The Wrongologist

“Just
because an organization has the power to do something doesn’t mean it should” – Seth
Godin

Seth is
talking about power, policy and public
perception. Consider these overreaches in the pursuit of more money:

• Car
  dealers working to stop Tesla
• The
  NFL refusing to pay sales tax
• Amazon
  trading customer satisfaction for concessions
• Power
  utilities working to stop net metering by solar panel homeowners
• Telecom
  companies working behind the scenes to get the FCC to abandon
  net
  neutrality

Or,
consider Boko Haram stealing female students:

Or, consider Republicans climbing Mount Benghazi (again):

Or, consider the Supreme Court’s focus on prayer at town meetings:

A majority of voters now support reforming the Supreme Court. According to a new survey by the polling firm Greenberg Quinlan Rosner, wide majorities disagree with the Court’s recent string of 5-4 party-line rulings:

• The landmark Citizens United ruling is opposed by a whopping 80-18 margin.
• The more recent McCutcheon decision, which lifted caps on total campaign spending, was said by a 51% to be likely to create more corruption, while 8% suggested it would lead to less.
• By a 60-36 spread, those surveyed said that Supreme Court justices were more likely to be carrying out a personal or political agenda than working to render a fair and impartial judgment, an opinion that cut across party lines.

Overall approval of the Supreme Court has been falling ever since its 5-4 Bush v. Gore decision handed the presidency to George W. Bush in 2000, according to a different survey by Gallup.

Or, consider the continuing denial of climate change:

Or, consider the VA scandal in Phoenix and how badly we have treated returning Vets:

The VA is underfunded and suffers from most of the problems associated with being a fairly low priority Federal bureaucracy. What reportedly happened in the Phoenix VA may or may not be an anomaly. The care at VA centers seems to be good, but once soldiers get home and are out of the service, they are pretty much written off.

Power, Policy and Perception. How often do we get to be wrong about them?

What’s
Wrong Today:

Americans
have found a new source of spending money. After draining their home
equity lines and maxing out their plastic, some people have decided it’s time
to draw down their 401(k)’s. Bloomberg has a disturbing report that shows just that, using the
latest available data from 2011:

An earlier study by the Fed found that in
2010, 9.3% of taxpayers with retirement accounts or pensions were penalized, up
from 7.9% in 2004. As of March 31, the
median size of a 401(k) is $24,400, with people older than 55 having
$65,300 in their accounts, according to Fidelity Investments. These funds can be dissipated quickly
in retirement, and the early
withdrawals
indicate that the coming Boomer retirement crisis could be even more acute than
expected.

This
is not an unheard of phenomenon: As economic conditions deteriorate, withdrawals
have spiked in the past. They did in 1991, 2002 and 2007. The
inflation-adjusted IRS penalty cash collections declined 5% percent in 2011:

Source: Bloomberg

While
the graphic shows that penalties were slightly lower in 2011 than 2010, the fact that it’s higher than the levels
seen during the financial crisis years shows that economic stress is still high
in America.

Adjusted
for inflation, the government collects 37% percent more money from
early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion
in 2013, down 38% from the 2007 peak, according to the Federal Reserve data.

Bloomberg
quotes Reid Cramer, director of the Asset Building Program at the New America Foundation, which tries to improve savings for
lower-income families: (brackets by the Wrongologist)

Under
US law, money in tax-deferred retirement accounts can be removed without
penalty after age 59 1/2 and generally, you must start withdrawing after age 70
1/2. Withdrawals at any age are treated as income for the taxpayer and are
taxed at regular rates. The extra 10% penalty for 401(k) plans applies to early
withdrawals, except in cases of disability and certain medical expenses. And
think about the Fidelity statistics above: The
average 401(k) account for people over 55 holds just $65,300.

The
people who pay the penalty include younger workers who switch jobs and don’t
bother to roll over their accounts and older workers who have no place else to
turn. Here is a demographic breakdown of 401(k)s:

Source:
Bloomberg

Younger
workers ages 20 to 39 cash-out the most, with about 40% taking money with them
when they switch jobs, according to data from Fidelity. However, they take out
the smallest amount. Bloomberg quoted Michael Branham, a financial planner at
Cornerstone Wealth Advisors in Edina, Minnesota:

The
decreased income in retirement from making such a tradeoff is increasingly
damaging as Americans rely more on 401(k)-type accounts that they manage
themselves as opposed to pensions run by their employers. According to a Gallup
survey released May
2, 48% of non-retired Americans plan to rely on retirement accounts as a major
source of income, up from 42% in 2009, though down from a high of 54% in 2008.

