The Wrongologist – Page 213 – Geopolitics, Power and Political Economy

Sunday Cartoon Blogging – June 14, 2015

Let’s talk taxes. Specifically, let’s focus on a Republican governor, Jindal of Louisiana. Louisiana faced a massive shortfall ($1.6 billion) due to the fact they are governed by Bobby Jindal and a bunch of Republicans who can’t admit that they are raising taxes because otherwise, Grover Norquist will get angry at them. From the NYT:

With less than two hours left in the 2015 session, Louisiana legislators agreed Thursday on a solution to the worst budget shortfall in decades, approving a funding arrangement that drew bipartisan criticism

The legislators had looked at raising taxes, but Jindal said that he would veto anything that violated his pledge to Norquist. The big losers if no deal was reached would have been public education and health care.

So, the governor consulted with Americans for Tax Reform, the Washington anti-tax advocacy group led by Norquist, and came up with a complicated plan that was an accounting fiction, in order to solve the budget crisis.

• The plan obligated $350 million of the revenue raised during the session to higher education, thus preventing cuts
• That was augmented by an “assessment” of $1,600 per student on the state’s public college students
• Nobody would actually pay the assessment because students would also be granted a tax credit against that assessment
• The student’s tax credit, in turn, would be transferred to the state Board of Regents, the body that runs higher education

The board would then use the credit to draw money from the Department of Revenue. It’s confusing, and not just to the accounting-challenged. But, under the plan, no one’s tax burden went up or down, which allowed the Louisiana Legislature to raise the cigarette tax by 50 cents a pack, increase costs for businesses by reducing a variety of tax credits and raise fees on car buyers and other Louisianians.

Lawmakers have called the provision everything from “money laundering” to “stupid,” and that was just the Republicans. Robert Travis Scott, president of the nonpartisan Public Affairs Research Council of Louisiana said:

There is no way you can explain that it’s an offset…This is a vehicle that allows Governor Jindal to raise taxes, period.

The fact that Norquist helped Republicans in Louisiana figure out a way around HIS OWN PLEDGE tells you that this “no new taxes” nonsense has become simply theater. Now Jindal can run for president with Norquist’s blessing. Isn’t that nice?

On to cartoons. The big news of the week included the Trade Fast Track fail, sending more troops to Iraq, and a new Jurassic Park movie.

Fast Track is side tracked:

The same old Iraq strategy reappeared:

With predictable results:

New Jurassic movie brought out new GOP creatures:

Like Jurassic movies, STEM in Congress creates BIG problems:

More Iraq??

We have solved nothing in 12 years in Iraq. As Tony Wikrent says at Naked Capitalism,

The sheer imbecility of American leaders is brought into glaring light [by] Bush’s attempt at the transformation of Iraq from among the Middle East’s most repressive states to a multiparty democracy.

As Col Lang says, we own it [Iraq], but cannot fix it.

So naturally, we will send more troops there in the next month or so. And to a new location. This will bring American troop levels to 3,500 since we left Iraq in 2011. The air base where the additional US forces are to deploy is al-Taqqadum, which sits about halfway between ISIS positions in Ramadi, about 40 kilometers (24 miles) to the west, and Fallujah, to the east.

Pat Lang reminds us that al-Taqqadum was originally a British air force base called RAF Habbaniya, which later became an Iraqi air force base. It had been abandoned for a long time when US forces occupied it in March, 2003. We initially called it Forward Operating Base (FOB) Ridgway before settling on the more Iraqi-friendly Camp Taqqadum in 2004. Pat Lang on our plans:

Former RAF Habbaniya was the center of the…British presence in Iraq. Look at the pictures of chapels, cemeteries, and swimming pools for the British troops… Habbaniya is the place we will defend and try to make Sunni tribesmen and Shia cowards into fighters? The omens for this are not good.

Think about it: It is an airfield we know well and maintained for years, but it’s only 24 miles from the ISIS lines. We are by design putting our newest effort right where the enemy could take out our planes and our soldiers. Makes you think that it is a trip wire of sorts, leading to a large re-deployment to Iraq when ISIS crosses our wire. We will have to fortify and defend this place very heavily. Otherwise, ISIS will see it as a place to engage us directly in battle.

