Category Archives: Economy

Fiorina, Lucent, and Lucidity

Fiorina 1 Nevada Republican Party Chair, Michael McDonald, was pleased to post that Carly Fiorina won the National Federation of Republican Women’s straw poll at their convention in Phoenix, AZ last month. [NVGOP]  Gathering 27% to the Hair-Do’s 20% – if that’s to be called a ‘win’ in the sorting of the occupants in the GOP 2016 Clown Car.  There’s another way to sort the candidates, especially those who claim that business acumen is an automatic qualifier for political office. 

Those pundits who have labeled Fiorina “Snarly Failure-ina” are usually referring to her unfortunate tenure – and subsequent Golden Parachuted Escape therefrom – at Hewlett Packard.  However, it’s instructive to go back a bit and start with AT&T.

Twenty years ago AT&T began the process of selling off one of its core assets, the equipment manufacturing division, including Bell Labs the originator of the transistor and a ‘preeminent research outfit.’  The idea was that as a separate entity the equipment division could compete with AT&T competitors and sell its products to flashy outfits like Sprint, Winstar, and PathNet telecom networks.   Fiorina’s star ascended as the head of the group selling gear to “service provider networks.” [Fortune]

The Big Deal in which AT&T spun off Lucent was not without some chickens which would come home to roost later.  There were several clues at the time which projected problems: (1) Lucent was valued at $15 billion at the time of the IPO, but a $21 billion value had been bruited about only a week earlier; (2) its major competitors were Siemens (Germany), Alcatel (France), and Motorola. (3) AT&T loaded the company with $3.8 billion in debt; (4) there were restructuring costs tied to planned major layoffs and Lucent reported a loss of $867 million for 1995 on revenue of $21.4 billion, down from a profit of $482 million and revenue of $19.7 billion for the year before. [LATimes]  And then there was this warning:

Lucent also faces a maturing U.S. market for telecommunications switches. It is making an aggressive push into faster-growing markets in Asia and elsewhere, but it faces tough competition from companies like Alcatel that have long had a powerful international presence. [LATimes]

A bit of history is in order:

“At that time, telecommunications equipment companies had entered a period of unprecedented — and as it would later emerge, unsustainable — growth. Congress had passed a law making it easier for new companies to compete with local phone companies, which had long been de facto monopolies. Households and businesses first connecting to the new-fangled Internet added phone lines and equipment and services, creating a gold rush to build up new network capacity around the world.” [Recode]

For “gold rush” read “financing” for the Qwests and WorldComs and other providers  which had laid far more fiber optic cable and installed way too much capacity, well beyond the needs of the potential customers.  What to do in the service of selling telecommunication switches in a “mature” market – one which was at least saturated if not in the flood zone?

Fiorina administered the practice of “vendor financing” to keep revenues up. There’s nothing necessarily nefarious about this – it was a standard business practice in which Lucent required suppliers to arrange or provide “long term financing for them as a condition to obtaining or bidding on infrastructure projects.” [recode]  When the deals were good, such as the $2.3 billion extended to Sprint, they were very good. But then… there were others of much more questionable obligations. 

It was reported in October 1998 that Lucent and WinStar entered into a $2 billion five year “network pact.” That $2 billion from Lucent was supposed to allow WinStar to expand on an international basis. [IntNews]  The deal didn’t last any five years, it only lasted until WinStar declared bankruptcy in 2001, and sued Lucent for $10 billion claiming that the firm broke its vendor financing agreement. [CompW]  By the time WinStar went under, Fiorina was ensconced at Hewlett-Packard.  WinStar wasn’t the only disaster.

There was also PathNet, a vendor financing deal which made even less sense.  PathNet at least had the sense to notice that first tier cities were all but awash in telecommunications equipment in 1999, so they were going to focus on second and third tier cities for their networks. To this end they secured $2.1 billion from Lucent in vendor financing in February 1999.  [FOonline]  This amount to a company which reported less than $2 million in annual revenue. [recode]  Even using the most generous estimates the company had barely $100 million in equity; it was juggling $385 million in junk bonds at 12.25% interest, and the added $440 million in loans from Lucent only served to jack up the company’s leverage to 8:1. Even higher as they drew more of the loan? [Fortune]

Fiorina has pushed back on the notion she was happy with these short term, dubious deals, however, there’s another side: Lucent at one point predicted annual growth of 17%-22% annually. (1997) [Fortune]  Now, what’s not for Wall Street to love about a 17% annual growth rate? Fiorina may not have been over the moon about the vendor financing deals, but she was determined to rack up big sales. [Fortune]  PathNet filed for bankruptcy in April 2001.

An SEC filing just after Fiorina left Lucent revealed a $7 billion in loan commitments to customers, Lucent dispensing some $1.6 billion. [Fortune]  Why would this be important?  For starters, think Bubble. What the highly questionable home mortgages were to the Housing Bubble, those vendor loans were to the Tech Bubble.  At one point Lucent shares dropped to >$1, and in 2006 the company merged with Alcatel. [Fortune]

So, what do we know?  Fiorina’s tenure at AT&T/Lucent wasn’t much more than that of the Super-Saleswoman who predicted high growth rates and revenues based on vendor financing deals, deals which collapsed as the saturated market finally emerged from behind the curtain of financial manipulation. This isn’t business vision, it isn’t even lucidity – it is merely chasing a fast buck.

References and Recommended Reading:  Linda Rosencrance, “Winstar files for bankruptcy, sues Lucent for $10 billion, Computerworld, April 18, 2001. Staff Report, “AT&T Spinoff Lucent Makes Historic IPO,” Los Angeles Times, April 4, 1996. Scott Woolley, “Carly Fiorina’s troubling telecom past,” Fortune, October 15, 2010. Arik Hesseldahl, “Time to revisit Carly Fiorina’s business record before HP?…” Recode, August 30, 2015.  Jeffrey Sonnenfeld, “Why I still think Fiorina was a terrible CEO,” Politico, September 20, 2015.  Glenn Kessler, “Carly Fiorina’s misleading claims about her business record, Washington Post, May 8, 2015.  Andrew Ross Sorkin, “The influence of Fiorina at Lucent, in hindsight,” New York Times, September 21, 2015. Julie Bort, “Yale Professor on Carly Fiorina’s business record: She destroyed half the wealth of her investors yet still earned almost $100 million,” Business Insider, September 16, 2015.

