Last year, Yale paid about $480 million to private equity fund managers as compensation â about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest â to manage about $8 billion, one-third of Yaleâs endowment.
He tells us that, of the $1 billion the endowment contributed to the universityâs operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. He reported that private equity fund managers also received more than students at four other endowments; Harvard, the University of Texas, Stanford and Princeton.
He makes another great point, that university endowments are exempt from corporate income tax because universities support the advancement and dissemination of knowledge. The tax advantage also benefits the fund managers whose carried interest is taxed at lower capital gains rates rather than ordinary income rates. It isnât a coincidence that hedge fund managers return the favor to their large university clients. Kenneth C. Griffin gave Harvard $150 million in 2014. This year, Stephen A. Schwarzman, the chairman of the private equity giant Blackstone, pledged $150 million to Yale toward a new student center. John A. Paulson, another hedge fund manager, topped both when he gave Harvard $400 million in June.
Maybe these university endowments need to do more to support students and faculty, and less to support fund managers, if they are to keep their tax-exempt status.
On to cartoons. With the email server and new polls, Hillary did not have a good week:
Maybe if the Obama years hadnât decimated the Democratic bench for an entire generation, we wouldnât have to rely on two senior citizens slugging it out for the chance to call the White House their retirement home.
Another senior, Mr. Biden, awaits the call, if Hillary falters:
Mylan, a generic drug maker based outside Pittsburgh, abandoned its status as a US corporation, gaining tax advantages by moving its headquarters to the Netherlands. The move reduced the taxes the company pays on profits from sales of drugs overseas, but Mylan continues to maintain most of its operations in Pennsylvania.
Mylan was viewed by some in Congress and the Obama administration as a symbol of corporate greed when they undertook a corporate inversion that placed profits above any commitment to its home country.
But now, Mylan is demanding that the US Federal Trade Commission (FTC) protect it from a hostile takeover bid by an Israeli company, TevaPharmaceuticals. Mylan asked the FTC to examine Teva’s purchase of Mylan stock for possible violation of the requirement that large purchases of stock of US firms must be reviewed by antitrust authorities, because Mylan is still listed on the NYSE. The company claims that its principal office remains in Pennsylvania, which makes it a âUS issuerâ of stock for federal anti-trust purposes.
The irony of this is not lost in Washington. Rep. Chris Van Hollen (D-MD), the senior Democrat on the House Budget Committee said:
Mylan is trying to have its cake and eat it too…It is an intolerable abuse of a loophole when US corporations pretend they are based overseas in order to get out of paying their fair share and duck their responsibilities to the United States. Itâs just plain hypocrisy when one of those same inverted companies claims that it is actually a US company because it needs the special protections US law gives to American companies.
Mylan may have a case. Its plea for help from the US government could pass legal muster but, the optics of a company that abandoned its US citizenship in order to pay less in federal taxes, and then seeking the protection of a federal agency is problematic.
Compounding the farce, Mylan is attempting its own hostile takeover of Perrigo, in order to stave off Teva.
Mylanâs unabashed lack of shame is impressive. Maybe the FTCâs decision-making on this case should take quite a while.
So, wake up Congress, and deal conclusively with corporate inversions! Our wake-up calls for the next few weeks will be songs about summer. We start with the Lovinâ Spoonfulâs only #1 hit, âSummer in the Cityâ:
For those who read the Wrongologist in email, you can view the video here.
Trucker jobs will be the first casualty of driving robots. Trucker salaries average $40,000/year. Most truck accidents are due to user error: Driving too fast, driving while tired, or driving while intoxicated. Robots don’t drink, don’t get tired, and won’t drive unsafely in order to get to a destination faster. Drivers will still be needed for inner-city driving (at least initially), but most long-haul operations will quickly vanish as soon as licensing is complete in most states.
Three years ago, Saudi Arabia announced a goal of building, by 2032, 41 gigawatts of solar capacity by 2032, slightly more than Germany has today. The Saudis burn about a quarter of the oil they produceâand their domestic consumption has been rising at 7% a year, nearly three times the rate of population growth. According to a British think tank, if this trend continues, domestic consumption could eat into Saudi oil exports by 2021 and make the kingdom a net oil importer by 2038.
