Category: Economics

Saturday Soother – April 25, 2020

The Daily Escape:

Wildflowers, Hidden Lake, Glacier NP, WY – August 2019 iPhone photo by anadoptabledog

Wrongo shopped at both Costco and at our local chain supermarket, Big Y in the past two days. Both were out of significant items, and not merely paper products.

A hallmark of American culture is the size of our supermarkets, and the dazzling variety of products available. Anyone who has shopped in foreign countries can attest to the difference, so it’s unsettling to see so many bare shelves.

What exactly is going on here? This is a downstream impact of COVID-19 and how we’re fighting the pandemic. We have a finely tuned supply chain, and the shutdown has upended it. On the demand side, commercial buyers of food, like restaurant chains, and commercial bakeries aren’t buying what they bought in pre-COVID times. While consumers are cooking at home, and buying much more than ever before.

On the supply side, there are clear disruptions: Consumer demand for meat has skyrocketed. The WSJ reports:

“US grocers are struggling to secure meat, looking for new suppliers and selling different cuts, as the coronavirus pandemic cuts into domestic production and raises fears of shortages.”

The Journal quotes Jeff Lyons, SVP at Costco:

“I have not seen beef sales and all protein behave this way since the Atkins Diet days…”

US beef production fell 24% compared with a month earlier, pork fell by 20%, and poultry was down 10%, according to estimates from CoBank, an agricultural lender. And wholesale prices are creeping up:

April’s sharp decline in beef and pork prices reflected the drop in demand after the shutdown closed restaurants, while the spike is due to increasing consumer demand when production is down.

The spread of COVID-19 among US meat plant workers has hurt meat production. Companies are trucking poultry and livestock to be processed at more distant plants that remain open. On some farms, pigs are being euthanized because slaughterhouses have closed. In Iowa, Gov. Kim Reynolds dispatched 1,000 National Guard members to help deliver COVID-19 tests to Iowa meat plants so they could get back into operation.

Egg farmers are destroying eggs. Dairy farmers have been dumping thousands of gallons of milk. Some cattle ranchers are sending their herds to early slaughter because the restaurant market is dead: No one is going out for steak & eggs, or a bacon and egg breakfast in a diner. The Hill described more lost food output:

“Some $5 billion of fresh fruits and vegetables have already gone to waste, according to the Produce Marketing Association, an industry trade group.”

We know how the virus outbreaks at food plants hurt meat production, but there are other supply chain problems.

The primary issue is supply chain mismatches caused by the lockdown. In normal times, people get a significant amount of food at restaurants, while many kids eat lunch at school. Our highly specialized supply chains can’t adapt easily or quickly to the lockdown reality.

Wholesalers who focused on restaurants do not have the facilities for packaging food in a way people are used to seeing it on shelves, and grocery stores don’t have relationships with the wholesale producers. The 50-pound bags of flour that mills sell to large bakeries or restaurants are of little use to people needing a five pound bag for a family of four.

Getting food to grocery shelves is also hampered by delivery people and grocery store workers alike who are increasingly calling out sick, either with Coronavirus, or the fear of getting it.

Finally, we’re seeing increased food insecurity. Before the pandemic began, 37 million Americans were considered food insecure. Since the start of the lockdown, about 25 million people have applied for unemployment. The bigger problem now is that so many people have no cash coming in. Meanwhile, food banks are having trouble supplying enough food to people who need it. In parts of America, that problem is far more acute that food shortages, and it’s unlikely to get better soon.

Sadly, we have millions needing food, when farmers are destroying what to them, is surplus food.

But enough of bad news, you’ve had it with a week that saw us hit 50,000 COVID-19 deaths, and Trump grabbing at straws for a Coronavirus cure. Time for our Saturday Soother, a few moments when we forget about Trump, Corona and lockdowns to focus on our breathing, and something a little different.

Today, pull up a socially distant chair and listen to Maude Maggart sing an old standard from the 1930’s, “Deep Purple”. Maggart is Fiona Apple’s sister. Pretty talented family:

Those who read the Wrongologist in email can view the video here.

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Saturday Soother – Brexit Edition, February 1, 2020

The Daily Escape:

Sunrise, Castle Mountain, Banff, Alberta, CN – 2019 photo by anitajwani

(Sunday Cartoons will appear on Monday)

Yesterday, Brexit became official. The UK is no longer part of the European Union.

