Multinational Corporations – The Wrongologist

The Bridge Collapse Will Mean More Socialized Losses

The Daily Escape:

Ceanothus, Black Mountain Preserve, San Diego, CA – March 2024 photo by Michelle Duong

Everyone knows about the cargo ship MV Dali that struck the Francis Scott Key Bridge (FSK) in Baltimore, causing it to completely collapse into the frigid Patapsco River. Currently, we know that six people are presumed dead, while two people were recovered alive. Let’s talk about the ways capitalism figures into the FSK bridge collapse.

The BBC reports that:

“The America Pilot’s Association provided details on the ship that crashed into the Baltimore bridge. The association says the ship lost full power, with no lights, no electronics and no engine propulsion, making it essentially a “dead ship” within 20 to 30 seconds. The group says lights came back on in the ship thanks to an emergency generator, but that doesn’t give the engine power. Video shows lights flicker back on briefly before the vessel hits the bridge.”

There are backup generators on ships because power can fail at critical times. In the case of the MV Dali, it has one propeller driven by one engine. The fuel and steering systems of the ship require electricity to function.It is believed that the Dali had 3-4 backup generators, but did they function as designed?

Wrongo knows from his experience with backup generators in the commercial world that they don’t start up instantaneously. It might take them 30-60 seconds to start and longer to come up to full power to restore control of the ship. Without electric power, both the navigation and the steering systems would have been disabled in the critical minutes prior to the collision. No one on the ground in the Port of Baltimore performs testing to see if the MV Dali’s back-up generators are working properly. Why? Because it would be very costly to do.

There are several other factors unique to shipping that will make it difficult for Maryland or US taxpayers to collect enough to cover all of Maryland’s costs from the ownership of the MV Dali. From VOX:

“The Dali was a Singapore-flagged ship, with an all Indian-nationality crew, operated by the Danish company Maersk….”

This organization structure, dividing ownership and operations, is a classic method used in shipping to limit liability when bad things happen, like when your vessel knocks down a bridge in a foreign country.

Cargo ships have become exponentially bigger while US bridges have been aging. When the Francis Scott Key Bridge was being built between 1972 and 1977 the average container ship carried between 500-800 twenty-foot shipping containers (called TEUs). But they ballooned to an average of 4,000 TEUs by 1985. The MV Dali, manufactured in 2015, had a capacity of 10,000 TEUs. According to bridge experts, no bridge pylon could have survived being hit by a vessel of this size.

This continuous upsizing has pitted US ports against each other in order to attract bigger vessels. The 2016 expansion of the Panama Canal caused ports along the US East Coast to dredge their harbors and build higher bridges to accommodate the larger ships now traveling through the Canal.

Back in 2015, Wrongo wrote about the upsizing of US bridges:

“Consider NJ, where, at high tide, 151 feet of empty air lies between the waters of the Kill Van Kull and the deck of the Bayonne Bridge. The Kill, a narrow tidal strait between Staten Island, NY and Bayonne, NJ, is one of the busiest shipping channels in the country. When the Bayonne Bridge opened in 1931,151 feet easily accommodated the world’s largest vessels. But the new ships won’t fit, so, the roadway will be elevated…to 215 feet, more than enough to let these big ships pass underneath. The five-year Bayonne Bridge project costs $1.3 billion.”

This imposed costs on NJ taxpayers beyond what it should have, because then-Gov. Christie (R), signed a bill that ended the collection of any cargo facility charge by the Port Authority of New York and New Jersey. Christie was attempting to offer something to ship owners and operators that would make Bayonne more competitive vs other US ports.

So the taxpayers of NY & NJ not only paid for allowing the bigger Panamax ships under the Bayonne Bridge, but no ocean-going vessel had ANY stake in paying the costs of that bridge expansion. Instead, NJ turned to a “Public-Private Partnership” to finance this project.

The Port of Baltimore also expanded to accommodate supersized ships in 2013, but it didn’t need to raise the height of the FSK bridge. Since then, it has grown into the 9th-busiest port for receiving foreign cargo. The Port of Baltimore is the largest in the US for roll-on/roll-off (Ro-Ro) ships carrying trucks and trailers.

Meanwhile, the FSK bridge has remained largely unchanged since the 1970s. From 1960 to 2015, there were 35 major bridge collapses worldwide due to ship or barge collisions, 18 of which happened in the US.