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Filed under Economy, Politics

No Free Lunch No Free Market

“The market is a human creation. It is based on rules that humans devise. The central question is who shapes those rules and for what purpose,” Reich concludes. “The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about he size of government; it is about whom government is for.” [Robert Reich]

Bingo!  Adam Smith, in Wealth of Nations, offered the Invisible Hand – and economists have been grabbing it ever since. IF, they mused, if all buyers and sellers were truly free then markets would achieve equilibrium and all will be well.  Everyone will act in their own self-interest, and the competition induced will benefit all.  There will be an equilibrium price – for anything – when the demand and the supply are equal.  However, there’s always been a flaw in this argument.

The cracks begin showing when it’s noted that “price” and “value” are not the same thing.  Truly, there is a “market value,” i.e. the price at which an asset would trade in a competitive auction setting, but this isn’t a definition of value.  Value is a qualifier we assign to things that are beneficial, significant, advantageous, or useful. Let’s digress a moment and review why this differentiation between price (even market price) and value is important.

Finance works best when it acts as the conduit for moving capital from places of surplus to places of scarcity.  In the simplest possible terms, finance allows the money in someone’s savings account to be invested in someone else’s business enterprise.   The owner of the savings account benefits from the earnings; the owner of the business enterprise benefits from the extra cash to expand his operations.   Not to put too fine a point to it, but when finance doesn’t move capital from surplus to scarcity then it’s not finance – all too often it’s merely gambling.

Additionally we should note that the the system itself is a gamble.  If I put in a $1000 investment in Widgets International Inc. then I’m betting my shares will either pay dividends, gain in price, or preferably both.  And now to return to “value.”  I’m taking a risk with my money, but I’m also hoping to invest in something of value – perhaps WI Inc. manufactures the best product on offer which helps nurses prevent bed sores from afflicting their patients.  I have $1000 on hand (surplus), Widgets International Inc. needs to expand to meet the demand for its product (scarcity) and finance allows the conduit to work toward mutual benefit.

However, what if I behave as though my $1000 really isn’t surplus? What if I make a side bet that the price of Widget International will go down?  In this instance I am buying a “financial product” which has precious little to do with the product the company is manufacturing, a bit more to do with how the company is managed, and a great deal to do with how a hedge fund can be used to “manage wealth.”   Or, to put it another way – to reduce risk.  Money (capital) slathered about in an effort to reduce risk isn’t part of that conduit for moving capital from surplus to scarcity, and it (as we’ve seen) is fraught with consequences.  The word “behave” is the key term.

If the concepts of price and value are problematic in a discussion of American economics, then our Economic Man as described by Adam Smith is also at issue:

“Economic Man makes logical, rational, self-interested decisions that weigh costs against benefits and maximize value and profit to himself. Economic Man is an intelligent, analytic, selfish creature who has perfect self-regulation in pursuit of his future goals and is unswayed by bodily states and feelings. And Economic Man is a marvelously convenient pawn for building academic theories. But Economic Man has one fatal flaw: he does not exist.” [Harvard]

The “convenient pawn” became the cornerstone of neoclassical economic theory.  The theory elevated the pawn, and the pawn returned the compliment by rationalizing everything from child labor to global out-sourcing.   The Magic Market would “equalize” everything, and all would be well.  In fact, there is no such thing as a free lunch, and there is no such thing as a free market.

In fact, if we skip the jargon (such as a trader saying “I make markets”) what we understand is that traders in the financial sector are sales personnel who have products to sell to prospective buyers.   Last time we looked those sales personnel, the buyers, and the sellers were all human beings – or human beings managing various and sundry enterprises.  Even if  trading is  computerized, someone – some human being – had to program those computers, which still have no innate capacity to count beyond 0 to 1.  There are some benighted souls who believe that if we have just enough “self monitoring,” and more elegant algorithms those messy, inconsistent human beings will no longer screw up the financial markets.  Again, we’d have to ask, “Who is writing those algorithms?” And,  how much “self-monitoring” is good enough?   There are markets, but they are certainly not free of human beings – humans being the brokers, the agents, the buyers, and the sellers.

“Who shapes the rules, and for what purpose?”

We have rules for all manner of human transactions.   When sharing a meal we don’t eat the mashed potatoes with our hands. When getting an invitation with an “RSVP” we don’t wait until after the event to respond.  A soccer match is played with only 11 on each side.  The FAA has rules for take offs and landings to minimize the risk of collisions.   And we have rules for financial markets.   Why? Because a market is simply a transaction between two human agents – buyer and seller – no matter how computerized.

One thing we did learn during the debacle of 2007-2008 was that some investment houses were selling products on which they could calculate a price but they were incapable of determining the product’s value. In some instances the artificiality of the product and its distance from anything tangible, such as a home mortgage, made it impossible to determine what the product was actually worth.  All too much of the Stuff had a “market price” but turned out to have no value in the last analysis.  Thus the demise of Lehman Brothers.

There are some questions at the intersection of economics and politics in 2016:

  • Do we want an unfettered market for financial products? Do we want rules advantageous to the sellers of products in the financial markets? Do we want rules advantageous to the buyers in financial markets? Do we want rules which protect the general public from irresponsible or anti-social behavior on the part of the buyers and sellers?
  • Do we want those who write the rules for the transactions in the financial markets to have the interests of the general public in mind?
  • Do we support agencies which enforce rules designed to restrain the behavior of buyers and sellers in the financial markets?
  • Do we encourage investment or speculation?
  • Should our system of taxation reward work or wealth?

We can focus down on a single issue illustrative of the general regulatory environment – this past July a Senate Committee was taking testimony on a proposed rule that investment advisers place the client’s interest first when deciding upon investments in retirement accounts. One member of the panel offered that the rule would “cost” the investors some $80 billion because financial firms would simply raise fees to make up the profit differential if they couldn’t put their own interests before the interests of their retirement account clients. [Litan pdf]  However, what didn’t go unchallenged was that the study cited by the panel member was financed by the Capital Group, a corporation which definitely stands to benefit if the proposed rule from the Department of Labor is not implemented. [BostonGlobe]

The question highlights the element of freedom:  Is the investment adviser free to purchase elements in a portfolio which enhance the profitability of his firm, or must the adviser give first priority to those investments which will best serve the clients’ interests?  Is the client free to assume his agent (investment adviser) is acting in his or her best interests?  Is the client free to know how investment portfolio decisions are made?  It isn’t a question of whether or not the “market” is “free,” it’s a question of who is free to do what.

