Category: Capitalism Reform

Saturday Soother – February 17, 2023

The Daily Escape:

Where desert meets mountains, near CA/NV border –  February 2023 photo by Austin James Jackson

Liz Hoffman at Semafor has a short analysis of the value of credit card loyalty programs to airlines. Many of us have them and we use them to purchase our everyday goods in order to earn air miles or points that we later use to get a seat upgrade, or to fly for free.

Everyone knows about this “perk” from the airlines, but few of us know just how profitable these programs are to the carriers. It turns out that they are the most lucrative assets on airlines’ balance sheets. The uncertain profitability of the airline business makes them very important since the airlines often lose money.

The airlines used to be secretive about just how profitable their frequent-flier programs were. But, when they were in deep financial trouble during the pandemic, several US carriers pledged their loyalty programs as collateral for new loans when other financing failed.

That required the airlines to open the books on their loyalty programs. And now we’ve learned that their credit card businesses are more valuable to shareholders than their basic business of flying planes. From Hoffman:

“It turns out that United’s rewards card program with JPMorgan Chase is valued today at $22 billion. But United’s market capitalization is $16 billion, meaning investors are assigning negative value to the part of its business that flies airplanes. The same goes for American and Delta.”

From a market valuation perspective, the basic businesses of the big three US airlines are under water. Hoffman provides an eye-opening chart showing that the airlines’ huge investment in aircraft and ground operations doesn’t produce a dime of market value for their shareholders:

As you can see, none of the big three US carriers get any incremental market value from flying planes. So should they either sell off all of that hardware, or spin off their credit card businesses?

They can’t. They need the flights to create demand for the points/miles. The secret sauce behind the success of their loyalty programs is that the actual value of an air mile isn’t clear. Customers think they’re getting a $3,000 upgrade to first class for a few thousand points, while the airlines know that the upgraded seat is unlikely to sell at all, and if it does, it won’t be for anything like that amount.

Foreign carriers have less reliance on their rewards programs. Many operate with government subsidies, so their flights are more profitable. And they serve consumers who are less comfortable with plastic. So their market valuation is less dependent on loyalty programs:

We have to assume that the board members of the airlines have always known about the value of their loyalty programs. But now everyone is seeing the potential value, and the airlines might be thinking that they can wring even more value from them.

What’s distressing about this is that the airlines needed bailouts only two years ago during Covid. The US airlines received $54 billion in federal aid to pay workers during the Covid pandemic. That agreement prohibited them from share buybacks.

That’s because they had continuously bought back shares in the years prior to the bailout. The four biggest US carriers — Delta, United, American, and Southwest — spent about $40 billion buying back their companies’ stock between 2015 and 2020. That effort to improve their market valuation failed spectacularly, since their loyalty programs are now worth more than the companies themselves.

America added a 1% tax on buybacks excise tax for buybacks this year, passed as a part of the Inflation Reduction Act. This will help reduce the deficit and might dampen American corporations’ appetite for stock buybacks. The largest US airlines are making money again, and labor unions don’t want them to spend it on more stock buybacks. In a public petition, some of the largest airline labor unions — representing more than 170,000 pilots, flight attendants, customer service agents — are urging carriers to stabilize operations and invest in workers before spending on buying back more of their stock. We’ll see if that ever happens.

Enough high finance, it’s time for our Saturday Soother. Here on the Fields of Wrong, we’ve had a few warm days that led to the beginning of our spring cleanup. To settle into your soother, grab a mug of coffee and a seat by the window. Start by forgetting about Nikki Haley’s campaign or what to do now that football is over.

Now listen and watch RenĂ©e Fleming sing “Nacht und TrĂ€ume” (Night and Dreams) written in 1825 by Franz Schubert conducted by Claudio Abbado with The Lucerne Festival Orchestra in 2005:

 

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Ohio’s Airborne Toxic Event

The Daily Escape:

Roan Mountain, NC – February 2023 photo by Spencer Carter. Roan Mountain has the largest naturally growing gardens of Catawba rhododendrons in the world.

Back on February 3, a Norfolk Southern (NS) train carrying hazardous materials derailed near the town of East Palestine, Ohio. Federal investigators say a mechanical issue with a rail car axle caused the derailment. After several days of underreporting, we now know what happened.

Here are some facts: The derailment included 50 cars, 20 of which carried toxic materials, 14 of those contained vinyl chloride. The subsequent fire burned for three days. Then there was a “controlled release” of poisonous gas. And finally, effects of the poison were felt on locals, their animals, and local waterways.

The axle problem is important since it is the cause of all the hardship in East Palestine. Trains use steel wheels on steel rails because they produce 85+ % less friction than rubber truck tires do on roads. The contact point of a wheel on the rail is about the size of a dime. Compared to trucks, trains are cheaper (4 cents vs 20 cents per ton-mile in the US), and more sustainable: One ton of freight can be moved over 470 miles on a single gallon of diesel fuel.