There are now about thirty ships stranded in the Harbor. They will stay there until the damaged bridge remains are removed from the ship channel. That includes container ships, Ro-Ro ships, and bulk carriers. There are also three US Naval ships stranded there. The collapse is almost sure to create a logistical nightmare for months, if not years along the East Coast. The accident will also snarl cargo and commuter traffic.

And who will pay the costs to repair the bridge, or compensate the people who died, or cover the lost revenues for the many years it will take to rebuild the bridge? Or the tax receipts that Baltimore won’t be in a position to charge while the port is closed?

According to Business Insider, the majority of the financial fallout is likely to lay primarily with the insurance industry:

“Industry experts told the FT that insurers could pay out losses for bridge damage, port disruption, and any loss of life. The collapse could drive “one of the largest claims ever to hit the marine (re)insurance market…”

The Dali is covered by the Britannia Steam Ship Insurance Association Ltd., known as Britannia P&I Club, according to S&P Global Market Intelligence. Britannia is one of 12 mutual insurers included in the International Group of P&I Clubs, which maintains more than $3 billion of reinsurance cover. Although the ship’s owner and it’s operator have insurance, their policies will in no way cover the all-in costs of this event.

Some are saying that this is a “black Swan” event. But this is almost certainly the result of operational pressure for more containers, faster turnaround, and more profit. The ship owners have traded reliability for economy. Unless we force the container trade to transition to more reliable and more costly vessels, we’ll continue to see events like this every few years.

That’s the price of cheap goods in our stores and of the profits it generates for ship owners.

Once again, the losses will be socialized, and the US taxpayer will be gouged again, all in service to our capitalist overlords who will laugh all the way to the bank. Wrongo certainly isn’t a Marxist, but Marx was absolutely right when he said that capitalism contained the seeds of its own destruction.

Why is it that no legislator is willing to consider the costs of externalities (a cost that is caused by one party but financially incurred by another) to its taxpayers when they approve partnering with big industry?

Are the tax revenues in Baltimore going to be enough to cover the costs to all US taxpayers when the US government rebuilds the FSK bridge? They will not. You know they’ll be minuscule compared to the real costs.

And the big shipping players will sail off towards the horizon with hardly a financial scratch.

Saturday Soother – May 20, 2023

The Daily Escape:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Late Stage Capitalism

The Daily Escape:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“….threatening the very underpinnings of society.”

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

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

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

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

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

Sources and reading list:

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

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

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

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

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

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

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

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

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

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

Alternative Views:

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

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

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.

Saturday Soother – August 13, 2022

The Daily Escape:

Arches NP, Moab, UT after rainstorm- August 2022 photo by Ian Coulter

A few words today about cars. Oil Price has an article about car quality:

“J.D. Power published its latest report this past weekend. The 2022 U.S. Initial Quality Study (IQS) took the time to highlight the issues currently afflicting the industry. However, they also called out “premium” car companies for their extensive quality issues.”

According to Forbes, Kia, Buick and Hyundai topped this year’s dependability rankings. Volvo, Ram, and Land Rover ranked at the bottom. J.D. Power’s research showed that many European brands struggled with technology at the 90-day mark of a new vehicle’s ownership.

Apparently, J.D. Power saw the highest number of vehicle problems reported in their 36-year history, with an 11% increase in problems per 100 vehicles, compared with 2021. The report also stated that while vehicle quality has declined across the board since the pandemic, pricier models had more quality issues than more affordable cars.

Oil Price says that the increase in problems is caused by cars having more “bells and whistles” than in the past. And, these high-end features require increasingly rare components. As an example, Wrongo didn’t know that BMW now offers its heated seat function on a subscription basis.

Another thing that can go wrong when your ass is cold.

Oil Price quotes J.D. Power’s Director of Global Automotive, David Amodeo:

“…automakers continue to launch vehicles that are more and more technologically complex in an era in which there have been many shortages of critical components to support them.”

Big picture, the question is whether there is a market for simpler, more reliable cars. The success of Dacia in Europe seems to indicate that the answer is yes. Dacia is owned by Renault; their cars are a mix of well proven hand-me-down components mated to modern compact gas engines. Their simplicity and toughness is appreciated in France and their residual value stays high.

But this is an unlikely market in the US.

Without being a Luddite, is anyone capable of backing up a car using only the rear view mirror? Did the high-definition backup camera become necessary because American drivers became incompetent?