Hackers have apparently cracked the computer systems responsible for issuing flight plans to pilots of every airline. The apparent weak link? The flight plan-delivery protocol used by every airline. Ground computers calculate the appropriate flight plan for planes, and someone on ground approves the plan before distributing it to pilots. Pilots receive plans before taking off, as well as enroute, when a change occurs during a flight. Plans are uploaded to planes via a datalink. Once a hacker figures out those protocols, it is possible to issue a bogus flight plan. But, the industry says, not to worry.
Your thought for the week: Giving money to poor people is socialism, or even communismâŚ..giving money to AIG or Goldman Sachs is capitalism, and that’s what made this nation grrrreat!!!
Have you ever heard of US Digital Services (USDS)? Neither had the Wrongologist before reading an interesting article in Fast Company, âInside Obama’s Stealth Startupâ, that describes how President Obama is recruiting top tech talent from companies like Google and Facebook. Their mission is to reboot how government works. Here is a first-person tidbit: (Brackets and editing by the Wrongologist)
Lisa GelobterâŚgot [a call] out of the blue last summer in New York, inviting her to some kind of roundtable discussion in Washington for tech leaders. Lisa had just spent time on the upper management teams at Hulu and BET. She decides, reluctantly, that sheâll go take the meeting, which includes this guy named Mikey as well as this other guy named Todd, and turns out to be in the Roosevelt Room in the West Wing. Then President Obama opens the door and surprises everyone, and over the course of 45 minutes gives the sales pitch…They need to come work for him. They will need to take a pay cut…But he doesnât care what it takesâhe will personally call their bosses, their spouses, their kids to convince them. The crowd laughs. But he gravely responds: I am completely serious. He needs them to overhaul the governmentâs digital infrastructure now.
âWhat are you going to say to that?â asks Lisa.
Todd and Mikey, the pair who helped bring people like Lisa Gelobter to DC are Todd Park, former chief technology officer of the US, and Mikey Dickerson, who led a team of 60 engineers at Google and supervised the crew that fixed the Healthcare.gov website last year.
Since that time, Park and Dickerson have been steadily recruiting a team of startup-savvy techies, mainly from top private-sector companies, and embedding them in agencies of the US government. Their purpose is to remake the digital systems by which government operates, to implement the kind of efficiency and agility and effectiveness that we admire at Silicon Valleyâs biggest successes, across everything from the IRS to Immigration Services.
Dickerson has insights learned from the Healthcare.gov experience, which became an $800 million boondoggle, involving 55 contracting companies: (Emphasis by the Wrongologist)
And of course it didnât work…They set aside hundreds of millions of dollars to build a website because it was a big, important website. But compare that to Twitter, which took three rounds of funding before it got to about the same number of users as Healthcare.govâ8 million to 10 million users. In those three rounds of funding, the whole thing added up to about $60 million.
OK, but Healthcare.gov may have been more complex than Twitter. Fast Company quotes President Obama regarding his big mistake in building Healthcare.gov:
When youâre dealing with IT and software and program design…Itâs a creative process that canât be treated the same way as a bulk purchase of pencils.
So, the Obama administration began USDS to recruit top tech talent to overhaul the governmentâs digital infrastructure. The point was not to sell these candidates on a career in government, but rather to enlist them in a stint of a year or two at USDS, or even a few months. For decades, lawyers and economists have worked in the capitol between private-sector jobs, so why not technologists? Fast Company quotes Megan Smith, the US chief technology officer:
What I think this does…is really provide a third option. In addition to joining a friendâs startup or a big company, thereâs now Washington.
Fast Company reports that the idea of short-term government assignments by software entrepreneurs appeals to Mr. Obama, and that it was built into the USDS design from the start. Mr. Obama:
Iâm having personal conversations with folks, meeting with them, or groups of them, and pitching them…And my pitch is that the tech community is more creative, more innovative, more collaborative and open to new ideas than any sector on earth…Is there a way for us to harness this incredible set of tools youâre developing for more than just cooler games or a quicker way for my teenage daughters to send pictures to each other?
Finally! Obama hits one nail on the head.
If the USDS team can successfully rebuild some of the digital infrastructure of Washington, it might not only change governmentâs functionality, it might transform Americansâ very poor attitudes about their government. And given our ideologically-riven Congress, success might just boost our citizensâ waning belief that America can return to a joint view of the future, but that’s a lot to ask of a group of techies.
Of course, if we have a GOP President and a GOP Congress starting in 2017, then itâll be back to technology outsourcing, since understanding high tech and the internet is only for capitalists.