And
take another look at the chart: People
in the 60-64 age group take out $36.4k, 2.4 times the average withdrawal,
and about 50% of what they have in the account.

Congress,
and others who are concerned about early withdrawals have two suggestions:
Lower the penalties, or raise them. (Thanks, Captain Obvious!) More restrictive
rules might prevent people from putting money in retirement accounts in the
first place, while lower tax penalties might make them more likely to take money
out of their accounts.

During
the 2008 campaign, Mr. Obama proposed allowing penalty-free withdrawals of up
to $10,000 from retirement accounts. That idea went nowhere and wasn’t included
in the 2009 economic stimulus.

Moving
in the opposite direction is House Ways and Means Committee Chairman Dave
Camp, (R-MI). In
his 2014 plan to revamp the US tax code, Camp proposed repealing the
penalty exceptions for higher education and first-time home purchases, contending that getting rid of the
exceptions would encourage Americans not to tap their retirement accounts early.

Maybe
this is understandable. The latest jobs report showed that the number of
long-term unemployed, measured as the level of people who’ve given up looking
for work and are counted as no longer in the workforce, continues to rise. We’re
also replacing middle class wage jobs with low end retail jobs and that trend shows
no signs of stopping.

So,
where are the jobs that will allow people to replace these drawn down savings? If
someone is already under economic stress, what do you think the odds are that she/he
will be able to repay the loan, particularly since it must be paid back with after-tax
dollars?

It’s
dispiriting to see economists and the financial pundits cheering the signs that
the economy is on the mend, that employment is better and consumers are regaining
their will to shop, at a time when plenty of people are needing to tap their
401(k)s to maintain their lifestyles. Financial advisors need to be able to reach a wider audience to talk about how this could affect their clientel. Going to websites like https://www.leadjig.com/financial-seminar-marketing/ can help them with strategies in this time of financial worry, so they are able to advise in the best possible way.

Withdrawals
which are required because of hardship shouldn’t incur a 10% penalty.

We need
to adjust our social and economic policies, or face up to the fact that the
401(k) piggy banks of many Americans are rocketing towards a brick wall.

What’s Wrong Today:

On Wednesday, President Putin suggested a peaceful solution in Ukraine:

Sounds good. But Putin goes on to say:

So, he is saying “postpone all elections” until we talk some more. Note that Russian Foreign Minister Lavrov has already dismissed calls for a Geneva 2 meeting.

More food for thought: Russia is moving military assets to Crimea for Victory Day. These assets consist of fighter jets, strategic bombers, transport and attack helicopters, paratroopers and SAM batteries.

Putin will attend, so there will be a “no-fly” zone declared for the celebration. A cynic might call this a test run of a Ukrainian “no-fly” zone. Subsequently, Russia could impose a “no-fly” zone on all of Eastern and Southern Ukraine without much warning or preparation.

Those assets could stay in Crimea and be ready for use in the event that the talks break down, or if the referendums go forward and follow the Crimea playbook.

Once it is known that the referendum supports independence, the new republic could immediately request protection from Russia. It is easy to see how that could lead to a Russian “no-fly” zone over Eastern Ukraine. If Kiev cannot control the airspace over Eastern Ukraine, it will be very difficult to win on the ground and avoid a partition of the country.

Mr. Obama and NATO must have game-planned this outcome: Will Russia intervene? What is the logic for a Russian intervention? It is possible that Putin and Angela Merkel have a deal in mind to split the country and avoid a war?

Russia’s Strategy:

Russia is working on driving a wedge between Germany (and the rest of the EU) and the US. Putin is banking on the US escalating sanctions which will cause economic damage to Germany. The harm will be so great that Merkel (or her successor) will distance Germany from the US and move toward Russia.

US Strategy:

The US strategy is to split Russia from the EU. In the long run, that can work, but it will take years just to reduce the EU’s energy dependency on Russia. The US hold on the EU is strong, and the US has cards to play. But first, employing stronger sanctions will cause German unemployment to skyrocket, and much of the EU might freeze one winter, but: “freedom and democracy”!

The WSJ Online reported that the biggest names in German business—including chemical giant BASF, Siemens AG, Volkswagen AG, Adidas AG and Deutsche Bank —have expressed opposition to broader economic sanctions against Russia. As a result, Germany’s position on additional, tougher sanctions is unlikely to shift, barring a dramatic escalation of the conflict in Ukraine—a message Ms. Merkel apparently delivered to Mr. Obama when they met in Washington last Friday.

