Late Stage Capitalism

The Daily Escape:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“….threatening the very underpinnings of society.”

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

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

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

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

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

 

Sources and reading list:

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

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

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

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

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

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

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

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

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

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

Alternative Views:

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

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

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Monday Wake Up Call – September 12, 2022

The Daily Escape:

Harvest Moon, Cape Cod National Seashore, MA – September photo by Tom Baratz

With all of the media’s coverage of the comings and goings of the British monarchy, Wrongo’s certain that you missed the reviews of a new book, “Slouching Towards Utopia” by Brad DeLong, an economist from UC Berkeley. Dylan Matthews in Vox quotes DeLong from the book:

“The 140 years from 1870 to 2010 of the long twentieth century were, I strongly believe, the most consequential years of all humanity’s centuries.”

Matthews thinks it’s a bold claim. After all, homo sapiens has been around for at least 300,000 years; DeLong’s “long twentieth century” represents 0.05% of that history.

But DeLong says an incredible thing happened during that sliver of time that had eluded our species for the other 99.95% of our history: Before 1870, technological progress was glacial, but after 1870 it accelerated dramatically. More from Vox:

“DeLong reports that in 1870, an average unskilled male worker living in London could afford 5,000 calories for himself and his family on his daily wages. That was more than the 3,000 calories he could’ve afforded in 1600, a 66% increase….But by 2010, the same worker could afford 2.4 million calories a day, a nearly five hundred fold increase.”

DeLong is speaking of the nations of the rich north, not about all nations. He’s saying that food surplus was the key driver of progress. What’s implied is that the greatest difference between the wealthy and everyone else was that the poor were living on the verge of starvation. Those basic economic facts shifted once having enough to eat ceased being society’s most critical status distinction.

Another interesting statistic from the book:

“…the average number of years of a woman’s life spent either pregnant or breastfeeding…has gone down dramatically, from 20 years of a typical woman’s life in 1870 to four years today.”

Most historians present modern history as a long 19th century (from the French revolution in 1789) to the crisis of 1914. Which is then followed by a shorter 20th century ending with the fall of communism. DeLong, by contrast, argues that the period from 1870 to 2010 is best seen as a coherent whole: the first era, he argues, in which historical developments were overwhelmingly driven by economics.

From the Economist:

“…despite the Industrial Revolution…for millennia, technological improvements never yielded enough new production to outrun population growth. Incomes had stuck close to subsistence levels. Yet from around 1870, growth found a new gear, and incomes in leading economies rose to unprecedented levels, then kept climbing.”

DeLong says that economic policy in this period was a duel between the ideas of Friedrich von Hayek, who extolled the power of the free market, and Karl Polanyi, who warned that the market should serve man, not man serving the market.

Before WWI, markets generated rapid growth along with soaring inequality. People pushed back, demanding greater political rights, which they used to pursue regulation of the economy and improved social insurance.

After WWII, a mix of a market economy and a generous safety-net made for a happy marriage of Hayek and Polanyi, improved by Keynes, who said that governments should act to prevent economic recessions. This led to a three-decade post-war period of growth unmatched before or since. DeLong calls them the Thirty Glorious Years; from 1945 to 1975, as the US and Europe recovered from World War II.

But when growth sagged and inflation rose in the 1970s, voters supported politicians promising market-friendly, or “neoliberal”, economic growth reforms, like lower taxes and reduced regulation. But those reforms didn’t keep economic growth high. And they also led to even worse inequality. Still, the US and other rich countries pressed on with them, right up to the 2008 global financial crisis, which marks the end of DeLong’s 20th century.

According to a paper by Carter C. Price and Kathryn Edwards of the RAND Corporation, had the more equitable income distribution that America experienced in those thirty glorious years stayed constant, the aggregate annual income of Americans earning below the 90th percentile would have been $2.5 trillion higher in just the year 2018. That’s an amount equal to nearly 12% of GDP.

Price and Edwards say that the cumulative inequality cost for our 40-year experiment in government-supported income inequality added up to $47 trillion from 1975 through 2018. And probably equaled $50 trillion by 2020.

That’s $50 trillion that would have made the vast majority of Americans far more healthy, resilient, and financially secure.

