Why People Say The Economy Is Terrible When It Isn’t

The Daily Escape:

Sunset, Thumpertown Beach, Eastham, MA – November 2023 iPhone photo by friend of the blog, KO.

We keep looking for good news that will buoy Biden’s polling numbers, and on Tuesday we learned that the Consumer Price Index (CPI) was flat in October. From Axios:

“Overall prices rose 3.2% in the 12 months through October, slowing from the 3.7% in September and well-below the peak levels reached last year. Core CPI rose 4%, compared to 4.1% the prior month.”

Among the good news was that last month, prices for gasoline and used cars and trucks fell outright, helping cool over inflation. Meanwhile, shelter costs rose at a much slower pace last month, possibly signaling that inflation could be ending in the next few months.

That gave investors reason to pile back into the stock market, since it may be a sign that the Fed won’t continue to raise interest rates.

But as always, analysis of the economic news could show why Biden polls so badly on the economy, and in particular why he hasn’t consolidated support among younger voters. Let’s take a different look at how some important economic indicators have performed under Biden.

From the Bonddad Blog:

“Below is a graph in which I compare average hourly earnings (nominal, not real) for non-supervisory workers (in red) vs. house prices (dark blue) and mortgage payments (light blue).”

It is important to note that Bonddad has set all of the values to 100 as of January 2021 so that we’re looking only at what has happened during Biden’s Administration. Bonddad compares the changes in average hourly earnings to the rate of fixed price mortgages and the price of homes. These are nominal rates:

Average wages have increased 16% since Biden took office, but existing house prices have increased by 32%, and monthly mortgage payments for new buyers have increased 279% (!), from roughly 3% to roughly 8%. Housing is close to unaffordable for many in America.

Turning to cars, new car prices have increased by 20%, and used car prices by 23%, compared to that 16% for wages. And new car loan payments (dotted line below) have increased almost 70% (from about 5% to 8.3%):

Houses and cars are the two biggest purchases that most average people make. And sorry to say, affording them has gotten much harder since Biden took office.

Finally, let’s look at the cost of two things people see every day: groceries and gas. First, grocery prices are up 29% since Biden took office in January 2021 (again, vs. 16% for average wages):

And gas prices, although they have come back down recently, are still up 55% since January 2021:

Looking at the economic data this way, would you be more likely to vote for or against Biden? This is a big Biden problem with voters who live paycheck to paycheck.

It’s hard to overstate the importance of viewing the Biden economic performance like Bonddad does above. Much of the blame for these specific price increases belongs to corporations who took advantage of the breakdown in the global supply chain to raise their prices. Some belongs to the Biden administration’s pumping money into the economy.

Bonddad provides a ton of perspective regarding how the Democrats shouldn’t be talking to voters about how fantastic the economy has become under Biden. Dems can’t simply talk about the aggregate economic numbers, since many will not fully believe them.

At the risk of piling on, Wrongo recently saw this October Experian survey which asked:

“I suffer or have suffered from financial trauma”

A staggering 68% of US adults replied that they had. You can view the survey here. The stress was felt more strongly by younger generations, namely Gen Z adults and millennials, with 73% of Gen Z’ers and 77% of millennials experiencing negative thoughts and/or anxiety about money.

The idea of “financial trauma” goes beyond mere stress. America’s seeing multiple social crises afflict it. Friendships are cratering, loneliness is soaring, deaths of despair are skyrocketing. Half of American young people say they feel “persistently hopeless.”

Now tie this to how the majority of voters are saying that America is on the wrong track. The prevailing attitude in America is that our systems are rigged against working people. If you work hard, play by the rules, try to be an honest, decent and productive person, but the reward is that you get financially, socially, emotionally traumatized, well, maybe you’d be pessimistic, too.

The result is that most Americans feel they are living precarious lives. When asked, they say they need north of $230K to feel “comfortable” while the average yearly income for a full-time worker is about $75,000 today. That means feeling stable and secure is completely out of reach for the vast majority of Americans.

Most of this happened over time and surely wasn’t caused by Biden, or the Democrats. And little of it can be fixed by him.

There’s some good news in the fact that history shows us that voters generally focus on how the economy has performed during the last 6 to 9 months before the election. In 2012, the economy improved a lot, and when the unemployment rate finally fell below 8% one month before the election, it helped Obama to get reelected.

On the flip side, the economy was weakening as we closed in on the presidential election in 2016. GDP growth and wage and job gains were weak. Strong stock market gains were a positive. Adding the pluses and minuses suggested that the economy was weak, and the insurgent Trump won the election.

Better news on inflation in 2024, particularly for groceries and gas, will mean Biden’s polling on the economy will be much better.

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Autoworkers Have A Deal

The Daily Escape:

Sunrise, Northern VT – October 2023 photo by Kristen Wilkinson Photography

The UAW announced Monday evening it had reached a tentative agreement with GM, the last of the Detroit car companies to complete negotiations with the Union. So all three have a tentative agreement which will now be voted on by UAW members. This is a big deal, even if nobody’s talking about it.

Some details from The Insider:

“The 25% pay increases by April 2028 agreed to in the new contracts raise top pay to about $42 an hour, according to the union. That starts with an 11% immediate boost upon ratification, three annual raises of 3% each, and a final increase of 5%. The UAW said restoration of cost-of-living increases, which were suspended in 2009, could boost the total increases to more than 30%.”

Some industry analysts have estimated that Ford’s contract, if ratified, would add $1.5 billion to the company’s annual labor costs. Ford estimated that this could add up to $900 in labor cost to each vehicle rolling off its assembly lines. Another analyst says the pact will reduce profitability by 1%. To put these numbers into perspective, keep in mind that a fully loaded Ford F150 can run over $80k. That means the car companies can afford this deal.

Labor accounts for 4-5% of the average cost of making a car for the Big Three. Also, the Big 3 have made $250 billion in profits over the past decade and have diverted a substantial amount of that money into stock buybacks to enrich wealthy shareholders and top executives instead of investing in their businesses or paying their workers.

So please spare us the tears about the workers’ hard-fought gains putting the Big 3 in peril. The NYT wrote:

“The terms will be costly for the automakers as they undertake a switch to electric vehicles, while setting the stage for labor strife and demands for higher pay at nonunion automakers like Tesla and Toyota.”