Germany knows that the US has its back with NATO and it has to spend virtually nothing on its own defense. This allows them to keep doing business with the devil instead of actually standing for something geopolitically. Germany does not want to experience any inconvenience or any sacrifice of its economy.

The big strategic consideration is that Ukraine has the EU’s largest Natural Gas reserves, and they are ready to be fracked. If Ukraine can develop them, it could put a huge dent in Putin’s money machine, and reduce Europe’s dependence on Russia. The gas could start flowing within a year, given political stability. One would think this is a no-brainer, but the Germans and French are not yet trying to get into the game. BTW, there is also lots of frackable Natural Gas east of the Dnieper, where Russia is likely to prevail.

Russia will not invade Ukraine, because it won’t be necessary. The IMF agreements that come with the IMF bailout will be in force. This will lower pension payouts and wages. Fuel prices will have to rise, people are going to be pissed at their own country. Civil war could ensue.

So, Putin’s strategy is to wait.

OK, so what are Obama’s options? Can he wait as well? He knows he can’t be seen to be the loser h
ere. All the rhetoric coming from Washington and the major news outlets is an uncompromising “Russia must stop its ‘provocative’ behavior and accept the coup – that is, Russia must surrender.

There is an American election in November: If Washington does not prevail vs. Russia, Republicans will say Mr. Obama doesn’t have the stuff to make it clear to the world that we will do whatever it takes to enforce our will globally.

This must be Obama’s calculus – Russia folds, or they fight. Then, either way, Obama is a winner. But if Germany has lost the support of its large corporations, Obama has a weak hand indeed.

Given the geography, tactically there isn’t much more that the Administration can do. There will be more sanctions, but absent EU willingness to go further, and given a very disorganized Ukraine that cannot defend itself or pay its own way, Obama is not able to do more than watch Putin and Merkel play out the hand.

Which probably means a partitioned Ukraine, divided by the Dnieper River.

What’s happening in Ukraine is vastly important. It will determine the shape of the blocs facing each other for the next 20 years, and it is playing out right in front of us.

If the US wins the battle for the EU, it probably ensures that China will have Russia’s support and that could have geopolitical ramifications which are difficult to unwind. 

The Ukraine crisis is not a fight for democracy or freedom, but a deadly serious struggle for supremacy and geopolitical influence, with the US and Russia as the major players. Ukraine changes the character of international politics. As the atmosphere turns dark, the task of promoting and maintaining world order grows more daunting.

Future historians will scratch their heads in the same way we do when looking back at the run-up to World War I. Fifty years after Barbara Tuchman’s great book, The Guns of August, it is good to remember that things in the Balkans have a way of spinning out of control.

 

What’s Wrong Today:

Yesterday, we wrote about the Supreme Court’s decision in Town of Greece, NY vs. Galloway. Since then, Interwebs have been ablaze with comments both supporting and hating the decision.

Here for your review are three letters to the editor in today’s NYT in response to their front page article on the decision:

To the Editor:

Politick in public, pray in silence; either way, say whatever you want.

ERNEST F. IMHOFF
Baltimore, May 6, 2014

To the Editor:

It always seems that the very same people (and justices) who believe that the Second Amendment is sacrosanct have no trouble meddling with the First. I have no doubt that if our country’s founders could see the unending string of tragedies resulting from a dogmatic interpretation of the Second Amendment and the repeated trashing of the First, they would make some changes to the Bill of Rights.

The Second Amendment would be dumped and replaced with the following: “Please reread the First Amendment!”

BOB ROSENBLUTH
Lincolndale, N.Y., May 6, 2014

 

And below is the Wrongologist’s favorite. Emphasis is by the Wrongologist:

To the Editor:

As recognized in the Constitution, the proper exercise of government does not require ties to religious practice. Nor is there a need to establish a certain tone before a town government meeting other than to call the meeting to order and to get down to business. Why should an American have to listen to a government-sponsored prayer before taking up issues such as zoning and other town laws and regulations?

When the Supreme Court defers to allowing a prayer to open town meetings, the court itself is in violation of its constitutional duty to protect the First Amendment rights of all Americans. If we have to pray, let’s pray that doesn’t happen again.

BRUCE NEUMAN
Sag Harbor, N.Y., May 6, 2014

Amen, brother Bruce!

What’s Wrong Today:

Remember when conservatives used to be against “activist judges”? Now, they like their shiny new toy, the Roberts Court, particularly after their decision in Town of Greece, NY vs. Galloway, et al. From the NYT:

The 5-to-4 vote divided the court’s conservative members from its liberal ones, and their opinions reflected different views of the role of faith in public life, in contemporary society and in the founding of the Republic

The WaPo quoted Justice Anthony M. Kennedy’s majority opinion:

Justices Thomas and Scalia differed. They said that to the extent coercion is relevant to whether there is a violation of the Constitution’s establishment clause, “it is actual legal coercion that counts.” Peer pressure, they said, is not enough.