So, the big unanswered question is: Can we again return to a period where we see both economic growth and equitable growth? It’s highly doubtful. As DeLong says in Time:

“Our current situation: in the rich countries there is enough by any reasonable standard, and yet we are all unhappy, all earnestly seeking to discover who the enemies are who have somehow stolen our rich birthright and fed us unappetizing lentil stew instead.”

The problem here is that our entire culture, economy and even our civilization is predicated around growth and people haven’t known anything else. Hope you’ve enjoyed the ride.

Time to wake up America! We need to reimagine capitalism, our taxation policies and our welfare scheme if we are to survive. Expect a rough adjustment.  To help you wake up, listen, and watch Bruce Springsteen perform “Darlington County” live in London in 2013:

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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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Musk Buys Twitter

The Daily Escape:

High tide, Bandon, OR – April 2022 photo by Bobbie Shots Photography

The Boston Globe is reporting that Musk is purchasing Twitter.

Musk is one of the great entrepreneurs of the 21st Century. He’s redefining space travel with SpaceX. He’s revolutionized internet communication with his Starlink low-earth orbit satellites, having more than 2,000 satellites in orbit. And he’s made Tesla the global leader in Electric Vehicles. And that has made him very rich.

Now he’s using some of his Tesla money along with a lot of Other People’s Money (Morgan Stanley, Barclays, and Bank of America) to buy Twitter and take it private. Bloomberg says Musk’s pledging $21 billion of his own money. The Banks are going to lend him $12.5 billion, secured by an additional $62.5 billion of his Tesla shares.

The rest of the purchase price will be funded by $13 billion in debt that Twitter will take on. After the deal closes, Twitter will have about $1 billion in interest payments due on the new debt annually. Twitter’s cash flow is projected to be about $1.43 billion this year and $1.85 billion in 2023. So debt payments will now be a huge chunk of Twitter’s future cash.

Since this is America, it’s unlikely that any government agency will stand in the way of the sale, but there are two things wrong with it.

First is how Musk became so fabulously wealthy. As Ranjan Roy points out at Margins, his rapid ascent to wealth is due to his unusual compensation package at Tesla. The package set what appeared to be unrealistic goals for sales and profits.

In early 2018, when the comp package was agreed, there was plenty of doubt whether Tesla could scale its manufacturing capacity. Musk had repeatedly said Tesla was on the verge of bankruptcy, yet over the next few years, Tesla both stabilized and grew. It went from producing around 90k cars/quarter in 2018, to nearly 300k in the last quarter of 2021. Revenue grew from $12 billion to $54 billion. Tesla produced nearly 1 million cars in 2021.

At the same time, Tesla’s stock price went to the moon, making Musk the world’s richest human. Not incidentally, much of that was helped by Musk’s tweeting. Ranjan Roy says:

“…since the Spring of 2013, it was clear Tesla’s business results and Musk’s tweeting could have a self-reinforcing impact, and that…cycle…became more clear in recent years. Shortly after Musk signed his giant package, the really high-volume tweeting began, and the rest is wealth accumulation history.”

Musk realizes that he’s dependent on his Twitter marketing strategy. He has 80+ million Twitter followers, and unfettered access to his account is vital to his current and future business interests. Why? His current Tesla 10-year pay package has nearly hit its maximum targets in just four years.

Musk needs to think about where he gets his next giant gain in wealth.

This is the challenge of today’s capitalism: Boards with little real vision give stupendous compensation packages that turn out to be easily achievable. And the SEC allows entrepreneurs with media savvy to pump up their own stock at little personal risk.

Yes, Musk and Tesla have both paid fines to the SEC for stock manipulation. In a September 2018 settlement, Musk and the SEC agreed that he would step down as Tesla Chair and pay a $20 million penalty. Tesla also had to pay a $20 million fine.

But these were just minor costs of doing business compared to the personal wealth he’s created.

The second problem is that Musk, (and maybe a few on Twitter’s board) think that individual users should decide who and what gets seen and heard online. Musk says he wants Twitter to be an open playing field for competitive speech.

That may be peachy in the abstract. But we all know that every unmoderated platform goes to shit because it only takes a few bad-faith users to make it miserable for everyone.

