnings stripping continues to grow. And the band plays on.  The longer the music continues the more average American income earners will be expected to shoulder the burden of generating revenue, and the less will be expected from corporations – those other kinds of “people,” my friend.

*For a more technical look at some of the controversy around Section 163(j) see Morrison, “Section 163(j) and Disregarded Entities,” Bloomberg BNA.  April 6, 2011.

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Swiping Away Toward the Next Debacle?

banker 2 The Las Vegas Sun reports that residents of the Las Vegas metropolitan area have run up $3.88 billion – yes, that’s billion with a B – in credit card debt as of June 2014.  The residents are not alone. There’s more credit card indebtedness piling up in Texas.  The Dallas Morning News lists the increases in credit card debt for Houston is up 5.45%, for Dallas-Fort Worth up 4.70%, and just for good measure there are other increases around the country.  Orlando’s credit card debt is up 4.89%, Atlanta up 4.21%, Tampa-St. Petersburg up 3.75%.   There’s good and bad news here.

Remember the mantra in this blog? One man’s debt is another man’s asset?

Somewhere, somehow, in the maw of the Wall Street financial institutions, those accounts receivable are being sliced, and diced, and traded.  They are being securitized.  They are becoming Asset Based Securities.  Read bonds. They are being priced and sold.  And, of course, someone is making a tidy profit. Synchrony, the largest issuer of private label credit cards for large retailers in the United States,  recently earned a Morningstar rating of BBB for its new issue.  Profits are good news, if the products being transferred are valued properly.  If not, then we have the 2007-2008 Mortgage Meltdown Debacle Redux.

The replication of that debacle will be a bit more difficult if the Security and Exchange Commission succeeds in enforcing rules under the 2010 Dodd Frank Act. The rules now call for firms issuing the securities to file reports with the SEC on the underlying loan data, including credit scores and debt levels.  The SEC plans on providing potential investors with debt to income ratio information and metrics which would help with the assessment of loan/credit quality.  [WSJ]

We should possibly recall at this point that both the Heritage Foundation and the American Enterprise Institute have called for the repeal of most, if not all, the provisions of the Dodd Frank Act.  The ultra-conservative think tanks have already declared the Act an imposition of unreasonable regulatory burdens on financial institutions.  [AEI]  It should also be remembered that Nevada Senator Dean Heller has called for the repeal of the Dodd Frank Act and its attendant regulations. [NVProg]

It’s also within recent memory that then-Representative Heller voted against the House version of the Dodd Frank bill on December 10 and  11, 2009 when Representatives Berkley and Titus voted in favor of it.  [govtrack]  Then on the final vote, December 11, 2009 Heller voted against the measure as one of 176 Republicans to do so. [govtrack]

When the conference report came back with the changes made to the bill from the Senate, once again Heller voted against it, on June 30, 2010. [govtrack] Heller also voted against H.R. 4173 (111th) on the conference report. [govtrack]  Four “nay” votes certainly should indicate that Heller was not in favor of financial regulatory reform.

Once in the Senate, Senator Heller teamed with Senator Jim DeMint (R-SC) to fully repeal the Dodd Frank Act in 2011. [DB]  And, lest he be considered inconsistent —  Senator Heller has now signed on as a cosponsor of Senator Bob Corker’s (R-TN) bill (S. 1217) which would make the FMIC (Federal Mortgage Insurance Corp) an independent agency of the federal government – read: Out from under the provisions of Dodd Frank.

For the record, there are eight bills in the House and Senate which provide for the repeal or diminishment of the financial regulation reforms included in the Dodd Frank Act. [govtrack]  Among these bills are those  sponsored by (H.R. 5016) Rep. Ander Crenshaw (R-FL), (H.R. 4564) Rep. Patrick McHenry (R-NC), (H.R. 4304) Rep. Steve Scalise (R-LA), (H.R> 3193) Rep. Sean Duffy (R-WI), and in the Senate, S. 1861, sponsored by Senator John Cornyn (R-TX). [govtrack]

The efforts by the Securities and Exchange Commission and the Consumer Financial Protection Bureau to implement and enforce financial regulatory reform measures remain under a steady assault of lobbying interests, banking associations, wealth managers, and their allies in the U.S. Congress.  Senator Heller is certainly among this legion.

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Ferguson: Time to put the brakes on the Kid Bashing?