Justice Kagan differed from the three conservatives: (brackets by the Wrongologist)

She compared it — using the text of some of the prayers offered before the council’s meetings — to the idea of a judge inviting a minister to open a hearing with a prayer about “the saving sacrifice of Jesus Christ” or an election official reciting the Lord’s Prayer before opening the polls. Kagan wrote:

The facts of the case: A citizen is offended by her government requiring her to listen to a prayer with explicit references to a god she doesn’t believe in as a condition to attending a public meeting. She asks her government to refrain from doing that: A simple request that could have been accommodated in any number of ways. By having the council members choose to meet privately to pray before the meeting, by having a simple moment of non-denominational silent reflection before the public meeting, by working to make sure the opening “prayer” is a rotating event, for which all denominations are invited and for which non-believers also have a slot periodically to use those moments for some other form of statement.

But no. The town fathers say we’re going to continue to pray to Jesus whether or not attendees at our meetings believe in him. And our little town is going to spend taxpayer money litigating our right to do this all the way to the Supreme Court.

This kind of arrogance of government has now been validated by the Supreme Court. This is now what the First Amendment means.

Public meetings for the purpose of conducting government business are just that, business meetings. They are not an appropriate venue for conducting an organized prayer. If individuals should feel the need to pray silently to themselves, go for it.

It doesn’t matter if opening meetings with a prayer has been a long standing tradition; that is not relevant. Slavery and other forms of discrimination were also long standing traditions, yet very wrong.

There is a vast chasm between what goes on at state legislative proceedings and the much more intimate business transacted at the local level. These are small meetings where everyone often knows everyone else. These are neighbors, friends, and acquaintances. And they know whether you are praying or not. They see whether you bow your head or not. Later, they hear the prayer-giver lecturing you on your “ignorance” of the issue before the council, or in fact, of the American system. And, because they share the majority view, they feel a little freer to question whether or not YOU belong.

Worse, that the Greece NY town officials would make a statement that atheists were welcome to give an opening prayer shows the true level of their insensitivity. This decision should have been 9-0 that prayer is a private matter and should not be intertwined with government business at the local level.

Atheists remain the one group among us against whom discrimination is viewed as appropriate. A decision does not become defensible merely because atheists are permitted to give the prayer. A bit of a contradiction in terms, isn’t it?

What’s wrong is the Supreme Court’s clear message that Greece, NY and other towns can now say: “This is not YOUR town council; it’s OUR town council.” It’s the same message African-Americans got from the Confederate flag on the statehouse in South Carolina. In Greece, New York, it means, “This is OUR town, not YOURS. Don’t get any ideas.”

Picture this: Out of respect for those feelings being expressed in a prayer, the sentiments of which are totally foreign to oneself, you respectfully leave the room. You return to questioning looks. What could you possibly disagree with in our simple prayer?

Notice just how well this plays into “us vs. them”?

In public grammar school in the 1950’s, the Wrongologist said the Lord’s Prayer, along with his classmates. Our teacher was Catholic, but the prayer recited included the Book of Common Prayer doxology, which the Catholics (at that time) did not use.

Never mind that there were Jewish kids in the class. This was a violation of the establishment clause of the Constitution, but who knew?

The most important course that the Wrongologist took in college was US Constitutional law with the late Prof. Walter Giles. Studying with Giles informs this blog on a daily basis. He would have hated the Supreme Court’s decision in Town of Greece, NY vs. Galloway, et al.

Giles was famous for his annual Martini Lecture:

Dr. Giles expected much from his students but promised much in return. We studied most of the Supreme Court decisions that had a bearing on Constitutional questions. You had to be able to stand up in class when called upon, and argue either side of the case in question. Giles prefaced every semester’s thick syllabus with a quotation from US Supreme Court Justice Benjamin N. Cardozo:

Enough digression. One of the great disillusionments of this age is the rejection of the values we achieved in the 1960s. You remember the Sixties, when the younger generation questioned everything “the establishment” stood for. We ended up with the Voting Rights Act, civil rights, women’s rights, abortion rights and some people are still pissed about it.

And now, this prayer decision. We do not live in a Christian nation. Most of our founding fathers were Deists. We rail against religiously-run Mideast nations and then our Supreme Court approves the use of religion in our own institutions…are we any better?