And what about: Automatic headlights? Power windows? Power locks? Remote (vs. mechanical) keys? LCD touch screen dashboards? Automatic climate control? Cell phone integration? All of these improvements mean that your new car contains about 1,400 microchips.

Some microprocessors have been added to meet US regulations, like engine control to reduce emissions. Then there are things that make assembling the cars easier. For example, electric windows are now controlled by a circuit board, so that the manufacturer doesn’t have to run 10+ wires to the driver side door.

Still, Wrongo thinks that most car electronics are a true value-add. Think air bags, or blind-spot mirror warning, and radar-assisted cruise control. These things add to the cost of the car and as we’re discovering, add to the risk of parts shortages.

The chip shortage isn’t going away. The auto manufacturers have contracted for their chips and sub-components on a long-term basis. They aren’t interested in taking a financial hit by changing their engineering designs for cars that are currently being sold. Their Asian suppliers are under long-term contracts, a cancellation could poison those relationships, and the suppliers would be very difficult to replace.

OTOH, some suppliers are pushing the auto manufacturers to move to more modern chips. But the current chip shortage is mainly of more basic units used in power windows and seat heaters, not the high-end microprocessors used in the most expensive cars.

So let your inner Luddite fly. Get an old, analog, manual transmission car. If you can find one.

But now it’s time for our Saturday Soother, where we unplug from the latest Trumpfest (or is it Trumpest?). Let’s shed our anxiety about too many IRS agents and too many anti-Trump FBI agents. Here on the Fields of Wrong, the heat wave has broken. We’re able to be outside again doing yardwork.

But before starting the yardwork, grab a cold brew coffee and a seat in the shade.

Now, take a few minutes to watch and listen to the Stanisław Moniuszko School of Music Orchestra play Vivaldi’s “Summer” from his “The Four Seasons”.

It’s performed here in 2016 at the Polish National Opera House in Warsaw, with violin soloist Agnieszka Uścińska, who now makes her home in Cleveland:

It appears to Wrongo that the entire orchestra is female.

J&J’s Texas Two-Step

The Daily Escape:

Wallowa Lake near Joseph, OR – May 2022 photo by Danny J Goff

From Judd Legum:

“Nearly 40,000 lawsuits have been filed against Johnson & Johnson (J&J), alleging that the company’s baby powder causes cancer. The lawsuits claim that customers became sick with mesothelioma or ovarian cancer after being exposed to asbestos contained in talcum powder.”

In July 2018, a Missouri jury awarded $4.7 billion in damages to 22 women who said they contracted ovarian cancer from J&J baby powder. According to judge Rex Burlison, J&J:

“…knew of the presence of asbestos in products that they knowingly targeted for sale to mothers and babies, knew of the damage their products caused, and misrepresented the safety of these products for decades.”

Obviously J&J appealed, and an appeals court reduced the verdict to $2 billion. J&J wasn’t satisfied and further appealed the verdict, ultimately to the US Supreme Court. In June 2021, however, the Supremes refused to hear the case, letting the $2 billion award stand.

J&J had no interest in bankruptcy, but came up with another strategy to protect most of its assets from the current and any future judgements. In July 2021, the company launched “Project Pluto,” in which J&J would create a new subsidiary, LTL Management, which would “own” the liability for the baby powder litigation. It also would receive about $2 billion in cash. LTL would then declare bankruptcy.

Boeing Documentary Shows Corporate Malfeasance

The Daily Escape:

Mount Liberty, White Mountains, NH – February 2022 photo by AG Evans Photography

Over the weekend, Wrongo and Ms. Right watched the Netflix Boeing documentary: “Downfall: The Case Against Boeing”. You can watch the trailer here. It exposes how Boeing’s management, Wall Street’s influence and the cratering of Boeing’s culture of quality control, resulted in two plane crashes of the 737 MAX, just months after being placed in service.

That two new planes would go down within five months of each other was beyond a chance event in 21^st Century airplane manufacturing. Boeing initially blamed the pilots based in Indonesia and Ethiopia for being poorly trained. But it turns out that Boeing knew all along that the 737 MAX had a critical software problem that caused the plane to go into an irreversible nosedive.

The film makes it clear that pilots had just 10 seconds to reverse those faulty software commands before it was too late. It shows that Boeing told the FAA and the airlines that purchased the MAX that no new pilot training was required to fly the new plane, even though pilots knew nothing about the software or the glitch.