The Wrongologist often writes about privatizing profits and socializing losses, a system where businesses and individuals can benefit from the profits earned by their business, while the public gets stuck with the consequences, the long-term bill. Governments all over America play into this, from doing deals to bring or keep jobs in the state, to underwriting the costs of sports areas, to building infrastructure when a new business comes to town.
Here is another object lesson in socializing the losses. Some towns in North Dakota (ND) are beginning to worry about the debt that they have incurred to build infrastructure to support the boom in shale oil production.
Oil Price reports that oil production in ND exploded in the past five years to well over a million barrels/day, making North Dakota the second largest oil producing state in the country. The likely fallout from the recent fall in oil prices may have serious financial side effects for NDâs towns.
Consider Williston, ND, a town in the center of the shale oil patch that finds itself planning for the worst. The town is deciding how to cope with $300 million in debt, money it borrowed to build infrastructure to meet the rapid growth of people and equipment working in the oil patch. That meant building new roads, schools, and a water-treatment plant, all of which were paid for by the city. The debt was expected to be repaid from increased sales and real estate taxes that suddenly may not be flowing into local and state coffers.
Williams County Commissioner Dan Kalil told NPR that he fears the town has overreached and wonât recover quickly, as global demand for oil is expected to grow slowly over the next few years, and shale oil prices may not bounce back to the mid-2014 levels. He may be correct. Production is down about 5% from its all-time high of 1.2 million barrels per day in December 2014. But more declines are expected with drillers pulling rigs and crews from the field. Rig counts in ND have fallen to 76, far below the 130 that state officials believe is needed to keep production flat.
And ND is experiencing the negative side effects of an oil boom. The huge increase in drilling brought a wave of cash and people to once sleepy towns, fueling a boom not only in oil, but also in crime, prostitution, and drug trafficking. Consider that Williston went from a population of 14,000 in the 2010 census to an estimated 24,000 in 2014.
On June 3rd, the US DOJ, in conjunction with NDâs Attorney General, announced the creation of a âstrike forceâ that would target organized crime in the state. The effort is a direct response to the rise in crime in the shale oil field towns in ND and Montana, which has been fueled by:
Dramatic influxes in the population as well as serious crimes, including the importation of pure methamphetamine from Mexico and multi-million dollar fraud and environmental crimes.
Too many people, too much money, too little economic security in the local economy. The weak oil players pull out, and the debt, crime and now unemployment, remain. And the towns and state government have to sweep up after the companies go.
Thatâs not all. The boom/bust cycle makes estimating the future population of Williston difficult. How many kids and spouses of oil field workers will settle permanently in the area? Does the school district build, or stand pat? Will more classrooms be paid for by more taxes, or will they be a money loser? In a boom, most oil field workers are temporary; towns need permanent residents in order to build schools.
Even if a semblance of the oil boom returns, and Williston attracts more workers who come to stay, Dan Kalil fears another boom would mean even more people, traffic and crime.
So, who pays? The taxpayers. The people who donât pull out when the companies leave. The people who stay have to cover the hole in the budget, and tolerate fewer services when the money guys hit the road. Williston isnât Detroit, but in both cases, the little people are left holding the bag.
Once again, a town makes a long-term investment, hoping for a return down the road in the form of increased sales taxes and property tax revenues. They sacrifice quality of life, looking for a return in the form of more and better jobs, and better house values. They pay higher prices for most things.
“Ethics is knowing the difference between what you can do and what you should do.” – Justice Potter Stewart
It looks like Scrooge McDuck runs human resources at Disney. Disney World laid off 250 tech workers, who were American programmers and computer operators that have been replaced by Indian techies with H-1B visas. The techs were supplied by HCL America, an Indian outsourcing firm.
H-1B visas are intended for high-level professionals who, in concept, fill jobs for which no Americans are available. 85,000 of these visas are granted each year, and they are in high demand. Technology giants like Microsoft, Facebook and Google repeatedly press Congress to add to the annual quotas, saying there are not enough Americans with the skills they need.
In Disneyâs case, the Americans were not only available, they were actually working in the jobs.