Where will the dismantling of the Constitution stop? What gets your blood boiling? Where do you make your stand?

What’s Wrong Today:

Last week, Jesse Eisinger at ProPublica had an article co-published with the NYT Magazine questioning our Department of Justice’s (DOJ) efforts to prosecute bankers for wrongdoing in the 2008 financial crisis. He shows that only one banker went to jail for his actions.

This proves we have a two tier legal system that dovetails nicely with our two tier economic system. The top 1% earn more and also abide by different rules than the rest of us. The banks play by different games, but they are still held by certain standards and terms, for example this current expected credit loss model compliance requirements in 2019.

The only Wall Street “executive” to go to jail for the financial crisis was Kareem Serageldin, the head of a trading desk at Credit Suisse. Serageldin pleaded guilty to holding mortgage-backed securities at artificially high marks in order to minimize reported losses on his trading portfolio.

“High marks” refers to the requirement that banks “mark to market” assets in their portfolios every day. Marking crappy mortgages that had lost much of their original value to market would cause the banks to show higher losses on their loans, and would simultaneously lower the bank’s capital ratios. As James Kwak of the Baseline Scenario says:

The Financial Standards Accounting Board (FASB) changed its rules in April 2009 to make it easier for banks to inflate their marks. And the Obama administration’s “homeowner relief program” (HAMP) was really designed to allow banks to delay realizing losses on their mortgage loans by dragging out—but generally not preventing—foreclosures.

This was a deliberate strategy called “foam the runway”.

Dave Dayden quotes Neil Barofsky’s book Bailout about a meeting between Elizabeth Warren (then Head of the Congressional Oversight Panel) who asked (then Treasury Secretary) Timothy Geithner about HAMP. After trying to avoid an answer, Geithner finally said:

The picture you get isn’t pretty. It’s a picture of the immense resources of the American criminal justice system deployed against bit players, with no consequences for the people responsible for the financial crisis. The judge in Serageldin’s case called his conduct:

Why hasn’t the Justice Department tried to convict anyone at a bank with any significant responsibility? What about Standard Chartered, where manually typing over data fields to circumvent money laundering controls was a written procedure? 

Serageldin’s former employer had revised its past financial statements to account for a loss of $2.7 billion that should have been reported. Lehman Brothers, AIG, Citigroup, Countrywide and many others had also admitted that they were in much worse shape than they initially allowed. Merrill Lynch, in particular, announced a loss of nearly $8 billion, three weeks after claiming it was $4.5 billion.

According to Eisinger, there was a change in strategy about pursuing individual prosecutions starting during the Bush administration, when Michael Chertoff initially went hard at companies like Enron’s accounting firm, Arthur Anderson. Anderson closed after its conviction costing nearly 10,000 jobs. Subsequently, the DOJ decided to seek large fines from corporations for wrongdoing rather than put executives in jail. From Eisinger:  

So the record is clear, they reached financial settlements in 9 times as many cases in 8 years than they had in the prior 12 years. This occurred in part because of a persistent effort to reduce prosecutorial power:

No change was momentous on its own. Indeed, some may have legitimately restored the rights of defendants, but taken together they marked a significant, if almost unnoticed, shift toward the defense.

Then there is the revolving door, which prosecutors and regulators walk through on their career climb up the corporate ladder. Moving from government to Wall Street or the big law firms that serve Wall Street keeps the prosecutions from getting too personal. As James Kwak says:

The erosion of the DOJ’s actual trial skills soon became apparent. In November 2009, the US attorney’s office in Brooklyn lost the first criminal case of the crisis against two Bear Stearns executives accused of misleading investors.

The prosecutors rushed into trial, failing to prepare for the exculpatory emails uncovered by the defense team. After two days, the jury acquitted the two money managers. The fear of losing put a chill on future efforts to prosecute.

Are the bank executives inoculated against lawsuit? Maybe. The prosecution and conviction of global financial institutions and their top executives is believed by the Fed and the Treasury Department to pose systemic risk to the world financial system, so we get spun, and the DOJ asks the banks for fines, not scalps.

All of this has made American banks view the rules of the game the same way that they look at rules in football. There is a rule in football against offensive holding. But nobody considers holding to be cheating, because holding comes with a penalty which is assessed as part of the game:

• It is the offensive lineman’s job to open holes for runners and to protect the quarterback
• It is the referee’s job to observe infractions of the rules and to assess the stipulated penalties

So holding in football is a part of the game which carries a certain risk. The lineman rolls the dice and holds if the situation seems to demand it, and attempts not to get caught, but nobody considers this cheating.