Teen PostOne of the more unfortunate responses from white voices to the issues raised by the shooting of Michael Brown, Jr. in Ferguson, Missouri is the “Get A Job!” refrain.  Thus far members of the Great Uninformed have taunted a financial analyst, and generally assumed that if a person were on the street protesting the individual ‘must’ be unemployed. It’s a good guess, but not a rational assumption.

Jobs, Jobs, Jobs

Approximately 47% of young men aged 16 to 24 in St. Louis County are unemployed. [Guard] However horrifying that statistic may be, it still means that over half of the young men in the county are, in fact, working.  To another point, I have a problem with putting 16 and 17 year old kids in the employment statistics generally, even though the technical notes from the BLS advise counting only those who have looked for work in the target four week period.   Call me old fashioned, but my idea of what a 16 or 17 year old youngster should be doing is Being In School.  That’s their job — to be in school.

There’s certainly nothing wrong with compiling statistics on how difficult  boys and girls find getting a summer job, or on trends about their part time employment, BUT my bottom line is that young people 16 and 17 years old have no business being included in employment statistics other than on a seasonal basis.

Education, Education, Education

Speaking of school.  About 37% of young African American young men are enrolled in college.  That’s too low, but again there’s a need for some perspective.

“Increasing numbers and percentages of Black and Hispanic students are attending college. Between 2000 and 2011, the percentage of college students who were Black rose from 11.7 to 15.1 percent, and the percentage of students who were Hispanic rose from 9.9 to 14.3 percent (source). Also, the percentage of Black 18- to 24-year-olds enrolled in college increased from 30.5 percent in 2000 to 37.1 percent in 2011 and the percentage of Hispanics enrolled increased from 21.7 to 34.8 percent (source).”  [NCES]

More young Blacks and members of the Hispanic community are, in fact, enrolled in college.  We also need to remember that the cohort is a declining one, the general 18 to 24 year old category is expected to be reduced in the next decade by about 4%, so a 13.9% predicted increase in college enrollment is a pretty positive thing. [IHE]

So, before the Great Uninformed pass judgment on the kids, they should know that the odds are about 50/50 they are yelling at someone who does have a job, and that they are spewing on about kids who are more likely to have plans for college than the previous cohort.

College isn’t the only thing those ear-bud inserting cocked hatted little Apples of Mother’s Eye are doing — there are also apprenticeship programs, with an national enrollment of 164,000 in FY 2013; and, across the nation about 375,000 individuals are currently receiving apprentice training. [DoL] As of mid 2013 there were another 60,000 signed up for Job Corps training at 125 centers nationwide. [JC]

It’s probably not occurred to the Great Uninformed that the individual they are currently insulting could be the person who will show up after completing their training from the air-conditioning repair service to fix their AC, or stop the flood in the bathroom, or get the transmission repaired in the family wagon.  On that fine day, the baggie pants T-Shirt clad ‘thug,’ ‘criminal’ and ‘creep’ will look like Salvation Personified  in his or her business logo white/blue shirt, tool kit in hand.

If we’d like more doctors, teachers, nurses, accountants, engineers, designers, EMTs, air conditioner repair technicians, construction workers, plumbers, electricians, …. there are some things we can do to help.  The St. Louis Community College System, literally in the heart of the Ferguson situation, acknowledges some of the problems.

The St. Louis CC reports on their efforts to attract more young African American men, and lists the problems they face:

“There are numerous reasons that can be attributed to the low numbers of African-American men persisting at community colleges and attaining their educational goals. The lack of on-campus support services, low or no financial assistance, lack of transportation, legal issues, the need for childcare, under prepared for college, and most importantly the lack of positive role models are just to name a few.”  [StLCC]

On campus support services range from one on one tutoring to group learning sessions, help using informational technology, study groups, and language instruction.  These efforts aren’t cheap and shouldn’t be approached as such. Cutting public college/university budgets because of lack of state support is counter-productive if we truly want the next generation to pick up the economic baton.

Don’t get me started on the lack of public transportation in general — the rant could go for days.  However, it doesn’t do to disparage young people who live in suburban sprawl or in metropolitan areas with meager public transport for not jumping at the chance to hike miles to a bus station, then transfer to a Metro, travel more miles, and then repeat the process at the end of the school day — IF there is a bus and IF there is a Metro.  I know, those of us of a certain age walked to school, up-hill both ways, in blizzard conditions…. Spare me.