To paraphrase, the NYT says that those evil unions are ruining shareholder value and will cause strife at Tesla, a company renowned for its fantastic working conditions.

Be it ever thus in the media: Unions demand, management offers. Note how the media framing is always “the automakers” as the protagonists, with workers as a mob that’s making trouble. Why can’t those workers be happy and content with their lot in life, which is ordained for them by the Higher Power?

Back in the real world, the tentative UAW agreement rewards autoworkers who had sacrificed much during and since the Great Financial Crisis. They now get record raises, more paid leave, greater retirement security, and more rights at work.

The UAW win is a testament to the power of unions and collective bargaining to build strong middle-class jobs, while helping a few of our most iconic American companies to thrive. The UAW workers have not only seen many of their jobs automated and offshored, they also hadn’t received an inflation-adjusted raise since the early 2000’s.

That the UAW prevailed shows that unionizing on a large scale is a viable path to rebuilding America’s middle class. Fed up with continual economic hardship at the hands of the Big 3’s management, these strikers achieved something good for themselves and their families. Moreover, they did it legally. Despite the NYT’s protests, they didn’t steal anything from anyone. They didn’t ask for handouts. They demanded a good future for themselves and their families.

This should be a lesson to all people whose labor is undervalued. You can organize and negotiate better contracts for yourselves.

And don’t underestimate how important a low rate of unemployment is to low-wage and working-class Americans, and how that also gives unions leverage. Biden’s American Rescue Plan Act of 2021 provided an economic stimulus that boosted US consumer purchasing power to the point that we avoided the expected recession. And today’s scarcity value of labor helped close the deal with the Big 3.

For some context, these landmark gains by the UAW, along with what the Teamsters secured with their UPS contract, and what health care support staff got at Kaiser Permanente go far beyond the pay and benefits that workers receive at their non-union counterparts. Except for railroad workers, it’s been a very good year for unions.

Once again, Biden took a risk that he hadn’t before by explicitly siding with the UAW. It paid off for him and the Union as well.

Finally, kudos to Shawn Fain and the UAW negotiating team!

Wrongo appreciates that Fain seems to understand class consciousness by describing the workers as working class. And their strategy was pure divide and conquer.

The final word on these tentative agreements will ultimately come from UAW members themselves when they vote on the new contracts.

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Two Writers Who Speak To What America Needs

The Daily Escape:

Wukoki, Wupatli National Monument, AZ – September 2023 photo by David Erickson

September is underway, and we’re about to have a negotiation about government spending. But that doesn’t mean that the news this month will be any less stupid than last month’s. Also, as the Republican presidential candidates demonstrate every day, we don’t actually know whether the GOP is a dying Party or, the rising single Party of an authoritarian state.

Unless and until the traditional press presents these as the stakes, it is very unclear which it’ll end up being. With this as an introduction, Wrongo wants to introduce two writers who are attempting to break through our chain of bad policies and the bad ideology that threatens our democracy.

First, from Wesley Lowery in the Columbia Journalism Review:

“We find ourselves in a perilous moment. Democracy is under withering assault. Technological advances have empowered propagandists to profit through discontent and disinformation. A coordinated, fifty-year campaign waged by one of our major political parties to denigrate the media and call objective reality into question has reached its logical conclusion: we occupy a nation in which a sizable portion of the public cannot reliably tell fact from fiction. The rise of a powerful nativist movement has provided a test not only of American multiracial democracy, but also of the institutions sworn to protect it.”

Lowery is a Pulitzer Prize-winning reporter. He goes on to say:

“In 2020, I argued that the press had often failed this test by engaging in performative neutrality, paint-by-the-numbers balance, and thoughtless deference to government officials. Too many news organizations were as concerned with projecting impartiality as they were with actually achieving it, prioritizing the perception of their virtue in the minds of a hopelessly polarized audience…”

Lowery also says that news organizations often rely on euphemisms instead of clarity in clear cases of racism (“racially charged,” “racially tinged”) and acts of government violence (“officer-involved shooting”). He says that these editorial decisions are not only journalistic failings, but also moral ones:

“…when the weight of the evidence is clear, it is wrong to conceal the truth. Justified as “objectivity,” they are in fact its distortion.”

Lowery concludes by saying:

“It’s time to set aside silly word games and to rise to the urgent test presented by this moment.”

Second, Bob Lord is a tax attorney and associate fellow at the Institute for Policy Studies. He also serves a senior advisor on tax policy for Patriotic Millionaires. At Inequality.org, he proposes a graduated wealth tax on the rich:

“The United States is experiencing a level of wealth inequality not seen since the original Gilded Age. This yawning gap between rich and poor has unfolded right out in the open, in full public view and with the support of both political parties.

A malignant class of modern robber barons has amassed unthinkably large fortunes. These wealthy have catastrophically impacted our politics. They have weaponized their wealth to co-opt, corrupt, and choke off representative democracy. They have purchased members of Congress and justices of the Supreme Court. They have manipulated their newfound political power to amass ever-larger fortunes.”

More from Lord:

“In well-functioning democracies, tax systems serve as a firewall against undue wealth accumulation. By that yardstick, our contemporary US tax system has failed spectacularly….Our nation’s current tax practices allow and even encourage obscene fortunes to metastasize while saddling working people with all the costs of that metastasizing.”

Lord along with the Patriotic Millionaires propose new legislation, called the Oligarch Act (Oppose Limitless Inequality Growth and Reverse Community Harms). It is being brought forward by Rep. Barbara Lee (D-CA) and Summer Lee (D-PA). The Lees have developed a graduated wealth tax tied directly to the highest wealth in America. The Oligarch Act propose a set of tax rates that escalate as a taxpayer’s wealth escalates:

  • A 2% annual tax on wealth between 1,000 and 10,000 times the median household wealth.
  • A 4% tax on wealth between 10,000 and 100,000 times the median household wealth.
  • A 6% tax on wealth between 100,000 and 1,000,000 times the median household wealth.
  • An 8% tax on wealth exceeding 1,000,000 times the median household wealth.

Per the US Census Bureau, the median household wealth in 2021 was $166,900. So the first tier 2% wealth tax would kick in at $166,900,000, and so on.

This would affect only very high levels of household wealth. To put that in perspective, according to the Federal Reserve, the wealth level that puts you into the top 0.1% of households in 2019 Q3 was $38,233,372. So if enacted, this Act would touch a really small number of outrageously wealthy households. Also, their taxable amount would be peanuts by their own standards.