The decision to stay or go consumed the UK to the exclusion of all else for four years. But listening to the BBC, they now are barely talking about it. For all the arguing about “Leave” or “Remain”, nothing much was really said about what would happen once things got concrete.

It may be hard for Americans to understand, since we are seduced by British accents, but the Tories are dumber than Republicans. One example of what changed on Friday, as the UK Independent observed:

“Brexit day is here, so let us celebrate our biggest victory – the freedom to drink very bad wine.”

So now comes the hard part. Britain has until the end of this year to make a new trade deal with Europe, the US, and with other non-EU countries. The EU is the UK’s largest trading partner. In 2018, UK exports to the EU were £291 billion (45% of all UK exports). UK imports from the EU were £357 billion (53% of all UK imports).

Services accounted for 41% of the UK’s exports to the EU in 2018. Financial services and other business services (including legal, accounting, advertising, research and development, architectural, and engineering) are important categories of services exports to the EU. They made up just over half of UK service exports to the EU in 2018.

Because of the EU’s structure, the parliaments of 27 countries will have to agree to any new deal. Imagine what a “No Deal” would mean starting in 2021: Both Britain and the EU would stand to lose a big chunk of their trade revenue.

It will be fascinating to see which side has the greater negotiating power. For example, the UK only accounts for just 6% of German exports of goods. It accounts for 6.8% of French exports.

The US needs a new trade deal with Britain as well. That deal will have to be approved by the US Congress. The US will want open access to the British markets for its agricultural and healthcare industries. That will conflict with Britain’s own farmers, food regulations and its National Health Service.

Britain will be negotiating these two large, and very complicated deals under severe time pressure. The EU might offer to extend the deadline, but Prime Minister Boris Johnson has said there will be no extensions. Despite Johnson’s promise, comprehensive trade deals take several years to complete, averaging 7-8 years. So there will be little deals announced in steps, with the simplest to agree areas finished first.

There are also the national issues: North Ireland will be integrated economically with Ireland. Having a customs border in the North Sea may prove unwieldy. Scotland preferred to remain with the EU, and voted “Remain”. After Parliament finally voted to Leave, Scotland asked to hold a referendum on leaving the UK, but were turned down by the Tories. They may try again to secede over the Prime Minister’s objections.

These new trade deals may be on less favorable terms than what the Tories told the voters. As an example, one argument for Brexit was that the UK would regain exclusive fishing rights within its economic zone. But some EU countries will likely ask for additional fishing rights in British waters in exchange for something Britain urgently needs.

We won’t know the outcome for five to ten years from now, but it’s likely that Great Britain will be less great than it is today.

What with the impeachment show drawing to a conclusion without calling witnesses, and the impending food fest of Super Bowl Sunday, it’s time for our Saturday Soother.

Our one oasis of calm in a week of crisis.

Let’s start by brewing up a big mug of Ethiopia Shaskiso Natural ($18/12oz.) roasted by Michigan’s own Battlecreek Coffee Roasters. The roaster says it tastes of strawberry and cocoa supported by spice-toned florals.

Now, settle back by the fire and listen to Telemann’s Concerto in D major for Violin, Cello, Trumpet and Strings, played live by the Bremer Barockorchester, in 2015:

Those who read the Wrongologist in email can view the video here.

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College Enrollment is Down, Student Debt is Way Up

The Daily Escape:

Cathedral Rock at sunset, Sedona AZ – 2019 photo by microadventures

The Student Clearing House reports that the college student headcount of undergraduate and graduate students combined fell by 1.3% in the fall semester of 2019 over the same semester last year. That equals 231,000 fewer students compared to 2018.

This is the continuation of a long decline. The peak year was the fall semester of 2011, when 20.14 million students were enrolled. Since then, enrollment has dropped by 10.8%, or by 2.17 million students. Here’s a helpful graph by Wolf Richter:

The report covers 97% of enrollments at degree-granting post secondary institutions that are eligible to receive federal financial aid. It does not include international students, who account for just under 5% of total student enrollment in the US.

Women by far outnumbered men in total enrollment in the fall semester of 2019 with 10.63 million women enrolled, compared to 7.61 million men, meaning that overall there are now 40% more women in college than men.

Inside Higher Ed reports that community college enrollments declined by 3.4%. Four-year public institutions saw a drop of 0.9%. Four-year private institutions bucked the trend with an increase of 3.2%. However, the Student Clearing House said most of this increase was due to the conversion of large for-profit institutions to nonprofit status. Grand Canyon University, for example, successfully made the transition last year.