Consider for a moment a situation in which a large employer has selected a financial advisor to manage its retirement program.  There are three human agencies at play: the employer, the employees, and the financial advisors.  And, because there are human beings involved we should assume that these relationships are contractual. If the financial advisors are placing their own interests above those of the retirees, then must the employer seek to break the contract? Under what conditions and at what expense?  Are the employees free to take their contribution elsewhere? But, what of the employer’s contributions?   In the rarefied theoretical academic version of a Free Market this would never happen – all the pawn would march neatly across the board. However, this isn’t a theoretical academic version – this is real life – and if the financial advisor is “free” to act in his or her firm’s interest, what happens to the contributions of the employer and the employee? If they act in their self interest then they must cut ties with the advisors.  If the adviser is “free” to act in his or her self interest the employer and the employees lose value in their retirement investments; if the employer and employees are “free” to act in their own self interest the adviser loses the account.   We are left asking: Who is going to write the rules of our economic game? Or to put it in economic-political terms:

“The most important political competition over the next decades will not be between the right and left, or between Republicans and Democrats. It will be between a majority of Americans who have been losing ground, and an economic elite that refuses to recognize or respond to its growing distress.”  [Reich]

References/Recommended Reading:  John Lanchester, “Money Talks: Learning the Language of Finance,” New Yorker, 8/4/2014.  Craig Lambert, “The Marketplace of Perceptions.” Harvard Magazine, March-April 2006.  Michael Blanding, “The Business of Behavioral Economics,” Forbes, August 2014.  Adam Ozimek, “The Future  Irrelevancy of Behavioral Economics,” Forbes, September 2015.  Dan Ariely, “The End of Rational Economics,” Harvard Business Review, July-August 2009.  Paul Krugman, “How did economists get it so wrong?” New York Times Magazine, September 2009.  Noah Smith, “Finance has caught on to behavioral economics, Bloomberg View, June 2015.  Robert Litan, Senate Subcommittee on Employment and Workplace Safety, Senate HELP, July 21, 2015. (pdf) Annie Linsky, “Warren…Brookings Institution,” Boston Globe, September 29, 2015.  Robert Reich, “How the pro-corporate elite has rigged the system against the rest of us,” Alternet, September 29, 2015.

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Filed under Economy, financial regulation

VW Bugs

VW “With three Volkswagen and two Audi dealerships in Las Vegas told to stop the sale order of its four-cylinder diesel vehicles, Volkswagen AG said Tuesday that a scandal over falsified U.S. vehicle emission tests could affect 11 million cars worldwide as investigations of its diesel models multiply.” [LVRJ]

There are some interesting layers to this story.  Let’s call layer one the “regulations” layer.  We do want to set standards for the emission of nitrous oxide, which accounts for about 5% of greenhouse gas created by human activity. And, the stuff tends to stick around:

“Nitrous oxide molecules stay in the atmosphere for an average of 114 years before being removed by a sink or destroyed through chemical reactions. The impact of 1 pound of N2O on warming the atmosphere is almost 300 times that of 1 pound of carbon dioxide.” [EPA]

Therefore, it sounds like a good idea to set some standards for light duty vehicle emissions. [ pdf]  Volkswagen, desirous of selling its products – in this case four cylinder diesel powered cars – was subject to those vehicle emission standards, just like other diesel vehicles manufactured by Ford, Mercedes Benz, and BMW. [AutoTrader]  So, why would the corporation cheat? One important reason is that the company could not manufacture a car with the three legs of the stool: Performance, Fuel Economy, and Low Pollution – and maintain its profits. [Vox]

As everyone knows by now, the corporation decided to install defeat software which fudged the numbers when the cars were being tested for emissions. In short, they could get the performance levels they wanted, at profitability levels they wanted, and this done by sacrificing the pollution part of the equation.  This explains the wide difference between the results of the road tests and the lab tests.

“The Environmental Protection Agency alleges the automaker had designed software to let its diesel cars detect when they were being tested for emissions. The software, known as a “defeat device,” was installed in some 482,000 cars, spanning model years 2009 through 2015, regulators say.” [LVRJ]

Again, as everyone knows by now, this was patently illegal.  Patently illegal behavior by a company with sales revenues of $202.46 billion in 2014; gross income of $33.88 billion; and, a net income of $10.85 billion. [MktWtch] Prior to this debacle, VW’s ROE (return on equity) was at 11.84%, Ford reported 14.33%, and BMW’s ROE was 15.61% [YCharts]

Investors like watching the ROE because:

“Return on equity (ROE) measures the rate of return on the money invested by common stock owners and retained by the company thanks to previous profitable years. It demonstrates a company’s ability to generate profits from shareholders’ equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate growth. Return on equity is useful for comparing the profitability of companies within a sector or industry.” [YCharts]

VW’s earnings for 2015 were estimated as about $234 billion. Ford, by contrast, was expected to see about $150 billion for 2015.  On June 24, 2015 VW was selling at $218.40/share; things started to go south quickly after VW hit $162.40/share on September 18, 2015, and the stock is reported at $111.50 September 23, 2015.   We are now sliding into the second layer of the story.  It’s not just that VW stock took a dive after the cheating was reported – nor that the cheating caused investors to sell – it may very well be that the very thing the corporate management feared, which caused the cheating, was the proximate reason for the Big Slide.

The Management Layer.   VW’s annual report to investors opens with a general description of board operations, “We also receive a detailed monthly report from the Board of Management on the current business position and the forecast for the current year. Any variance in performance as against the plans and targets previously drawn were explained by the Board of Management in detail, either orally or in writing. We analyzed the reasons for the variances together with the Board of Management so as to enable countermeasures to be derived.” [VW pdf]

What we appear to have at this point is Management Speak for Shareholder Value management.  It’s probably safe to assume that the discussions of “current business position” included the old standbys sales, revenues, expenses, liabilities, and analyst expectations.  We can base this conjecture on the reference to the “forecast for the current year.”  Remove the gilding on “variance,” and “targets,” and we’re most likely talking about share prices predicated on earnings expectations. 

So, in order to keep the earnings expectations nice and high, and thereby secure higher share prices – the management decided to roll the dice and hope that no one caught on to the Defeat Device.  More simply stated: Shot. Into. Own. Feet.

If there were a better reason to chuck the Share Holder Theory of Management – or at least to modify it such that it doesn’t drive the decision making process into the nearest convenient ditch – this just might be the appropriate occasion.