The legislation would also require at least a 30% IRS audit rate on households affected by the new wealth tax. One recent estimate indicated that the richest Americans dodge taxes on more than 20% of their earnings, costing the federal government around $175 billion in revenue each year.

The immediate argument is that this tax will never pass as long as the filibuster is intact. And here’s how the work of both authors comes together. We see the “it will never pass” objection from journalists and pundits who try to appear savvy in the ways of DC. On any cable news show, someone is sure to jump up to say it.

The paradox is that if you look at the Congressional Record and flip to the special orders section and extensions of remarks, you’ll notice they’re filled with speeches and statements on behalf of recently introduced bills which the sponsors know will never pass as written. So why do they do it?

Because the point of introducing a bill is not just to pass it in the current session of Congress. It never has been. There is a tradition going back to the earliest days of Congress of introducing bills to make arguments and advance debate. Many famous members of Congress (think Ted Kennedy, Thaddeus Stevens, John Quincy Adams) sponsored or backed multiple bills they knew were not going to become laws.

They did it because they knew that debates over bills that will become laws don’t occur in a vacuum. They happen in the greater context of the debate in Congress over issues which are influenced by every other bill under consideration. And of course, you’ve gotta start somewhere.

Jumping to the conclusion “it will never pass” isn’t being savvy, it’s a sign you’ve missed the point. And it’s a sign of the vapidity of so many journalists and pundits that it’s the first thing out if their mouths. It’s never a good idea to take cues from the stuffed shirts on Fox, CNN and Meet The Press.

This graduated wealth tax is a good start and sets a precedent: There is an amount of wealth that is ruinous to democracy. Taxing it is a necessary condition for preserving democratic governance.

It is true that Congress, as it is presently constructed, will not pass this, or other badly needed legislation. A genuine revolution in thinking will be required. Both Wesley Lowery and Bob Love point us toward fresh thinking about how we start dealing with what we consider to be intractable problems.

Wrongo still has hope for the younger generations who are suffering the consequences of all this government sanctioned selfishness.

Change is coming.

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Biden’s Plan To Cut Drug Prices

The Daily Escape:

Mars on left, Earth on right – image by alofeed

The Biden administration released its list of 10 prescription medicines that will be subject to the first-ever price negotiations by Medicare. This is a big deal because Medicare covers 66 million older Americans, people who routinely take very expensive drugs.

Until recently it was illegal for Medicare to negotiate prices with drug companies. But the Inflation Reduction Act (IRA), passed last August, gives Medicare that power. It also forces companies to pay a rebate to Medicare if their drug prices rise faster than inflation. The Congressional Budget Office estimates that price-capping measures will reduce Medicare expenses (and the federal deficit) by $96 billion by 2031.

The list includes drugs for diabetes, arthritis, and Crohn’s disease, and could sharply lower medical costs for patients. Reuters says that the US Centers for Medicare & Medicaid Services (CMS) spent $50.5 billion between June 1, 2022 and May 31, 2023 on these 10 drugs. That was about 20% of the total cost of drugs in the Medicare prescription drug program known as Part D.

The WaPo had an opinion piece by David Goldhill, CEO of SesameCare.com, a digital marketplace for discounted health services: (brackets and emphasis by Wrongo)

“The pharmaceutical industry earns almost 50% of its worldwide revenue here [the US], as do medical information-technology firms. [Medical] Device makers earn 40% of their money in the US. And this understates things, because US revenue is generated from higher prices, so margins are greater. If the US accounts for half of a company’s revenue, it probably contributes at least 75% of its profits.”

This has always been the business plan for Big Pharma: Make your money in the US and take whatever scraps of profit you can get in other markets.

That market subsidy is paid by American taxpayers generally (through the funding of Medicare) and by US pill-takers specifically when they pay higher co-pay prices for the drugs that help with their chronic conditions. The Economist points out that prescription medicines in America cost two to three times more on average than in other wealthy countries:

The blue dots are the price paid in the US for brand name drugs. The grey dots are prices paid in the various countries for all US drugs sold in those countries. The comparison of brand name to generics shows how much greater the cost is to an American.  It also follows that US patients’ out-of-pocket expenses, (the slice of drug costs not covered by insurance), are among the highest in the world.

It’s understandable why Biden’s move to start negotiations on some of the most expensive drugs has been fiercely opposed by the pharmaceutical industry. Essentially, high US drugs costs underwrite what amounts to a subsidy for buyers of the same drug sold when it’s outside the US.

Many of the Big Pharma have jumped on the legal bandwagon, challenging price-setting provisions in the IRA. More from the Economist:

“Since the law’s passage over 50 companies have blamed the IRA in earnings calls for clouding their prospects.”

A quick primer on drugs. Most medicines are either small-molecule drugs or large-molecule drugs. The former are the kind of pills that line our medicine cabinets. Large-molecule drugs, (also called biologics), are more complex and must be injected. The IRA grants biologics 13 years of pricing freedom after a drug is approved, while small-molecule drugs get only nine years post-approval before they must face Medicare’s bean counters. The industry estimates that small-molecule brands could lose between 25% and 40% in overall revenue due to the earlier cap on prices.

PhRMA, the pharma Industry’s lobbyist argues (and Republicans back them) that high US prices reflect the high cost of drug development. The pharmaceutical manufacturers are, of course, suing to stop the price negotiations. They say that allowing the government to negotiate lower bulk prices for drugs will stifle innovation, and will cut funds for research.

One thing that Big Pharma wants to avoid showing us is that they rely on smaller, more agile biotech firms for ideas. Between 2015 and 2021, 65% of the 138 new drugs launched by Big Pharma originated mostly from smaller firms. So, while innovation isn’t totally gone from the big firms, what they’re mostly doing is marketing the intellectual property of small pharmaceutical firms.

It didn’t take long for Republicans to jump on the decision to allow Medicare to negotiate drug prices. From Politico:

“Piggybacking on the pharmaceutical industry’s strategy, Republicans are working to persuade Americans that the Biden plan will stifle innovation and lead to price controls.”

Politico quotes Joel White, a Republican health care strategist:

“The price control is a huge departure from where we have been as a country….It gets politicians and bureaucrats right into your medicine cabinet.”