Wolf Richter says that the 10.8% decline in enrollment since 2011 comes even as student loan balances have surged 74% over the same period, from $940 billion to $1.64 trillion:

Looking at the two charts, it’s clear that over the last eight years, enrollment has declined in a straight line at about 1.35% per year. And over the same eight years, student loan debt has increased in a straight line at nearly $90 billion per year!

We’re seeing three trends: First, the decline in enrollments. Second the decline in men attending college. Third, the soaring costs of college leading to soaring student debt.

No one has the answers to all three, but the decline in enrollments may have a demographic element. We are approaching the tail end of the college-aged millennial generation. Higher education has been facing demographic headwinds for a decade. The post-millennial generation is simply smaller than the previous generation.

Meanwhile, a big part of the enrollment peak spike in 2009-2012 period was due to people choosing education to avoid unemployment during the Great Recession. And 25% of the enrollment decline is due to the for-profit diploma mills losing their government support after years of robbing their “students” blind.

The rapidly increasing costs of college are a burden that can also drive down enrollments. The numbers do not favor investing in a college degree as much as they used to. Back in the day, a good entry level job’s salary was about 4 times the annual tuition. Now it’s under 2 times. If you check out some of the terrible numbers for 20-year net Return on Investment (ROI) on payscale.com, it’s clear that many colleges and universities have negative or relatively small ROIs.

OTOH, there’s still a massive income gap between people with a college degree and those without one. And outside of a few small business owners, there’s no way around it. College is the only reliable way to get into the middle class, and stay there.

The college industrial complex knows that it has a stranglehold on your future, and it will try to suck as much money out of you as possible.

The solutions involve some of the things that Sanders, Warren and others are talking about. Wrongo is for making college free for all. He isn’t for debt forgiveness, but for granting interest-free loans to students. Those loans should be carried only by the federal government.

Cost containment is the biggest issue. Online education is now readily available, and saves on both tuition and room and board. The economy is stronger, so on-the-job training is returning, and a lot of specific how-to knowledge is now available online.

Except for the male-female imbalance, much of this is solvable.

Finally, higher education serves many purposes in our society. As a people, we need it for its practical value, but also for sharpening our ideals, nurturing our growth, advancing our knowledge, and our arts.

Despite a popular subculture of anti-intellectualism and doubt, we should still know that a people without ideals are lost.

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Sunday Cartoon Blogging – December 15, 2019

Paul Volcker died last week. It’s likely that few readers know who he was, or what he did. He was one of the most important persons in finance in the last 50 years.

Volcker was Chairman of the Federal Reserve under Carter and Reagan, until Reagan fired him in 1986. He is widely credited with having ended the high levels of inflation in the US during the late 1970s and early 1980s. Earlier, he was an important part of Nixon’s team that took the US off the gold standard in 1971.

In that time of red-hot inflation, Volcker’s goal was to stop the growth of prices, while keeping the dollar strong globally. Back then, Americans saw inflation as our most pressing economic problem. Volcker’s goal was to reduce wages as a way to reduce price inflation. As an example, during his time as Fed Chair, Volcker carried a card listing the wages of unions in his pocket to remind himself that his early goal was to crush the unions.

When Reagan and his people complained that interest rates were too high, Volcker would pull out his card on union wages and say that inflation would not come down permanently until labor “got the message and surrendered.” Volcker said that the prosperity of the 1950s and 1960s was a:

“hall of mirrors”, and that the…”standard of living of the average American must decline.”

Volcker’s jacking up of interest rates eventually purged inflation from the system. Along the way, it hurt small businesses, farms, banks, and home owners who needed a mortgage. Mortgage rates reached a peak of 18.63% in October 1981.

While Wrongo briefly worked for Volcker at the big bank in the early 1970’s, we had no relationship.  Wrongo reported to a guy, who reported to a guy, who reported to Volcker. Despite that (minimal) connection, Wrongo knows that Volcker’s stint at the Fed helped to shatter the American middle class. It might not have been his intent, but it was what he did. On to cartoons.

Trump outdoes Obama:

McConnell says he’ll take his instructions from the defendant:

 

Trump’s Xmas list:

The people would rather have a lump of coal:

21st Century Wise Men:

Greta vs. the Rest:

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Auto Loan Delinquencies Are Rising

The Daily Escape:

Tetons twilight from Snake River overlook, WY – November 2019 photo by timtamtoosh. Ansel Adams once shot a picture from this spot.