Legal Issues

Legal issues? Could this be a euphemistic way to describe police records for petty crimes, misdemeanors or class Z felonies, plaguing kids these days?   Please stare at the following chart from ChildStats.Gov for a moment.  Who, by the percentages, has a more visible rate of drug and alcohol dependency?

Drug Use ChartThis is an eye test: Whose line is the lowest on the chart? If you said “Blue” you pass. Blue, for Black, non-Hispanic 18 to 24 years of age.  Member of the Great Uninformed who fail this test are probably listening to other members of the Great Uninformed instead of the kids themselves.  If African American young men are the lowest on the chart tracking alcohol or drug dependency where does the impression they are likely to be drug dealers come from?  Try the judicial system.

‘Since blacks are more likely to be arrested than whites on drug charges, they are more likely to acquire the convictions that ultimately lead to higher rates of incarceration. Although the data in this backgrounder indicate that blacks represent about one-third of drug arrests, they constitute 46 percent of persons convicted of drug felonies in state courts.[21] Among black defendants convicted of drug offenses, 71 percent received sentences to incarceration in contrast to 63 percent of convicted white drug offenders.”  [HR]

Notice, it’s not that African Americans are more likely to DO drugs, but that it’s more likely they will be arrested and convicted than their white cohorts.  And for this, those “legal issues” will haunt a young African American in terms of housing, education, and employment.  As the old saying goes, “Justice may be color blind, but the War on Drugs isn’t.”

 Family Family Family

Child care? Here’s another topic for another day.  The U.S. has little to no real child care services when compared to other developed nations.  The role model issue offers some cause to pause.  If the media were to be believed, especially some facets of our national media, every Black child grows up in a single parent household without a father.  Not quite.

The Census Bureau’s 2013 report (pdf) shows approximately 55% of African American children in single parent homes, 31% for Hispanic children, White 21%, Asian 13%.  Read these numbers in reverse and note that 45% of African American children are growing up in household with two adults.  As in the case of the employment figures, there’s a better chance that the Great Uninformed will automatically assume the Black youngster is in the 55% category and not the 45% classification.  For further clarification, there are maps included in the Census Bureau Report which illustrate that children in Missouri are more likely to live in two-adult homes, and fewer live in single family homes than the national average. {figures 4 and 5}

Every reporter in the country has been speaking to the 67% African American population in Ferguson, Missouri — perhaps this is an outlier?  Not. So. Fast.  The Census Bureau also tells us that 68% of the 8,751 Ferguson households are defined as family homes.  Of these, some 31% have children residing there.  2,669 of these households, or 31.3%, are single parent (female) homes.  7.4% are single parent (male) homes.  Again, before jumping to the conclusion that the youngster on the TV screen marching down West Florissant Ave. is from a ‘broken’ home with a single mother — look at the actual numbers.

We almost inevitably get from the Single Mother narrative to the Absent Dad.  “These kids have no role models.”  First, it’s true that many African American men live separately from the mothers of their children — but don’t jump to the conclusion this means they are absent from their children’s lives.

“Recent data published by the Center for Disease Control reveal that African-American fathers spend more time in their children’s day-to-day lives than dads from other racial groups, defying stereotypes about black fatherhood. The Pew Research Center has found similar evidence that black dads don’t differ from white dads in any significant way, and that there isn’t the expected disparity found in so many other reports. Although black fathers are more likely to live in separate households, Pew estimates that 67 percent of black dads who don’t live with their kids see them at least once a month, compared to 59 percent of white dads and just 32 percent of Hispanic dads.” [HuffPo]

When we speak of role models it’s nearly always in a positive sense. “Dad” or “Mom” is the primary role model.  Is it necessarily ‘negative’ to have a parent known in the household for working two jobs to make ends meet? Or, ‘negative’ to have parents who shift child care roles in order to juggle employment schedules?  There are other ‘negatives.’ What kind of a role model is a local police officer who assumes kids sitting on the stoup are up to no good?  Would this encourage a youngster to want to be a police officer?  What kind of role model is it if a Black youngster is trailed through the department store by security or sales personnel who assume that shoplifting is the order of the day? Would this encourage a youngster to want to work in retail sales?

