Category: Regulation

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.

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Boeing’s Max Jet Fails Again

The Daily Escape:

Desert sunflowers at dawn in Anza-Borrego SP, CA looking west to the San Ysidro Mountains – January 2024 photo by Paulette Donnellon

Wrongo didn’t expect to again be writing about Boeing’s problems with its MAX aircraft, but here we are. From CNBC:

“The Federal Aviation Administration on Saturday ordered a temporary grounding of dozens of Boeing 737 Max 9 aircraft for inspections, a day after a piece of the aircraft blew out in the middle of an Alaska Airlines flight.”

More:

“…video of Alaska Airlines Flight 1282 that were shared on social media showed a gaping hole on the side of the plane and passengers using oxygen masks before it returned to Portland shortly after taking off for Ontario, California, on Friday afternoon.”

What blew off of the plane is a “door plug”, not a door. The configuration used by Alaska Airlines didn’t require an emergency exit door in that location so Boeing installed a door plug, which is attached to the plane’s skin and covered on the inside so that it appears to be a windowless wall.

Seats adjacent to the blowout were by chance, unoccupied. The accident depressurized the cabin and headrests were detached from two nearby passenger seats, the back of one seat was gone. Here’s a picture taken after the plane landed safely:

Boeing and the Alaska Airlines passengers were very lucky in two respects: First, that no one was sitting in the seats where it happened, and Second, that it didn’t occur at cruising altitude. The sudden depressurization at altitude would have been a disaster with many lives lost.

This happened on a plane that had been in service for just 10 weeks! And it happened a few days after Boeing asked every airline to check their Max-9’s for missing rudder bolts:

“Last month, the company urged airlines to inspect the more than 1,300 delivered Max planes for a possible loose bolt in the rudder-control system. Over the summer, Boeing said a key supplier had improperly drilled holes in a component that helps to maintain cabin pressure.”

And that was only a couple weeks after Boeing asked the FAA to give them a pass on a design flaw in the plane’s engine de-icer.

You remember that this is the plane that Boeing famously mis-programmed to nosedive into the ground. You may have forgotten that Boeing paid a big price:

“In 2021, Boeing agreed to pay more than $2.5 billion to settle a criminal charge related to the crashes. Under the deal, Boeing was ordered to pay a criminal penalty of $243.6 million while $500 million went toward a fund for the families whose loved ones were killed in the crashes. Much of the rest of the settlement was marked off for airlines that had purchased the troubled 737 Max planes.”

These are huge issues with quality and quality control. There are also problems with suppliers. The WSJ reported:

“Fuselage maker Spirit AeroSystems is responsible for installing the emergency-door configuration involved in Friday’s incident. Spirit AeroSystems was working with Boeing on Saturday to determine what went wrong….Spirit AeroSystems was also responsible for the misdrilled holes on the fuselages that disrupted production in 2023.”

Spirit changed CEOs in October 2023, hiring Patrick Shanahan, a 30-year Boeing veteran. Since then, Boeing has invested in and worked more closely with Spirit to address “production” problems.

The Max is the best-selling plane in Boeing’s history. The more than 4,500 outstanding orders for the plane account for more than 76% of Boeing’s order book. Of the nearly three million flights scheduled globally this month, about 5% are planned to be made using a Max, mostly the Max 8.

Wrongo has written about Boeing before and how it lost its culture of engineering prowess and expertise. It began valuing financial engineering over aerospace engineering in 2009-2017 by engaging in $30 billion in stock buybacks, an amount that exceeded its earnings. Then in 2018, buybacks of $9 billion constituted 86% of annual earnings and late in 2018, they approved $20 billion more in buybacks.

Rank capitalism is a big element in this story. Passenger safety has been sacrificed to Wall Street profit-taking and bonuses for Boeing’s shareholders and executives. Until the culture changes back to one focused on engineering, the company will continue to be a hot mess.

Boeing needs a senior management change, and fast, before more people die on their airplanes. Wrongo will certainly avoid flying a 737 Max in the future.

Time to wake up, Boeing! You’re using euphemisms like “production problems” or “supplier problems” to describe improperly drilled holes. There should be no circumstance where a section of the fuselage falls off an airplane in flight.  This is systemic, an organization-wide failure.

To help you wake up, watch and listen to Larkin Poe, who Wrongo has featured before, doing a cover of Son House’s “Preachin’ Blues”:

Sample Lyric:

I’m gonna get me some religion
I’m gonna join the Baptist church
Gonna be a preacher
So I don’t have to work

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Two Writers Who Speak To What America Needs

The Daily Escape:

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

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

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

First, from Wesley Lowery in the Columbia Journalism Review:

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

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

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

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

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

Lowery concludes by saying:

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

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

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

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

More from Lord:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Change is coming.