From Wolf Richter:

“Serious auto-loan delinquencies – auto loans that are 90 days or more past due – in the third quarter of 2019, after an amazing trajectory, reached a historic high of $62 billion, according to data from the New York Fed today….”

Total outstanding balances of auto loans and leases in Q3, according to the New York Fed, rose to $1.32 trillion. That $62 billion of seriously delinquent loan balances are what auto lenders, particularly those who specialize in subprime auto loans, are now attempting to either get to current status, or to repossess. If they cannot cure the delinquency, they’re hiring specialized companies to repossess the vehicles, which will then be sold at auction. And the repo business is booming!

The difference between the loan balance and the proceeds from the auction, plus all of the costs involved, are what a lender stands to lose on each delinquent loan.

Worse, lenders are still making new subprime loans, and a portion of those loans will also become delinquent, and a smaller portion of them will default. Wolf helpfully adds a chart that shows today’s level of delinquencies as a percentage of the auto loan portfolio is the same as it was in 2009, when we were in the middle of the Great Recession:

It’s useful to remember that in 2009 and 2010, the US was confronting the worst unemployment crisis since the Great Depression. People were defaulting on their auto loans because they’d lost their jobs. That isn’t the case today, we’re near full employment.

Let’s differentiate “Prime” auto loans and leases from “Subprime”. Prime auto loans have minuscule default rates. Of the total of $1.3 billion in auto loans and leases outstanding, according to Fitch, Prime auto loans currently have a 60-day delinquency rate hovering at a historically low 0.28%.

That means that most of the delinquencies are in the subprime category. In fact Wolf says: (emphasis by Wrongo)

“Of the $1.32 trillion in auto loans outstanding, about 22% are subprime, so about $300 billion. Of them roughly, $62 billion are seriously delinquent…around 20% of all subprime loans outstanding.

We know that the subprime delinquencies are not caused by an employment crisis or, by the brutal recession we endured during the 2008 financial crisis. Employment is still growing, and unemployment claims are near historic lows. But subprime auto loans are defaulting at very high rates.

What’s going on? It’s car dealers’ greed. They’re striving to sell more cars. Customers with a subprime credit rating have already been turned down when they try to buy things on credit. But, when they walk on a car lot, their bad credit rating is magically no longer an issue.

The dealers know they’re sitting ducks, who won’t negotiate. They accept the price, the monthly payment, and the trade-in value. They’re just happy to be in a new car. When they drive off the lot, they have a high monthly payment, which, since they already have trouble making ends meet, will soon be late, or in default.

The subprime car buyers really have little choice if they need a car to get to work. Poor people are smart about doing what it takes to survive: If you don’t have a down payment or a good credit rating, and need a car to keep your job, it means a bad deal is better than no deal.

They take the bad deal because if things get worse, they probably will only lose the car.

The kicker is that auto loans aren’t the loan category with the highest delinquencies. Student loans have even higher delinquencies:

  • Outstanding student debt stood at $1.50 trillion in the third quarter of 2019, an increase of $20 billion from Q2 2019
  • 9% of aggregate student debt was 90+ days delinquent or in default in Q3 2019

The student loans total of about $1.5 trillion, is higher than the $1.32 trillion of auto loans.

The system is broken. Someday soon, the job market will deteriorate. We’ll be back listening to why we should bail out lenders and investors who lend, securitize, and sell these loans to investors who are chasing yeild.

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Monday Wake Up Call – June 3, 2019

The Daily Escape:

Mont Rotui, Moorea, French Polynesia – 2019 iPhone photo by mystackhasoverflowed

Time to wake up America! Donald Trump has proven once again that he has no understanding of economics. From the Wall Street Journal:

“President Trump will award the Presidential Medal of Freedom to economist Arthur Laffer, one of the pioneers of the idea that tax cuts can boost government revenue, the White House said Friday.

Mr. Laffer is one of the founding theorists of supply-side economics, a school of public economics that rose to prominence during the Reagan administration and returned to the fore in the run-up to the 2017 package of tax cuts that Mr. Trump signed into law.

The White House described Mr. Laffer as “one of the most influential economists in American history,” and said his “public service and contributions to economic policy have helped spur prosperity for our Nation.”

Laffer is famous for his drawing his Laffer curve on a napkin, illustrating his idea to Dick Cheney and Donald Rumsfeld at a dinner in 1974. His curve showed that increases in tax rates will eventually cause government tax revenue to decrease, because people will begin to work and earn less. This was then taken to its theoretical limit, saying that tax cuts could pay for themselves by spurring economic growth.