Da Nang anybody?

The idea behind the new site is to provide greater support for Sunni tribal fighters, who have yet to receive all of the backing and arms promised by the Shiite-led government. But there may be a glitch. The Guardian quotes Mr. Obama at the close of the G7 summit, saying that there were not enough recruits to train:

We’ve got more training capacity than we’ve got recruits…It’s not happening as fast as it needs to.

The Guardian also quoted Hisham al-Hashimi, an Iraqi scholar and expert on ISIS that:

Only 1,100 Sunnis had taken part in the US training program, and none of them have graduated from it. In total, about 9,500 fighters have completed the training.

Washington wants to revive the “Sunni Awakening” strategy that we used in 2007 when large numbers of Sunni tribal fighters joined with US troops to help defeat al Qaeda in Iraq. Former Iraqi Prime Minister Nouri al-Maliki promised us that he would incorporate the Sunni fighters into Iraq’s standing security forces and pay them regular salaries, but failed to do so, sparking the sectarian anger across Anbar Province that left some Sunni tribal leaders amenable to working with ISIS.

Mr. Obama originally said that we did not have a strategy, now, a year later, he sends an additional 450 troops to train Iraqi recruits that he himself says don’t exist. The Wrongologist has supported President Obama, however, this has the makings of a fool’s errand.

Why do we keep talking about training Iraqis to fight? The evidence shows that lots of Iraqis already know how to fight, and many of them are fighting very effectively against the very government that America installed.

This is almost like early days in Vietnam. We dribbled in more and more advisers and support. But it’s not what’s in the hands of the soldiers, it’s what’s in their hearts, and we have no control over that.

The NYT says this will cost us $8 million per week, or $47,619.05 per hour, which is more than many people earn in one year. Do the American people want their tax dollars spent in this way? When our infrastructure is falling apart? When our kids have to take out onerous loans to go to college? When Social Security, which we paid for, is under threat from the right side of the aisle?

Thomas P. M. Barnett has advised US leaders on national security since the end of the Cold War, including the Secretary of Defense, the Joint Staff, Central Command and Special Operations Command. Barnett said in a TED talk:

We field a 1st half team in a league that insists on keeping score until the end of the game

Barnett is correct. We have not learned how to play the 2nd half in Iraq.

Turkey’s March Towards an Islamist Presidency Stalls

Results from Turkey’s parliamentary elections Sunday show that President Recep Tayyip Erdogan’s AKP party lost its majority in Parliament.

With 99.9+% percent of the vote counted, Erdogan’s Justice and Development Party (AKP) garnered the support of 41% of voters. That would give it some 258 seats – 18 below the minimum needed to keep its majority. In 2011, the AK Party received 49% of the vote, 8 points higher than in 2015. This is the first time the AKP fell short of a majority since it came into power in 2002.

The election was widely perceived as a referendum on Erdogan’s plan to change the Turkish constitution in order to grant himself sweeping, unprecedented presidential powers. Because Erdogan’s record shows tendencies toward authoritarianism, many observers in Turkey and outside believed that his proposed constitutional amendments would not just change the structure of Turkish democracy, but pose an existential threat to it.

Erdogan began the campaign asking voters for 400 seats, which would have allowed the party to change the role of the presidency unilaterally. The AK Party needed 330 seats of the total 550 to call for a national referendum to change the constitution, but they stalled at 258, so that will lead to a coalition government, and no immediate ability to change the Turkish constitution.

The Kurdish HDP, now the first Kurdish party ever to be seated in Turkey’s parliament, won 80 seats. Most westerners like the Kurds, for their resistance around Mosul in Iraq and around Kobani in Syria. They also support women’s rights and gay rights. Kurds are the Muslims who are closest to western values. From BBC: Who are the HDP?