Politico says that the GOP effort to reframe the drug price debate may hurt them, since they plan largely to run on inflation, while the Biden plan will lower drug prices. Also they quote a new poll from the Kaiser Family Foundation (KFF) that shows 58% of independent voters trust Democrats to lower drug costs compared with 39% of Republicans.

Our politicians and pundits have bleated at us for years about being an “exceptional nation” – but what we really are is exceptionally gullible. As long as the large healthcare and pharmaceutical companies insist on standing between American consumers and their health needs, maximizing their profit will always come first.

We also continue to elect leaders who lobby for keeping corporations unleashed so that they can make as much profit as possible, while saying that the “market” will decide where the public good is prioritized. This keeps us hopelessly mired in a grossly expensive, and often ineffective healthcare system.

We continue to let ourselves be convinced by corporations and our politicians that reforming healthcare is impossible. That the solutions and methodologies used by other developed nations are substandard, and/or somehow immoral.

The Hill reported that the 14 leading US drug companies paid out more in stock buybacks and dividends from 2016 to 2020 than they spent on research and development. Those firms spent $577 billion from 2016 to 2020 on stock buybacks and dividends, $56 billion more than the $521 billion they spent on R&D. So, it’s oblivious how Big Pharma could easily fund their R&D with lower drugs prices.

It is also useful to remember that America has more healthcare billionaires AND healthcare bankruptcies than any other country. Those two things are inextricably linked.

As long as the pharmaceutical companies can maximize profits by buying politicians rather than by charging higher prices in other countries – the American people are the ones who will continue to get screwed.

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Homeschoolers Want Your Tax Dollars

The Daily Escape:

Rich Mountain Fire Tower, Marshall, NC – August 2023 photo by Michael Morris. This photo has a painterly quality to it.

Americans’ interest in homeschooling has soared in recent years. Migrating from mainstream education to homeschooling tracks with the rising fears among parents that schools are failing their children.

For parents frustrated with their child’s public school education, the pandemic provided another reason to give homeschooling a try. Homeschooling has become a significant element in education in the US. According to the National Home Education Research Institute (NHERI), there are 3.7 million homeschooled students in the US, about 6.7% of the school-age children in K-12. The popularity of homeschooling is growing rapidly, with an annual growth rate of 10.1% between 2016 and 2021.

Home schooling is legal in all 50 states, with the highest number of homeschoolers in North Carolina, Florida, and Georgia. About 10% of states have strict laws regulating homeschooling: New York, Vermont, Rhode Island, Massachusetts, and Pennsylvania. Another 18 states have no to low regulation, while 11 states provide complete freedom to parents regarding homeschooling. In New Jersey, parents do not have to let anyone know about their decision to homeschool their children. They don’t even have to produce any kind of proof at any time, explaining that their kids were homeschooled. Here’s a view of homeschooling regulation in the US:

Source: HSLDA

In many states, there is little oversight of homeschooling. And for many, what regulations do exist were adopted in the 1980s, when homeschooling was almost exclusively provided by a family member at home. Now, with the number of homeschool students soaring, much of the educating is now being provided by third parties.

The WaPo reports that there is an emergence of “microschools” provided by for-profit companies, such as Prenda which provide online courses and syllabi to the microschools. Last year, Prenda served about 2,000 students across several states by connecting homeschool families with microschools that host students, often but not exclusively in homes. The local educator is called a “guide” for students who study math and reading online while depending on the “guide” for other subjects. Families pay Prenda $2,199 per year, plus additional fees set by the guides, which can range from $2,800 to $8,000 per child although there is often a multi-child discount.

Many similar options to Prenda are transforming home schooling in America. More from WaPo:

“Demand is surging: Hundreds of thousands of children have begun homeschooling in the last three years, an unprecedented spike that generated a huge new market. In New Hampshire, for instance, the number of homeschoolers doubled during the pandemic, and even today it remains 40% above pre-covid totals.”

More:

“For many years, homeschooling has conjured images of parents and children working together at the kitchen table. The new world of homeschooling often looks very different: pods, co-ops, microschools and hybrid schools, often outside the home, as well as real-time and recorded virtual instruction. For a growing number of students, education now exists somewhere on a continuum between school and home, in person and online, professional and amateur.”

Still more:

“Microschools sometimes provide all-day supervision, allowing parents to work full time while sending their children to “home school.” Hybrid schools let students split their days between school and home. Co-ops, once entirely parent run, might employ a professional educator.”

All of this is adding to the conundrum of how K-12 education is financed in the US. The WaPo says that about a dozen states allow families to use taxpayer funds for home-school expenses. Education Savings Accounts, or ESAs, direct thousands of dollars to families that opt out of public school, whether the destination is a private school or their own homes.

Nonprofits, including school-choice advocates, are directing millions of dollars in charitable giving toward homeschool organizations, linking two powerful but traditionally separate movements into one interest group that seeks to move taxpayer money away from the local public school system into private hands.

In the past, homeschoolers and school-choice activists didn’t see themselves as aligned. The latter group wanted taxpayer money to pay for charter, private and religious schools, whereas homeschoolers looked to limit any government involvement.

But since the pandemic, they found themselves in common cause. Historically, homeschool advocates have been wary of any government money or involvement, for fear it would lead to rules and regulations.

But many school-choice advocates incorporate support for homeschoolers into their advocacy work, including for school vouchers that give these families tax dollars to pay education costs. Where they used to be a defensive constituency, today they have become partners.

And venture capitalists have invested tens of millions of dollars in new businesses to serve what they see as a growing, and potentially huge market. One entrant is Outschool, an online marketplace for classes, which has raised $255 million since 2015. This year, Outschool has delivered 500,000 live learning sessions to more than 150,000 students globally.

WaPo says Prenda has raised about $45 million. Primer, another microschool company formed to serve homeschoolers, has raised about $19 million, though its campuses are becoming more like tiny private schools, an example of the fuzzy line between traditional and home schooling. WaPo spoke to Michael Moe, founder of GSV, a venture capital firm in the Silicon Valley, who has invested in several education technology start-ups: (brackets by Wrongo)

“The mega trend of [school] choice is wildly important to us…All these shifts create opportunities for companies providing solutions that allow parents and communities to take more control of the learning.”

That’s “venture capitalspeak” for more privatizing of the commons in search of higher financial returns.