The WSJ calls Laffer “one of the pioneers of the idea that tax cuts can boost government revenue”. Isn’t it weird that the fact that his “idea” has been completely disproven in the real world, doesn’t seem to matter?

Conservative economics is not a branch of economics, it’s a branch of Conservatism.

The Laffer curve was successful at its real purpose, providing a basis to funnel more money to corporations and the rich. Republicans traffic in propaganda, not knowledge.

Last year, Laffer co-wrote a book titled “Trumponomics: Inside the America First Plan to Revive Our Economy.” Laffer’s co-author was Stephen Moore, another conservative who styles himself as an economist. Earlier this year Trump nominated Moore to serve on the Federal Reserve Board of Governors. Moore had to withdraw, amid bipartisan opposition from Senators.

Laffer was the advisor behind the notorious Kansas state income tax plan that ruined the state’s finances. In 2012, Then-Kansas Gov. Sam Brownback passed a package of tax cuts based on Laffer’s ideas. The result was that Kansas lagged behind neighboring states with similar economies in nearly every major category: job creation, unemployment, gross domestic product, and taxes collected.

In 2017, the Kansas legislature repealed the Laffer/Brownback tax cuts. After the repeal, state taxes were boosted by $1.2 billion.

Laffer has spent years preaching his idea that almost any tax cut for businesses and the rich could potentially pay for itself. That idea has become the bankrupt conceptual backbone of the Republican Party’s entire economic theology.

For the 2017 Trump tax cuts, his administration also borrowed Laffer’s idea. Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow, have repeatedly claimed that the Trump tax cuts will pay for themselves. But, a new report finds that the tax cuts were responsible for less than five percent of the growth that is needed to offset the revenue loss from the Trump tax cuts.

We must point out here that Larry Kudlow does not hold a degree in economics. He was once fired from an investment bank for doing cocaine. Imagine just how much cocaine you’d have to do to get fired on Wall Street in the 1980s.

Trump’s now added the Presidential Medal of Freedom to the American traditions he’s debasing. Other economists awarded the Medal of Freedom include Gary Becker, Milton Friedman, John Kenneth Galbraith and Robert Solow. Laffer can’t carry their briefcases.

There may be no man alive who has done more damage to America’s understanding of taxes and their effect on economic growth than Art Laffer.

Evidently, Trump is grading him on a curve.

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The Long Battle to Reform Capitalism

The Daily Escape:

Poppies in bloom, Southern California – March 2019 photo by Leslie Simis. This annual explosion of color is enhanced this year by extraordinary rainfall

You can call the period in US history from FDR to Nixon “America’s social democratic era”.  A collection of politicians had hammered out the policies and regulations that became FDR’s New Deal in America. It became a period of post-war prosperity during which inequality narrowed, economic growth boomed, and optimism reigned.

The characteristics these policies shared were reciprocity and generosity. For the citizen, there was some form of social support that grew from Social Security in 1935 through the 1960’s with Medicare and Medicaid. In 1970, Nixon implemented the Environmental Protection Agency. There was also a willingness to care for the disadvantaged. Our Marshall Plan and our commitment to foreign aid are both great examples. The success of social democracy in the postwar era weakened the market’s power to act independently within our society.

But then things changed. Our government’s role became a helpmate for corporations, financial institutions, and their lobbyists. The result has been growing inequality between suppliers of capital and the suppliers of labor, even of highly educated labor, like teachers and professors. Economic growth slowed, and we have developed a permanent underclass that seems impervious to repair.

Yesterday, we talked about Economic Dignity, and how focusing on it might help solve inequality. Today’s market economics is partly based on the ideas of Jeremy Bentham and John Stuart Mill, economists who viewed human beings as supreme over the state. As individuals who would make rational decisions to maximize utility. It turned out to be incomplete, since it left out key dimensions of human psychology, like the individual’s need for social esteem or respect. In other words, they ignored economic dignity.

Couple that with Milton Friedman’s idea, that the mission of the firm is to solely maximize profits, that any responsibilities to its employees, consumers, or society should be ignored. Profit maximization at all costs has done great damage to American society. And conservatives and free marketers have married the ideas of these three economists, making the removal of government from markets their primary mission.

But what they call “the market” is really a bundle of regulatory (and non-regulatory) rules by which market activities operate. The mix of free and regulated market activities can be changed, even though capitalists say we shouldn’t change the rules, because it adds uncertainty to markets.