• The HDP was founded as a pro-Kurdish party in 2012
• There are 15million Kurds in Turkey, 20% of the population
• It had the only openly gay candidate in Turkey’s elections
• A higher proportion of women ran for the HDP than any other party

Here is an election results map from the Daily Hurriyet:

Voter turnout was 85%. The map shows the AKP in orange, the CHP party in red and the HDP in purple. It is clear that the HDP made its gains in southeast Turkey, the area most at risk in the ISIS and Syrian uprisings. HDP leader Selahattin Demirtas called his party’s showing:

A fabulous victory for peace and freedoms…As of now the discussions on a presidential system, a dictatorship, has come to an end

The Daily Star reported on the dilemma Erdogan faces. Under the current constitution, the president position (that Erdogan now holds) has limited powers. He campaigned to change the constitution, but the election’s result could leave Erdogan stranded in the presidency without the powers he sought. Bottom line: While Erdogan’s plan for Islamic presidentialism has been defeated, the AKP is still in control of Turkish politics — and likely will remain that way for a long time.

The reasons for the loss seem mostly driven by the Turkish economy and Erdogan’s policies on Syria. For the past decade or so, the AKP has ridden high on a dynamic record of promoting economic growth. But recently, the economy has been slowing down. The Turkish lira has lost considerable value, the economy has not grown anywhere near the rate that it had in the past, and there are worries about an economic collapse. And many were afraid of Erdogan’s plan for deepening Turkish involvement in Syria, Iraq and the greater Middle East.

Today, Erdogan is a wounded politician, and the AKP is weakened. This will lead to infighting within the AKP and maybe even a split of the party into several factions. In all this result will likely leave less capacity in Turkey for adventures in Syria and Egypt, or with ISIS and the AL-Qaeda affiliated Al-Nusra front.

As the Guardian said:

None of the four parties in the new parliament are able to form a single-party government, meaning Turkey is entering a period of volatility. Erdogan approaches politics as a binary contest between winners and losers in which the decisive aim is to secure a majority. On Sunday he lost…

The country had been sliding into an Islamic autocracy under the guise of democracy, but the Turkish electorate have called a halt to that.

Technology Isn’t Creating Enough Middle Class Jobs

Yesterday we talked about how America is losing middle class jobs to technical outsourcing on our way to becoming a land of spreadsheets and flags. Today, let’s discuss another aspect of that; how technology continues to cost more and more mid-skilled jobs. We usually think of technology as a great panacea, making most of our processes more efficient. In fact, many of us can look back on the “sneakernet” of the 1980s and feel good about how far we’ve come with technology.

But technology has also reduced the number of middle class workers required, at a time when American wages are stagnant and benefits are falling for the remaining available jobs.

The meme used to be that if technology replaced workers, new jobs came along and net-net, more people were employed. Although things weren’t that simple, by 1900 if you were displaced, you could get another job because 99% of all jobs were still done only by humans.

Today corporations tell us that the knowledge economy can take as many workers as we can create, and since we can’t create them fast enough, technology firms need more of the H-1B visas we discussed yesterday. This is false. Facebook is touted as a prime player in the knowledge economy, but it only employs 5,800 to service 1 billion customers! Twitter has 400 million total users. It has 2,300 employees.

What is the value of Facebook and Twitter to the jobs economy? These are two of our very “best” success stories, and they only employ 8,100 workers. They have had a huge impact on society, but the total jobs they have created are only a rounding error in our economy.

Much of what we want to buy is produced in factories increasingly run with robots, and maintained and operated by small cadres of engineers. Increased sales of iPhones only add a few sales jobs at $12/hour in the US and not many new factory jobs in China. Also, keep in mind that globally, some 3 billion people are looking for work and the vast majority are willing to work for less than the average American.

We all know that technology is costing jobs, and by some estimates it could cost half of all current jobs in the next 20 years. So, we can expect an ever-greater number of unemployed chasing an ever-shrinking number of jobs that can’t be eliminated or simplified by technology. Thus, the prognosis for many medium and some higher-skilled workers appears grim. With this being said, technology is benefiting a lot of businesses and the way they operate. You’ll get a better understanding of it just by reading these Quotes about AI. Seeing as technology doesn’t look like it is going anywhere anytime soon, we might as well use it to our advantage in a business.

The oligarchs have seen these forecasts. That may explain their unwillingness to do anything serious to create effective jobs programs here at home. They don’t need to do anything, because there is a (virtually) infinite supply of skilled and unskilled workers in the overpopulated third world.