But sustaining that economic advantage requires the railroads to maintain all that steel in good working order. Otherwise if things go wrong with a train that’s 4.5 miles long, they can go very, very wrong. And reporting seems to indicate that NS didn’t maintain its steel wheels correctly.

Also, the derailed NS train was not classified as a “high-hazard flammable train,” despite its hazardous and flammable cargo. Such a classification would have lowered its speed and affected its route. From Lever News:

“Though the company’s 150-car train in Ohio reportedly burst into 100-foot flames upon derailing — and was transporting materials that triggered a fireball when they were released and incinerated — it was not being regulated as a “high-hazard flammable train,” federal officials told The Lever.”

Apparently when current transportation safety rules were first created, a federal agency sided with industry lobbyists and limited regulations governing the rail transport of hazardous compounds. That decision effectively exempted many trains hauling dangerous materials including the NS train in Ohio, from the “high-hazard” classification and its more stringent safety requirements.

Generally, workers want safety and the bosses want money. Safety requires additional time, more workers, and money. Deregulation contributes to the lack of safety. Using vinyl chloride in a chemistry lab requires safety equipment. Tank cars containing thousands of gallons of it should require more than the government apparently thinks is safe.

Wrongo always looks at the politics in these sorts of industrial disasters because they are usually caused by the economics created by politics.

Given how dangerous these chemicals are, and given how they are used and transported, we have to expect accidents like this to happen. But the government should be able to tell us whether the current accident rate is higher or lower than expected, and if higher, what should be done to correct the problem.

We trust the bureaucrats that make the rules to balance safe operations against the risk of an airborne toxic event like this. Wrongo’s brief look into this one incident doesn’t evidence that kind of trust. It appears that the bureaucrats who make the rules on railroad safety were influenced by the industry and wrote a rule that puts the economics for the railroad industry ahead of public safety.

These issues exist everywhere in the relationship between industry and government. There’s always pressure by the industry on the bureaucrats to deregulate. In a man-made disaster, that can place greater burdens on the communities, like just happened in East Palestine.

This is what the Michael Lewis’s book “The Fifth Risk” is about: People who go to school, get extensive training and then work in obscure corners of the government. Lewis talks about how important these people are, and how for decades they’ve been denigrated, vilified, and ignored, largely by Republicans.

This is another area in which the GOP is awful in a completely lopsided way to Democrats.

The existence of corporations who can impose risks on the rest of us is what happens when there is unequal political power. We need a state with a strong regulatory system to protect us. The state must build regulatory regimes for chemical spills that shift the risks back onto those who create them.

NS in this case, has said that they will be fully responsible for the damages caused in East Palestine.

That’s encouraging, but how does that little town with a population of less than 5,000, or even the state of Ohio hold NS to their word?

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It’s Impossible To Buy A $200k Home Anymore

The Daily Escape:

Mt. Hood sunrise – February 2023 photo by Mitch Schreiber Photography

Happy Valentine’s Day for those who celebrate! If you don’t celebrate, find someone or something to give a little bit of love to.

In all of the hype about the Super Bowl and Rihanna’s halftime show, you may have missed that homes selling for less than $200k have basically disappeared in America.

John Burns, a real estate consultant, reports that they are now 0% of the new home market. They were 40% of the market 10 years ago. Burns also says that $500k+ new homes have grown from 17% of the market to 38% of the market during Covid. He provides this handy chart showing how average home prices have changed since 2010:

At the same time, sales of homes going for $500k or more (red line) have shot up from less than 10% to nearly 40% of the new homes market and represent the largest share of new home sales.

This isn’t great for Millennials looking to buy their first homes, or for retirees who have to downsize. It also explains why many first-time homebuyers are angry.

It’s not only the $200k and under segment that has fallen off a cliff. New homes going for between $200k – $300k now make up just 11% of the total, down from 80% of all new home sales in the year 2000.

Ben Carlson shows Federal Reserve new home price data going back to 2000 that breaks down new homes price points more clearly. He says that those being sold for $750k and up have gone from less than 1% to more than 10% of the market.

A few reasons for the shifts: First, we’re not building enough new houses anymore. Second, we’ve seen changing tastes drive demand toward larger homes, helping move the market to a new floor in home prices. Inflation didn’t help either.

We overbuilt in the 2000s housing bubble, and that led to more than a decade of underbuilding ever since. There was a brief spike during the pandemic housing craze but that has abated with mortgage rates rising so rapidly in the past year.

In 2002-2006, we were building around 120,000 new homes per year. In 2022, it was more like 65,000 units per year. Tastes have changed as well. Houses today are substantially larger than they were in the 1950s, 1960s, and 1970s.