The H-1B visa program has been great for tech innovation, and the Wrongologist supports it, but this is an egregious abuse of the corporate right to employment at will, and of the spirit of the H-1B visa laws. From the NY Times:
The chairman of the Walt Disney Company, Robert A. Iger, is a co-chairman with Michael R. Bloomberg, the former mayor of New York, and Rupert Murdoch, the executive chairman of News Corporation, in the Partnership for a New American Economy, which pushes for an overhaul of immigration laws, including an increase in H-1B visas.
Companies speak a lot about teamwork, esprit de corps, and group identity, all in the context of helping the company reach its goals. But the Disney lesson is that we’re really good at ignoring those lofty ideals, while driving an anti-employee, mean-spirited chase of a marginal dollar of profit.
If employers really need a foreign employee resource, they should be charged an annual fee of $50K for each H1-B visa they use. For truly unusual skills, it would be worth the fee. For Disney, who is just looking to buy labor for a few dollars less than the going rate for American citizens, it would remove the economic advantage. We need to ask our corporations to stop defending the indefensible.
Republicans shout from the mountaintops about illegal immigrants, while on the other hand, they are quite willing to add to the numbers of H-1B visas, immigration of a kind. Furthermore, H-1Bs allow for chain migration (kids and spouses) as well, and thanks to new rules, H-1B spouses can work as well.
Time to wake up America! Disney’s H-1B’s are the first step in a process. They have been brought in by Disney so that they can gain the experience to manage Disneyâs IT operation. And some time down the road, Disney’s Florida HCL people will work with HCL’s India-based IT workers, allowing Disney to move most of their IT operation over there at a fraction of the cost that Disney pays here.
Corporatism has inverted Henry Ford’s mantra to pay his workers enough to afford his cars. The new mantra is, pay only a few employees enough to afford your goods, and let the government worry about the rest of them.
America has to be more than a spreadsheet and a flag.
Todayâs wake-up is another in our spring bird collection. It is the Orchard Oriole, the smallest of North Americaâs orioles, it builds hanging, pouch like nests during its breeding season. We get both the Baltimore Orioles and these guys in Mid-May:
For those who read the Wrongologist in email, you can view the video here.
Owning a home no longer plays the same role in the lives of Americans that it has in the past. And it is clear that many middle-income Americans cannot realistically aspire to become homeowners anytime soon. A recent survey conducted by the American Institute of CPA’s found that most Americans are now more concerned about having enough money to retire than about becoming a homeowner.
We have written about taxpayer-funded corporate subsidies this week. Let’s talk about the Private Equity (PE) industry, where profit margins are pretty high. By PE we mean investing in assets that include equity securities and debt of operating companies that are not at the time of the investment, publicly traded. Having a number of streams of income coming from a variety of investments or income generating assets is one of the best ways to build wealth. You see, hPE is a re-branding of leveraged buyouts (LBOs) which were the way Wall Streeters built wealth in the 1980s.
In the past 35 years, we have seen a finance-led revolution that has generated fantastic wealth for PE managers. PE has in large part, helped create the growing chasm between America’s most wealthy and everyone else. This is shown in the disproportionate numbers of private equity and hedge fund principals in the top .1% of American wealth. That wealth doesn’t only come from just making a killing when the target company goes public or is acquired, it also comes from favorable tax treatments for the PE company principals and investors.
Although the PE industry is often held up as an exemplar of free-market capitalism, it is surprisingly dependent on government subsidies for its profits. In a typical deal, a PE firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it, or taking it public.
The key to this strategy is debt: the PE firms borrow to invest since, just as with your mortgage, the less money you put down, the bigger the potential return on investment. But debt also increases the risk that companies will go bust, so early on, the amount of debt PE firms employed was conservative.
That has changed in the last 10 years. After using debt to buy them, many PE funds now have their portfolio companies borrow even more. They then use that money to pay themselves “special dividends.” This allows them to recoup their initial investment while keeping the same ownership stake.
Before 2000, big special dividends were not common. But between 2003 and 2007, PE funds took more than $70 billion out of their companies. These dividends created no economic value-they just redistributed money from the company to the private-equity investors.
As an example, in 2004, Wasserstein & Company bought the mail-order fruit retailer Harry & David. The following year, Wasserstein and other investors took out more than $100 million in dividends, paid for with borrowed money. In 2011, Harry and David defaulted on its debt and dumped its pension obligations on the US government. And when an investment goes bankrupt, there are more fees, and maybe more tax write-offs for the PE partners.