Just because in baseball, three strikes and the batter is out, or with four balls, there is a free pass to first base, doesn’t mean it has to be that way. It could be five strikes and you’re out, or three balls is a walk.

As an example, we tend to fight unemployment with “trickle-down” solutions. That means we bribe the rich and corporations to hire more. But, the bribe is always bigger than the payrolls that are generated.

We could fight unemployment with fiscal policy, such as infrastructure spending by the government. It would employ many, possibly hundreds of thousands, and there would be no need to pay any entity more than was warranted by the tasks at hand.

America needs a return to what economist Paul Collier calls the “cornerstones of belonging”— family, workplace, and nation, all of which are threatened by today’s market driven capitalism. That means capitalism has to return to the ethics of the New Deal. Joseph Stiglitz, Nobel laureate in economics, says: (parenthesis and emphasis by Wrongo)

Over the past half-century, Chicago School economists, (including Milton Friedman) acting on the assumption that markets are generally competitive, narrowed the focus of competition policy solely to economic efficiency, rather than broader concerns about power and inequality. The irony is that this assumption became dominant in policymaking circles just when economists were beginning to reveal its flaws.

Stiglitz says we need the same resolve fighting for an increase in corporate competition that the corporations have demonstrated in their fight against it. We’ll need new policies to manage capitalism.

It means higher taxes on profits.

It means paying workers more.

It means rebuilding public assets like roads.

It means teaching students to be both technically capable, and grounded in their values.

Speaking of needing to teach our students, if you think we’re not in a rigged game, think about one “USC student” who is part of the admissions fraud scandal, Olivia Jade Giannulli. She was on the yacht of the Chairman of USC’s Board of Trustees when she heard about it.

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Monday Wake Up Call – December 3, 2018

The Daily Escape:

Boston Public Library – photo by joethommas

The NYT’s David Brooks:

We’re enjoying one of the best economies of our lifetime. The GDP is growing at about 3.5% a year, which is about a point faster than many experts thought possible. We’re in the middle of the second-longest recovery in American history, and if it lasts for another eight months it will be the longest ever.

So everything’s good, no? Not really. More from Brooks: (emphasis by Wrongo)

Researchers with the Gallup-Sharecare Well-Being Index interviewed 160,000 adults in 2017 to ask about their financial security, social relationships, sense of purpose and connectedness to community. Last year turned out to be the worst year for well-being of any since the study began 10 years ago.

And people’s faith in capitalism has declined, especially among the young. Only 45% of those between 18 and 29 see capitalism positively, a lower rate than in 2010.

Brooks’ conclusion? It’s not the economy, we all just need more community connections.

His is another attempt to dress up the now-failing neoliberal economics. Things look good today from some perspectives, but our economy is crushingly cruel from others. Brooks seems to think that millions of Americans are struggling to pay their rent or mortgage, education loans, health care insurance or buy groceries because they have failed to master the art of networking in their neighborhoods.

Alienation is behind the rise of Trumpism, and the rise of populism across the world. In that sense, Brooks is correct, but the leading cause of people’s alienation is economic inequality.

And the leading cause of economic inequality is corporate America’s free rein, supported by their helpmates in Washington. Last week, Wrongo wrote about the exceptional market concentration that has taken place in the US in the past few years. He suggested America needs a revitalized anti-trust initiative. In The Myth of Capitalism, authors Jonathan Tepper and Denise Hearns write:

Capitalism without competition is not capitalism.

For decades, most economists dismissed antitrust actions as superfluous, so long as consumers were not the victims of price-gouging. Monopoly capitalism is back, and it’s harmful, even if a company’s core product (like Google’s and Facebook’s) is free to consumers. As we wrote last week, there’s excessive corporate concentration in most industries, including air travel, banking, beer, health insurance, cell service, and even in the funeral industry.

All of this has led to a huge and growing inequality gap. That means there is little or no economic security for a large and growing section of the American population. People see their communities stagnating, or dying. They feel hopeless, angry, and yes, alienated.

One consequence is that we’ve seen three years of declining life expectancy, linked to growing drug use and suicides. We seem to be on the edge of a social catastrophe.

But our real worry has to be political. People could become so desperate for change that they are willing to do anything to get it. The worry then, is that few vote and a minority elects a strong man populist leader, simply because he/she tells them what they want to hear. That leader can then go out and wreak havoc on our Constitutional Republic.

After that, anything could happen.