In his book The Fifties, David Halberstam talks about how the housing market played a huge role in the rise of the suburbs following World War II. Then houses were about 1,300 square feet. In the 1970s, the median size of a new home in the US was 1,525 square feet. Today it’s around 2,500 square feet.

Tastes have changed. People want bigger houses. They want open floor plans for entertaining, bigger bedrooms with more bathrooms, and more storage space for all of their stuff.

It’s also true that homebuilders aren’t incentivized to build starter homes anymore. In the 1950s the government helped out the troops and their families. With the GI Bill, the federal government took some of the risk that homebuilders wouldn’t be able to find mortgages for all the new houses they were building.

Local zoning regulations have made it difficult to get approvals to build new homes. So builders have moved upmarket in home size to justify those upfront expenses. Starter homes aren’t as profitable as they once were.

There’s a big change in the buyer’s market as well. The WSJ quotes John Burns: (emphasis by Wrongo)

“You now have permanent capital competing with a young couple trying to buy a house.” Burns estimates that in many of the nation’s top markets, roughly one in every five houses sold is bought by someone who never moves in.”

The Atlanta Journal-Constitution in an article last week entitled: “American Dream For Rent: Investors elbow out individual home buyers. Metro Atlanta is ground zero for corporate purchases, locking families into renting’. The Journal says a generational housing shortage, inflated construction costs and a surge in consumer demand all contributed to the historic rise in prices.

But there’s little doubt that a flood of cash from institutional investors has exacerbated it. They quote Maura Neill, a realtor in Alpharetta:

“They go after every listing under $500,000
it’s like clockwork…The property gets listed and, sight unseen, they make offers within an hour.”

This is late-stage capitalism at work. Young working couples are increasingly shut out of buying homes. America is failing them. It would be helpful for families to build equity by purchasing homes instead of renting.

Pricing families out of home ownership carries risks to a cohesive society.

We should have a federal tax policy that disincentivizes ownership of multiple single-family homes, by investment funds. The way to remedy this is to steer investors to other assets that don’t directly impact individual welfare to the same degree as single family housing.

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China’s Population Declines

The Daily Escape:

Dune Evening Primrose, Anza-Borrego Desert SP, CA – January 2023 photo by Paulette Donnellon

From the NYT:

“The world’s most populous country has reached a pivotal moment: China’s population has begun to shrink, after a steady, years long decline in its birthrate that experts say is irreversible.”

Irreversible. It was the first time that deaths had outnumbered births in China since Mao’s Great Leap Forward.

Feng Wang, Professor of Sociology, UC Irvine agrees: (emphasis by Wrongo)

“As a scholar of Chinese demographics, I know that the figures released by Chinese government on Jan. 17, 2023…. is the onset of what is likely to be a long-term decline. By the end of the century, the Chinese population is expected to shrink by 45%, according to the United Nations. And that is under the assumption that China maintains its current fertility rate of around 1.3 children per couple, which it may not.”

China has tried different policies for years in an effort to delay this moment, first, by loosening a one-child policy and then, by offering financial incentives to encourage families to have more children. Neither policy worked. Now, facing a population decline, coupled with a continuing rise in life expectancy, China’s demographics will have consequences not just for China but possibly for the rest of us.

China’s rise as an economic powerhouse is the result of its becoming the world’s factory floor. That created the world’s largest middle class. It moved hundreds of millions of rural Chinese to urban areas and fueled the spectacular growth of its largest cities. It made China the world’s second-largest economy, and also led to the increase in life expectancy.

Both Feng Wang and the NYT worry that China’s declining population will lead to a time when China will not have enough people of working age to fuel its growth. In the short run, there will be fewer workers to generate future growth in their economy. In the longer run, the costs to maintain an aging, post-work population will become very high (like in the US).

But economies don’t stand still for long. That China has a manufacturing-oriented economy isn’t a negative but a positive in this scenario. China has been moving up the manufacturing value chain for more than 20 years. So they are in a good position to use automation to address increasing labor scarcity and (presumed) rising labor costs.

They could also encourage work after normal retirement age, even if part time, with better wages and job environments. And like other countries facing similar issues, they could encourage immigration.

The US may be closer to China’s fate than we think. The US Census says that: (brackets by Wrongo)

“The U.S. population grew at a slower rate in 2021 than in any other year since the founding of the nation….[growing by]  only 0.1%…”

It looks like we’re on a similar trajectory to China as are many other developed nations. Japan is currently dealing with it. South Korea and Taiwan are currently at a crossroads as both are facing a massive demographic crash. But, both are smaller and more economically developed than China, so they also have options. Much of Europe is looking at the same problem.

The solution would seem to be to allow immigration from the less developed world. But that comes with the likelihood that the newcomers will change our social and cultural norms.  With immigration, our norms will change, and control of the politics in each country is likely to evolve as well.