When Wall Street bankers are arrested, they do what is known in finance as an expected-value analysis: They weigh the cost of fighting, how long it would take and the chances of the best and worst outcomes. And they consider the fines to be just a cost of doing business.

How apparent does the death of the rule of law have to become before the little people catch on? Meanwhile, the “little” taxpayers fund these regulatory agencies whose primary purpose is to provide cover for executives involved in corporate criminal enterprises.

The Divide by Matt Taibbi details how the high-income investment banker types pay a fine, admit no personal wrong-doing, and walk away to do it again. It is worth your time and money.

Our society has become really good at punishing the little guy (sometimes for nothing at all) and abysmal at taking on the big fish who are perpetrating economic crimes against society.

“The two greatest obstacles to democracy in the United States are, first, the widespread delusion among the poor that we have a democracy, and second, the chronic terror among the rich, lest we get it” – Edward Dowling

Wealth disparity, a subject we used to not talk about, is now being talked about because of Thomas Picketty and his book, Capital in the 21st Century. The subject was ignored, mostly on purpose, for decades while the cash piled up, much of it offshore. That wonderful outcome was aided and abetted by US bankers and tax lawyers:

If millionaires in the United States formed their own political party, that party would make up just 3% of the country, but it would have a majority in the House of Representatives, a filibuster-proof super-majority in the Senate, a 5-4 majority on the Supreme Court and a man in the White House

After the dust cleared from the Great Recession, we finally saw that the rich had built themselves an impregnable fortress. The rich, and the Congress members they bought and paid for, now lecture the rest of us on how to create jobs, how to cut the deficit and how to get along on a $7.25 minimum wage.

Congress says wages of little people are just enough:

And now they want us to thank them for their concern by electing Republicans to majorities in both Houses of Congress:

Of course, not everyone will have an easy time voting:

But the little people better pay their taxes. We need their money to project power around the world. Well, maybe not in Ukraine.
There is a joke in Latin America: “Why has the USA never had a regime change? Because it doesn’t have an American embassy.”

Europe seems cool with feeding the Bear:

Justice John Roberts spreads the word; some Americans hear the message:

The NBA has a much better understanding of our world than the Supremes:

What’s
Wrong Today:

As of April
21, the Afghan war had cost 2,314 Americans their lives and wounded 19,701. It
is very early for a complete debrief, but the press has started offering
several under-reported stories for Americans to think about.

First, the
revisionist history has started. According to Andrew Peek at the Fiscal
Times:

Win?
Where’s the win? As soon as we leave, the place will go back to where it was.
All that is visible today is a near-trillion dollar expenditure, with limited
benefit to Americans.

Second, we are beginning to see
in-depth studies of what went wrong in Afghanistan. Neil Gordon, of the Project on Government Oversight (POGO) reports on just how concentrated US funding
of Afghan reconstruction projects was. Nearly 90% percent of State Department’s
reconstruction funding—$3.5 billion—was obligated in 55 contracts awarded to just
19 recipients. The Special Inspector General for Afghanistan Reconstruction
(SIGAR) found that, between the beginning of fiscal year 2002 and
March 2013, more than two-thirds of the money ($2.8 billion, or 69%) will go to
just one company—DynCorp.

Readers may
be familiar with DynCorp
International’s colorful history in Afghanistan,
which includes instances of labor smuggling, weak performance and overpayments on a base support services
contract, botched construction work on an Afghan Army garrison, and lawsuits filed by disgruntled
subcontractors.

The second
largest contract recipient is PAE Government Services, which received 15% of
all State Department reconstruction funds. PAE was a subsidiary of Lockheed
Martin until 2011. It
had issues as well:

The law
requires the federal government to award contracts only to responsible vendors—those with satisfactory
records of past performance, integrity, and business ethics. Do these contractors sound like they should
be qualified to you?

There
should have been an outcry in Congress. Why no outcry? Follow the money!

Third, Bloomberg just got its hands on a previously undisclosed Pentagon study
that says in part that the US government:

The details
are surprising. Analysts for the US Joint Chiefs of Staff said in a 65-page
assessment dated Feb. 28 that:

The
Pentagon analysts found that the US coalition “was slow to understand the
integrated and pervasive threat corruption posed” to their mission:

The assessment
found that the initial US focus in late 2001 on defeating the Taliban and Al-Qaeda “created mutually dependent relationships” that “empowered” warlords,
and “expanded their [warlords] opportunities for financial gain and impeded
later” efforts to counter corruption:

The
widespread use of Afghan trucking companies, which employed security
contractors, became a primary engine of corruption, according to the report:

Bloomberg
speculates that once the report is released, it might undercut any remaining
support by Congress and taxpayers for the diminished mission. The war has cost
the US more than $710 billion since 2001, according to the National Priorities
Project, which studies federal spending.