What kind of a role model might a teacher be who calls on the white children in the room first, and the Black students rarely if at all? Would this encourage a young person to be a teacher? What kind of a role model is a secondary school principal who illustrates the national statistics that Black young people are more likely to receive more and longer suspensions than white students? Does this encourage a young Black person to want a career as an educator?

Imagine a Black teen entering an office building, do the women clutch their purses? Do the men move back and check their wallets? Who would want to grow up and work in that office building?  Before the Great Uninformed pontificate on the roles of fathers and mothers, they might want to consider how their own actions convey ‘models’ to young people of color.

Kids Kids Kids

The problems evident in the Ferguson situation won’t be solved over-night, nor are there quick Band-Aid solutions at hand.  However, it might help if the youngsters who feel threatened in their own community were seen for what they are: Baggy pants, ear-bud inserted, caps askew, often silly teenagers –much like everyone else’s baggy pants, ear-buds likely requiring surgical removal, caps smashed down on expensive hair cuts, silly teenagers; texting constantly to see if She said He Liked Her better than Him maybe but He didn’t like Her better even if She looked at Him in the hall while He was with Her.

God love them, they will grow up, and if God has a sense of humor they’ll have at least one child just like themselves.

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Cracks in the Economic Mirror

cracked glassWhy not come out and say it? Wall Street is not your friend. At least it’s not your friend if you are among the group casually known as American Workers.  I know, much has been said about our “Nation of Investors” and how millions of Americans have a stake in the financial markets.  [SEC] However, all that palaver papers over the obvious.  Wall Street’s financial markets are dominated by institutional investors, and such connection as the average American does have is often limited to the tertiary strings which attach to retirement savings accounts and pension funds.

There are forces which generate revenue for Wall Street investment houses that have a negative impact on those American Workers, for example — when Walgreen Inc. decided to eschew a corporate inversion, keeping its headquarters in Chicago the Market pounced and instead of rewarding the company for maintaining its American identity and retaining its American workforce at the Chicago HQ the Wall Street Wizards dumped its stock. [CBS]  More examples?

Merck, Cisco Systems, AOL, HP, Citigroup, Bank of America, and Wells Fargo — all companies which were rewarded by Wall Street for cutting expenses (read employees). [MoneyCNN] Cost cutting (read layoffs) will be rewarded because…? If revenues are at least stable and expenses are reduced there will obviously be more profits for shareholders.  If Wall Street has an anthem it must be “Onward Shareholder Value.”

The problem with marching to this tune is a loss of corporate focus.  Henry Ford’s big idea was to manufacture automobiles.  Merck may be the oldest pharmaceutical company in the world, beginning with Friedrich Merck’s purchase of an apothecary shop in 1668 — a firm which grew to sell the first commercial small pox vaccine in the United States in 1898. [Merck]  Henry Wells and William Fargo started their San Francisco business in 1852 offering banking and express services. [WF] In each of these instances the founders, whether a middle western mechanic, the descendents of an apothecary owner, or the bankers during the Gold Rush, opened their doors to provide products or to deliver a service.

A firm gets to be an institution by providing goods or services, sold to people who need or want them. There is no other way to build a business.  However, when the management of a company is more interested in the stock price than in the goods or services rendered to the public we start to see the cracks in the system.

The mythology takes over — We, say the managers, must guarantee to our shareholders (owners) the highest possible return on their investment.

Crack Number One:  How long must one wait for the return on the investment?  We have a relatively recent example of what happens when the management of a commercial enterprise decides to cash in on quick returns instead of waiting for long term results. Back in 2003 CBS News asked “Who killed Montana Power?”  The short answer is the management. Montana Power management took a blue chip company, a formerly solid investment, a source of economical electric power, and transformed it into … a disaster.

Crack Number Two: Institutional and professional investors aren’t investing in long term corporate strategies which they expect to grow over the next 90 years. They are instead attuned to the quarterly reports, the earnings estimates, and the pronouncements of the analysts.  Volatility, not stability, is the key to high and quick returns. Stability protects long term investors, volatility rewards short term speculation. [BusIns]

Crack Number Three:  When the Finance Department meets the Production Department who wins?   In the 1990s the financial sector accounted for about 20% of all corporate profits, by 2011 the sector rebounded from the Mortgage Meltdown and accounted for approximately 29% of all corporate profits. [HuffPo] The process happens in the remainder of the economy as well. Consider the recent information coming from General Electric.