The alternative to permanent economic growth is to allow the population shrinkage to happen. It’s kind of infuriating that big business and their captured politicians fail to recognize that a shrinking population (within reason) is both essential for our future and a good thing in the long run.

It can be scary: But transitioning from an economic model based on a constant input of young, working people to one where, we create fewer jobs, can work. If we make sure that those jobs are extremely productive.

What is the end game of an ever expanding population and perpetual economic growth for the human race? The world population when Wrongo was born was about 2.3 billion. It’s 3.5 times that today. Since resources are finite, it’s an inescapable conclusion that someday we must shrink the number of people. So why not today?

Sure, we can extend the economic life of certain resources by using new technologies. But if we continue to expand the number of humans on earth, we’ll see a global war for those resources, which will be a catastrophe.

Is a commitment to low population/low economic growth even possible at this late stage of capitalism?

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Monday Wake Up Call, MLK Jr Day – January 16, 2023

The Daily Escape:

It’s MLK day, so let’s talk about a topic that was near to his heart: economic inequality. Since 1980, economic inequality has been increasing between the top 1% and the bottom 90% of Americans. It’s become so great that today, America now faces the same level of economic inequality that existed before the Great Depression.

Here’s a chart from Elise Gould and Jori Sandra of the Economic Policy Institute (EPI) showing the percentage change in annual wages by income group for the last 40 years:

From the EPI article: (emphasis by Wrongo)

“The level of earnings inequality that existed in 1979 could have simply continued…to today. Instead, we have seen a growing concentration of earnings at the…very top of the earnings distribution, while the bottom 90% has experienced meager gains. Wages for the top 1% grew more than seven times fast as wages for the bottom 90% between 1979 and 2021. The top 1% now amasses a record share of total earnings, while the bottom 90% share of earnings has hit a historic low.”

Slow growth in real (inflation-adjusted) hourly wages for the vast majority of workers has been a defining feature of the US labor market for most of the last 40 years. Only for about 10 years after 1979 did workers see consistent positive wage growth: in the tight labor market of the late 1990s and in the five years prior to the pre-pandemic labor market peak in 2019.

While some low-wage workers have experienced high wage gains after America reopened from Covid, the truth is that most haven’t even kept pace with where they were in 1979.

Today is Martin Luther King Day in America. We mostly celebrate Dr. King’s birth rather than acknowledging what he was arguing for when he was killed. His focus at the end was on both economic justice, and voting rights. Perhaps more than any other leader in American history, King could see the different strands of political and social injustice. He was able to tie them together to form a coherent narrative, one that was capable of leveraging dissent for concrete policy change.

Those were the enduring lessons of Dr. King’s life.

There’s less than three months between the observance of King’s birthday and his death. The way each is recognized by politicians reveals the contradictions in his legacy. Most politicians extol the virtues of racial equality, while most ignore King’s criticisms of economic injustice.

From his April 30th speech in Atlanta: (emphasis by the Wrongologist)

“A true revolution of values will…look uneasily on the glaring contrast of poverty and wealth with righteous indignation. It will look across the seas and see individual capitalists of the West investing huge sums of money in Asia, Africa, and South America, only to take the profits out with no concern for the social betterment of the countries, and say, ‘This is not just’
this business of…injecting poisonous drugs of hate into the veins of peoples normally humane….cannot be reconciled with wisdom, justice, and love. A nation that continues year after year to spend more money on military defense
than on programs of social uplift is approaching spiritual death.”

As the EPI report above shows, over the last four decades, policies promoted by the GOP have reduced the opportunities for most workers to achieve wage growth at rate similar to the top 10%.

Time to wake up America! Develop your narrative, one that fights against economic injustice and for voting rights. Add any other issues that are pertinent to you. Take your narrative to your neighbors. Then work to get out the vote.

To help you wake up, watch “People Get Ready”, a Curtis Mayfield tune that foretold the turning tide in the battle for racial equality. It topped the R&B charts after its 1965 release by The Impressions. It’s been covered by scores of artists, including Bob Dylan, Bruce Springsteen and by Rod Stewart and the late Jeff Beck, who died last week. Early in their careers, in 1969, Beck and Stewart performed together in the Jeff Beck Group. Here’s Beck’s official music video for “People Get Ready” featuring Rod Stewart:

Jeff Beck was one of one as a guitarist. There was no one better. He had the mindset of a jazz musician playing blues rock. His guitar sound wasn’t anything like traditional jazz guitar. He didn’t cut his teeth playing the old jazz standards, but he could improvise something fresh every time. OTOH, Wrongo didn’t love Beck the recording artist.

Rod Stewart has a secret hobby; he builds model trains. He would take his trains on tour with him, requesting an extra room so he could work on them while staying in hotels. Stewart recently unveiled his 1,500 square-foot replica of post-war Chicago and New York railway systems that took him 23 years to build.