The report’s
money quote may be that the US federal
acquisition system is “more suitable to Peoria than Kabul”. Gee whiz.
Modern nation state meets feudalism; fails at playing feudal lord.

For the US
government to say that it was unaware of the extent of corruption in Afghanistan
is startling. If any of them had bothered to read the history of Afghanistan,
they should not have been surprised.

What an
affront to the intelligence of American citizens.

Finally,
the Fiscal
Times reports
that the US has spent $7.5 billion on counter-narcotic programs in Afghanistan.
The result? Record high opium-poppy
production. A report to Congress by the Special Inspector General
for Afghanistan Reconstruction detailed figures from the United Nations Office
of Drugs and Crime estimating that opium-poppy cultivation in Afghanistan this
year will reach an all-time high, jumping up 36% from just two years ago:

Afghanistan
produces about 75% of the world’s opium, which is estimated to account for 4%
of the country’s GDP. That share of GDP climbs to 14%, factoring exports such
as heroin and morphine. Nice work! We got the exact opposite of what we thought
we were paying for.

Americans should
be saying: “I’m mad
as hell, and I’m not gonna take this anymore”.

Then they need to ask: All that money spent in Afghanistan,
and for what?

If Americans aren’t distracted by missing planes and racist team owners, they
might also want to focus on questions like:

• Why
  aren’t our bridges getting replaced?

• What
  happened to the money to fund our schools?

• Why
  are returning Afghan veterans begging on street corners?

• Why
  are there empty houses down the block?

• Why
  can’t their son or daughter get a job and move out?

• Why
  can’t they retire?

Has anyone
actually seen their congressperson lately? Why is he/she running the same ads
he/she ran two or four years ago?

Then they
need to ask themselves: How will I make a difference in all of this?

What’s
Wrong Today:

It’s May
Day in the US, May Day was celebrated by early European settlers. International Workers’ Day began in the
US as a commemoration of the Haymarket Massacre of 1886 in Chicago. After the
1917 workers’ revolution in Russia, May Day
became a widely celebrated holiday in industrial areas of the US.

So, with
workers on today’s radar, it is appropriate we continue yesterday’s discussion of how low-wage jobs are driving
our recovery from the jobs lost in the Great Recession. Reader Linda S. called
out an article in the Wall
Street Journal about the decline in apprenticeships available from US
corporations. From the WSJ:

Here is a WSJ chart that describes the current apprenticeship
situation:

Most of us
are unaware that there is a National Apprenticeship Act that was passed in 1937, an earlier
poor economic environment. It is administered by the Department
of Labor (DOL), and
establishes minimum standards for apprenticeship programs. The Act was later
amended to permit the DOL to issue regulations protecting the health, safety
and general welfare of apprentices, and to encourage the use of contracts in
the hiring and employment of them. Subsequently, additional regulations banning
racial, ethnic, religious, age and gender discrimination in apprenticeship
programs became part of the Act.

Earlier
this month, President Obama set aside $100 million to go toward apprenticeships
in high-growth industries, and recognized a few new programs in health care,
information technology and supply-chain management. Whilst in the UK people can get cips level 4 apprenticeships, this is at least a start towards diverifying the options over here in the States.

So, with
government assistance and oversight, why are these programs declining in usage?

Perhaps the
biggest obstacle is that two-thirds of
apprenticeship programs in the US are in the construction industry, and
jobs in construction have just not recovered:

Construction
jobs are down by 1.2 million since the start of the Great Recession.

Apprenticeships
involve more industries than the handful of trades that embraced the
earn-and-learn model that began in 1937: Wastewater technicians and
computer-system administrators are among the positions for which apprentices
can now train.

Another damper is a widely held view that young people should
stay in school and then get a job. Advocates of apprenticeships say this
thinking is misguided. The WSJ quotes
Brad Neese, director of Apprenticeship
Carolina, a program of the South Carolina Technical College System:
(brackets by the Wrongologist)

South
Carolina has had great success increasing the number of apprenticeships.  The number of SC businesses offering
apprenticeships has grown from 90 in 2007 to 647 today. Some 4,700 people who
trained in South Carolina’s apprentice program are now fully employed. To get
employers involved, the state offers a $1,000 annual tax credit for each
apprentice on the payroll. More from Mr. Neese:

Apprenticeships
are very much alive in the professions, we just call them something else. What
is a MD’s residency but an apprenticeship? (albeit paid for by Medicare) Accounting and Law work the same
way, you leave school and work like a slave for a few years in exchange for paying
tuition (in the form of longer hours and lower wages) while getting real world skills.