Vouchers that once paid only for tuition at private and parochial school can now, in some places, be used for homeschoolers. Most sweeping are Education Savings Accounts, or ESAs, which allow families to claim state tax dollars to use at their own discretion for any education expense.

This increasingly means taxpayer money is following the student out of the public school. It flows to whatever a family chooses. That can include things like Prenda’s fees, online classes or home-school curriculum, as well as tuition at private schools.

In Detroit, a program called Engaged Detroit , is a cooperative that’s part of a network specifically to serve Black families looking for schooling options in response to the pandemic. Among Engaged Detroit’s backers is the VELA Education Fund, which has made more than 2,400 grants totaling more than $28 million since 2019. VELA’s primary funders are longtime advocates for school choice: the Walton Family Foundation and the Charles Koch foundation, Stand Together.

There are pluses and minuses to homeschooling. There are situations where it’s appropriate to homeschool, but the loose oversight and lack of expertise might mean that some homeschooled kids are going to be at risk. When parents say they don’t trust the trained/educated teachers in their public school, but instead want their kids to get the viewpoints of only one or two specific people, the kids are entering a small world. Later in life, they’ll have to adjust to a larger reality.

Wrongo is fully aware of the weaknesses of our public school systems. It’s possible that SOME of these small private schools that they say are “home schools”, are teaching those kids better than some public schools do. So Wrongo is ok if kids learn there. But there should be no problem with requiring these kids to take end-of-year minimum standards tests, proving that they learned the base-level material in each subject.

Without some testing, society has no idea if these kids learned anything. The lack of oversight, particularly in those situations where taxpayer money was diverted to homeschooling, seems well—Wrong.

The literature is clear: Some homeschooled children have attended Ivy League schools and won national spelling bees. Some have also been the victims of child abuse. Some are taught using the classics of ancient Greece, others with Nazi propaganda.

Many parents say home education empowers them to withdraw from schools that fail their children. Or they want to provide instruction that better reflects their personal values. But should the rest of us pay for those individual decisions?

Time to wake up America! Homeschooling may offer certain advantages, but also comes with a set of disadvantages that should also be considered. And it’s clear that those who would privatize K-12 education want to take funding from the public school systems wherever they can.

To help you wake up, listen to Steely Dan’s “My Old School” from their 1973 album “Countdown to Ecstasy”. Steely Dan always used outside musicians, and on the record, they had the late Skunk Baxter on guitar and four (!) saxophones. But Steely Dan didn’t like to tour. Today, we’re going to see a rare video of a Steely Dan live performance on “The Midnight Special” where Skunk had a blistering solo for the song’s finale:

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How To Think Differently About Housing

The Daily Escape:

Sunrise, Outer Banks, NC – June 2023 photo by Stephen P. Szymanski

Wrongo and Ms. Right have 12 grandchildren, only one of which is still in high school. The other 11 are out of school and pursuing their careers or are finishing their education. Only one of the 12 owns a home. Their experience with real estate is representative of what most younger Americans face in today’s real estate market. Ben Carlson uses data from Redfin to show us that mortgage payments are way up over prior years:

The median mortgage payment was up by more than $1,000 over four years. Carlson reminds us that this is just the monthly mortgage payment, it doesn’t include insurance, property taxes or upkeep. This is part of the reason that housing affordability is more excruciating — the pace of the increases has happened so quickly. We’ve simply never seen prices and rates rise this fast in such a short period of time. And asking prices are up as well:

Note that at the end of May 2023, the median asking price was $397k, up from $300k in May 2020, a 32% increase in four years.

But high mortgage rates and rising home prices aren’t deterring all buyers. John Burns Research shows buyers still outnumber sellers by a wide margin in today’s market. They report that as of April, even with 7% mortgage rates, 78% of all real estate agents say that buyers outnumber sellers in their markets.

And for rentals, the national median rent for a one-bedroom apartment has climbed to $1,504, according to research from Zumper. That’s significant: It’s only the second time in history that it has risen past $1,500. But the median doesn’t represent what you’ll pay in big cities:

In America, buying an investment property near work is more lucrative than actually working. The growth of asset values has outstripped returns on labor for four decades. Last year, one in four home sales was to someone who had no intention of living in it. Investors are incentivized to buy the type of homes most needed by first-time buyers: Inexpensive properties generate the highest rental-income cash flows.

Harvard’s Joint Center for Housing Studies found that in 2019, the median net worth of US renters was just 2.5% of the median net worth of homeowners: $6,270 versus $254,900. There’s no better example than the economic challenges to America’s young persons than trying to find (relatively) affordable housing near where they work.

A very interesting article in the May 23 NYT Magazine suggests a possible solution to housing inflation. Vienna, Austria began planning it’s now world-famous municipal housing in 1919. Prior to that, Vienna had some of the worst housing conditions in Europe. Vienna’s housing program is known as “social housing” (Gemeindebauten), a phrase that captures how the city’s public housing and other limited-profit housing are a widely-shared social benefit:

“The Gemeindebauten welcomes the middle class, not just the poor. In Vienna, a whopping 80% of residents qualify for public housing, and once you have a contract, it never expires, even if you get richer.”

Vienna isn’t a small town. Its population is just under 2 million, and if it were in the US it would be our fifth largest city, between Houston and Phoenix.

The availability of Vienna’s social housing also helps to keep costs down even for private housing:

“In 2021, Viennese living in private housing spent 26% of their after-tax income on rent and energy costs on average, which is…slightly more than the figure for social-housing residents overall (22%).”

One of the reasons Vienna’s social housing works is that it is not means-tested; it is open to middle class people. And as a result, the residents care more about whether their grounds stay clean and beautiful. In the US we restrict public housing to the poorest of the poor, making public housing something to escape from, not to enjoy.

Meanwhile, 49% of American renters are paying landlords more than 30% of their pretax income, In New York City, the median renter household spends 36% of its pretax income on rent.

The key difference is that Vienna prioritizes subsidizing construction, while the US prioritizes subsidizing people, like with housing vouchers. One model focuses on supply, the other on demand. Vienna’s choice illustrates a fundamental economic reality, which is that a large-enough supply of social housing offers a market alternative that improves housing for all.

Calls for a federal social-housing plan in America might sound far-fetched but the US government is already deeply involved in the housing market. There’s generous support for homeowners and deliberately insufficient support for the lowest-income households. In 2017, the US gave $155 billion on tax breaks to homeowners and to investors in rental housing and mortgage-revenue bonds, more than three times the $50 billion spent on affordable housing.