For now, Twitter has decided that Trump can’t post on its platform. It decides whether to delete a post about vaccines if it deems the post to be misinformation. Most people don’t have the time to learn what’s real and reliable, and history shows how susceptible most are to harmful misinformation campaigns. Expect this to change after Musk buys Twitter.

Scott Galloway says:

“In an unmoderated online forum, all speakers do not play by the same rules or have the same tools. University of Maryland professor David Kirsch has found that automated pro-Tesla Twitter accounts are responsible for 20% of the tweets about Tesla, and that the launching of these bots correlates with increases in the company’s stock price.”

Rupert Murdoch transformed media in order to exercise greater influence over society. Does America need Musk to become another Murdoch? There’s a good chance one of his first acts as the Tweeter-in-Chief will be to re-instate Trump’s account, something that will have very serious political consequences.

Wrongo is a capitalist, but we’ve always needed rules to reign in the worst of the market’s players. And rules require umpires. Without umpires, anticompetitive and illegal acts go unpunished. Worse, today people insist, in the name of freedom, on their right to shout down all dissenting voices.

In America, underregulated economic winners have funded think tanks. Some have bought politicians. Some, newspapers and cable news stations. Musk is buying Twitter. They’re trying to convince us that the umpire is the enemy.

Musk wants you to live in a Wild West of speech and power. Are you ready for that?

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Why Won’t Manchin Help Keep Jobs in West Virginia?

The Daily Escape:

Grand Canyon NP at golden hour – photo by indieaz

Viatris is a new pharmaceutical company formed by the merger of Mylan and Upjohn late last year. Their strategy for improving profits post-merger was as is usual, to restructure and cut $1 billion in costs. One victim of the cost-cutting is the Viatris plant in Morgantown, West Virginia. The company announced the plant would close last December.

The Morgantown plant has been in operation since 1965. It employs between 1,500 and 2,000, whose jobs will be offshored to India and Australia. These are well-paying jobs in one of America’s poorer states. The bulk of the layoffs will occur on July 31, when 1,246 people will be let go, including 764 union workers and 482 nonunion staff. Complete closure will happen by March 2022.

Mylan reported $3.9 billion in profits in 2019. Naturally, local union president Joe Gouzd had harsh words for Viatris:

“This is the last generic pharmaceutical manufacturing giant in the US, and executives are offshoring our jobs to India for more profits. What is this going to do to us if we have another pandemic?”

The local union represents about 900 workers. Gouzd said:

“…we’re going to rid ourselves of 2,000 high-paying jobs in north central West Virginia, taking out $150m to $200m out of the local economy…”

The West Virginia legislature passed a bill calling on Governor Jim Justice and Joe Biden to save the jobs. Biden has proposed taxing companies that offshore jobs, but it remains to be seen whether he will be successful.

Senators Elizabeth Warren and Marco Rubio introduced the Pharmaceutical Supply Chain Review Act to study America’s over-reliance on foreign countries in pharmaceutical industry, but neither West Virginia Senator has sponsored the bill.

The Guardian reports that Republican Senator Shelley Moore Capito has ignored pleas to work with Biden officials to save the plant. Democrat Joe Manchin, whose daughter Heather Bresch served as Mylan’s chief executive until she retired in 2020, didn’t fully ignore their requests to get involved; he held a Zoom meeting in December that might as well have focused on “thoughts and prayers.”

Isn’t it curious that the state’s two Senators aren’t trying hard to keep jobs in their state?

You probably hadn’t heard that Bresch collected $37.6 million when she stepped down from Mylan. You also missed that under her leadership, Mylan recently undertook what’s called a “tax inversion”, changing its headquarters for tax purposes from Pittsburgh, PA to the Netherlands, reaping big tax breaks. So, less tax revenue for America.

Earlier, Mylan disclosed that it is in an ongoing lawsuit by the Public Employees Retirement System of Mississippi that alleges misconduct by the company. The suit alleges “misrepresentation and concealment of violations of FDA regulations governing pharmaceutical product quality and safety.” In 2016 and in 2018, the FDA found documentation, record-keeping, quality-control and cleaning issues. The plant was shut down temporarily after the 2018 findings. It then reduced production volume by about two thirds, and “right sized” plant staff.