Note that it is not that Volkswagen wasn’t a profitable company.  It had a perfectly acceptable RoE (11.84%) with earnings expected to be in the $230B range for 2015.  Nor did the 4 cylinder diesel engine cars constitute a major portion of its sales.  While the total number of cars involved isn’t clear yet, VW has shut down sales of the 2015 and 2016 “clean diesel” models, noting that 23% (7,400) of new cars sold in August were diesel. [NYT]  Volkswagen Group manufactured some 10.2 million vehicles in 2014. [Stat]  The North American production for 2015 was estimated at 0.64 million. [Stat]

It almost defies common sense to perceive how cheating on the emissions testing for a group of products which were not a major part of the American market was really supposed to enhance the bottom line.  Unless, we revert to the “every penny counts” mindset in maintaining a certain targeted profit level.  Let’s take an educated guess that it was more important for VW management to maintain profit (and thus share value) than it was for them to develop and produce cars with legal levels of emissions, acceptable standards for performance, and reasonable fuel efficiency.  They were more interested in making money than in making cars? More interested in short term profits and rolling those dice against long term losses?

It wasn’t that long ago that Volkswagen wanted to be the global leader in unit sales, but as a CNBC commentator put it: “Volkswagen is learning that getting ahead at all costs eventually catches up with you. So much for being the leader on a global basis on auto sales.”

The international layer.  Diesel powered cars are much more popular in Europe than in the U.S.  Thus, economists are trying to sort out what the impact will be on the Eurozone economy [Express]  The company is now facing litigation in Italy over fuel economy related issues. [Telegraph]  And, there are reports that the EU is looking at stricter rules to close the gap between laboratory and road test results. [EuObs]  Ironically, a company that didn’t want to play by the rules may find itself facing a more rigid regulatory regime in the very part of the planet where it had 25% of the market.  As of yesterday, there were calls for greater scrutiny of all automobile manufactures in Europe. [MrktWtch

Perhaps even more ironically, a company that wanted to increase its value managed to cause a 30 billion Euro drop in market cap in two days. [MrktWtch]  The CEO has resigned, the Chancellor of Germany is calling for a prompt investigation, [Telegraph] and the UK is entering the lists for a probe of what went so ridiculously wrong. [Guardian]

What went wrong?  What’s been going wrong for a while now – the story sounds entirely too familiar?  Financial institutions which sold and then bet on the value of financial products on which they could not place a value (Lehman Brothers et al.) in the U.S. in 2007-2008? Subprime CDOs?   Bankers colluded to fiddle with the LIBOR rate?  Does it sound like the same motivation as seen in the Worldcom and Enron?  It’s founded in the same swamp land all the other egregious examples have inhabited – greed.

Perhaps it’s too easy to forget that money isn’t the root of all evil; it’s the LOVE of money, or  that “For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.” [1T 6:10]  There will be sorrows aplenty – in the regulation layer, the management layer, and on the international scene.  There is a relatively fine line between seeking economic growth and downright avarice, and when it’s crossed the results can be catastrophic.  The question becomes: How many more times do we have to see this play before we get the point?

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Filed under ecology, Economy

Distracted to Distraction?

carnival barker What are there? Some 412 days until the next general election, and the broadcast media is behaving like that is going to happen any moment? Perhaps we might call the campaign thus far, as presented by the beltway media and associated punditry, “The Click Bait Campaign?”  There are as many explanations for why the campaign appearances and speeches by Democratic candidates (Clinton, Sanders, etc.) aren’t getting the press coverage garnered by the Republican Clown Car as there are Punditatti to express them.  But while the press-gangs muse about whether Secretary Clinton is seen as “reliable,” or if Senator Sanders is perceived as “electable,” of if candidate Fiorina is “crisp and effective”… or if candidate Trump is “serious”… we’re missing some issues that deserve far more attention than the National ADHD click bait coverage is giving us.  Here’s what I’m waiting to hear more about.

The national economy.  The candidate who can convince me that he or she understands the shape of the American economy is probably the one who will get my vote.  Surely someone can clarify and amplify the changes in the U.S. economy in the past forty years:

“Previously, income grew more or less in step with household wealth. From 1962 to 1966, a period of low inflation and robust economic growth, real private sector wages rose 27.5 percent while real net worth increased 23.6 percent, according to Bloomberg News calculations based on government data. In the five-year period ending in 1996, real net worth gained 15.6 percent while private wages grew 11.3 percent. More recently, the gap between household net worth and wage growth has widened. From 2001 to 2005, the value of household assets minus liabilities rose 16.6 percent after inflation. Private sector wages rose just 2.7 percent.” [Bloomberg 2006]

Thus we  have an hour-glass economy, [Salmon, Reuters] one in which the wealth is concentrated at the upper end of the scale, and more occupations continue fall into the low-income levels. [Salon]  Senator Sanders has made continuous reference to the Income Inequality Gap, [Sanders] and Secretary Clinton has made this topic part of her repertoire on the campaign trail. [WSJ]

By February 2015 someone on the Republican side of the aisle noticed the Income Inequality gap (hour glass economy) [NYT] and Senator Marco Rubio attempted to slot into the issue by suggesting expanding the Child Tax Credit and cutting the tax brackets from seven to two (15% and 35%) unfortunately there’s no suggestion as to how to pay for this. Nor does he specify how to pay for expanding tax credits to childless adults; put simply, his arithmetic doesn’t work.  [NYT]  And, then there’s the rather tired Republican “promise” to create “flex funds” – another way of expressing the block grant anti-poverty programs proposal which lends itself nicely to eventual (and predictable) cuts to the grants by Congress.  In short, there’s nothing much new here: Credit Card Conservatism, and cuts to anti-poverty programs.  Meanwhile, we have the Limping Middle Class.

Perhaps we need a What To Watch For List?

  • Which candidates are speaking of a taxation system which rewards work and not just wealth?
  • Which candidates are addressing the decline in middle class income jobs in this country?
  • Which candidates are advocating equal pay for equal work? And/or an increase in funding for child care?
  • Which candidates are proposing an increase in the federal minimum wage?
  • Which candidates are suggesting we need to address the restoration of the manufacturing sector in this country?
  • Which candidates are supportive of workers’ rights to organize and form unions to bring more balance with multi-national corporations?
  • Which candidates are advocating funding for the improvement and maintenance of our national infrastructure?