The issue is not technology, or robots, or restoring our manufacturing base. Nor is the issue better skills, or technology or outsourcing. We have too many people chasing too few good jobs.

Incomes will continue to stagnate, because automation does not threaten unskilled jobs. This is sometimes called “Moravec’s Paradox”, which says that, contrary to traditional assumptions, high-level reasoning requires relatively little computation, but low-level sensorimotor skills require enormous computational resources. The “Roomba” robotic vacuum cleaner is, despite years of development, just an expensive toy. It has had zero impact on the market for janitors and maids, yet, wages for American janitors and maids have fallen because of competition from the currently unemployed and newly arrived immigrants. While the Roomba aims to be a forward-looking cleaning solution, it still cannot compete with the manual vacuum cleaners, like Bissell’s, that still prove to be the preferred choice despite innovative attempts to move towards automation. See this link for Bissell vacuum cleaners – https://www.bissell.com/vacuums/upright-vacuum-cleaners/

If we forecast continuing technology breakthroughs (and we should), and combine that with the 3 billion people currently looking for work globally, we have to conclude that the planet is overpopulated if the goal is a growing global middle class.

This is why the quest for better technology has become the enemy of sustaining middle class growth in the developed world.

Monday Wake Up Call – May 8, 2015

“Ethics is knowing the difference between what you can do and what you should do.” – Justice Potter Stewart

It looks like Scrooge McDuck runs human resources at Disney. Disney World laid off 250 tech workers, who were American programmers and computer operators that have been replaced by Indian techies with H-1B visas. The techs were supplied by HCL America, an Indian outsourcing firm.

H-1B visas are intended for high-level professionals who, in concept, fill jobs for which no Americans are available. 85,000 of these visas are granted each year, and they are in high demand. Technology giants like Microsoft, Facebook and Google repeatedly press Congress to add to the annual quotas, saying there are not enough Americans with the skills they need.

In Disney’s case, the Americans were not only available, they were actually working in the jobs.

The H-1B visa program has been great for tech innovation, and the Wrongologist supports it, but this is an egregious abuse of the corporate right to employment at will, and of the spirit of the H-1B visa laws. From the NY Times:

The chairman of the Walt Disney Company, Robert A. Iger, is a co-chairman with Michael R. Bloomberg, the former mayor of New York, and Rupert Murdoch, the executive chairman of News Corporation, in the Partnership for a New American Economy, which pushes for an overhaul of immigration laws, including an increase in H-1B visas.

Companies speak a lot about teamwork, esprit de corps, and group identity, all in the context of helping the company reach its goals. But the Disney lesson is that we’re really good at ignoring those lofty ideals, while driving an anti-employee, mean-spirited chase of a marginal dollar of profit.

If employers really need a foreign employee resource, they should be charged an annual fee of $50K for each H1-B visa they use. For truly unusual skills, it would be worth the fee. For Disney, who is just looking to buy labor for a few dollars less than the going rate for American citizens, it would remove the economic advantage. We need to ask our corporations to stop defending the indefensible.

Republicans shout from the mountaintops about illegal immigrants, while on the other hand, they are quite willing to add to the numbers of H-1B visas, immigration of a kind. Furthermore, H-1Bs allow for chain migration (kids and spouses) as well, and thanks to new rules, H-1B spouses can work as well.

Time to wake up America! Disney’s H-1B’s are the first step in a process. They have been brought in by Disney so that they can gain the experience to manage Disney’s IT operation. And some time down the road, Disney’s Florida HCL people will work with HCL’s India-based IT workers, allowing Disney to move most of their IT operation over there at a fraction of the cost that Disney pays here.

Corporatism has inverted Henry Ford’s mantra to pay his workers enough to afford his cars. The new mantra is, pay only a few employees enough to afford your goods, and let the government worry about the rest of them.

America has to be more than a spreadsheet and a flag.

Today’s wake-up is another in our spring bird collection. It is the Orchard Oriole, the smallest of North America’s orioles, it builds hanging, pouch like nests during its breeding season. We get both the Baltimore Orioles and these guys in Mid-May:

For those who read the Wrongologist in email, you can view the video here.