But we initially heard about Ms. Bresch during Mylan’s EpiPen pricing controversy. They had been hiking prices for years on their epinephrine injector to the point where many people could no longer pay for it. Along with the EpiPen fiasco, Mylan paid $465 million to the federal government to settle claims it underpaid Medicaid rebates.

Understandably, the town and the state are looking for ways to head off the layoffs. Last week, members of the union and others rallied outside the state capitol in Charleston to urge Republican governor Jim Justice to help save the facility. According to the union, Justice said his administration was trying to find an alternative to closure, including holding talks with two companies that have expressed an interest in buying the plant.

But Justice said that Viatris was not cooperating:

“We’ve talked with Viatris, and we continue to struggle with them….They’re difficult to work with. The least they could do …is be cooperative.”

So, Viatris isn’t the best of corporate citizens. That doesn’t make them different from most multinationals. That means political pressure is the only leverage that will keep these jobs in America.

Yet, when you see these two “bipartisan” Senators not lift a finger to help the soon-to-be unemployed citizens of their own state, you have to ask: Why haven’t they done more?

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Are the Wrong People Manipulating the Market?

The Daily Escape

Green River covered bridge in Guildford, VT photo by jackalatch

Out of nowhere, we’re all hearing about “GameStop”. From The NYT:

“Traders on the Reddit message board, r/wallstreetbets, a community known for irreverent market discussions, made GameStop their cause du jour and rushed to buy out-of-the-money GameStop options.”

GameStop (GME) is a struggling, mid-size retailer stuck in a legacy business. They sell physical video games in a world where you buy and play them online. The financial fundamentals for GameStop suggest that its price should be below $20. It’s a real company, with about 53,000 employees, but it’s not worth anything close to its current valuation. It began the year at $19, got as high as $350, and is currently dropping like a stone, at about $196 right now.

Here’s how the r/wallstreetbets crowd made it happen: A hedge fund shorted GME — betting the price would go down — and thousands of retail investors banded together on Reddit to buy the stock, driving the price up. That caused the hedge funds to lose money, since they had to buy the stock for more than they had sold it for.

The r/wallstreetbets crowd numbers about 2 million subscribers. They realized that GME’s float (the number of shares physically available to trade) was very small, small enough that any large order or volume of buy orders would greatly affect its share price.

They knew that GME’s stock could be driven up to the point where the hedge funds that shorted the stock would have to panic-buy them to cover their short positions and contain their losses. They also understood that this could seriously damage those hedge funds.

This is known as a short squeeze, and Wall Street players do it all the time. What’s different is that a bunch of day traders got in on the action. A well-executed short squeeze is a thing of beauty, and in this case, it’s out in the open, and probably legal.

No one seems to be managing this effort. It’s a self-organized campaign with people using message boards to communicate with each other. What’s interesting is that this time, it’s the institutions that were caught with their pants down.

R/wallstreetbets is drawing on techniques used during the 2016 presidential election. Over the course of that campaign, a loosely organized community of alt-right meme pushers and their followers, located on sites like 4chan and Reddit, used social media to barrage Hillary Clinton with an endless flow of memes targeting her supposed inauthenticity and corruption.

They exploited social media to disrupt the normal workings of the US political system, just like these traders are doing this week to the pros on Wall Street. Interestingly, the traders on r/wallstreetbets, describe themselves as “Like 4chan found a Bloomberg Terminal”. It’s a remarkable testament to the internet’s ability to facilitate collective action.

From Bloomberg:

“This is all fascinating. In the space of 12 years, the role of the short-seller has turned on its head. Back in 2008, it was the shorts who upset the status quo, revealed what was rotten in the state of Wall Street, and brought down the big shots. They were even the heroes of a big movie. It was the Wall Streeters who attacked them.”

Now, short-selling hedge funds are seen as part of a corrupt establishment (as they should). And there is a deep generational divide: those unable to own their own home, who have student debt up the wazoo, and are forced to plan retirement without a pension have a stunningly unfair deal, compared to those of an older generation. That percolates into anger, in this case, partly directed at hedge funds.