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Monday Wake Up Call – December 19, 2022

The Daily Escape:

Skiing Santas at Sunday River Ski Resort, Newry, ME – Dec. 11, 202, AP Photo/Robert F. Bukat

(As we cruise towards Christmas, each day this week we will feature pictures of Santas and/or Christmas trees, along with loopy songs vaguely representative of the season. You’ve been warned.)

The war in Ukraine has once again reminded policy makers of the importance logistics plays in winning on the battlefield. In reading a Defense One post by Marcus Weisgerber, Wrongo learned that demand for weapons by Ukraine — combined with worker shortages, inflation, and other factors — has made it more difficult and more expensive to produce the most in-demand weapons. This describes the current problem:

“The US has sent 13 years’ worth of Stinger production and five years’ worth of Javelin production to Ukraine…”

That’s in 10 months. And a newsletter by CDR Salamander states the overall problem clearly:

“The Ukrainians would have run out of weapons and ammunition months ago if the former Warsaw Pact nations in NATO didn’t empty what inventory they had left of Soviet Era weaponry and the rest of NATO led by the USA didn’t wander the world trying to soak up as much available inventory money could buy. That and the rapid adoption of NATO compatible equipment by the Ukrainians is helping, but that has revealed other problems – who says the West has enough to give?”

It is said that amateur warriors deal in tactics while professional soldiers deal in logistics. Both sides in this war are burning through their weapons stockpiles at unsustainable rates even though the war seems (at least momentarily) to be a stalemate. The US and NATO had little in stockpiled weapons even before the Russo-Ukrainian War, able to mount only a very limited or short war as they did (poorly) in Libya. This has been true for the past 20 years. Now those limitations are out in the open.

US defense spending could rise 10% percent in 2023. A good chunk of the increase is meant to rush weapons to Ukrainian forces fighting the Russian invasion, along with replenishing the US missiles, artillery and other weapons sent to Ukraine.

But the sad truth is that it isn’t clear that US or European defense companies, along with the thousands of small businesses that supply them, can meet this increased demand. There are plenty of reasons, including worker shortages and supply-chain disruptions that have been exacerbated by the pandemic and the global current economic outlook.

And the Pentagon was slow to award contracts to rebuild weapon stockpiles. Those that were awarded quickly had to be fast-tracked by top-level Biden administration officials. And it gets worse. Many defense firms are short-staffed relative to what’s needed to fulfill anticipated Pentagon orders to replace weapons sent to Ukraine. Defense One quotes Raytheon Technologies CEO Greg Hayes:

“The real question is, can we actually build it?….They can appropriate all the money, but…if we take months and months and months to get on contract, that’s months and months of delay.”

Raytheon builds the Stingers that are so depleted.  They are willing to ramp up, but it takes investment and lead time to grow production. More from Hayes:

“We want to be prepared to meet the demand that’s out there….I wish I could snap my fingers and then all of a sudden miraculously, throw a building up and train 500 people [to build them], but it just takes time.”

American business calls this “Lean Manufacturing“.

A final illustration of how a simple part that gets caught in the supply chain becomes a big problem: The Eurasian Times reports that German ammunition manufacturers have warned about delays in receiving cotton linters. They are a necessary component for propelling charges from small guns and artillery. All European ammunition producers depend on China for cotton linters, even though it is a commodity produced and traded globally. The time to get them to Europe has tripled to nine months.

Much like we learned during the height of the pandemic, our supply chain is only as strong as its weakest link. Lean Manufacturing and “Just-in-Time” supply chains drove the prices of imported goods through the roof, but increased demand meant that we still had to wait months to get what we ordered. Have we learned anything?

Like during the pandemic, the Russo-Ukrainian War is sending a clear warning to everyone throughout the West: We need to ramp up production, capacity, and have a more reliable – if somewhat less efficient, supply chain to support our military. This is a hard lesson, because unlike jets, missiles and ships, ammunition and expendables are hidden away in bunkers. And if your governments and diplomats do their job, they will never be used.

However, if/when you need them, like right now, the need is existential. Time to wake up America! We can’t depend on capitalism only to solve our supply chain problems. To help you wake up, take a moment to watch the Foo Fighters, who closed 2017’s Christmas episode of Saturday Night Live with an extended performance of “Everlong” that morphs into a pair of seasonal classics:

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Will New House Prices Go Down?

The Daily Escape:

Mt. Hood viewed from Timberline Lodge – December 2022 photo by Mitch Schreiber Photography

We have all watched house prices go through the roof since the start of the pandemic. Of Wrongo and Ms. Right’s six kids, two do not currently own a home, and despite having good jobs, and wanting to buy, they’re priced out of their local markets. Houses near Wrongo’s daughter on Cape Cod, MA have nearly doubled in price since the start of the pandemic. The same is true for Wrongo’s son in Bergen County, NJ.