Despite what Brooks thinks, we don’t have a crisis of connections. It’s a crisis of poorly paying jobs, job insecurity, and poverty. When people look at their economic prospects, they despair for their children. Doesn’t it matter that in America, health care, education, and transportation all lag behind other developed countries?

The unbridled ideology of free markets is the enemy. Our problem isn’t that individual entrepreneurs went out and took all the gains for themselves, leaving the rest of us holding the bag. It’s more about how neoliberal economics is used both by government and corporations to justify an anti-tax and anti-trust approach that has led to extreme wealth and income concentration in the top 1% of Americans.

The reality is that the nation’s wealth has become the exclusive property of the already prosperous.

We need to wake up America! We have to stop for a second, and think about how we can dig out of this mess. When America bought in to FDR’s New Deal programs 75 years ago, we entered an era we now think back on nostalgically as “great”.

And it isn’t enough to talk about how we can look to Sweden or Norway as economic models. Both have populations of under 10 million, and our society is far less homogeneous than theirs.

We need a uniquely American solution to this problem. It will involve reforming capitalism, starting with tax reform, and enforcing anti-trust legislation.

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Capitalism Must Be Reformed

The Daily Escape:

Mt. Fuji, Japan at sunset – November, 2018 photo by miles360x

From the Economist:

In 2016, a survey found that more than half of young Americans no longer support capitalism.

One reason that young people have lost faith in capitalism is the exceptional market concentration that has taken place in the US in the past few years. US firms have gotten bigger, often by acquiring their competition. This is true across many markets. Vox reports that: (parenthesis by Wrongo)

Four companies…control 97% of the dry cat food sector: NestlĂ©, J.M. Smucker, Supermarket Brand, and Mars. According to the report, NestlĂ© has a 57% (share of)…the industry, owning brands such as Purina, Fancy Feast, Felix, and Friskies. Altria, Reynolds American, and Imperial have a 92% market share of the cigarette and tobacco manufacturing industry. Anheuser-Busch InBev, MillerCoors, and Constellation have a 75% share of the beer industry. Hillenbrand and Matthews have a 76% share of the coffin and casket manufacturing industry.

On November 26th, the Open Markets Institute, an anti-monopoly think tank, released a data set showing the market share of the largest companies in each industry. Pulling the data together was a challenge, because the FTC halted the collection and publication of industry concentration data in 1981, during the time of Ronald Regan. Now, David Leonhardt of the NYT has turned it into a table:

As you can see, big companies are much more dominant than they were just 15 years ago. More from Leonhardt:

The new corporate behemoths have been very good for their executives and largest shareholders — and bad for almost everyone else. Sooner or later, the companies tend to raise prices. They hold down wages, because where else are workers going to go? They use their resources to sway government policy. Many of our economic ills — like income stagnation and a decline in entrepreneurship — stem partly from corporate gigantism.

Sarah Miller, deputy director of the Open Markets Institute, told Vox: (brackets by Wrongo)

… [When] you go to the store, you see all of these brands, but guess what? They’re all being operated by the same companies…She called the system a scam economy where competition is an illusion, and choice is an illusion.

The primary issue with corporate concentration is its potential to drive up prices. The fewer sellers, the fewer choices consumers have for goods and services, and thus, there is less pressure for the big competitors to hold prices down.

Even if many consumers don’t immediately realize they are victims of concentration, it’s visible when millions of homes only have one internet provider. Or, when four cellphone providers control 98% percent of the market (Verizon, AT&T, T-Mobile, and Sprint). And if the T-Mobile and Sprint merger plan goes through, there will be just three.

Ultimately, monopolies aren’t just an economic problem. They are also a political one. Democrats believe that anti-monopolism can be a political winner. It’s a way to address voters’ anxiety over high drug prices, digital privacy, and low wages.

We have been at this rodeo before. At the start of the 20th century, we broke up monopolies in railways and energy. In 1984, we broke up AT&T, only to see the “Baby Bells” recombine in the 1990s. We’ve simply stopped enforcing our anti-trust laws over the past 40 years.

Meanwhile, the public has been manipulated to believe that ever larger companies are in their best interests. We celebrate the “right” of large corporations to operate in unfettered ways.

But, Econ 101 shows that the trajectory of a monopoly starts with economies of scale, and ends with economies of exploitation. And remember that six corporations own 90% of the media. We won’t hear much about wrongdoing at Amazon from the Washington Post.