Anger, at least as much as greed, has the capacity to make us throw caution to the winds. Many of us have a lot to be angry about. It’s impossible to foresee the consequences of similar angry bubbles driven by social media.

It also made a few titans of Wall Street angry. Here’s Leon Cooperman:

This is hilarious! Short positions get squeezed all the time, but the fact that he’s losing to a bunch of losers, who are “sitting at home getting their checks from the government, trading their stocks.” is unacceptable!

For God’s sake these people didn’t even go to Wharton!

And early on Thursday, Wall Street got a measure of revenge, when the trading platform Robin Hood suspended trading in GME. More than half of all Robinhood users own at least some GameStop stock.

No shortage of irony when you’re named Robin Hood, but you protect the rich by blocking everyday citizens from trading.

It’s almost as if capitalism is a tyrannical system arranged to benefit a select few.

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Sunday Cartoon Blogging – June 23, 2019

Iran’s solution to possible war with the US. If this happened, Trump would say he got a love letter from the Ayatollah:

Little-known technology shows Pentagon the best story to use about its reasons for war:

This week, the Trump administration argued in court that detained migrant children do not require basic hygiene products like soap and toothbrushes in order to be held in “safe and sanitary” conditions:

Mitch ain’t willing to discuss reparations:

Reparations are a difficult subject. As the historian Howard Zinn said, “You can’t be neutral on a moving train.” He meant that you either abide the status quo, or you oppose it. You either commit yourself to be the best anti-racist you can be, or you don’t. Whichever you choose, you should be honest in how you frame your choice. Saying that reparations are not worth pursuing, or simply doing nothing about them, is an implicit defense of the policies and systems that have created our present-day racial inequities.

The Supremes held 7-2 that a cross located in a war memorial could be displayed on public property (at a traffic circle). They said that some crosses are merely historic icons. Their decision favors one religion over others, and it seems hostile towards religious minorities. And why won’t Christians act like Christians?

How the Capitalism game actually works:

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Is Ending Income Inequality a “Radical” policy?

The Daily Escape:

Mount Robson & Berg Glacier, BC, Canada – June 2019 photo by DrTand the women

New York Magazine’s Eric Levitz writes: (brackets and emphasis by Wrongo)

“…the Federal Reserve just released…its new Distributive Financial Accounts data series [that] offers a granular picture of how American capitalism has been distributing the gains of economic growth over the past three decades. Matt Bruenig of the People’s Policy Project took the Fed’s data and calculated how much the respective net worth of America’s top one percent and its bottom 50 percent has changed since 1989.

He found that America’s super-rich have grown about $21 trillion richer since Taylor Swift was born, while those in the bottom half of the wealth distribution have grown $900 billion poorer.”

This is what a few of the Democratic presidential candidates have been talking about, some loudly and some quietly, for the past few months. Levitz asks the right question:

“So, is an economic system that distributes its benefits in this manner consistent with Americans’ common-sense views of economic justice? If not, would incremental changes be sufficient to bring it into alignment with the median American’s values? Or would more sweeping measures be required?”

In a sense, Democrats are testing whether advocating for changing Capitalism is an argument that voters will accept in 2020. More from Levitz:

 “Some Democratic presidential candidates say that America’s economic system is badly broken and in need of sweeping, structural change. Others say that the existing order is fundamentally sound, even if it could use a few modest renovations. The former are widely portrayed as ideologues or extremists, the latter as moderates.”

Essentially, the question is “who’s the extremist?” in the Democratic Party. This conflation of “extreme” or “radical” with “bad” is what the GOP and the Main Stream Media do every day, and it weakens our policy-making.

We use “extremist” or “radical” as a way of signaling that a policy position is too awful to consider.

If you simply say that something is bad, then you are forced to defend your position. But, when you describe it as “extreme“, you’ve called it bad, and people will HEAR that you think it’s much too big a change to even discuss.

Respectable talking heads like Judy Woodruff will ask: “Will Americans really go for THAT?”

This is bad faith messaging about important questions. This is so ingrained into people who talk about politics that it largely goes unquestioned. We shouldn’t care about pundits and broadcasters saying how extreme or not extreme something is. We should care about the merits of the argument.

Republicans have been calling Democrats “extreme” “radical” and “Socialist” for decades. They’re using bad-faith tactics; de-legitimizing an idea or a candidate without having to debate on the merits.