The company’s industrial division (medical equipment, oil & gas drilling equipment, aircraft engines, locomotives, and gas turbines) reported revenue increases of 9%, its oil and gas revenues were up an impressive 25%, its financial services were up 7%.  In fact, the financial services end of the business, Synchrony Financial, is to be spun off getting GE out of the private label credit card business by 2015. Oh, and by the way — the corporation is planning to get rid of its appliance manufacturing. “Mr. Immelt made a promise to investors that the company would expand its industrial businesses and get rid of non-core segments.” [MBN]

The company formerly synonymous with nearly all things electrical is going to profit from selling off its private label credit card operations and dropping the appliances end of the business.  There’s nothing intrinsically wrong with the evolution of a corporation moving with the tides to stay profitable — but this does illustrate how a firm can move from manufacturing into financials as a core segment of its business.

Meanwhile there are several Wall Street investment banks no longer in existence that were enamored of generating fast revenue in derivatives markets and moved with another tide — out to sea.

Crack Number Four: Insert the hedge fund managers here.  Its one thing to argue for shareholder activism when speaking of the managers of pension funds, 401(k) funds, or the like, it’s quite another when the shareholder activists are hedge and wealth management types.  The Harvard Business School issued a report (July 9, 2014) coming to the following, rather depressing conclusion:

“As in prior research, we find positive announcement-period returns of around 4% to 5% when a firm is targeted by activists and a 2% increase in return on assets over the subsequent one to five years. We find that activist directors are associated with significant strategic and operational actions by firms. We find evidence of increased divestiture, decreased acquisition activity, higher probability of being acquired, lower cash balances, higher payout, greater leverage, higher CEO turnover, lower CEO compensation, and reduced investment.”

We can lump “increased divestiture, decreased acquisition, higher probability of being taken over, more debt, and less investment” under the general category of short term interests.

What is a pension fund or 401(k) administrator to do?  If pension funds, both public and private, are to be invested in corporations increasingly likely to be managed for short term revenue results, and those results are all too likely to be hinged on a swinging door of price volatility; and, if corporations are more likely to be managed with an eye toward the financials, coupled with increased divestiture and greater leverage — how does one invest for the long term in a short term environment?

So, here comes the dilemma.  The fund managers and administrators may decide to swim with the sharks — to go along with the short term investment strategies and applaud the volatility of the financial markets.  However, we’d have to ask: Does the very volatility of the markets or the acquisition of more indebtedness actually work against the best interests of the people who are paying into those retirement or pension funds?

Those who are now working, expecting retirement benefits or pension payments, seem to be at the mercy of a financial sector which rewards their layoffs and applauds the divestiture of their firms.  The message is reflecting from a cracked mirror: If you are lucky and the financial markets are up on your 65th birthday you can retire — If not?

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Filed under Economy, Nevada economy, Nevada politics

The Two’fer Talking Point and the Pointless House Suit

Old news:  Nevada Representatives Amodei (R-NV2) and Heck (R-NV3) voted in favor of “Providing for authority to initiate litigation for actions by the President or other executive branch officials inconsistent with their duties under the Constitution of the United States,” otherwise known as H.Res 676. [HouseClerk] What hasn’t been as widely available is the text of the resolution:

“Resolved, That the Speaker is authorized to initiate or intervene in one or more civil actions on behalf of the House of Representatives in a Federal court of competent jurisdiction to seek any appropriate relief regarding the failure of the President, the head of any department or agency, or any other officer or employee of the executive branch, to act in a manner consistent with that official’s duties under the Constitution and laws of the United States with respect to implementation of any provision of the Patient Protection and Affordable Care Act, title I or subtitle B of title II of the Health Care and Education Reconciliation Act of 2010, including any amendment made by such provision, or any other related provision of law, including a failure to implement any such provision.” [HouseRules] (emphasis and links added)

Notice the weasel words? “…the Speaker is authorized to initiate or intervene in one or more civil actions on behalf of the House….  Do we see the magic legislative words “may” or “shall,” or even the less common “will?”