It may be difficult to listen for these points since the media seems intent on speculating about the “electoral” effect of what candidates are proposing instead of explaining or clarifying the implications of their policy positions.  Meanwhile the media focuses on “Abortion!” or the “Planned Parenthood” hoax videos – the “Email,” the “Islamists!” the Whatever Will Get The Clicks of the Day.  A little over 412 days from now Americans will vote, and we’ll probably cast ballots based on the issue that is and remains the top American concern: It’s the Economy Stupid. Or, It’s the Stupid Economy.

Recommended: Robert Reich, “The Limping Middle Class,” New York Times, 9/03/11.  Danny Vinik, “Marco Rubio…”, New Republic, 1/14/15. Brendan Nyham, “Why Republicans are suddenly talking about economic inequality,” New York Times, 2/13/15.  Andrew Leonard, “The Hour Glass Economy,” Salon, 9/13/15.  Future of Jobs, “In an Hourglass Economy,” transcript,, 8/2011. Bernard Starr, “Corporations Plan for a Post Middle Class America,” Business, Huffington Post, 4/6/12.  Mollie Reilly, “Thomas Piketty calls out Republican hypocrisy on income inequality,” Huffington Post, 3/11/15.

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Filed under Economy, elections

Conflated Issues Inflated Fears

Inflation chart cause

There’s fear, right here in the outback, that raising the minimum wage will drive up inflation.  The Humboldt Sun (Sept. 18, 2015 p3)  includes a long LTE titled, “$15 minimum wage would stimulate inflation.”   The author writes:

“The government requires businesses to pay employees more by passing minimum wage legislation. This increase is not because workers are more productive, so it costs more to produce goods and services. Businesses might lay off workers to bring down labor costs, but that results in less output. Ultimately, they must raise the cost of consumer goods.”


There are several macro-economic concepts mashed into this, but let’s assume that the writer is speaking of the form of inflation diagrammed in Chart 2 above, “Cost-Push Inflation,”  defined as follows:

Cost-push inflation … occurs when prices of production process inputs increase. Rapid wage increases or rising raw material prices are common causes of this type of inflation. The sharp rise in the price of imported oil during the 1970s provides a typical example of cost-push inflation (illustrated in Chart 2). Rising energy prices caused the cost of producing and transporting goods to rise. Higher production costs led to a decrease in aggregate supply (from S0 to S1) and an increase in the overall price level because the equilibrium point moved from point Z to point Y. [SFFRB]

Cost-Push inflation might be presented as the Inflation Monster, IF it were the only kind of inflation possible – it isn’t.  There’s also Demand-Pull.  And we return to the San Francisco Federal Reserve for its basic definition:

“Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money. See Chart 1 for an illustration of what will likely happen as a result of this shock. The increase in money in the economy will increase demand for goods and services from D0 to D1. In the short run, businesses cannot significantly increase production and supply (S) remains constant. The economy’s equilibrium moves from point A to point B and prices will tend to rise, resulting in inflation. [SFFRB]

And how does a central bank increase the supply of money? Monetary policy.  The textbook way, prior to September 2008, was that if the opportunity costs for holding noninterest-bearing bank reserves was the nominal short-term interest rate (federal funds rate), then we’d have a situation in which if the funds rate were low the quantity of reserves banks would want to hold would increase. [SFFed]  Note: the banks have an interest in putting reserves to work by lending them.  If a bank found itself with “excess” reserves the obvious thing to do would be to find borrowers and earn a return on the money. Thus the situation wherein the cost to the banks of borrowing money is essentially zero, in a post 2007-08 effort to support the financial markets and kick-start the economy.  Now what?

Why hasn’t there been some awesome Demand-Pull Inflation?  Monetary Policy. The situation has changed, although few outside the financial commentators have paid much notice.

“The change is that the Fed now pays interest on reserves. The opportunity cost of holding reserves is now the difference between the federal funds rate and the interest rate on reserves. The Fed will likely raise the interest rate on reserves as it raises the target federal funds rate (see Board of Governors 2011). Therefore, for banks, reserves at the Fed are close substitutes for Treasury bills in terms of return and safety. A Fed exchange of bank reserves that pay interest for a T-bill that carries a very similar interest rate has virtually no effect on the economy. Instead, what matters for the economy is the level of interest rates, which are affected by monetary policy.” [SFFed]

If Demand-Pull inflation is corralled by monetary policy which is based on the Federal Reserve now paying interest on reserves, doesn’t this argue against raising wages which will increase unit costs of production and hence raise consumer prices?  Not necessarily.

The author of the LTE maintains: “The Federal Reserve has held interest rates at near 0 percent for several years. Some claimed cheap loans would stimulate the economy. The problem is that banks have been fiscally conservative, with few loans and little interest rate to savers.”

A crucial part of this puzzle is the press release from October 6, 2008 from the Federal Reserve stating:

“The Federal Reserve Board on Monday announced that it will begin to pay interest on depository institutions’ required and excess reserve balances. The payment of interest on excess reserve balances will give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee.”

Yes, the interest rate remained low, but the banks with excess reserves on hand had less incentive to loan out those reserves if they could simply leave them on the books and earn interest.  The Financial Services Regulatory Relief Act of 2006 allowing this situation  [S 2856 109th] was quite generous to the bankers, such as section 201 which “(1) authorize payment of interest on funds maintained by a depository institution at a Federal Reserve bank; and (2) authorize the Federal Reserve Board to reduce to 0% the reserves required to be maintained by a depository institution against its transaction accounts. (The current requirement ranges from 3% to 14%.)” [GovTrack]

While the Federal Reserve makes a nice scapegoat for those who believe in broader extensions of consumer credit, it really doesn’t do to belabor its role (or lack thereof) in stimulating the consumer end of the economy when Congress provided the vehicle by which the wall between brokers and bankers was breached (Title 1, Section 101) and compounded the issue by enacting authorization for banks to sit on reserves in order to earn interest (Title 2, Section 202).

And, here’s where the LTE author swims in shark territory – a monetary policy which encourages broader consumer lending would also be a factor in the creation of Demand-Push inflationary pressures.  A person really can’t have it both ways.

How much is too much?

There are, in both fact and theory TWO forms of inflation.  Nor can we assume that inflation is always a bad thing.  Most economists like an inflation rate of just under 3%. [Investopedia]  Why? Because the alternative – deflation —  is even worse.  During deflationary periods workers get laid off, consumers spend less, people hold off major purchases believing prices will fall further, and the spiral continues – downward.

Consumer Price Index 2005 to 2015 The blue line includes items like energy/food which are inherently more volatile, the line for all others shows a fairly consistent rate of inflation right around the 2.5% mark – remember 3% is the economist’s ideal. It’s also useful to note that the wide variances occur between January 2008 and January 2010 – when the U.S. economy was trembling before and  in the wake of the financial crash.