Bernie Sanders and Elizabeth Warren are offering “extreme” policies only if our baseline is what the average Congress critter’s economic agenda looks like. It’s not clear why that’s an appropriate yardstick.

Did we think calls for sweeping change in Egypt were extremism when students took to the streets demanding basic civil rights? Do we think the young people demonstrating today in Sudan are radicals?  Our assessment (and support) of these dissenters’ ideologies has more to do with how far their values are from those of their corrupt political and military leaders.

And also by how close they seem to be to our core values.

Whether it is extreme or moderate to propose sweeping changes to American capitalism should depend on how close our existing system is to how a just economic system operates. And these latest data show that the one percent have gotten $21 trillion richer since 1989, while the bottom 50% have gotten $900 million poorer.

This is what economic class warfare looks like. Saying that isn’t hyperbole. The earnings and wealth of a majority of our citizens has been systematically declining with the complicity and power of our government, in order to benefit the rich.

It shows how bad things are when the “radical” in American politics is anybody who argues that the American economy isn’t working for a huge percentage of the population.

Judy Woodruff may think that the economy is great, but incrementalism has failed most of us for the past 40 years.

Given all this, any politician who insists that American capitalism is “already great” is clearly someone who is indifferent to economic inequality.

We need to adopt redistributive economic policies. That may sound like an extreme position, but the alternative of continuing our growing wealth inequality, should really be thought of as far more radical.

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Boeing: Poster Child for Capitalism Reform

The Daily Escape:

La Sal Mountains in background, Canyonlands NP and Colorado River in foreground, UT – 2019 photo by Larnek

The Boeing 737 MAX story is getting worse. Just when you thought you had the whole story, you find more ugliness underneath. Ralph Nader published an open letter to Dennis A. Muilenburg, CEO of Boeing, and it’s quite the takedown, capturing the essence of Boeing’s problem:

“Aircraft should be stall-proof, not stall-prone.”

The stall-prone MAX was supposedly fixed, but then it failed. Nader has a personal interest in the MAX’s problems, since his niece, 24-year-old Samya Stumo, was among the 157 victims of an Ethiopian Airlines flight crash last month. Here’s a part of his letter:

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

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

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

Nader notes that Boeing is one of the companies that MarketWatch labelled as “Five companies that spent lavishly on stock buybacks while pension funding lagged.” Their pension fund is only 79.6% funded. More:

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

Nader’s focus on stock buybacks shows that Boeing had the capital to invest in developing a new plane. From Bloomberg in 2019:

”For Boeing and Airbus, committing to an all-new aircraft is a once-in-a-decade event. Costs are prohibitive, delays are the norm and payoff can take years to materialize. Boeing could easily spend more than $15 billion on the NMA, according to Ken Herbert, analyst with Canaccord Genuity….”

NMA means the New Middle-of-the-Market Aircraft. Boeing has already spent a total of $30 billion in share repurchases, with another $8 billion to come in 2019. A new aircraft would have cost half of that amount.

The main reason may have been Boeing’s earlier problems with the launch of the 787:

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

The 737 MAX was Boeing’s answer. It allowed them to continue their share buybacks while paying for the 787 cost overruns. Abandoning the 737 for a new plane would’ve meant walking away from its financial golden goose. OTOH, someone should be responsible for the 346 deaths Boeing’s MAX has caused.

Finally, there are reports that some pilots are giving the MAX a vote of no confidence. The FAA has opened another 737 Max investigation based on reports on the FAA whistleblower hotline:

“A source familiar with the matter says the hotline submissions involve current and former Boeing employees describing issues related to the angle of attack sensor — a vane that measures the plane’s angle in the air — and the anti-stall system called MCAS, which is unique to Boeing’s newest plane.”

Reuters says:

“American Airlines pilots have warned that Boeing’s draft training proposals for the MAX do not go far enough to address their concerns, according to written comments submitted to the FAA.”

Stock buybacks like Boeing’s were once illegal because they are a type of stock market manipulation.

But in 1982, then President Reagan wanted to do his banker buddies a favor. So his Securities and Exchange Commission passed rule 10b-18, which created a legal process for share buybacks. That opened the floodgates for companies to start repurchasing their stock en masse.