Taxpayers are left on the hook. Interest payments on that debt are tax-deductible, and when pensions are dumped, a federal agency, the Pension Benefit Guaranty Corporation (PBGC) picks up the company’s pension liability. That means taxpayers are on the hook for those unfunded pensions.
And the money that PE dealmakers earn is taxed at a much lower rate than normal income, thanks to the US tax code’s carried interest loophole, which permits that income to be taxed at capital gains rates.
Most do not know that the single largest source of investment capital in PE funds is government pension funds. According to Preqin, a database company that tracks investment in PE, approximately 30% of capital in US PE funds is contributed by government pension funds. Government pension funds are usually called “public” pension funds, administered by government employees and governed by officials who are directly elected by the public or appointed by elected officials.
A key point about the power and reach of PE. They have more than $3.5 trillion under management. Assuming normal leverage (30% equity) that gives them $11.7 trillion in buying power. That’s about 40% of the value of publicly-traded firms in the US. Think about the political clout they have by investing government pension money. Not only do PE firms own a huge portion of America’s productive businesses, unlike the diffuse ownership of public companies, they control them outright.
So, PE is a government-sponsored enterprise, both via tax subsidy and via funding. We taxpayers are helping them to fabulous paydays, thanks to our Congress Critters.
If PE firms are as good at remaking companies as they claim, they shouldn’t need tax loopholes to make their money. If we capped the deductibility of corporate debt, and closed the carried-interest loophole, it would not prevent PE firms from buying companies or improving corporate performance.
But it would add to our tax revenues, and that might keep a bridge or two from falling into a river during rush hour somewhere in America.
“The American Dream: You have to be asleep to believe it.” -George Carlin
Regarding Tuesday’s post, “More About Taxpayers Subsidizing Corporations“, which deals with taxpayers subsidizing the low-wage employees of restaurant chains, long-time blog reader Kevin asks: “Why don’t the folks who flip burgers go out and get better jobs?” Excellent question.
Two thoughts. First, they should move up whenever possible, and the chart below about restaurant employee turnover should lead us to believe that they do move out, if not up. When it comes to workplace changes, everyone deserves the chance to move up into higher positions and therefore, this will increase the rate of employee turnover. Research from Work Institute has suggested that 22% of turnover was due to career development and a higher chance of job growth. Being able to excel in your chosen career can only happen if these people decide to make this change. But, whether they leave or not, those jobs will remain at or below minimum wage, and the taxpayers will continue to subsidize these restaurant corporations who underpay them. It falls to the social safety net to make up the difference. Take a look at restaurant employee turnover statistics:
Source: People Report, a division of TDN2k
The burger flippers turnover is the highest among restaurant hourly employees, and it is growing. These are the people who don’t even get tips, so since employee turnover is the highest where wages are the lowest, it’s the burger flippers who move on. This could also be due to job satisfaction they may feel in the workplace. It could be argued that they do not feel the same level of appreciation within a service profession as they would in an office environment that would buy gifts for employees in order to boost their morale in an attempt to keep them for longer.
A second thought is, what jobs can they move up to? Here is a little background:
The US lost more than 8.84 million private sector jobs in the Great Recession. Now, five years after employment hit bottom in February 2010, private sector employment has returned to prerecession levels. The National Employment Law Project (NELP) indicates in a study that low-wage job creation didn’t just happen in the first phases of the recovery, but today, five years in, job growth is heavily concentrated in lower-wage industries. Lower-wage industries accounted for 22% of job losses during the recession, but 44% of employment growth.
Worse, low-wage jobs account for 100% of the net job growth in the economy. Today NELP reports that there are:
⢠958,000 fewer mid-wage jobs than at the start of the recession
⢠976,000 fewer high-wage jobs than in 2008
So, where do the motivated, striving burger flippers go?
The glibertarians say the burger flippers should work hard, save money from their minimum wage jobs, get a better education, and move on to a higher paying job, maybe in an office or a laboratory. OK, that’s possible for some.
They say that Mr. Market determines what the value of a burger-flipping job should be. And, if it isn’t a living wage, the burger flipper should study some more.
But when they move on, odds are that they will move to another low-wage job, more likely than not, in the restaurant industry.
And regardless of what new low-wage job they take, the taxpayers’ subsidy of the Corporatists will continue.
Maybe if the Obama years hadnât decimated the Democratic bench for an entire generation, we wouldnât have to rely on two senior citizens slugging it out for the chance to call the White House their retirement home.