But house sales in US have been slowing down in the past few months as interest rates climb. Wolf Richter at Wolf Street says there are now too many new houses for sale:

“Inventory of new houses for sale…has ballooned to 470,000 houses, up by 21% from the already high levels a year ago, and the highest since March 2008….Which destroys the theory that home prices are high because the industry isn’t building enough houses…”

Wow, nearly a half-million unsold new houses! Much of this inventory of unsold new houses were built in locations that are far from the big suburbs and the cities. After the pandemic started, US businesses redefined the office to include working from home. That further moved to “live anywhere” remote work for some firms.

Now, firms are bringing people back to their physical offices. That makes selling houses at great distances from the office a tough proposition for new home builders. It means buying a lower price rural home based on a big remote salary is no longer in the cards for many workers.

According to Bloomberg, Lennar a major home builder, has been approaching the big corporate rental landlords with an inventory listing about 5,000 houses that it wants to offload:

“Lennar is circulating lists of properties to potential acquirers, according to people familiar with the matter….Many of the properties are located in the Southwest and Southeast…with the builder giving landlords the chance to acquire entire subdivisions in some cases.”

It’s an industry-wide problem. Home builders have pitched at least 40,000 new houses to rental operators in recent months. Bloomberg says that many of these houses had originally been sold to individual buyers who later canceled their purchase contract.

According to a survey by John Burns Real Estate Consulting, the purchase contract cancellation rate spiked to 26% in October, up from a rate of 8% a year ago, and up from 11% in October 2019. The cancellation rates were highest in the Southwest at 45%, up from 9% a year ago. In Texas, the cancellation rate spiked to 39%, up from 12% a year ago. That’s understandable since mortgage rates have been rising so quickly.

This tells us that a part of the “housing shortage” is both local and price-driven. We know that house prices are driven by building costs, which have spiked in the past two years. Prices are also driven by the quality of the schools in the area, or whether the location is near a tourist destination. Retirees can move anywhere, but they generally want to be close to doctors and medical centers and will pay a premium for location rather than pay a lower price to live in the middle of nowhere.

Entire subdivisions sold as a rental community is better from the viewpoint of an individual home buyer instead of a percentage of that development’s homes being sold into a rental pool. No one should buy into a development that is partially sold and partially rented. The big landlords will rarely improve them beyond the least amount possible. So the overall value of all the homes in that community will be diminished by the presence of a rental pool.

We saw that in California in the 2007-2009 real estate bubble, where a few houses in otherwise nice neighborhoods would have overgrown lawns and trash lying in the yard, a clear sign of vacancy. That didn’t help the property values of the individual homeowner neighbors.

How far will housing prices fall? Nobody knows. Here is a chart showing average housing prices since 2019:

Comparing 2019 to 2022, average house prices have risen by 39%. Your area’s average may be even higher, particularly if you live in or near a large city.

It’s clear that the US housing market needs a price correction. Wrongo would like to say that people shouldn’t be offering anything higher on the house they want than it would have sold for in 2019. But, we may not get back to that price level anytime soon.

A price correction alone won’t solve America’s housing crisis, but a 20% correction sure would be a nice start.

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Workin’ On The Railroad

The Daily Escape:

Pikes Peak with Garden of the Gods in foreground, Colorado Springs, CO. View is from the reflection pool at Garden of the Gods Club and Resort – November 2022 photo by John Susan Hoffman

On Monday, Biden called on Congress to prevent a rail workers’ strike. Railroad workers are threatening a nationwide strike on December 9, which could deliver a crippling blow to the American economy. According to the Association of American Railroads, a nationwide rail shutdown could cost more than $2 billion per day. Passenger rail transportation would also stop, disrupting hundreds of thousands of commuters. 

The unions have rejected a tentative agreement that had secured a pay increase of 24% over 5 years for rail workers, but wages don’t appear to be the primary sticking point. The outstanding issue is paid sick leave. The railroad companies have adamantly refused to include any more short-term paid leave. That means rail workers must report to work, even when they are sick, or forfeit their pay.

The essence of the unions’ position is that rail workers must use accrued paid time off (PTO) for their sick time. Actually, they use PTO for ANY days off. They get about 21 days of PTO annually. The rest of their time, including their weekends, is tightly controlled.

The context is that rail workers do not get weekends or holidays off unless they use their PTO. They’re on call 24/7, and if they refuse a shift after a designated (12 hour) rest period, they are docked points. Since the rail carriers have laid off more than a third of their workforce in the past decade, every shift is understaffed, and on most shifts, everyone who is eligible is likely to be called in.

Rail workers have jobs that often require them to be on the road for weeks at a time. From Heather Cox Richardson: (brackets by Wrongo)

“…[the unions]…oppose a new staffing system implemented after 2018, which created record profits for the country’s main rail carriers but cost the industry 40,000 jobs, mainly among the people who actually operate the trains, leading to brutal schedules and dangerous working conditions.”