Is it too much to ask that the Boeing CEO be asked to resign, even if he did kill a lot of people?

After all, wasn’t he only trying to maximize shareholder value?

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Capitalism’s Bad Smell

The Daily Escape:

New Macallan Distillery – 2018 photo via ArchDaily. There are 952 different bottles to taste on site. Bring a designated driver.  

Capitalism in America has gotten bad enough to attract the attention of The Economist:

“Two things stand out about business in America today. One is how successful American firms are: they account for 57 of the world’s 100 most valuable listed firms. The other is the bad smell hanging over a number of powerful companies.”

No one says that The Economist has a liberal worldview. They are the news journal of globalism and neoliberalism. But, even they think that the time has come to revisit how we treat our largest companies.

They go through a litany of all-too-familiar corporate abuses.

  • Boeing selling 737 MAX planes with dangerous software that you had to pay extra to get.
  • Criminal charges have been filed against Goldman Sachs in Malaysia for its role in arranging $6.5 billion of debt for a fraudulently run state fund.
  • A jury in California has just found that Monsanto failed to warn a customer that its weed killer could cause cancer.
  • Wells Fargo admitted creating 3.5 million in unauthorized bank accounts.
  • Facebook’s data practices are under scrutiny in several countries.
  • Purdue Pharma is the subject of a lawsuit by New York’s attorney general, along with McKesson and Johnson & Johnson.

The Economist points out that America has been no stranger to corporate scandals. In the 19th century meat packers sold rotten meat. In the 1960s, Detroit made cars that were in the words of Ralph Nader, “unsafe at any speed”. In the 1990s, tobacco companies and asbestos manufacturers had to settle class action suits that cost them more than $150 billion.

In the early 2000s, WorldCom, Enron and Tyco committed accounting fraud. And nobody forgets the mortgage fraud by our large banks and insurance firms that caused the Great Recession in 2008.

Back to the Economist: (brackets by Wrongo)

“Today’s crises…have common elements. The firms tend to be established, with dominant market positions. Outrage infuses social media and Congress. And yet the financial cost [to these bad actors] has been limited.”

They say that of ten big American listed firms involved in scandalous episodes, their median share price only lagged the stock market by 11% after the event. And just two of the CEOs at scandal-ridden firms were fired. Worse, for the ten firms, the total pool of senior executive pay has risen over the four most recent years to almost $600 million.

Doesn’t corporate America just see these things as the cost of doing business?

We need to remember that this just doesn’t happen here. Volkswagen cheated on emissions tests, as did Audi and Nissan. Sweden’s Swedbank is facing a criminal investigation for money-laundering.

American capitalism needs reform. The Economist says that in the past, three forces constrained corporate conduct: regulation, litigation and competition. Since the 2008 financial crisis, each of these three forces have been weakened by both our elected officials, and by US regulators. This provides an incentive for firms to take an extended walk on the wild side.

First, America’s regulatory system features both capture and incompetence. The FDA has allowed opioids to be sold in huge numbers, clearly beyond what was medically necessary. The FAA delegated its inspection process to Boeing. The FTC can’t police Facebook. The Fed, the FDIC, and the Comptroller of the Currency, our bank regulators, fail to indict bank executives. They impose fines that are small, relative to value of the gains made by rules breaking.

Second, litigation is no longer a deterrent. The Economist says that:

“Criminal cases leading to jail terms for top executives are as rare as socialists at Goldman Sachs.”

The same is true for civil actions. Arbitration clauses cause both customers and employees to forfeit the right to pursue class actions. Firms are more likely to extend cases by appealing, which can take years.

Finally, we all expect the market will punish bad behavior by corporations, because customers have options. But we know that America’s corporations have gotten larger, primarily by acquisition. That makes it harder for angry customers to move to competitors. There’s just one alternative to Boeing; Airbus, but it doesn’t have spare capacity. Users aren’t leaving Facebook. If you need OxyContin, you have just one source. Try changing your cable provider.

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

Voters need to push for more enforcement of regulations, which can only be done by the federal government.

We have to insist that the protection of citizens is more important than protecting corporations and the 1%.

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