No, all we see in the actual resolution is the authorization for the initiation or intervention into a civil case against the President or a member of the Executive Branch.  In short, the House said — in a party line vote — that the Speaker can (but maybe not necessarily will, or may, but might not) bring a civil suit against the President.  This is a far cry from the “House Votes To Sue” headlines which offer red meat to the Obamaphobe Republican Base.  There are substantive bills, there are ceremonial bills — but this one is neither fish nor fowl, in case there is no standing or if the political winds don’t fill the sails, the Speaker has a back door exit.  Nothing in the bill really requires him to act, it only says he is authorized to do so.

Viewed from this perspective, H. Res. 676 has no more “substance” than the 40+ odd efforts of the Republican controlled House of Representatives to repeal all or portions of the Affordable Care Act.  Even the usually adept publication, The Hill, presented the authorization of a  law suit as an alternative to impeachment, not as a possible alternative to …. anything?

“The lawsuit focuses on Obama’s decision to delay the healthcare law’s employer mandate, which requires employers with 50 or more workers to provide insurance coverage. The mandate was slated to originally take effect this year, but it has been pushed back for gradual implementation in 2015 and 2016.” [TheHill]

So, why the delay in the first place?  Business interests questioned whether the rules regarding the application of ACA provisions could be promulgated and reviewed in the time available one, for example, being  the restaurant owners:

“The National Restaurant Association, whose nearly 500,000 members were concerned because many industry employees work odd schedules and do not receive benefits, lauded the phase-in. “It’s welcome news, as is anything that helps employers figure this out and gives them time to comply,” said the group’s director of labor and workforce policy, Michelle Neblett, who noted that many members do not yet have systems in place to keep track of worker hours.” [WaPo]

The Restaurant owners weren’t the only business groups seeking more time, as this post from the Treasury Department indicates when describing some of the devilish details:

“The ACA includes information reporting (under section 6055) by insurers, self-insuring employers, and other parties that provide health coverage.  It also requires information reporting (under section 6056) by certain employers with respect to the health coverage offered to their full-time employees.  We expect to publish proposed rules implementing these provisions this summer, after a dialogue with stakeholders – including those responsible employers that already provide their full-time work force with coverage far exceeding the minimum employer shared responsibility requirements – in an effort to minimize the reporting, consistent with effective implementation of the law.” (7/2/13)

In sum, the reporting requirements and implementation were discussed with stakeholders (both labor and management) prior to the decision to delay the matter until the provisions could be ironed out over the ‘shared responsibility requirements.’  The temerity of the House Republicans to authorize a civil case for the failure to implement the provisions of the ACA which they’d tried to repeal (without replacing) during the 112th and 113th Congresses has been duly noted.  What’s been less publicized is the fact that the delay came at the request of business owners — the very group the GOP purports to enthusiastically support.

Since H.Res 676 doesn’t actually DO anything, and because it’s beyond ironic to have the House GOP file suit to require the instant implementation of a law it tried every which way to repeal, there’s perhaps another rationale for this risible legislative exercise. Publicity.

The Two’fer Talking Point

Opposition to the Affordable Care Act isn’t what it used to be.  In the Golden Age of Astroturfed Koch Brothers sponsored, Freedom Works sustained, and Tea Party sycophancy, elections were carried based on Obamacare Bashing. No more. [LATimes]  The generic “Obamacare” may not be popular, but the provisions are. People like the parts wherein health care cost increases are contained and the provisions on pre-existing conditions. [Pew]  As could easily be predicted, opposition to the law centers on the “Too Much Government” ideology.

So, if talking about allowing insurance corporations to abuse rescission clauses isn’t popular, and no one’s thrilled to go back to the days when being a woman was a “pre-existing condition,” what can the GOP do for an encore to 2010?  Try The Lawless President.

Google “lawless president” and all the usual voices come forth. Bachmann, George Will, The American Spectator, The National Review, Breitbart, Jeff. Sessions, Fox News, and that’s just from the first page of results.

Back in May, 2014, the New Republic was predicting the latest theme from the GOP for the mid-term elections would be the “lawless President.” ” This tactical change makes sense. Obamacare is no longer struggling and Democrats are putting Republican congressional candidates in difficult positions over the Medicaid expansion. Criticism of Obama’s lawlessness will rile up the base and bolster turnout.”

And there we have it.