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About The Energy Grid

The Daily Escape:

Coyote Gulch, Escalante, UT – May 2023 photo by Chirag A. Patel

Wrongo and Ms. Right watched the Knicks vs. Miami and Ted Lasso rather than dipping into the political rally for Trump held by CNN. But other news outlets reported on it. Apparently, the live audience gave him a standing ovation as he entered the set. They laughed when he called E. Jean Carroll “a whack job” and belittled her claim of sexual assault:

Trump suggested that the US should default on its debt if Biden didn’t agree to the cuts that House Republicans want. He pledged to pardon many of those convicted in the Jan. 6 attempted coup. He refused to back Ukraine in its war against Russia.

For those who think that there’s an opening in 2024 among GOP partisans to either vote for someone other than Trump or gasp!, vote for a Democrat, you are sadly mistaken.

A big part of the press (obviously including CNN) just can’t bring itself to admit the truth about the current state of the Republican Party. And they don’t really see it as their job to engage in such denunciations, even to protect the nation.

America is chockfuckingfull of Republicans who are, as Hillary said, “deplorables”. And they’re not all in New Hampshire. It’s way past time for the press to acknowledge this sad fact.

But today, let’s talk about the US energy grid. Our transition from fossil fuels to a green energy future will require a huge investment in our current electric grid. This probably means we’ve understated the costs of America’s energy transition. From Haley Zaremba, at OilPrice: (emphasis by Wrongo)

“In order to keep up with the expansion of renewable energy production capacity, the United States will have to more than double the current size of the electric grid. Stimulus from both the public and private sectors are hitting their intended mark, and the clean energy sector is booming. However, much of the potential environmental benefits of electrification will be completely wasted if we don’t have the power lines and grid capacity to transmit that power from where it’s being produced to where the demand is concentrated.”

Zaremba quotes McKinsey, who say that building sufficient wind and solar farms to power the clean energy transition will require overcoming three major hurdles: Finding enough land at an affordable price, building up the power grid to support the influx of electricity, and fixing the archaic and inefficient permitting process that governs these processes.

America needs massive investment in our national energy simply to stand still, regardless of the source of electricity.

But it’s important to identify today the key energy sources of the future because that determines how we specify and build the upgraded grid. A grid based on renewable sources requires a denser network and more long distance direct current lines, while conventional grids need a relatively small number of very high capacity short distance alternating current lines (i.e. from a cluster of small modular nuclear reactors (SMRs) to the nearest city).

Either option is expensive and each brings its own set of regulatory issues. Zaremba notes that:

“Building power lines alone is an enormous bureaucratic hurdle that can take years to gain approval. The  average review of renewable energy projects takes about 3.5 years, but there are cases in which a single transition line took over a decade to be completed…”

According to the US DOE, the country will need 47,300 gigawatt-miles of new power lines by 2035. That represents a 57% expansion of the existing grid. And the real issue is the glacial pace of the bureaucratic review processes which underlie permitting and oversight of clean energy projects as well as grid expansion.

Zaremba closes with:

“Fixing the presently nightmarish permitting and approval system will be integral to decarbonizing the US economy…and making sure that the efforts already underway to decarbonize the nation’s energy mix are not squandered. It’s great that wind and solar capacity are being added at a record-breaking rate, but it’s all a waste if, once completed, there’s no permit allowing them to plug into the grid – or if there’s no grid at all.”

As if on cue, on Wednesday Biden signed on to Sen. Manchin’s (D-WVA) plan to speed the approval of some fossil fuel projects and to hasten the construction of new transmission lines. The NYT quotes John Podesta, Biden’s senior adviser for clean energy innovation:

“Right now, the permitting process for clean energy infrastructure, including transmission, is plagued by delays and bottlenecks…”

Manchin’s bill has some holding their noses because it is so pro-fossil fuel. But should it become law, perhaps the US government will be able to speed up approval for at least some of the green energy projects.

In summary, there’s lots to do and no sure way to get it all done.

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Sunday Cartoon Blogging – March 12, 2023

Let’s talk about Silicon Valley Bank (SVB). The tech industry’s go-to lender just became the second-largest bank failure in US history. The bank’s customers withdrew $42 billion from their accounts on Thursday. That’s $4.2 billion an hour, or more than $1 million per second for ten hours straight.