Universal
acceptance of apprenticeships in corporate America is not an easy problem to
resolve. Our current educational system poorly serves the need for skilled
workers. Schools regularly push their students (especially the
“smart” ones) towards college education and many parents, perhaps
unaware of other options, go along with this line of thinking.

The
desire by parents for their kids to have a gradual “socialization” experience by attending college, is likely another contributing factor.
The other side of the problem is that companies are often reluctant to offer
apprenticeship programs because they fear (often with good reason) that the graduates
of such programs will be quickly “poached” by other companies who do
not offer training programs. (See our High Tech Collusion column which describes the
prevalence of “no-poaching” agreements in Silicon Valley.) 

Germany’s success, as the chart above shows, might be a model for US apprenticeships.
Their strategy, apart from producing skilled workers, also provides options for
further education. In that system, a skilled toolmaker can go on to earn a
doctorate in engineering. The political and social structure required by such a
system would probably not be welcomed in the US as it would involve interlocking arrangements between government
industrial policy and corporate strategy, which US conservatives would
label as “excessive interference” in markets or, as “socialist”.

Thirty
years ago, throughout the US, it was quite typical for a company to pick up
tuition costs for part-time attendance at major public or private universities
or at community colleges, provided that the courses were work-related and part
of a technical degree program.

As soon as corporate America sold the
concept of H1B visas to Congress that policy started to evaporate. Many
American companies don’t train their workers (so much) anymore. Most of those
companies treat employees as disposable assets and focus more on short-term profits
than building skill sets and loyalty by their employees.

Our industries would work better if
more schools offered technical courses for interested students. In past years,
students in industrial schools completed their apprenticeship while in high school.
That allowed them to enter the working world as journeymen, able to earn a good
living.

And despite
what corporate America says they want, there’s NO such thing as finding the
“ideal” employee, one that is young, without unreasonable salary demands, but
with a complete skills set.

That is unrealistic,
just like searching for the “ideal boss”.

What’s Wrong Today:

The news today comes in two flavors. Bad and awful. Some of you probably saw Sunday’s New York Times article By Annie Lowrey in which she quotes from a National Employment Law Project (NELP) study. The study showed that in the last recession, the economy lost more higher wage jobs than it has gained since then, and it has created more low wage jobs than it had previously lost.

The study found especially strong growth in restaurants and food services, administrative and waste services and retail trades. Those industries — which often pay wages at the federal minimum — accounted for about 40% of the increase in private sector employment over the past four years.

In essence, America’s economy has replaced good jobs with bad ones:

That’s the merely bad news. The awful news is that this is how we have finally regained all of the jobs lost in the recession that began in 2007.

The next day, the Times published a rebuttal by Justin Wolfers:

Sure. Mr. Wolfers must be a charter member of the Society of Apologists for Plutocrats (SAPs).

Retail employed 15.26 million people (seasonally adjusted) last month. 13.049 million retail jobs were non-management (production and non-supervisory). For those keeping score, that is 85.5% of retail jobs. Those jobs averaged 29.9 hours/week, down a half-hour from a year ago and pay an average of $14.26/hour. That’s a yearly income of less than $22,000. Most jobs in retail are not in management. And most of those working in retail are going to earn less than the poverty level for a family of 4 in the US.

The larger point is that, using the NELP study, 22.4% of the jobs lost in the 2007 recession were in the lower-wage category, but 43.9% of those created since then are lower wage. This trend must be seen not just against the backdrop of the deteriorating quality of American jobs but the country’s growing inequality.

It is clear that hard work and integrity are no longer guarantees of upward mobility in America. We could easily see a corrosive class envy coming to a boil. Here is an illustration of the point:

It’s clear that the top 10%–the class of finance guys, hedge fund managers, technocrats, professionals, and entrepreneurs, have managed to increase their wealth in the past 20 years, while the 90% have just been treading water. A household income of $150,000 a year qualifies as a top 10% income.

Breaking out of the bottom 90% has become only a dream for the average person.

If recent college grads can only find jobs in retail, hospitality and food service, or underpaid/unpaid internships just to cling on to their “dream career”, how can we expect them to get married, purchase a home, purchase a car, purchase the goods and services that will sustain our economy’s fragile recovery?

We are in the late stages of the recovery from the Great Recession. There is a good ch
ance that that the “job creators” will do nothing that brings about any change to the current crapification of our economy.