So, Representatives Amodei (R-NV2) and Heck (R-NV3) added their names to the roster of theme promoters for the benefit of the base in the 2014 mid-term elections.  Not so the Affordable Care Act will be quickly implemented, but because they can say they are against the “lawless President.”  And then talk about the “lawless President,” and keep talking about the ‘lawless President,” until the narrative sticks with copious assistance from Fox News.  Again, it is sound and fury signifying nothing… except for riling up the Republican base.  It’s a two’fer, Republican politicians get to say Obamacare + Lawless in the same sentence. What could possibly go wrong?

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Filed under Economy, Health Care, Politics

Getting From the Swampy No to a Functional Yes

SwampWith all due respect to my fellow liberals and progressives — and with this introduction you know the criticism is about to pour forth — enough ink and pixels have given their all in the effort to analyze, explain, or otherwise explicate the ‘problems with the Republican Party’ specifically those who’ve been elected to the House of Representatives.  Enough. It doesn’t matter all that much.

It doesn’t really matter, for example if one adopts the “Neoconfederate” model [Salon] or the “two foundings” explanation [Salon], and we can argue if the ‘two foundings’ in question were the Continental Congress and the Federal System, or the Early Federal Period and the U.S. Civil War.  It’s interesting, it’s academic, and as amusing and thought provoking as the argument is it’s not very useful at the moment.

It doesn’t matter too much if the origins of the present dysfunction are religious, social, racial, psychological, pathological, psychiatric,  or a combination of all the above. What matters is that something is very fundamentally wrong with the way the people’s business in conducted in the Congress of the United States.

Getting To No

As of January 6, 2013 there were 48 members of the Tea Party Caucus, all Republicans.  Of the 435 voting members of the House, 234 are Republican, 199 are Democrats. Two independents caucus with the Democrats.  218 votes are needed to pass legislation. If all the members directly affiliated with the Tea Party Caucus refuse to join their other GOP caucus members, the GOP leadership can control only 186 votes.

In short, the ultra-conservatives in the House of Representatives do not have anywhere near the number of votes necessary to enact the agenda of their choosing, but they have more than enough votes to prevent the leadership from enacting legislation cobbled together with Democratic support.

This is the perfect recipe for NO. No action. No real pragmatic politics. No major legislation. No long term solutions.  The high wire act in the 113th Congress is more conducive to (1) short term stop gap measures to alleviate large problems, (2) interim short term budget appropriations and resource allocations, and (3) periodic breakdowns.

Little wonder then the Absolutely Do Nothing Congress has passed only 34 “ceremonial” bills and “108” substantive bills so far. [WaPo] However, if governmental gridlock is the desired result then the 113th is doing splendidly.

Getting Nothing Done

One of the problems with polarized politics is that hyperbole replaces reasoned discussion, and all too often things become A CRISIS!  There are a couple of ways a crisis can occur. First, and most obviously, there is a situation, unforeseen, which arises from a natural or man-made disaster or catastrophe.  Floods, tornadoes, an attack, an unpredictable infrastructure failure might all qualify as a crisis.

The second crisis category is manufactured.  There appear to be two forms of manufacturing of late. One manifestation is the “political crisis” in which a problem of long standing has been ignored or left unresolved for enough time to create an overwhelming backlog — the Veterans’ Administration issues in regard to wait time for medical services is a classic, as is the number of refugee children who have arrived unattended from Central America — a number that’s been increasing since October 2013.

The other form is more ephemeral and depends upon the Crisis, or Scandal du Jour.  For example, the Benghazi attack in 2012 has generated 25,000 pages of documents submitted in 13 hearings. That the documents have done nothing but reinforce the initial reporting, and that the hearings have generated nothing but easy copy and headlines, is immaterial.  The Congress is ‘dealing with the crisis…’

Meanwhile

While Congress fritters and frets its way to the end of the 113th session there are some issues which may fall into the first manufactured category — the backlog swamp.

Infrastructure: Residents of Los Angeles were recently reminded that 92 year old water pipes cannot be expected to last forever, and when they fail they have no regard for sacred public spaces — like Pauley Pavilion. Over 170 school buildings and 165 bridges in New York were constructed over a century ago. The average age of the 6,800 water lines in New York is 69 years, and 2/3rds of them are susceptible to internal corrosion and failure. [FutNy]  One out of every nine bridges in this country falls in the structurally deficient category, and the average age of a U.S. bridge is 42 years.  [2013RC] We have a early 20th century power grid which is supposed to keep us going in the 21st century. Failure to address aviation needs is costing the U.S. economy valuable revenue as a result of congestion and delays.  [2013rc]

Civil Rights:  The Civil Rights Act, and the provisions safeguarding voting in America are overdue for review. Voter intimidation, suppression, and curtailment are no longer the sole province of the old Confederacy.  We continue to put this issue on the back burner at our peril as a democracy.