We ancient, moss-covered former bankers call this a bank run. That occurs when a large number of customers of a bank withdraw their deposits simultaneously over concerns about the bank’s solvency.

Nearly half of all venture-backed US companies were SVB customers. We’re unsure why the run started, but on Thursday, several Venture Capital firms started telling their client companies that pulling cash from SVB was prudent, and the run began.

While bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, few of SVB’s deposits, by value, were FDIC insured, since its customers were overwhelmingly corporations with much more than $250,000 in the bank. By Friday, there was no cash left in SVB’s coffers. In fact, the cash on hand was negative, to the tune of $958 million.

Do you remember when Trump and Republicans rolled back some of the regulations Dodd-Frank placed on regional banks?:

“Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.”

Trump signed the bill despite a report from Democrats on Congress’s joint economic committee warning that under the new law, SVB and other banks of its size:

“…would no longer be subject to nearly any enhanced regulations”.

This also affects ordinary people. Wrongo has a California friend who banks with SVB. Here’s a quote from her:

“While I’ve been waiting to sign the purchase contract on a condo, I woke to the news that my lender Silicon Valley Bank has been closed and taken over by regulators. That concludes literally 8 months of working on this….and the end of my effort to buy a home.”

So don’t listen to the pleas for another bank bailout. Wrongo would be okay with bailouts if they were accompanied by personal accountability by management. Like, we’ll rescue your institution, but none of the bank senior management can ever work in finance again. On to cartoons.

Tucker’s mendacity:

It takes two teams to play:

Walmart’s OK with pills for boners, but not for pregnancy:

GOP wants to regulate Trans not Trains:

GOP loves doormats:

Most appropriately named movie of this or any year:

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Saturday Soother – February 17, 2023

The Daily Escape:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now listen and watch Renée Fleming sing “Nacht und Träume” (Night and Dreams) written in 1825 by Franz Schubert conducted by Claudio Abbado with The Lucerne Festival Orchestra in 2005:

 

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Ohio’s Airborne Toxic Event

The Daily Escape:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Workin’ On The Railroad

The Daily Escape:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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.

More from Judd Legum:

“J&J is attempting to exploit a 1989 Texas law, deploying a legal maneuver known as the “Texas two-step.” J&J temporarily became a Texas company and then executed a “divisive” merger. The move split J&J into two new companies: one with almost all of the assets and no baby powder liability and another with all of the baby powder liability and few assets.” The latter almost immediately filed for Chapter 11 bankruptcy.

More:

“By filing for bankruptcy, all civil litigation against LTL Management is immediately halted. The claimants no longer have the ability to have their claims heard in court. Instead, if the scheme is successful, all claimants have to split up a limited pool of assets defined by J&J.”

That’s the “Texas Two-Step.” You may remember that in 2021, the NRA had requested to be reincorporated in Texas when it filed for bankruptcy, a move hailed by Texas governor Gregg Abbott. It would also have led to splitting the NRA into two companies, with the liability in the new firm. That effort failed when a Texas judge wouldn’t allow the move without the approval of New York State, something NYS wouldn’t do.

It’s possible in every state to split a company’s assets and liabilities through a spin-off, and spin-offs have often been used to fraudulently transfer assets that might be part of a bankruptcy. The Two-Step exploits a quirk of Texas law, which defines “merger” as including not just two companies merging into one, but also the exact opposite, when a company divides into two or more entities.

Texas and Delaware are the two states that allow for such “divisive” mergers. This type of “merger” avoids what in bankruptcy circles is called a “fraudulent transfer” of assets, assets that should by rights be considered a part of the bankruptcy estate to be divided among the firm’s creditors.

The deemed lack of an asset transfer is what makes the Texas Two-Step unique and interesting to J&J.

The Senate Judiciary Subcommittee on Federal Courts, Oversight, Agency Action, and Federal Rights, led by Sen. Sheldon Whitehouse (D-RI), is looking into the legality of the Texas Two-step:

“It does not make sense for a $450 billion corporation with 38,000 people with potentially lethal injuries to be able to carve off $2 billion…and walk away from the responsibility for what it did.”

We’ll see what becomes of the lawsuits against J&J and the LTL Management company.

More broadly, this shows we need to substantially strengthen the US bankruptcy fraudulent transfer laws. Unfortunately, that’s a political fight between the capitalist wolves and the consumer lambs, with all the best lawyers on the side of the wolves. For example, J&J has retained Neal Katyal, former Acting US Solicitor General under Obama to help with their liability carve-out. Katyal is earning $2,465/hour while working for J&J. Seems reasonable, no?