Consumer Price Index chart If fact, before we become too alarmed by inflationary trends we might want to take a look at the column highlighted above from the Bureau of Labor Statistics, and note that we are well below that 3% threshold.  In other words, it’s time to stop worrying excessively about inflation – both forms – and start being concerned with why wages and salaries have tended to stagnate over the past thirty years?  [Pew]

“…after adjusting for inflation, today’s average hourly wage has just about the same purchasing power as it did in 1979, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms the average wage peaked more than 40 years ago: The $4.03-an-hour rate recorded in January 1973 has the same purchasing power as $22.41 would today.” [Pew] see also: [EPI]

Our local author is still alarmed, “Recent price spikes are more noticeable than the usual gradual increases.  That naturally leads to call for a minimum wage increase. But if granted, the inflation cycle will begin again.”  To which we’d have to ask:

  • What recent price spikes? The annual inflation rate as calculated by the BLS Consumer Price Index, the figures the economists use, has been less than 2.5% since 2006.  Further, the prices of gasoline has dropped from about $4.11 in July 2008 to $2.73 as of August 2015. [EIA]
  • If not those phantom price spikes, then what else could raise the call for an increase in the minimum wage?  The trends in stagnant wages and salaries?
  • What inflation cycle?  The annual increase in inflation hasn’t risen above 2.5% since 2006 and 3% is the threshold used by most economists to determine a “significant” increase.  During five of the last ten years we’ve experienced inflation of less than 2%.
  • However, let’s not assume that the author is referring to the here and now but to the ubiquitous “awfulness to come somewhere down the road about which we should be terribly alarmed.”  Is there anything in the statistical tables indicating that an increase in the federal minimum wage would yield inflation rates in excess of traditionally  held economic standards?  Given that the federal minimum wage has been raised 22 times since first authorized in 1938, has there been any drop in the real GDP per capita in the last 75 years? (Hint: no)

If it’s not consumer spending driving an inflation cycle in the modern economic environment – what is?  There is something about which we ought to be worried, but it’s not your father’s inflation cycle – it’s the climate created by the financialists:

“Both gross and net business debt have continued to rise since 2007, but the proceeds have been almost entirely recycled into financial engineering—including more than $2 trillion of stock buybacks and many trillions more of basically pointless M&A deals.

This diversion of the $2 trillion gain in business debt outstanding since 2007 to financial engineering is owing to the near zero after-tax cost of corporate debt. The latter has caused the enslavement of the C-suite to the instant gratification of rising share prices and stock options value in the Fed’s Wall Street casino.” [ZeroHedge]

Not to put too fine a point to it, but the brakes will be applied to any inflationary pressure by the bursting of the next financial bubble.

References and Sources: Federal Reserve Bank of San Francisco, “What are some of the factors that contribute to a rise in inflation?’ October 2002.  John C. Williams, “Economic Research: Monetary Policy, Money, and Inflation,” Federal Reserve Bank of San Francisco, Economic Letters, July 9, 2012.  Bernard Shull, “The impact of financial reform on Federal Reserve Autonomy,” Levy Economics Institute of Bard College, working paper 735, November 2012. (pdf)  Douglas Rice, “Inflation: It’s a Good Thing,” Investopedia, May 22, 2009.  Bureau of Labor Statistics: Consumer Price Index, 12 month percentage change. (2015) “For most workers wages have barely budged for decades,” Pew Research Center, October 9, 2014.  EPI, wage stagnation in nine charts, January 6, 2015.  CBPP, “A guide to statistics on historical trends in Income Inequality,” revised July 15, 2015.  L.E. Hoglund, “Gasoline prices: cyclical trends and market developments,” Beyond the Numbers, BLS, May 2015. (pdf) EIA, “Petroleum and Other Liquids: Retail Prices all grades and formulations, August 2015.  Department of Labor, “Minimum Wage Mythbusters.”  CNN, “Minimum wage since 1938,” interactive graphic.  “Meet the New Recession Cycle,” Zero Hedge, April 4, 2015.

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Filed under Economy, financial regulation, income inequality, Minimum Wage, Nevada politics, Politics

Domestic Violence is Everyone’s Business: Just Perhaps Not The State of Nevada’s Business?

Domestic violence costs $8.3 billion in expenses annually: a combination of higher medical costs ($5.8 billion) and lost productivity ($2.5 billion).” [Forbes]

In the same year this quotation appeared in Forbes magazine, the Nevada Network Against Domestic Violence reported 58,582 contacts concerning  domestic violence in the state. 37,439 of them were first time contacts, another 13,670 were “repeats,” and there were 7,473 follow up contacts. [FY2012-13 pdf]  In the next annual report there were a total of 61,229 contacts; 38,042 initial, 15,165 repeats, and 8,022 follow ups. [FY 2013-2014 pdf]  The calendar year report for 2014 shows  a total of 65,026 contacts, 40,927 first time, 15,534 repeats, and 8,565 follow ups. [CYR 2014 pdf]

DV victims total We also know that in calendar year 2014 the primary victims were most often women (38,145) as contrasted to men (2,782).  We can also infer from the numbers that they are in the age range 18-64, or during the years in which they are most likely to be employed.

Indeed, some 9,119 of the primary victims were someone’s full time or part time employee.  Perhaps what we can’t know is how many of those in the unemployed category were women who were isolated in abusive domestic

DV victims employment statussituations where they were forbidden to work outside the home, or in some instances to have only very tenuous contacts with those outside the house.

What we can know, and do, is that in national terms we are losing an estimated $2.5 Billion annually in lost productivity costs. Domestic violence contributes to lost wages and reduced earnings, it impeded  the victim’s job advancement, and compromises safety for the employees and their co-workers. [BBoston]   That $2.5 billion also includes time lost as the victims miss work, arrive late or have to leave work early to care for themselves or other family members.

A Fall 2000 report for the State Attorney General’s office (pdf)  outlines recommendations for employers to mitigate the effects of domestic violence: (1) condition perpetrators’ continuing employment on remaining non-violent; (2) intervene against stalkers in the workplace; (3) safeguard battered employees’ employment and careers by providing flexible schedules, leaves of absence, and establishing enlightened personnel policies; (4) provide employment security to battered employees; (5) provide available resources to support and advocate for battered employees.