The Precision Schedule Railroading (PSR) system made trains more efficient by keeping workers on very tight schedules. Any disruption in those schedules, like a family emergency, brought disciplinary action and possible job loss for the worker.

In the US, the 40-hour work week provides on average, 104 weekend days off per year, plus federal holidays. How many American workers would accept the total of 21 days off that most rail workers will accrue in PTO under the now-rejected Tentative Agreement?

The Railway Labor Acts of 1926, 1934 and 1966 control not only railroad labor disputes but also airline labor disputes. There is a series of steps that must be taken by both sides, and the final steps are where a union may strike, and Congress can step in and enact a law codifying an agreement between the companies and the unions.

The US Chamber of Congress and some 400 business groups, representing a wide range of industries, have sent a letter calling on Congress to intervene before the strike deadline if a deal is not reached to “ensure continued rail service.”

You would think that puts Democrats in a bind. They’re pro-union, but in this case, they’re jumping to the tune of big business. And why did Biden make his announcement a week in advance of the possible strike? A good negotiator would create some uncertainty in the minds of both the companies and the unions. There should be at least the appearance of a strike being possible.

Shouldn’t the “most pro-labor president” in a generation (in 1992, he was one of only six Senators to vote against legislation that ended another strike by rail workers), demonstrate that he’s proud to be on the workers’ side, at least until he isn’t?

Congress also has the option to dictate a cooling-off period, allowing parties to continue negotiating until they reach an agreement, or force both sides to enter arbitration, where a third-party mediator gets involved.

The unions knew that Congress would likely intervene. So workers would rather have a bad deal forced on them than to vote for it.

Four paid sick days is nothing. The fact that the rail companies are unwilling even to give four sick days says everything you need to know about American corporations in 2022.

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Is “Yellowstone” A Political Show?

The Daily Escape:

Early snow, Zion NP, UT, November 2022 photo by Bob Busund

After friends and many family members said that they really liked the TV show “Yellowstone”, Wrongo and Ms. Right watched the 2-hour season premiere on Paramount on Sunday night to see if we should commit to watching all five seasons.

Wrongo’s hot take is that the show is “The Sopranos” with horses. There’s some family intrigue like on “Succession” but the Logan Roy family isn’t directly responsible for killing people or animals at the volume of Montana’s John Dutton family.

Since its launch in 2018, Yellowstone has become one of TV’s most-watched dramas. January’s fourth-season finale had over 9 million viewers the night it aired. By comparison, HBO’s Succession drew 1.7 million for its third-season finale a few weeks earlier.

From the NYT:

“John Dutton, a Marlboro Man Tony Soprano, runs the Yellowstone Ranch like a quasi-mob. His wranglers, many of them ex-cons, are branded with a “Y” to mark them as his. When they’re not breaking horses, they’re breaking his enemies’ faces (and often one another’s).”

We watched the season-five opener where patriarch John Dutton becomes governor of Montana, basically running on a platform of “Why do I have to do everything myself”? He owns the largest ranch in Montana but feels that the whole world is conspiring against him. Specifically, it’s a cabal of greedy tycoons who want to buy Dutton’s property and build casinos, condos, and ski chalets on it.

So the main fight is between rich, white-collar city folk who have degrees and suits. The Dutton’s hate those people who fly in from California and then get their (relatively) small farms qualified for tax breaks. The Dutton’s enemies are the bankers and lawyers who are part of the scheming to take Dutton land.

It seems that John Dutton is defending his land and way of life from educated, monied outsiders who rarely actually go outside. Since his enemies mostly live on the coasts, the show is a kind of Red vs. Blue allegory.

Yellowstone’s message is that if you live in rural America, other Americans envy you. You have something they want. Even if you are land poor, you’re richer than they are. And they’ll try and take it from you if you let them.

There’s a market reality to that thinking. Nationwide, available farmland is scarce. Last year, values increased by 12.4% to an average price of $3,800 an acre. Elsewhere, the NYT reports that: (emphasis by Wrongo)

“… the supply of land is limited. About 40% of farmland in the United States is rented, most of it owned by landlords who are not actively involved in farming. And the amount of land available for purchase is extremely scant, with less than 1% of farmland sold on the open market annually.”

Both small and beginning farmers are being priced out of farmland. And Bill Gates is the largest owner of farmland in America. Like wealth, land ownership has become concentrated in fewer and fewer hands. And thus, land costs more, resulting in a greater push for more intensive industrial farming techniques to generate higher returns.

One report found that just 1% of the world’s largest farms control 70% of the world’s farmland. And the biggest shift in recent years from small to big farms was in the US. No wonder then, that Yellowstone has a big and loyal audience in America’s heartland. Land is power, land is wealth, and importantly, land remains a way to sort both race and class in America.