The wolves know that the legal positioning really matters. They will fight tooth and nail to keep the firm’s money in the firm and out of the hands of the plaintiffs. Even though there are substantially more lambs than wolves, the lambs have neither the resources nor the smarts to protect themselves.

These greedy schemes by America’s biggest firms are designed to dodge financial responsibility. J&J is attempting to cheat cancer patients from getting what the courts have already awarded them.

The management and their attorneys should face prison time for depriving justice to these consumers who won in court.

If we can’t bring Capitalism to heel, it must go.

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China’s Torpedoing the Supply Chain

The Daily Escape:

Spring snow, Mt. Princeton, CO – April 2022 photo by Haji Mahmood

For the past two years, Covid has thrown the global supply chain into a tailspin. Even though the cargo industry’s ships, trains, trucks, and planes worked full-time, we still have shortages. Now, China’s zero Covid policy is increasing both the uncertainty and costs of efficiently operating the still-choked global supply chain.

From Bloomberg:

“We expect a bigger mess than last year,” said Jacques Vandermeiren, the chief executive officer of the Port of Antwerp, Europe’s second-busiest for container volume, in an interview. “It will have a negative impact, and a big negative impact, for the whole of 2022.”

Bloomberg says that China accounts for about 12% of global trade. It’s recent Covid lockdowns have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. And since US and European ports are already swamped, this new outage will leave them vulnerable to additional shocks.

China is home to six of the world’s 10 largest container ports. It’s the global economy’s most important manufacturing hub. While most countries have decided to learn to live with the Covid, Beijing has maintained its Zero Covid policy, where even small outbreaks can shut down large population centers and slow economic activity.

It’s taking an average of 111 days for goods to reach a warehouse in the US from the moment they’re ready to leave an Asian factory. That’s similar to the record of 113 set in January 2022 and more than double the time that the same trip took in 2019, according to Flexport Inc., a freight forwarder.

Julie Gerdeman, CEO of supply-chain risk analytics firm Everstream Analytics says:

“Once product export activities resume and a large volume of vessels make their way to the US West Coast ports, we expect waiting times to increase significantly…”

You’d think that after more than two years into this pandemic, America would have realized that single-sourcing much of our industrial production to a dictatorship is a bad idea. One with enormous consequences when something goes wrong.

But we haven’t. US Treasury Secretary Janet Yellen has advocated for what she calls “friend-shoring” meaning reducing our dependence on China and Russia. Brian Ehrig, a partner at the consulting firm Kearney is co-author of a report that found 78% of CEOs are either considering reshoring or have done it already. He says that relocating supply chains:

“…might cost more, but if you can make smaller quantities that you can then sell at closer to full price, you can actually completely change the game…”

Le Monde reminds us that capitalism has created hidden dependencies in Ukraine. It is the main producer of the wiring harnesses that hold together the many electrical cables in a car. They quote Christine Lagarde, president of the European Central Bank (ECB) in a speech in Washington, DC: (brackets by Wrongo)

“Ukraine produces one fifth of Europe’s [harness] output,”

These parts are low value added, but essential in the construction of cars, a perfect outsourcing target for capitalism. Globalization isn’t going to die; but maybe it can evolve. Much of that possible shift hinges on convincing consumers to accept higher prices for the certainty of supply.

For example, once the CDC finally gave us unambiguous advice about wearing masks, there was a huge rush to open mask production facilities in the US. But now they’ve all closed, because it’s cheaper to make masks in China.

Dictatorships can ensure that labor remains cheap. That’s great for capitalists, not so good for people who needed masks in 2020 when China decided to keep most of them for their population. Or, now, when China is still willing to shut down its economy to stop a Covid outbreak.

And, despite all the good will in the world, nobody will make masks in the US if it means their five-dollar boxes of masks go unsold because everyone is buying the one-dollar boxes. Instead, they will complain about how the company asking five dollars is a bloodsucker.

We’re told that capitalism works. That it just does. That just-in-time supply cuts costs for consumers. But does it?

Art installation by Steve Lambert – 2013, Times Square, NYC

It’s proven not to work during an emergency. But what are the chances of re-shoring ever happening? Business school really only teaches one thing: Short-term profits rule and everything else is irrelevant.

After all, America is a business, not a country.

What should be readily apparent is that despite the CEO poll above, our corporate masters are certainly not thinking about systemic change to supply chains. Nor will they, as long as the focus is reducing costs as low as possible for maximum shareholder gain.

The point is that unless business is incentivized otherwise, don’t expect the supply chain to get any better. That incentive must come from the government in the form of tax policy or subsidy.

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