For many, housing expense can be an economic burden. And it’s hard to even contemplate what it would mean to have it not be a problem. What’s mind-boggling is how social housing gives the economic lives of Viennese an entirely different shape.

Imagine where the rest of America’s young adults’ income might go if they were able to spend much less of it on housing. Vienna’s program is a look into a world in which homeownership isn’t the only way to secure a financial future.

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Saturday Soother – May 20, 2023

The Daily Escape:

Daffodils, Laurel Ridge, Litchfield CT – May 2023 photo by Dave King

The oil industry enjoys special economic status in the US. That is demonstrated by the tax breaks and outright subsidies we give them. Hannah Dunlevy notes that:

“In 2020, the explicit and implicit fossil fuel subsidies cost the United States $662 billion, around $2,006 per capita. Cutting just two tax breaks for the fossil fuel industry — the intangible drilling costs subsidy and the percentage depletion tax break — could generate $17.9 billion in government revenue over ten years, according to Congress’s non-partisan Joint Committee on Taxation.”

Biden’s fiscal year 2024 budget proposed cutting some of tax subsidies for oil and gas companies, which would save the US $31 billion over ten years. It will probably not survive the current Debt Ceiling and budget discussions.

One hidden subsidy that the oil industry enjoys is when wells are no longer productive – they are idled. If it’s no longer profitable to return idled wells to production, they need to be plugged. And the cost of plugging a well can be $100,000 or more.

The problem is that when wells start to decline, they are sold by Big Oil to smaller producers. When the well is sold, the plugging and cleanup liability passes to the new buyer. And often, the new buyer simply walks away from the uneconomic well, creating what the industry calls “orphaned wells”. But if a company doesn’t plug its wells before walking away, the cleanup costs will ultimately fall to taxpayers and current operators.

This has already happened with thousands of wells in California and may happen to millions more across the country. Pro Publica reports that there are more than two million unplugged oil wells scattered across the US. California is just the tip of the iceberg.

Petroleum reservoir engineer Dwayne Purvis laid out the reality at a recent conference. His research shows that more than 90% of the country’s unplugged wells are either idle or minimally producing and unlikely to make a comeback.

California is the canary in a coal mine. Shell and ExxonMobil recently agreed to sell more than 23,000 California wells which they owned through a joint venture, to a German asset management group IKAV for an estimated $4 billion. This means that a subsidiary of IKAV now owns about a quarter of California’s oil and gas production, largely in Kern and Ventura counties.

This ownership shift moves the subsequent environmental liability from Big Oil powerhouses to firms with smaller capitalization, increasing the risk that aging wells will be left orphaned, unplugged and leaking oil, brine and methane. For California and other states, this could repeat what was seen in coal mining, which led to taxpayers bearing all of the cleanup costs.

The oil industry has created layers of LLCs that are used to screen Big Oil from the dirty end of the oil business, like responsibility for cleaning up the messes that they make. And these firms can easily declare bankruptcy rather than pay for cleaning up orphan or idle wells.

ProPublica reports on an analysis by Carbon Tracker Initiative, a financial think tank that used the California regulators’ draft methodology for calculating the costs associated with plugging oil and gas wells and decommissioning them along with their related infrastructure.

The cost categories included plugging wells, dismantling surface infrastructure and decontaminating polluted drilling sites. That would cost California about $13.2 billion. Adding inflation and the price of decommissioning miles of pipeline could bring the total cleanup bill to $21.5 billion.

Meanwhile, Purvis estimates that California oil and gas production will earn only about $6.3 billion in future profits over the remaining course of operations; nowhere near sufficient to pay for the cleanup, even if those profits could be captured by the state.

That’s just California. These costs are what economists call “Externalities”. An externality is an indirect cost (or benefit) to a party (taxpayers) that arises as an effect of another party’s (Oil Companies) economic activity. The problem is that the price of their product doesn’t include the externalities. That means there is a gap between the profit of these corporations and the aggregate loss to society as a whole.

Republicans have a tried and true solution for this problem. Taxpayers pay the bills. We’re back to the “privatize profit, socialize the losses” game that corporations have played forever. Maybe the correct terminology should be socialism for the rich.

They prefer to call it keeping government off the backs of job creators.

Time to let go of California’s messy problem and find a few minutes to center ourselves before next week which will bring either financial Armageddon, or a diminished Biden. At the Fields of Wrong, we had a freeze last Wednesday that caused us to cover the newly planted vegetables and bring the Meyer Lemon tree indoors. Spring in Connecticut can always show up with a backtracking nod towards winter.

But on this rainy Saturday, grab a chair by a big window and listen to Debussy’s “Nuages” (‘Clouds’) from his “Trois Nocturnes”. Leopold Stokowski and the Philadelphia Orchestra made the first American recording of Debussy’s “Three Nocturnes” for a 1950 LP.

Here is the first “Nocturne”, a musical impression of slow-moving clouds:

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Late Stage Capitalism

The Daily Escape:

A 20 feet x 9 feet sign placed in Times Square, NYC in Sept. 2013. Created by Steve Lambert.

In yesterday’s column about Bed Bath and Beyond’s (BBBY) bankruptcy, Wrongo used the term “Late Stage Capitalism” to describe some of the factors that led to the firm’s demise. Several readers asked what Wrongo meant.

First, some history. A German economist named Werner Sombart seems to have been the first to use the term “Late Capitalism” around the turn of the 20th century. A Marxist theorist named Ernest Mandel popularized it in the 1960s. For Mandel, “late capitalism” described the economic period that started with the end of World War II and ended in the early 1970s, a time that saw the rise of multinational corporations, mass communication, and international finance.

In America the terms “Late Capitalism” and “Late Stage Capitalism” are used interchangeably. Late-stage capitalism is characterized by greed, corruption, and a focus on profits over people.

The current crisis of capitalism’s legitimacy stems from business pursuing the aberrant form of capitalism known as shareholder capitalism, which began in the 1970s. It causes firms to seek maximizing shareholder value as reflected in the current share price, at the expense of all other stakeholders and society.

