Essential--And Unasked--Healthcare Questions

Despite all the talk about the Affordable Care Act, two questions essential to the debate go largely unasked and ignored.  They are the following:

• Who pays for the cost of healthcare?  For example, if someone obtains an emergency hospital service but doesn't pay for it, who covers the cost?  Moreover, when people declare bankruptcy in order to avoid accumulated medical expenses, who pays for that?  Do hospitals eat the difference?  Not really.  The costs become components of the overhead hospitals pass on to paying consumers.  For county-owned hospitals that offer below-cost services, taxpayers cover deficiencies.  In other words, paying consumers not only foot their own healthcare bills, but they cover the costs of non-paying patients, too.  This is an example of what is called the "freeloader" problem in economics and it's a cost that is borne by society, because when it comes to emergency medical services, our morality informs us that we must help first and ask for payment later.  Quite often, however, the freeloaders described here are people who simply couldn't get insurance or lost the coverage they once had.  These situations occur due to job loss or development of pre-existing conditions, which leads me to my second question.
• Do we want everyone who desires coverage to be able to obtain health insurance, including people with pre-existing conditions?  If that's what you believe, you have no option but to support an individual mandate requiring everyone to be insured.  Do you see why?  The fact is in a situation where everyone can choose if and when they obtain health insurance, rational consumers--and most of us are rational when it comes to money--won't get covered until after being diagnosed with a serious illness!  In other words, we'll avoid the need to make premium payments until we're sick and have reason to file for benefits.  In the insurance world this is known as an extreme case of adverse selection and it's terribly problematic.  In fact, insurance wouldn't work in the situation just described.  That's because premiums would be prohibitively expensive since only high-risk individuals would seek coverage.  

So let me summarize what I've just said: If you want everyone to have access to health insurance, you must support the necessity that everyone be required to obtain coverage.  The alternative is to say it's too bad, but people with pre-existing conditions shouldn't expect the benefit of health insurance.  While heartless, it's a legitimate position, but as I've said above, to the extent that our morality informs us that we must provide emergency treatment to the uninsured, the associated costs are borne by society--namely taxpayers or those who pay for their own healthcare--anyway.  Withholding care and letting people die is also an alternative, but tell that to a baby born with a life-threatening, but reparable, heart condition.  

So what's my point?

If you're opposed to the individual mandate in the Affordable Care Act, you're supporting an environment in which only the healthy get insured.  In such a case, we either let people with pre-existing conditions flounder, or we help them and cover their costs of care by paying higher hospital bills.  Doesn't it make more sense to ask everyone to obtain coverage up front and ask everyone to pay a portion of the cost of care?  It not only makes sense from a societal benefit perspective,  but the law of large numbers allows us to better mange risks as well.

An Embarrassing Admission

I'm going to out myself.  Here goes.

Before I moved from California last year, I was a registered Republican.  (There, it took a lot for me to admit that--the embarrassment is overwhelming).  Now that I live in Wisconsin, I'm not required to state my political affiliation, but if it were necessary, I wouldn't do so as a Republican--not anymore.  The party, in short, abandoned me a long time ago.

I'd been wondering how to best describe my feelings of abandonment, when I saw a scene in an episode of HBO's Newsroom that resonated with me.  In this scene, a news anchor for a fictional cable news program justifies his identity as a Republican after making several disparaging remarks about the party.  This is what he says:

I call myself a Republican because I am one.  I believe in market solutions.  And I believe in common sense realities and the necessity to defend ourselves against a dangerous world and that's about it.   

The problem is now I have to be homophobic.  I have to count the number of times people go to church.  I have to deny facts and think scientific research is a long con.  I have to think poor people are getting a sweet ride.  And I have to have such a stunning inferiority complex that I fear education and intellect in the 21st century.  Now most of all, the biggest new requirement--really the only requirement--is that I have to hate democrats.

Amen!

I cannot align myself to this new breed of Republicanism that claims to be Christian, but battles efforts to feed the hungry and care for the sick.  I reject its assertions that science is trying to deceive the populace and that we have no obligation to heal the planet because God will fix our problems.  I'm tired of how the party works to dismantle voting and women's rights that stood as bold lines against hatred and bigotry.  I'm sickened by its depictions of the poor as lazy and its solutions that disproportionately benefit the rich.  Most of all, I'm disheartened by its apologetic worldview that rejects fact and reason in search of ways to justify its intolerance.

Great Idea: Let's Arm Schools

After the shooting at Sandy Hook Elementary, one of the solutions many gun advocates offered to solve the problem of mass killings was to post armed security guards at schools.  In the wake of the most recent shooting in our nation's capitol, it's clear that this is far from a reasonable solution to the problem. 