Boeing was lying about training to keep the costs of the new aircraft competitive with Airbus. It was a lie that Boeing took months to correct. It also took months for Boeing to admit that they were flying an unsafe plane.

Why did this (and even worse things) occur while Boeing was attempting to bamboozle the Feds, the airlines, crash victims and their families? Money. The film features Michael Stumo, father of Ethiopian Airlines crash victim 24-year-old Samya Stumo. While not mentioned in the film, Ralph Nader is Samya’s uncle. At the time, he published an open letter to Dennis A. Muilenburg, then-CEO of Boeing. Here’s a part of his letter: (brackets by Wrongo)

“Your narrow-body passenger aircraft – namely, the long series of 737’s that began in the nineteen sixties was past its prime. How long could Boeing avoid making the investment needed to produce a “clean-sheet” [new design] aircraft and, instead, in the words of Bloomberg Businessweek “push an aging design beyond its limits?” Answer: As long as Boeing could get away with it and keep necessary pilot training and other costs low…as a sales incentive.”

Nader draws a connection between Boeing’s decision to “push an aging design” and their financial engineering:

“Did you use the $30 billion surplus from 2009 to 2017 to reinvest in R&D, in new narrow-body passenger aircraft? Or did you, instead, essentially burn this surplus with self-serving stock buybacks of $30 billion in that period?”

Nader notes that Boeing was one of the companies that MarketWatch labelled as “Five companies that spent lavishly on stock buybacks while pension funding lagged.” More:

“Incredibly, your buybacks of $9.24 billion in 2017 comprised 109% of annual earnings….in 2018, buybacks of $9 billion constituted 86% of annual earnings….in December 2018, you arranged for your rubberstamp Board of Directors to approve $20 billion more in buybacks.”

Nader shows that Boeing had the capital to invest in developing a new plane. They also had problems with the launch of the 787:

“In the summer of 2011, the 787 Dreamliner wasn’t yet done after billions invested and years of delays. More than 800 airplanes later…each 787 costs less to build than sell, but it’s still running a $23 billion production cost deficit.

The 737 MAX was the answer to Boeing’s prayer. It allowed them to continue their share buybacks while paying for the 787 cost overruns. Abandoning the 737 for a completely new plane would’ve meant walking away from a financial golden goose.

Rep. Peter DeFazio (D-OR) who chaired the House Committee on transportation and infrastructure that investigated Boeing, said:

“My committee’s investigation revealed numerous opportunities for Boeing to correct course during the development of the 737 Max but each time the company failed to do so, instead choosing to take a gamble with the safety of the flying public in hopes it wouldn’t catch up with them in the end…”

Wrongo remains baffled by how Boeing management was given a pass after this gross negligence. They paid the US government $2.5 billion to settle criminal charges that the company defrauded the FAA when it first won approval for the 737 MAX. The deal deferred any criminal charges by the DOJ to January 2024 and will dismiss the case then if there are no more misdeeds by the company.

Perhaps this is another example of a corporate mistake that’s simply too big to be punishable in the US. That means US corporations and their CEOs are immune to accountability. This should have put people into prison, but the CEO got off, and ultimately got a $62.2 million severance for his misdeeds, despite a lot of people dying on his watch.

To curry favor on Wall Street, Boeing reduced salaries. They cut costs deeply in quality assurance and safety programs to give the shareholders more money.

See the movie. Be outraged. Elect more people like Peter DeFazio.

More Shortages Are Coming

The Daily Escape:

Fall, Longfalls Dam road, Carrabassett, ME – October photo by Laura Casey

The NYT reported on how the German economy is being slowed by product shortages:

“More than 40% of German companies said they had lost sales because of supply problems in an August survey….Europewide, exports would have been 7% higher in the first six months of the year if not for supply bottlenecks, according to the European Central Bank.”

And it isn’t just Germany. Since the onset of Covid, US consumers have been experiencing disruptions in the supply chain. Wrongo has once again noticed empty shelves are back in our local chain supermarkets.

The bad news is that many think it’s going to get worse.

It’s no longer a matter of fixing one problem. A cascade of sourcing failures in raw materials, production, shipping, staffing, labor, along with weather disasters, may mean these shortages are around for several years. From Shelley Fagan:

“The US has 20 container ports located along the East and West coasts as well the Gulf of Mexico. Ports are where 70% of all US-international trade enters, accounting for 26% of…GDP.”