A follow up report “Nevada Domestic Violence Prevention Council Domestic Violence and the Workplace:  A Toolkit for Employers,” (pdf) was issued by former Nevada Attorney General Catherine Cortez Masto.  This document links to the Workplaces Respond (to domestic and sexual violence) model policy guidelines to implement the recommendations set forth in the 2000 report.   The model policy guidelines would work well for moderate to large sized businesses, what isn’t clear is how many employers in Nevada have  clearly stated and implemented domestic violence prevention and mitigation policies in their personnel manuals. For that matter, it’s difficult to determine precisely what the state is doing – assuming that the state should function as as example for other entities to follow.

Let’s look at the  the model policy and compare it to the State Personnel Manual.  The Model Policy includes the following:

“[Employer] recognizes that victims of domestic violence, sexual assault, stalking and dating violence may need time off to obtain or attempt to obtain a restraining order or any other legal assistance to help ensure his or her health, safety, or welfare or that of his or her child. [Employer] will work in collaboration with the employee to provide reasonable and flexible leave options when an employee or his or her child is a victim of domestic violence, sexual assault, dating violence and/or stalking. [Employer] will work with employee to provide paid leave first before requiring an employee to utilize unpaid leave.”  [Model Policy]

Here’s an exercise. (1) Download the State of Nevada’s Employee Handbook. (pdf)  (2) Type <Cntrl F>  (3) Type “Domestic” in the inquiry box.”  If you don’t want to do this yourself then you’ll have to trust that I found 5 instances of the term “domestic” anywhere in the document.  The first concerns insurance benefits, the second concerns domestic partner benefits, the third concerns survivor benefits, the fourth is in the same paragraph as the third, and the fifth finally gets around to the issue at hand:

“ The personal safety and health of each employee is of primary importance. It is the responsibility of all employees to support safety and health programs by reporting any threats received or restraining orders granted against a disgruntled spouse, domestic partner, acquaintance, or others. You must report all incidents of direct or indirect threats and actual violent events to a supervisor, and the matter will be treated seriously. A direct or indirect threat and/or actual violence will be documented and reported to both the Attorney General’s office and the Department of Administration, Risk Management Division using the report form found on their website All incidents will be immediately investigated and appropriate action taken. (NAC 284.646-284.650)”

The link takes you to the Risk Management site.  In short, the Nevada policy manual for employees addresses workplace violence, but not necessarily violence which takes place “off campus.”  Yes, workplace violence should be taken seriously. Yes, domestic violence all too often translates to workplace violence; but NO the State of Nevada has not adopted personnel guidelines which would put a dent in those lost productivity, lost career advancement, lost earnings and wages columns that plague other institutions?

Comparing the Model Policy with the State Employee Handbook, the Model Policy calls for collaborative efforts to assist a victim of domestic violence get a restraining order or legal assistance.  The victim should give the employer a reasonable amount of time to juggle schedules or fill in when calling in, and the employer should make every effort to secure the legal protections which may be necessary.

The State Handbook does address what happens after the battery.

“If you are a full-time employee, you earn 10 hours (1¼ working days) of sick leave for each month of full-time service. Part-time employees earn a prorated amount based on full-time equivalent service. Sick leave can be used as soon as it is accrued. (NRS 284.355, NAC 284.113, 284.5415) You may only use sick leave for authorized reasons. Authorized reasons for using sick leave are: an inability to work because of illness or injury, incapacity due to pregnancy or childbirth, medical and dental appointments, family illness (subject to some limitations), and death in the immediate family.”

Apparently, about as close as the state gets to addressing the needs of a battered person to secure legal or technical assistance, is:

“An employee does not need to use this leave entitlement in one block. Leave can be taken intermittently or on a reduced leave schedule when medically necessary. Employees must make reasonable efforts to schedule leave for planned medical treatment so as not to unduly disrupt the employer’s operations. Leave due to qualifying exigencies may also be taken on an intermittent basis.”  (emphasis added)

If we put this all together we have a situation in which (1) Nevada obviously has issues regarding domestic violence in the State; (2) Domestic violence has ramifications beyond the medical and legal costs associated with it and has an impact on earning power, career advancement, and productivity; (3) Nevada has at least two publications endorsing and promoting positive measures employers may take to reduce the medical, legal, and economic impact of domestic violence; and (4) Nevada doesn’t include policies designed to assist victims of domestic violence in its own Personnel Manual.

What’s wrong with this picture?

References: Weller, “Covering Domestic Violence: A Guide for Informed Media Reporting in Nevada, (pdf)  State of Nevada Employee Handbook, Department of Administration, Division of Human Resource Management, (pdf)  National Resource Center – Workplaces Respond to Domestic and Sexual Violence, Model Workplace Policy.   Catherine Cortez Masto, AttyGen, “Nevada Domestic Violence Prevention Council Domestic Violence and the Workplace: A Toolkit for Employers.” (pdf) Nevada Network Against Domestic Violence: Statewide Statistics FY July 2013-June 2014. (pdf) NNADV Calendar Year Report Jan.-Dec. 2014 (pdf) NNADV. org general resources and web site; statistics.

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Filed under domestic abuse, Economy, Nevada, Nevada economy, Nevada politics, Women's Issues

The Big Catch: Pay Us and We’ll Do The Right Thing

Banker Sorry A small group of ultra-wealthy individuals are getting alarmed by the widening income gap in America. [NYT]  Their cries hit some major news outlets and were analyzed in others. [Salon] [NationalMemo] And, as we might expect there’s a catch:  Corporate Welfare.

“There is a way to start. Government can provide tax incentives to business to pay more to employees making $80,000 or less. The program would exist for three to five years and then be evaluated for effectiveness.

The benefits would be huge. People would have more money to spend, and many would no longer need government help. That would mean a reduction in entitlements.” Peter Georgescu, CEO Young & Rubicam

Yes, you and many others read this correctly – CEO’s like Ken Langone (Home Depot founder) and Georgescu and Paul Tudor Jones are worried about the possibilities of either peasants with pitch forks or declining sales.  And, no, there is nothing new here. Nothing that ventures too far from the business model calling for tax breaks, cuts, incentives, etc. for corporations to locate in beautiful downtown West Buffalo Fart. 

If the suggestion weren’t so demonstrably callous it would be ludicrous and risible.  First, there’s nothing preventing companies from doing this without benefit of yet more tax cuts for the already wealthy corporations – or, is there.  Welcome back to the world of Shareholder Value!