The required anti-trust laws are already on the books, but interpretation of them has changed over the years under Republican administrations. Eventually, we will have to break up existing giants, like we did before. One obvious candidate is Amazon, a company that will soon dominate the supply chain and all logistics in the US.

Facebook, which has gobbled up Instagram and WhatsApp, may be another candidate.

America is very late in addressing the negative outcomes of free markets, so there’s no time like the present to begin to Make America Love Small Business Again.

Voters need to push for anti-trust enforcement, which can only be done by the federal government. We have to insist that the protection of citizens is more important than protecting the 1%.

Let’s close with this quote from Louis Brandeis: “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

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We Saved GM For This?

The Daily Escape:

Redfish Lake, ID – 2018 photo by potatopatriot

From the Guardian:

General Motors announced yesterday that it will halt production at five North American facilities and cut 14,700 jobs as it deals with slowing sedan sales and the impact of Donald Trump’s tariffs.

The cuts will also hit 15% of GM’s 54,000 white-collar workforce, about 8,100 people. And some 18,000 GM workers have already been asked to accept voluntary buy-outs. By next year, it will no longer make the Buick LaCrosse, the Chevrolet Impala, or the Cadillac CT6 sedan. It’s also killing the Chevy Volt plug-in hybrid. GM’s CEO Mary Barra:

We recognize the need to stay in front of changing market conditions and customer preferences…

“Changing market conditions” means that GM’s sales are down despite offering enormous cash incentives to potential buyers. GM’s new-vehicle deliveries in the US plunged 11% in the third quarter, and are down 1.2% for the year. In Canada, GM’s sales have dropped 1.6% so far this year.

GM’s goal in restructuring is to save $6 billion in cash flow a year by year-end 2020. But saving all this money will cost a lot: GM estimates it at $3.0 billion to $3.8 billion, including asset write-downs, pension charges, and up to $2.0 billion in employee-related and other cash-based expenses.

GM will have to borrow this money. They said they expect to fund the restructuring costs through a new credit facility. The money has to be borrowed because GM blew through $13.9 billion in cash on share buybacks over the past four years:

Source: Wolfstreet.com

Despite spending $14 billion on share buybacks, the price of GM’s shares fell 10% over the same period.

You’d think that GM, a company that went bankrupt not too long ago, would be conservative in how it uses its cash. Nope, they wasted their cash on stock buybacks, and now they have to take out loans in order to reposition the company in its market.

Failing to anticipate where their market is going isn’t a new GM story. It had a 46% share of the car market in 1961, and now has a 17.6% share. They emerged from bankruptcy in 2009, only to be laying off workers and shutting plants in 2018.

Some history: Through the Troubled Asset Relief Program, the US Treasury invested $49.5 billion in GM in 2008 and recovered $39 billion when it sold its shares on December 9, 2013. We lost $10.3 billion. The Treasury invested another $17.2 billion into GM’s former financing arm, GMAC (now Ally). The shares in Ally were sold on December 18, 2014 for $19.6 billion netting $2.4 billion.

Net, GM has cost taxpayers $7.9 billion, while the top decision-makers spent $14 billion largely to enrich themselves.

How were they enriched? Share buybacks boost stock prices. Usually the salary and bonus plans for top executives in public companies are keyed to share price, so the incentive to prop up the share price includes a personal reward. The Chairman and Board set the compensation plans for the CEO and C-suite. The composition of Boards is strongly influenced by the major shareholders, including the large stock funds, who want share price gains, along with a few buddies of the CEO.

We’ve just witnessed a decade of stock buybacks by large firms. They are doing that as opposed to investing in R&D, plant efficiency or market expansion. But companies can only go so far with financial engineering before they actually have to improve their businesses, and now GM has been burned by share buybacks.

This is more corporate greed that leads to the little guy facing real suffering when jobs are lost.

GM is a shot across the bow. The auto industry will follow with additional capacity reduction. Volkswagen has already warned that the shift to Electric Vehicles (EV’s) will drastically cut employment at its plants that manufacture internal combustion (IC) components. EV vehicle production is far less costly than IC vehicle production, so this will be a real and ongoing issue.

OTOH, car manufacturers all have an EV option, but people are still buying Toyota’s, Honda’s and Mazda’s, even though only a few are EV’s.

This new GM “plan” seems more like a smoke screen for being caught AGAIN behind a market that is moving away from them.

America: A sucker for saving GM in 2008.

And possibly, a sucker-in-waiting when the latest, greatest plan to make GM great again only works out for GM’s executives.

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