Public Health and Safety: Heart disease and cancer continue to be the main causes of death in this country, but Alzheimer’s is climbing up the tables.  An aging population will require more health care services in a wider variety of settings than our current system can address.  We kill 34,677 of us every year in traffic accidents, but we continue to defer highway improvements because of budget constraints.

We kill off 26,631 individuals annually in firearm accidents, another 19,766 in firearm related suicides, and yet another 11,101 in firearm homicides. [CDC]  Still we wrangle about requiring universal background checks and how we might prevent straw purchases.  We can’t even seem to agree that stalkers and spousal abusers shouldn’t have immediate access to firearms.

Whether it’s Alzheimer’s or assault rifles, we’re still operating with entirely too many Medically Under-served Areas, there are 297 such reports for Nevada, and a search of neighboring California turns up 2,065 records. [HRSA]

Immigration: We have a mess going in this department.  It’s hard to ignore the fundamentally racist rantings of the Deport’em Now crowd, who never seem to have much to say about the northern border.  However, we will need to tune them out, or at least down,  if we are going to attract the best and brightest scientific and technical minds we’ll need for a 21st century economy.  We’ll need to figure out how to invite in those who have joined our Armed Forces, willing to die for this country, only to discover later there are voices demanding that they mustn’t  live here. Something rational needs to be done to meet the needs of children who came here as toddlers and have known no other country, and those who have one native born or naturalized parent and another who is not.  Comprehensive immigration policy reform would help. So would adequately funding the judicial, social, and educational components of our immigration policy — security is the easy part — it’s the larger, more complicated portions of the problem we’re delaying.

Might we add more to this list? — items which if we let them progress on their own long enough we’ll find ourselves in a “crisis” situation — climate change, income disparity and inequality, educational funding and curriculum development, and the regulation of capital markets to improve stability.

Our Bottom Line

One of the more egregious practices of failing businesses is the Run To Ruin mentality.  Got an aging delivery truck? Never mind, just keep depreciating it without putting any funds in replacement and capital improvement accounts, and when the thing finally gives up the ghost go out and get another loan to cover the cost.  Delaying serious proposals for maintaining our national safety, health, economy, and infrastructure is tantamount to adopting the Run to Ruin model on a national scale.

Another highly questionable business practice which will lead directly to bankruptcy court is the Disposable Asset Theory of Management  wherein all facets of an enterprise are ultimately disposable, including personnel.  Low wages and paltry benefits yielding high employee turnover? No problem, just hire more and cheaper labor. With 3 job seekers for every position available there will always be somebody.  Eventually those training and retraining expenses will add up, predictably levels of service will decline… and those adherents of the DAT management style should be looking for a buyer sooner rather than later.  Deferring the issues of hiring and retaining well trained and competent public employees is, again, like trying to run the country on the cheap (DAT) and then expressing surprise when “things don’t get done.”

By far one of the most predictable ways to go out of business is to ignore the changing circumstances and economic atmosphere around a firm.  Ever so redundantly speaking — Rule Number One: If you have an increasing share of a declining market you are in very real trouble. Think Kodak.

Let’s be optimistic and believe that eventually we will move from dependence on fossil fuels and toward renewable energy sources.  In old fashioned retail terms this means fossil fuels will be a declining market.  So, WHY are we subsidizing an industrial sector which we know to be on the way out?  Again, if we take a short-term defensive approach to energy policy we’ll be violating Old Rule Number One in ways that will not be helpful in the future — or we can wait for the Crisis in which the oil sector sputters out and takes a chunk of the economy with it.

Avoiding the Run to Ruin, Disposable Asset Theory, and the Ostrich Stance mistakes means we are going to have to stop lurching from crisis to crisis, and start doing some serious public policy planning.  We need to stop talking about running government like a business, and start doing precisely that — running it as a long term, asset rich, enterprise with public service as its core.

Instead of the Doctrine Of No, how about functioning based on the belief that Harry Truman was right: “It is amazing what you can accomplish if you do not care who gets the credit.”

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Filed under Economy, Politics, Republicans