Even if the goods get to America, we’re at the mercy of our system of rails, barges, and trucks that transport goods to factories, distribution centers, stores, and consumers. Trucking moves 71% of all this freight in America, and there’s a shortage of drivers.

But our transportation infrastructure is also vulnerable, and our politicians have yet to lift a finger to help. Maybe next month.

Moving cargo by sea is historically cheap and efficient, so most of our imports from Asia arrive via cargo vessels. But now there’s a shortage of shipping containers. This has caused an immense spike in the cost of shipping. From Scott Galloway:

“Until 2020, the cost of shipping a 40-foot container along the world’s major trade routes never exceeded $2,000. Then Covid hit, and shipping firms reduced their fleets in expectation of low consumer demand. Instead, demand went up. This has upended the global supply chain. Shipping costs are now up 5 times to a record high: $10,000.”

The largest ships can carry more than 10,000 of these and when things run smoothly, about 25 million containers are in use on some 6,000 ships sailing around the globe.

The supply chain disruptions are causing backlogs in transporting all this cargo. About 40% of all US container traffic flows through the ports of Los Angeles and Long Beach. Currently, there are 65 ships waiting to unload thousands of containers. Again, that’s complicated by too few drivers in the trucking industry.

Flying into San Francisco last week, Wrongo saw about 30-35 ships also stacked up there. And China’s current forced reduction in energy consumption has hurt many high-tech producers. Wolfstreet reports that:

“…suspensions or reductions of industrial electricity supply that manufacturers in numerous industries are hit with, including key facilities that produce components for Apple, Tesla, Intel, NVIDIA, Qualcomm, NXP, Infineon, and ASE Tech….They’re now under orders to temporarily halt production…”

And supply chain issues go beyond tech products. Currently, 119 million Americans use prescription drugs, of which 25% are imported. These drugs start out as APIs (active pharmaceutical ingredients) — chemicals like hydrochloric acid and caustic soda. And China accounts for 80% of total raw materials for making medicine.

India is the largest producer of generic pharmaceuticals. They fulfill 40% of the demand in the US generic market. And shortages linked to this vulnerability aren’t a new problem. From Pharmaceutical Outsourcing:

“The average drug shortage in the US lasts for 14 months and some last for years when based on a high-risk supply chain. Before COVID-19, the FDA had already placed 145 pharmaceutical products on its drug shortages list.”

Since disruptions of the supply chain cause big price increases for goods that are difficult to get, it’s a threat to America’s economic health. And for medical and pharmaceuticals, it’s also a threat to public health.

Government knows about the problem but can’t fix it. After the PPE shortages at the onset of the Covid pandemic, you’d think we would develop a detailed plan to address the areas of greatest disruption. But all that happened was a 100-day review, making recommendations to shore up vulnerabilities sometime in the future. The proposals are sound, but they won’t help end our current shortages. Consumers can expect the current supply chain issues to persist well into 2022, and possibly beyond.

The geniuses in the multinational corporations who sold us globalization and just-in-time supply chains as the way to our best future are now telling us we just have to get used to shortages.

Economies can’t always just fix themselves. That’s a fantasy of capitalist utopianism.

Saturday Soother – March 27, 2021

The Daily Escape:

Stinson Beach, Marin County, CA – photo by Merrill Dodd

A single-point-of-failure in the global economy failed last week when the Ever Given, one of the world’s largest container ships, ran aground in the Suez Canal shutting down traffic in both directions. It’s now stuck sideways in the Canal.

And the Suez Canal isn’t just any waterway; it links the factories of Asia to the customers of Europe. It’s also a major conduit for crude oil. The WaPo reports that 12% of the world’s cargo travels through the Suez Canal. That this vast flow of cargo could come to a halt because a gust of wind blew a ship off course makes the brittleness of our global system of trade apparent.

That one mishap could spread chaos from Los Angeles to Rotterdam to Shanghai underscores the extent to which commerce today is tightly intertwined with the global supply chain. From the WaPo:

“By Friday, more than 160 ships were anchored in the Mediterranean and the Red seas. Egyptian officials appeared confident the canal could reopen within days, while salvage engineers cautioned that freeing the stuck ship might take weeks.”

A delay of two weeks could strand at sea one-fourth of the supply of containers that would normally be in European ports.

The NYT reports that a surge of Covid-related goods orders for items like exercise equipment has exhausted the supply of available containers at ports in China. The cost of shipping a container from Asia to North America has more than doubled since November. And on the US west coast, container unloading has been slowed as dockworkers and truck drivers were infected with Covid-19 or forced to stay home to attend to children who are out of school.