Wal-Mart recently announced plans to increase company-wide minimum wage to $9 per hour, and to increase pay to $10 per hour for many employees by February.  And, then it bowed to the First Law of Staffing:

The company has also increased store staffing at peak hours so shoppers move quickly through checkout lines and see stocked shelves, said executives during the company’s quarterly earnings call earlier in August. [MarketWatch]

The old First Law is that you have enough employees if you can satisfy customer demand and maintain acceptable levels of client or customer service.  This should have been good news all around – except it wasn’t.

Those efforts contributed to a 15% drop in second-quarter net income compared with a year earlier, said executives. [MarketWatch]

What did Wall Street do?  The Street didn’t like that drop and punished Wal-Mart accordingly.

walmart stock

That’s right… it didn’t matter to investors if there were happier employees at the giant retailer; it didn’t matter that customers didn’t have to wait in the cashier’s line so long.  It mattered that the second quarter net income report was down on a YOY basis.

This is one of the more egregious contemporary examples of the Shareholder Value Monster trampling on any corporate plans to do what businesses should do best – meet customer demand with an acceptable level of customer/client service.

As long as the Financialists continue to steer the corporate ships details like customer service and employee retention – which used to inform management policy – will take a back seat to the quarterly earnings reports. So, Wal-Mart caved to the financial side and announced to its +/- 4,600 store managers that it would return to “pre-determined” staffing levels (back to the old levels), and cut employee hours to trim expenses.

CEO’s, of such organizations like Wal-Mart, are now trapped in a device of their own creation. If they attempt to offer higher wages (or improve the quality of customer service), both of which have long term benefits;  they are punished by the Shareholder Value oriented short term investors and their stock prices drop. If the stock prices drop so does executive compensation.  Should the stock prices drop too far in the estimation of investors the CEO can be gliding off on his or her Golden Parachute into the corporate sunset.

Thus, it isn’t surprising that the CEOs are anxious to have some taxpayer assistance “doing the right thing” (increasing wages) in the long term because the short-sightedness of the Shareholder Value Theory of Management has translated into a situation in which long term benefits are sacrificed on the altar of short term profitability.

The paycheck pinch: One of the CEO’s angling for government (read: taxpayer) assistance in decreasing the widening income gap is Ken Langone (Home Depot founder). Sales and revenue for Home Depot in 2011 was $68 billion, increasing to $83.1 billion in 2015. 2011 gross income was reported as $21.69 billion, increasing to $27.3 billion in 2015. Its current domestic income tax liability is $3.26 billion, it has a deferred domestic tax liability of $116 million. [Marketwatch]  And, Mr. Langone agrees that corporations should be given tax breaks in order to pay more to the employees of concerns like Home Depot.

There are some 20 Home Depot stores in Nevada, most in the Las Vegas area, some in Reno/Sparks, and a couple in what is understood as rural Nevada, Elko and Pahrump.  There are plenty earning less than $80,000 per year in these operations.  The wages for a sales associate range from $8.67 to $13.95; cashiers earn from $7.93 to $10.83; department supervisors earn between $12.01 to $18.91; and, retail sales associations can make from $8.68 to $17.16.  (See as information updates)

These salaries have tax implications in Nevada as a result of 2015 legislation:

The Modified Business Tax (MBT) is currently imposed on businesses other than financial institutions in the amount of 1.17 percent of wages paid above an exemption level of $85,000 per quarter. Financial institutions pay a higher rate of 2 percent. The MBT rate had been scheduled to decline to 0.63 percent for nonfinancial institutions beginning July 1, 2015. The MBT base has been narrowed significantly since the tax’s introduction in 2003, with exemption level increases in 2011 and 2013.

After significant debate over whether to expand the MBT or adopt a new gross receipts tax, the final plan includes elements of both options. The MBT will increase from 1.17 percent to 1.475 percent for most businesses, effective July 1, 2015. Mining companies will join financial institutions in paying the higher 2 percent tax rate. The MBT base is broadened by reducing the exemption to $50,000 per quarter, increasing the estimated number of MBT taxpayers to 18,607, up from the 13,492 paying the tax at present.[2] An earlier proposal to remove the MBT exemption for employer-provided health care costs was dropped.

After the first year, taxpayers may deduct up to 50 percent of their Commerce Tax payments over the previous four quarters from their MBT liability. Moreover, should total revenue from all business taxes exceed projections by more than four percent, the MBT rate will be adjusted downward, though to a rate no lower than 1.17 percent. [TaxFoundation]

Note the last paragraph, even with a compromise between larger and smaller corporations in Nevada, there’s still a bit of a tax break allowed on the Commerce Tax depending on the “previous four quarters.”  We’re probably not looking at any massive tax breaks in the 2015 legislation, but we need to add these to the $88 million in breaks given to Apple [MJ]  and the state’s generosity to Tesla in the form of $1.25 billion. [RGJ] In the latter deal the understanding was that Tesla would pay an average of $25/hr.

Not to put too fine a point to it, but corporations are quite used to having government entities, be they Apple in Nevada and North Carolina, Tesla in Nevada, or the bargaining in the 2015 Nevada legislature over how to maintain tax revenues, engage in tax-payer subsidies for corporate operations.  Thus, it’s not the least bit surprising the CEOs would ask for tax-payer subsidization for payroll increases.

It would be a reasonable conjecture to conclude that Home Depot and other Big Box firms like Wal-Mart might be willing to adopt staffing policies which increase employee wages and provide for better customer service –IF and ONLY IF there are further tax breaks associated with those policies which will please the short-term oriented Shareholder Value financialists who pull on the purse strings.

Hanging the Wash? Consider what the CEOs are proposing – it’s all good: “The benefits would be huge. People would have more money to spend, and many would no longer need government help. That would mean a reduction in entitlements.”  But wait, there’s some loaded language herein.  Programs like SNAP, and subsidized housing, or similar assistance to low wage earners are NOT entitlements. These are situational support programs for people in need.  Social Security/Medicare, into which people have paid for decades are entitlements – you get what you paid for.

Loaded language aside,  What happens when the corporations raise wages, projected to reduce the number of people receiving social assistance, but the revenues for that social assistance are reduced by the tax breaks given to the corporations in order to support those very same wage increases? The tax payers are on the hook either way – they either pay for the social assistance programs which subsidize low wages,  or they subsidize the tax breaks to corporations to reduce the need for the social programs?  It’s a win-win for the corporations, and a lose-lose for the average American.


Filed under Economy, Nevada economy, Nevada legislature, Nevada politics, nevada taxation, Politics