Yellowstone is described as a “red-state show”. Based on watching just two hours, Wrongo can see that, but as the NYT says:

“On one level, the appeal of “Yellowstone” is apolitical and as old as TV. It’s a big, trashy, addictive soap about a family business, like “Dallas”

It speaks the language of today’s culture wars with a country accent. We found the family members in Yellowstone both hard to like, or root for, but the show gives them enemies who seem worse. So you can maybe accept the amorality of it.

Wrongo doesn’t see it as a Conservative show in a political sense. The issues Yellowstone raises about land stewardship and big business are relevant, and not just in rural America. But from Wrongo’s limited experience with the show, the plot is more about romance, violence and feuds, along with beautiful horses and Montana scenery.

Dutton’s trying to conserve his family’s land. If you think about it, that’s not something today’s conservatives are at all interested in doing. Developers on the coasts are happy to pave over everything, and very, very few of them are liberals and/or Democrats.

And you don’t have to be politically conservative to want to preserve our natural world.

Will we watch more? Depends on what else is on.

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What Was The Dems’ Closing Argument?

The Daily Escape:

Valley of Fire SP, NV – November 2022 photo by Carol Cox

It’s Election Day. Over the next few days, the mainstream media, and self-appointed pundits like Wrongo will try to make sense of what the vote tallies mean for America and for the two Parties. Regardless of the outcome, many things will be very different in 2023.

Here’s Sherrilyn Ifill with a great closing argument for voting rather than standing on the sidelines:

“Voting this year is not only political, it’s personal. To vote is to speak. To vote is to declare that you will not be written out of the definition of who can claim their right to this national identity. To vote is to fight. Voting is not the only way to fight, but it is one of our most powerful weapons. Wield it with power and determination. And leave no power on the table.”

The one overriding issue in this midterm election has been inflation. The media won’t let go of it, and the glare effect of inflation makes some voters think that the economy is also terrible. And it hangs over the closing arguments of all Democrats because the Republicans falsely say that the sole cause of inflation is that the Biden administration’s spending like crazy.

The truth is that about 54% of the current inflation rate is due to elevated corporate profits.

Prices are rising not just because of worker’s wages. The cost of labor is increasing at a slower rate than inflation. Raw materials are not the prime driver of increased inflation either. Companies are raising prices above and beyond costs because they can.

Unless companies can reduce their cost of bringing products to market, the only way to increase the firm’s markup is by increasing its selling price. Kevin Drum has helpfully taken a look at that for us:

The blue line represents the total cost of employing somebody, including all wages and benefits. Since 2020 it’s risen at less than the rate of inflation. The red line represents after-tax profits as a share of gross value added, (markup to economists). Before 2020 it rose roughly in line with inflation, but since 2020 it’s skyrocketed.

From Drum: (emphasis by Wrongo)

“Corporations are increasing prices…and blaming it on inflation. But it’s not because of inflation. It’s a cause of inflation. Prices are rising….mainly because companies are raising prices above and beyond that for no special reason except that they can. And all of us are paying the price.”

Economist Robert Reich points out that corporations can jack up prices today without losing customers because we’ve allowed virtual monopolies to develop in many US industries. Since the 1980s, he says, two-thirds of all American industries have become more concentrated. Some examples:

  • Foods: Four companies control 85% of all meat and poultry processing. Just one corporation sets the price for most of the nation’s seed corn. Just two giant firms dominate consumer staples.
  • Drugs and prescriptions: Big pharma consists of just five corporations.
  • Air travel:The airline industry has gone from 12 carriers in 1980 to just four today.
  • Banking: Wall Street has consolidated into five giant banks.
  • Broadband: It’s dominated by three cable companies.

The US House Subcommittee on Economic and Consumer Policy released an analysis last Friday that spells out how some corporations have enacted price hikes and are enjoying record profits. What’s worse, the CEOs of the big firms openly admit on earnings calls with investors that they use inflation as a cover to raise prices. Here’s what a few CEOs of major companies are saying:

Michael McGarry, CEO of PPG, in response to a question whether prices will go back down when input prices are lower:

“…we’re not going to be giving this pricing back….So we’re telling people, this is the new price. And if you don’t like it, please don’t place purchase orders.”

William C. Rhodes, CEO of Autozone:

“It is also notable that following periods of higher inflation, our industry has historically not reduced pricing to reflect lower ultimate cost.”

Jim Snee, CEO of Hormel:

“…our Grocery Products pricing is very sticky and so the pricing that we’ve taken and that we’re in the midst of executing the additional price increase, that pricing will by and large stay.”

The inflation we’re experiencing is not due to wage gains, it’s due to profit gains from corporate pricing power.

It would be nice if the media reported on what’s really causing the inflation. Many people are going to the polls today thinking this is Biden policy-caused inflation rather than the reality of a corporate drive for higher profits.

Too bad so few Democrats are talking about this when they get hammered about inflation by their Republican opponents.

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