Monday’s Hot Links:

The Wall Street Journal had a blog post open letter to consumers asking why consumers didn’t spend more money. Imagine their concern, since mean US family income is stuck at the same level as in the late 1990s. Remember that the WSJ supports the TPP trade legislation, like the last deal that outsourced millions of middle class jobs. Please, WSJ, go back to talking to companies, and leave consumers alone.

A list of the top 50 restaurants in the world. 5 are in the US. Wrongo and Ms. Right are going to #49 later this month.

In a stunning discovery that overturns decades of textbook teaching, researchers at the University Of Virginia School Of Medicine have found that the brain is directly connected to the immune system.

Owning a home no longer plays the same role in the lives of Americans that it has in the past. And it is clear that many middle-income Americans cannot realistically aspire to become homeowners anytime soon. A recent survey conducted by the American Institute of CPA’s found that most Americans are now more concerned about having enough money to retire than about becoming a homeowner.

China has 30,000 tons of gold, (which is almost more gold than the rest of the world’s central banks, combined). It’s also important to make explicit that the Chinese are slowly laying the groundwork for it to take over the dollar’s role as the global reserve currency sometime in the future.

Chinese state media has warned that war with the US may be “inevitable.” Beijing published a policy paper detailing how its military will shift its focus from land and coastlines to the open seas. They criticized “external countries…busy meddling in South China Sea affairs. The money quote:

We do not want a military conflict with the United States, but if it were to come we have to accept it.

Sunday Cartoon Blogging – June 7, 2015

This week, mass surveillance by the USA Freedom act replaced mass surveillance by the Patriot Act.

It’s as if Kafka and Orwell collaborated on a novel that was too unrealistic to publish. The plot shows how the NSA operates a $multi-billion program in violation of the Constitution. But, EVERY element of that program is protected by national security secrecy, so no one knows about it. In addition, the managers of the program lie to Congress and hide the extent of the program from lawmakers.

Then an NSA contractor informs us that the illegal program exists. As the story unfolds, the contractor is pursued, is forced into asylum, and faces prosecution if he returns home. And he can’t use the fact of that illegal program to defend himself because of state secrecy. Here is Charlie Pierce on the new legislation:

The ambivalence about Edward Snowden, International Man of Luggage, all clears away at one simple point — without him, none of this happens. Without what he did, nobody looks closely enough at the NSA and its surveillance programs even to think of reforming them even in the mildest way, which is pretty much what this is. Without what he did, the conversation not only doesn’t change, it doesn’t even occur.

Without Edward Snowden, this timid effort to roll back from the politics of fear created in the wake of September 11, 2001 would not have happened last week in Washington. Instead of thanking Snowden for his public service and inviting him to come home, the US government is still seeking to arrest him and try him on charges that carry long prison sentences. Bring this hero home.

Is the new Act the same, or better than the old act?

Apparently, phone records were not covered by the founding fathers:

You didn’t lose your privacy, it was transferred to Squillionaires:

In other news, Caitlyn Jenner dominated:

Denny Hastert’s indictment reminded us of who holds the moral high ground:

And California’s water problems get executive attention:

Where Are The Activists?

And why aren’t they out in the streets? Why isn’t every bank office, and every legislature, “occupied?”

The NYT reported on their NYT/CBS News poll on income inequality. It found that Americans are broadly concerned about inequality of wealth and income despite the improving economy. Among the findings:

Nearly six in 10 Americans said government should do more to reduce the gap between the rich and the poor.

Inequality is no longer a partisan issue. The poll found that inequality is important to almost half of Republicans and two-thirds of independents, suggesting that it is likely to be a central theme in next year’s general election. We are already seeing populist appeals by politicians of both parties who are trying to capitalize on the sense among Americans that the economic recovery benefited only a handful at the very top.

Sadly, the surveillance society has changed the costs and benefits of protests. The Occupy movement was crushed with a coordinated 17 city paramilitary crackdown. In this day of background checks as a condition to get a job, a misdemeanor arrest for protesting can make you unemployable. You can find yourself on any one of a variety of official lists that cannot be challenged because of secrecy laws; there are sham arrests like those conducted at Occupy Wall Street or, at the NYC Republican convention in 2004 by then-Mayor Bloomberg.

And the financial services industry seems to be able to get cops to come in and round up people on their behalf.