For decades, economists have lectured us about the virtues of “economic efficiency”. But, as the initially poor response of the global supply chain to the Covid-19 showed, economic resilience is also particularly important. We couldn’t get PPE for essential workers because we followed just-in-time inventory management and relied on China as our primary supplier. We’ve also seen shortages of computer chips for cars.

From the NYT: (brackets by Wrongo)

“It [just-in-time] has also yielded a bonanza for corporate executives and other shareholders: Money not spent filling warehouses with unneeded auto parts is, at least in part, money that can be given to shareholders in the form of dividends.”

Once again, we’re learning that the neo-liberal economic solution fails the people. So the economists and the CEOs have gotten it wrong. And the canal blockage, like the PPE shortages, show that they can be spectacularly wrong sometimes. More from the WaPo:

“And the grounding of the Ever Given has exposed how complex ownership structures in global shipping make it difficult to hold anyone accountable: The Ever Given is operated by Taiwan-based shipping company Evergreen Maritime. Evergreen charters the ship from a Japanese firm; a Dubai-based company acts as the agent for the ship in ports; and the ship flies the flag of Panama.”

So, accidents will happen, and they’re nobody’s fault.

The challenges presented by the Suez blockage come directly from the ‘just-in-time’ mantra. While a crisis cannot be predicted, it can be prepared for. Corporations and nations need to stop sticking their head in the sand about long-term planning, and get back to doing what the MBA’s call “resilience planning.”

Resilience planning’s been devalued by our push for short-term profits and stock market gains. If you doubt that, read about the massive cyberhack of US government agencies and major corporations, perhaps the biggest in history, that was discovered in early December by the security firm FireEye. Much of that was preventable by better management and planning.

Globalization isn’t our only problem. Add to it our short-term mindset which, when combined with greed, has endangered America.

It is unclear how long it will take for the Ever Given to be refloated and the flow of the canal traffic can resume. CNN reports that it may be freed over the weekend. But to do that, more than this level of effort will be required:

Credit: Reuters

As the clock ticks, Egypt isn’t collecting tolls for ships’ passage. And many ships, including some operated by Evergreen, have begun to re-route around the Cape of Good Hope. Multiple shipping firms have contacted the US Navy for protection against pirates on their rerouted trip, according to the Financial Times (paywalled).

Enough of the world’s problems for now. It’s time for our Saturday Soother, when we take a break and either watch the Sweet Sixteen if so inclined, or do more spring yardwork, since today is supposed to be the better of the weekend days.

Before pulling on the gloves, let’s take a few moments and listen to “Cloudburst” by George Winston, from his album, “Plains”. The video is of springtime in the northern Idaho plains. It’s a meditation on a few of our feathered friends in spring:

Sunday Cartoon Blogging – January 19, 2020

What to make of the new trade deal with China? The deal seems to restore the US-China trade relationship to where it was before Trump launched his “easy to win” trade war. Nothing that China has agreed to departs markedly from what it agreed to during the Obama administration. In 2015, Obama and Xi Jinping announced an end to cyber-intellectual property theft and embarked on a next round of negotiations over market access.

Trump’s Phase I agreement barely restores China’s agricultural purchases to where they were before 2017, even though Trump presented it as a victory. If one of your main customers boycotts you and then agrees to start buying again, but is buying fewer goods, it’s disingenuous to announce that they had promised to buy more.

After two years of mounting tariffs hostilities, the Phase I agreement has cost the US more than $30 billion in subsidies to American farmers. It has cost American consumers tens of $ billions in tariffs. It has forced some US companies to diversify their supply chains out of China at an additional cost of $ billions.

Trump and his trade sidekick Peter Navarro, fundamentally misread the relative strengths of both the US and China. They thought that Chinese exports to the US are the key driver of the Chinese economy. If that were true, tariffs would be a potent weapon.

But a recent McKinsey study shows that China has aggressively shifted from an export-driven economy to a domestic consumer-driven one. Much of any gain in Chinese exports primarily accrues to the multinational companies like Apple that source in China, and not to the domestic Chinese economy.

At best, Trump fought China to a draw. At worst, China now understands that less economic engagement with America is in its self-interest. The trade war and its new, paper-thin truce leaves America with less leverage going forward. On to cartoons.

Was Round One a win?