Some of the problems with late-stage capitalism include wealth inequality, environmental destruction, and financialization. Financialization refers to the increase in size and importance of a country’s financial sector relative to its overall economy. In the US, the size of the financial sector as a percentage of GDP grew from 2.8% in 1950 to 21% in 2019. The financial services industry, with its emphasis on short-term profits, has played a major role in the decline of manufacturing in the US. Financialization has created “unproductive” capitalism. According to economist Michael Roberts: (brackets by Wrongo)

“…financialization is now mainly used as a term to categorize a completely new stage in capitalism, in which profits mainly come not from…production, but from financial [engineering]

Today, capitalism is no longer the heart of a free market. Algorithms run the stock and foreign exchange markets. Large players in these markets operate freely with the expectation that they will eventually be caught. They then pay off the DOJ or SEC, chalking up the fines to the cost of doing business.

Lobbyists on Capitol Hill curry favor with politicians. Companies then receive substantial tax breaks and move their ever larger profits to offshore tax havens. The revolving door between Wall Street and the banking sector allows former Federal Reserve Chairs to charge speaking fees of $500,000 and earn seats on the boards of the algorithmic trading firms. The Pentagon continues to benefit from budgetary increases while the profits of Boeing, Lockheed Martin, and other defense contractors continue to swell.

Late stage capitalism helped create the current distortion of wealth. From the wealthy one percent living in multiple homes and flying private, to the plight of the working poor in America. In a 2020 survey by Edelman, a marketing and public relations firm, 57% of people worldwide said that:

“capitalism as it exists today does more harm than good in the world”

When you have money, capitalism is your wing man. It opens doors to business leaders and helps develop political influence, all with the goal of amassing more wealth and power.

Late stage capitalism has allowed oligopolies and the oligarchs that run them, to rig the system in their favor. They’ve won Supreme Court cases, such as Citizens United v. FEC (2010), that give corporations the same speech rights as people, allowing them to spend millions on political ads to elect compliant politicians.

In recent years, capitalism’s shortcomings have become more apparent: Prioritizing short-term profits has sometimes meant that the long-term well-being of society and the environment has lost out. Indeed, if you judge by measures such as inequality and environmental damage, as economists Michael Jacobs and Mariana Mazzucato wrote in their book “Rethinking Capitalism”:

“…the performance of Western capitalism in recent decades has been deeply problematic…”

There’s also no denying that this strain of capitalism has led to increased economic growth worldwide, while lifting a significant number of people out of poverty. At the same time, its tenets of lowering taxes and deregulating business has done little to support investment in public services, such as crumbling public infrastructure, improving education and mitigating health risks.

Watch Paul Tudor Jones, a successful hedge fund manager describe why we need to rethink capitalism:

He’s concerned about capitalism’s laser focus on profits. He says that it’s:

“….threatening the very underpinnings of society.”

More people are aware of the term “late, or late-stage capitalism,” due to the growing wealth gap. People now have access to information that exposes the defects of capitalism, and the effects of political and elitist interference in the monetary policy of a country. There is a popular Reddit community devoted to it.

And calling something “late” implies the potential for significant change or revolution, A “late” period always comes near the end of something. Calling it “Late capitalism” says:

“…This is a stage we’re going to come out of at some point…”

Perhaps we’re on the cusp of society dictating that capitalism provide us with a more equitable way of life. Or maybe the wealth gap will continue to grow, and the corporations will continue to seize more power.

Whenever late-stage capitalism eventually comes to an end, you can be sure of one thing – it won’t be a soft landing.

 

Sources and reading list:

https://wrongologist.com/2023/04/bed-bath-and-beyond-another-retailer-bites-the-dust/

https://en.wikipedia.org/wiki/Werner_Sombart

https://www.theatlantic.com/business/archive/2017/05/late-capitalism/524943/

https://www.investopedia.com/terms/f/financialization.asp

https://www.linkedin.com/in/prof-michael-r-roberts/

https://www.fec.gov/legal-resources/court-cases/citizens-united-v-fec/

https://www.wiley.com/en-gb/Rethinking+Capitalism%3A+Economics+and+Policy+for+Sustainable+and+Inclusive+Growth-p-9781119120957

https://www.bbc.com/future/article/20210525-why-the-next-stage-of-capitalism-is-coming

https://www.edelman.com/sites/g/files/aatuss191/files/2020-01/2020%20Edelman%20Trust%20Barometer%20Global%20Report.pdf

https://www.reddit.com/r/LateStageCapitalism/

Alternative Views:

https://tomdehnel.com/crushing-the-myth-of-late-stage-capitalism/

https://www.nytimes.com/2023/04/20/opinion/american-capitalism-good.html

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Bed Bath And Beyond: Another Retailer Bites The Dust

The Daily Escape:

Super bloom, Carrizo Plain NM, CA – April 2023 photo via Today’s California

Bed Bath and Beyond (BBBY) filed for Chapter 11 bankruptcy on April 23. It said it will liquidate its assets and close its remaining stores unless it can find a bidder for the 360 Bed Bath and Beyond stores and for the 120 buybuy BABY stores.

A little history: A year ago, the prices of their bonds began to collapse. By August 2022, suppliers halted shipments due to unpaid bills. When this became public, its 30-year bonds, issued in 2014, plunged to 16 cents on the dollar (last Friday, they were at about 5 cents on the dollar).

From Wolf Richter:

“While all this was going on, the company promoted its latest turnaround plan and closed hundreds of stores. But you can’t turn around a failing brick-and-mortar retailer. On January 5th this year, the company issued a “going concern” warning.”

There are at least three lessons to take away from the BBBY story: First, they are the latest victim of the move to online shopping. People trusted Bed Bath & Beyond, and they had a pretty good e-commerce business. They could have done very well with it if they had accepted 10 years ago that they needed to phase out of their brick-and-mortar stores.

But brick-and-mortar retailers have difficulty letting go of their brick-and-mortar storefronts. They just can’t explain to their investors that their huge, fixed investment in physical stores are doomed and need to be closed.

Wolf has two great charts comparing the rapid growth in e-commerce and the steep drop in sales by brick-and-mortar retail over the past 15 years:

These two charts show that e-commerce basically replaced $5-9 Billion in annual in-store sales for the retail industry. The top chart shows that e-commerce had reached about $115 billion by 2023. The lower chart shows that in-store sales fell from $17 billion per year in 2008 to a low of $8 billion in 2020 before recovering to nearly $12 billion in 2023.