It is not enough to gather in the street. Once you are there and gathered, it must lead somewhere, there must be a goal. Admittedly, the problem with activism is that the fight is to change perceptions and narratives, and progress toward those goals is slow, and rarely concrete and visible.

It’s astonishing today to see how Americans have been conditioned to think that political action and engagement is futile. The Wrongologist was a demonstrator when the reverse occurred, when activism in the 1960s produced significant advances in civil rights for blacks and women, and eventually led the US to exit the Vietnam War. But today, when activism is an option, quite a few argue that there is no point in making the effort, that we as individuals are powerless. Yet, what Richard Kline wrote about protest in 2010 still applies:

The nut of the matter is this: you lose, you lose, you lose, you lose, and [then] they give up. As someone who has protested, and studied the process, it’s plain that one spends most of one’s time being defeated. That’s painful, humiliating, and intimidating. One can’t expect typically, as in a battle, to get a clean shot at a clear win.

What activism does is change the context, and that change moves the goalposts on your opponent. It also raises the political price for governments that make bad decisions. Demonstrations helped stop LBJ and Nixon from making a few bad decisions. The same principle could apply to the Conservative’s desire to kneecap Social Security, Medicare and Obamacare while they hand out more baubles to their rich friends. This kind of class inequality is deeply un-American, but it has big political benefactors in both parties.

We can’t use the protests of the 1960s as a model in today’s political environment. Back then, power feared the people. Power feared the people because there was a free press to publicize and record events. The White House press confronted presidents; they didn’t pander, or act as stenographers as they do now.

That no longer exists. The press has been destroyed by corporate consolidation and foreign ownership. Investigative reporting and the institutions that nurtured and supported it were alive and well.

In the 1960s, few local politicians would refuse a permit for a peaceful demonstration, if in fact, a permit was even required. That is no longer true. No permit, no demo. The arrogance of power is demonstrated repeatedly right in front of cameras and reporters; the police harass and provoke, restrain and intimidate at peaceful demonstrations. They also create incidents to blame on demonstrators, which are dutifully captured by the cameras.

If one unit of protest worked in 1965, we need 10 units today to achieve similar results. In the meantime, reflect on this quote from a noted demonstrator:

“When the idea is a sound one, the cause a just one, and the demonstration a righteous one, change will be forthcoming”–Martin Luther King, Jr.

See you on Sunday.

End Government Subsidies of Private Equity

We have written about taxpayer-funded corporate subsidies this week. Let’s talk about the Private Equity (PE) industry, where profit margins are pretty high. By PE we mean investing in assets that include equity securities and debt of operating companies that are not at the time of the investment, publicly traded. Having a number of streams of income coming from a variety of investments or income generating assets is one of the best ways to build wealth. You see, hPE is a re-branding of leveraged buyouts (LBOs) which were the way Wall Streeters built wealth in the 1980s.

In the past 35 years, we have seen a finance-led revolution that has generated fantastic wealth for PE managers. PE has in large part, helped create the growing chasm between America’s most wealthy and everyone else. This is shown in the disproportionate numbers of private equity and hedge fund principals in the top .1% of American wealth. That wealth doesn’t only come from just making a killing when the target company goes public or is acquired, it also comes from favorable tax treatments for the PE company principals and investors.

Although the PE industry is often held up as an exemplar of free-market capitalism, it is surprisingly dependent on government subsidies for its profits. In a typical deal, a PE firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it, or taking it public.

The key to this strategy is debt: the PE firms borrow to invest since, just as with your mortgage, the less money you put down, the bigger the potential return on investment. But debt also increases the risk that companies will go bust, so early on, the amount of debt PE firms employed was conservative.

That has changed in the last 10 years. After using debt to buy them, many PE funds now have their portfolio companies borrow even more. They then use that money to pay themselves “special dividends.” This allows them to recoup their initial investment while keeping the same ownership stake.

Before 2000, big special dividends were not common. But between 2003 and 2007, PE funds took more than $70 billion out of their companies. These dividends created no economic value-they just redistributed money from the company to the private-equity investors.

As an example, in 2004, Wasserstein & Company bought the mail-order fruit retailer Harry & David. The following year, Wasserstein and other investors took out more than $100 million in dividends, paid for with borrowed money. In 2011, Harry and David defaulted on its debt and dumped its pension obligations on the US government. And when an investment goes bankrupt, there are more fees, and maybe more tax write-offs for the PE partners.

Taxpayers are left on the hook. Interest payments on that debt are tax-deductible, and when pensions are dumped, a federal agency, the Pension Benefit Guaranty Corporation (PBGC) picks up the company’s pension liability. That means taxpayers are on the hook for those unfunded pensions.

And the money that PE dealmakers earn is taxed at a much lower rate than normal income, thanks to the US tax code’s carried interest loophole, which permits that income to be taxed at capital gains rates.

Most do not know that the single largest source of investment capital in PE funds is government pension funds. According to Preqin, a database company that tracks investment in PE, approximately 30% of capital in US PE funds is contributed by government pension funds. Government pension funds are usually called “public” pension funds, administered by government employees and governed by officials who are directly elected by the public or appointed by elected officials.

A key point about the power and reach of PE. They have more than $3.5 trillion under management. Assuming normal leverage (30% equity) that gives them $11.7 trillion in buying power. That’s about 40% of the value of publicly-traded firms in the US. Think about the political clout they have by investing government pension money. Not only do PE firms own a huge portion of America’s productive businesses, unlike the diffuse ownership of public companies, they control them outright.

So, PE is a government-sponsored enterprise, both via tax subsidy and via funding. We taxpayers are helping them to fabulous paydays, thanks to our Congress Critters.

If PE firms are as good at remaking companies as they claim, they shouldn’t need tax loopholes to make their money. If we capped the deductibility of corporate debt, and closed the carried-interest loophole, it would not prevent PE firms from buying companies or improving corporate performance.

But it would add to our tax revenues, and that might keep a bridge or two from falling into a river during rush hour somewhere in America.

“The American Dream: You have to be asleep to believe it.” -George Carlin

Why Don’t Low-Wage People Get Better Jobs?

Regarding Tuesday’s post, “More About Taxpayers Subsidizing Corporations“, which deals with taxpayers subsidizing the low-wage employees of restaurant chains, long-time blog reader Kevin asks: “Why don’t the folks who flip burgers go out and get better jobs?” Excellent question.

Two thoughts. First, they should move up whenever possible, and the chart below about restaurant employee turnover should lead us to believe that they do move out, if not up. When it comes to workplace changes, everyone deserves the chance to move up into higher positions and therefore, this will increase the rate of employee turnover. Research from Work Institute has suggested that 22% of turnover was due to career development and a higher chance of job growth. Being able to excel in your chosen career can only happen if these people decide to make this change. But, whether they leave or not, those jobs will remain at or below minimum wage, and the taxpayers will continue to subsidize these restaurant corporations who underpay them. It falls to the social safety net to make up the difference. Take a look at restaurant employee turnover statistics:

Source: People Report, a division of TDN2k

The burger flippers turnover is the highest among restaurant hourly employees, and it is growing. These are the people who don’t even get tips, so since employee turnover is the highest where wages are the lowest, it’s the burger flippers who move on. This could also be due to job satisfaction they may feel in the workplace. It could be argued that they do not feel the same level of appreciation within a service profession as they would in an office environment that would buy gifts for employees in order to boost their morale in an attempt to keep them for longer.

A second thought is, what jobs can they move up to? Here is a little background:

The US lost more than 8.84 million private sector jobs in the Great Recession. Now, five years after employment hit bottom in February 2010, private sector employment has returned to prerecession levels. The National Employment Law Project (NELP) indicates in a study that low-wage job creation didn’t just happen in the first phases of the recovery, but today, five years in, job growth is heavily concentrated in lower-wage industries. Lower-wage industries accounted for 22% of job losses during the recession, but 44% of employment growth.

Worse, low-wage jobs account for 100% of the net job growth in the economy. Today NELP reports that there are:

• 958,000 fewer mid-wage jobs than at the start of the recession
• 976,000 fewer high-wage jobs than in 2008

The National Restaurant Association’s 2015 economic forecast says the restaurant industry in 2014 added 1,000 jobs per day. It is projected to provide a record 14 million jobs in 2015.