The second issue was that rather than investing in their business, BBBY spent $11.6 billion on share buybacks from 2005 to 2021. Since 2010, BBBY basically burned $9.6 billion in cash on its share buybacks. Like other companies, BBBY used share buybacks to drive up its share price, as “demanded” by its large shareholders and Wall Street. In addition, by not using that money to transition to e-commerce, they began driving the company towards April’s Chapter 11 filing.

A third problem was that the activists that won control of the BBBY board created a self-imposed disaster. While BBBY had withstood competition from Amazon earlier, in 2019, activist investors in control of its board hired a CEO who implemented a private-label product strategy. This led to customers no longer finding the national branded goods they expected on BBBY’s shelves. Products like AllClad, Kitchen Aid, Rowenta, Miele, Corning, Wustof and Braun. So customers bought them elsewhere. That sent sales down even further, and left BBBY in a cash-poor position.

Wrongo and Ms. Right occasionally shopped at our local BBBY stores, both here in CT and earlier in CA. We always thought it was a good value proposition, particularly for towels, sheets and pillows. Back then, the stores seemed well-stocked and the 20% off coupons didn’t hurt.

BBBY followed a classic path to failure: The retail founders preside over rapid growth. Then when Wall Street and the financers get involved, the founders step back. They then hire “professional” CEOs from their big retail rivals who apply whatever worked at their previous employer.

The new leadership skips the crucially important step of giving customers more of what they need than competitors do, focusing instead on sophisticated financial engineering.

All the while their aggressive rivals are going after their customers. This leads to a loss of market share, ultimately sending a once-proud retailing icon into bankruptcy. To BBBY’s credit, they outlasted far older, bigger and better financed competitors from Sears to Montgomery Ward to pretty much everyone else in their household-goods space.

Is late-stage Capitalism at fault in the BBBY story? You betcha.

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Another Bank Bailout!

The Daily Escape:

Pronghorn in Las Cienegas National Conservation Area, AZ  – March 2023 photo by Alan Nyiri Photography

More about the Silicon Valley Bank (SVB). A joint announcement by Treasury Secretary Yellen, Fed Chair Powell, and FDIC Chairman Gruenberg said:

“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13…”

This appears to be the mechanics of the bailout:

  1. The Fed gives money to the FDIC as needed.
    2. The FDIC makes all deposits available on Monday. Not just those that are FDIC-insured.
    3. The FDIC then sells the assets of the banks, which will take time.
    4. The difference between the cost of bailouts and the net proceeds from the asset sales is the actual amount the FDIC will have lost.
    5. The FDIC will charge all other banks a “special assessment” to cover the losses.
    6. The FDIC will then pay the Fed back with the special assessment funds it collects.

Much about this makes Wrongo’s blood boil. We have a well-defined regulatory system for the US banking industry. But, as with our lax regulation of train traffic that resulted in the Norfolk Southern accident in East Palestine, these pesky banking regulations were considered a major impediment to Mr. Market.

Regional banks argued that they shouldn’t be held to the same standards as the biggest banks because if they failed, they wouldn’t pose systemic risks to the banking industry or the nation.

So in 2018, Dodd-Frank was amended by the Trump administration to raise the asset threshold at which a bank would be considered “too big to fail” from $50 million to $250 billion. The 2010 original law required that banks considered systemically important keep more capital on hand, undergo stress tests and produce a “living will” that would provide for their orderly dissolution.

But now five years later, the FDIC says that SVB and Signature Bank in NY really do pose a systemic risk to the banking system! The regulators are saying that the threat of a systemic risk gives them the authority to hold all SVB depositors harmless, even if their deposits exceed the current FDIC maximum of $250,000.

Few if any average Americans have $250,000 in a single bank account. Who has bank accounts above $250,000? Corporations.

The FDIC insurance on deposits is meant to assure retail customers, not companies that hold very large balances. Why? Because companies have the ability to perform their own risk analysis. This risk analysis should force them to ask questions about the business practices of the bank, to make sure the bank will properly manage their assets.

The US is going to protect the deposits of corporations in this bailout despite the fact that there’s a product called “Insured Cash Sweep” that cuts your large deposits into pieces that are FDIC insured (i.e. $250k each). In the event of a bank run, those deposits would not be over the limit, so they would be safe.

But, for reasons unknown, the Silicon Valley Venture Capital masters of the financial universe didn’t deign to use it.

American capitalism remains a system that privatizes profits until shit happens. And then? We socialize the losses, meaning it’s up to the federal government and taxpayers to handle the problem. When Biden says the banking system will pay fees via a special assessment, that means the cost will ultimately be paid by depositors and borrowers through higher fees and interest costs.

This is why people have so little faith in our government.

The very serious people in finance and politics were worried that the 2023 version of the US banking system might be close to another 2008-style collapse. So the Treasury, Fed and FDIC had to step in.

The basic problem relates to what’s called “asset management” in the banking biz. The goal of asset management is to maximize the return of the bank’s investment portfolio while maintaining an acceptable level of both liquidity and risk.

For banks, that means keeping a certain amount of cash available to meet the needs of depositors and investing the rest in loans or bonds. SVB invested in long-term bonds in order to realize better returns on their investment portfolio, because short-term interest rates were very low. They, like others, felt it was necessary to maintain a portfolio of higher yielding assets to offset the low market rates generally available to them.

But when mass withdrawals from depositors started to happen, they had to sell bonds at a loss, ultimately leading to default and FDIC takeover. Wasn’t it the job of the SVB executives to foresee this? And adjust their asset management accordingly?

This seems to mean that the $250,000 FDIC limit has effectively gone away. If true, there’s systemic risk that taxpayers will have to bail out bank deposits with uninsured deposits at any bank. Most of those depositors will be corporations. So, new rules must be written. And until then, we’re in trouble.

The big picture is that very few people of means in America ever pay a price for bad management.

And none go to jail.

Average Americans who get caught cheating on their taxes might go to jail if you were represented by an overworked public defender. But if you had the means to hire a high-priced lawyer, most likely, you will get community service, or probation.

It’s never been a fair system. Back in the 2008 Great Financial Crisis, then-Treasury Secretary Timothy Geithner worked to save his banker cronies; they didn’t lose money. They didn’t go to jail. The economy was saved, but no one who profited from blowing it up paid a price.

The bottom line: If I’m bad at my job, I’ll get fired. If these bankers are bad, they may get rescued by the government.

And one way or another, we’ll be paying for it.

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