So, where do the motivated, striving burger flippers go?

The glibertarians say the burger flippers should work hard, save money from their minimum wage jobs, get a better education, and move on to a higher paying job, maybe in an office or a laboratory. OK, that’s possible for some.

They say that Mr. Market determines what the value of a burger-flipping job should be. And, if it isn’t a living wage, the burger flipper should study some more.

But when they move on, odds are that they will move to another low-wage job, more likely than not, in the restaurant industry.

And regardless of what new low-wage job they take, the taxpayers’ subsidy of the Corporatists will continue.

More About Taxpayers Subsidizing Corporations

Yesterday we talked about how apartment rents can’t be afforded by minimum wage workers. Today, we look at one industry with low wage workers, the full-service restaurant industry. Full service restaurants are the large name brands like Appleby’s, Cracker Barrel, Chili’s, Outback and Olive Garden.

Full service restaurants employ over 4 million people and that is expected to grow by nearly 10% by 2022, which means that these companies are in a profitable market segment. The top 5 full service chains made $705 million in profits last year, while paying out another $751 million in dividends and stock buybacks.

A new report by the Restaurant Opportunities Center (ROC), shows that five of the ten lowest paid jobs as reported by the Bureau of Labor Statistics (BLS) are in full-service restaurants. Since many full-service restaurant workers receive wages below what is needed to meet their basic necessities, these workers rely on taxpayer-funded programs in order to meet their basic needs. We pay the full-service restaurant industry a double subsidy:

• High numbers of full-service restaurant workers are on public assistance
• By paying a less-than-minimum wage, customers are paying restaurant workers’ wages directly through tips

The ROC’s analysis looked at utilization of public assistance programs to estimate annual benefit expenditures for families of full-service restaurant workers for the years 2009-2013. Here is a summary of their findings:

• Nearly half of the families of full-service restaurant workers are enrolled in one or more public-assistance programs
• The cost of public assistance to families of workers in the full-service restaurant industry is $9,434,067,497 per year (that’s $9 billion for the math-impaired)
• Tipped restaurant workers live in poverty at 2.5 times the rate of our overall workforce
• The taxpayer underwriting of social programs for low-wage workers in a single Olive Garden is $196,970 annually.

ROC estimated that low wages and lack of benefits at the five largest full-service restaurant companies in the US cost taxpayers an estimated $1.4 billion per year. They focused on the major means-tested public programs that provide income supplements for working families. These included Medicaid and Children’s Health Insurance Program, or CHIP, the federal earned income tax credit (EITC), food stamps (the Supplemental Nutrition Assistance Program, or SNAP), basic household income assistance (Temporary Assistance for Needy Families, or TANF).

Since 1991, the federal tipped sub-minimum wage has been set at $2.13 per hour, but states may establish a minimum wage that is higher than the federal government’s. So restaurant workers in 22 states receive the federal sub-minimum wage of $2.13 per hour, while restaurant workers in 20 states receive higher state sub-minimum wages of up to $5.00 per hour. Restaurant workers in eight states receive the full minimum wage.

Women make up 66% of all tipped workers, and people of color make up 40% of the total. Unsurprisingly, their poverty levels are higher in states that pay a $2.13 sub-minimum wage than in states that pay one minimum wage for both tipped and non-tipped workers.

You will pay more for a meal at most of these restaurants than at the fast food places. And that cost will go up if you believe in a fair wage for a fair day’s work. Naturally, the industry, represented by the National Restaurant Association is fighting any increase in the minimum wage for restaurants. This is something ALEC has been working with the National Restaurant Association and state governments to fight.

How about if the 535 well-coiffed rubber stamps in Washington start by raising the wages on any companies where public assistance subsidizes payroll wages? Why should taxpayer money be going to fund stock buybacks and bonuses to restaurant chain CEOs?

We could dream big, of tying the minimum wage to the cost of local resources like housing. Given the problem we reviewed yesterday, the minimum wage could be linked to how many hours is necessary to pay a month’s rent and utilities.

Every low wage worker needs a place to sleep when they aren’t working. It shouldn’t be on the street so that their employers can repurchase more stock.

On our dime.