Facts regarding the tragedy continue to emerge, but two widely reported pieces of information should be noted: 

• At least one of the twelve who died was an armed security officer
• The gunman apparently used two firearms that he took from his victims to continue the rampage

Ignoring the cost of the solution, which would be problematic given already stretched budgets, do we make our public places safer by putting them under the protection of armed security?  I doubt it.  The Navy Yard was apparently heavily armed and guns were in the possession of people whom I imagine were well trained.  Yet, some of the weapons appear to have become tools used to murder more innocent victims.  I shudder at the thought of the accidents and deadly crossfire that will occur if schools are similarly armed. 

For information about the most recent shooting, go to this link. 

Barclays Influence

State legislatures across the country are passing voter suppression laws ostensibly to prevent fraud.  While over thirty states have considered regulations requiring people to present government-issued photo IDs to vote, up to 11% of American citizens lack such identification.  The requirement would make it more difficult for certain people—especially the elderly, blacks, students and people with disabilities—to vote. 

Here is a summary of other similar actions that have been taken:

• Three states passed laws to require documentary proof of citizenship, though as many as 7 percent of American citizens do not have such proof.
• Seven states shortened early voting time frames, even though over 30 percent of all votes cast in the 2008 general election were cast before Election Day.
• Two state legislatures voted to repeal Election Day registration laws, though Election Day registration increases voter turnout by 10-12 percent.
• Two states passed legislation making it much more difficult for third-party organizations to register voters—so difficult, in fact, that some voter registration organizations are leaving the states altogether.

Proponents of voter suppression legislation have failed to show that fraud is a problem anywhere in the country.  For example, despite the Department of Justice’s 2002 Ballot Access and Voting Integrity Initiative, which promised to vigorously prosecute voter fraud, the federal government obtained only 26 convictions or guilty pleas between 2002 and 2005.  Other studies consistently find that voter fraud appears to be extraordinarily rare.  

At the same time as these steps are being taken, corporations have been given the extraordinary ability to sway votes through unlimited campaign contributions.  One case in point goes beyond the believable into the realm of the surreal.  Barclays, the bank that has acknowledged irregularities among its traders, has been revealed to be the ninth largest bundler of campaign funds to the Romney campaign.  What its traders were apparently doing was to go into cahoots with at least four other banks to manipulate the London Interbank Offering Rate (or LIBOR).  LIBOR is a floating interest rate that $350 trillion of financial contracts, including residential mortgages, reference.  The effect of this manipulation conceivably led to instances in which mortgage borrowers were made to pay too high a rate in order to improve the profit performance of Barclays traders. 

Barclays has been a vocal critic of financial regulation and with its access to corporate profits and a network of well-heeled bankers, is able to influence American voters.  But the thing that is most bizarre about this is that Barclays is a British—not an American—bank.  In other words, a foreign corporation that wants to reduce its regulatory scrutiny despite a spotty ethical track record is bundling millions of dollars to support a candidate who has vowed to dismantle the legal framework built to prevent another financial collapse.   If we don’t recognize something incredibly dangerous in all this, we’re not paying attention.  While it is becoming increasingly difficult for American citizens to cast their votes, even foreign corporations are expanding their influence in our elections.  

Government Waste or Corruption?

A friend of mine recently told me a story that should anger any American taxpayer.  Not too long ago he was working for a company that had earned a $120 million federal contract for the development of a computer system and he was the project's manager.  The work was going well and the system was on schedule for an on-time completion.  After the company had charged $90 million of the full contract amount, a representative of the agency that had ordered the work, visited my friend and ordered a stop to it.


My friend, rightly so, was incredulous.  The system was still a work-in-progress, but enough had been completed that he could show it was living up to expectations.  The man said a demo wasn't necessary and that he didn't intend to take the contract away form the company.  In fact, he wanted to replenish the budget in full, but he needed the work to begin again from scratch.  Why?  Did it have to do with some new consideration or development that hadn't been a concern at the time of the bidding?  No, the agency wanted the work farmed out to a specific subcontractor.  


You probably already suspect what had happened behind the scenes, but here's the summary: 1) An original bidder on the project complained to a congressional representative who was on an important appropriations committee, 2) the congressman put pressure on the regulatory agency to rethink the project to include the losing bidder, and 3) the agency--afraid future appropriations would be jeopardized without political support--cancelled the contract and demanded the work be restarted with the new subcontractor.  Now, some people might call the result government waste, but in my mind, it's more than that.  It's corruption based upon the influence of a well-heeled corporation and the money at its disposal.  The result was that $90 million of tax revenue--money you and I paid--evaporated.  


We can't give corporations and billionaires the ability to exert financial arm-twisting in this way, and a good place to start would be to end their influence in campaign financing.  The degree to which fraud occurs is dangerous and destructive.  Here's a case in point: Karl Rove's Crossroads GPS has raised tens of millions of dollars from unnamed donors and is using the money in attack adds against democratic opponents.  This would normally be illegal, but he's getting away with it because he calls Crossroads GPS a 501 (c) non-profit entity that is working to enhance social welfare.  


This is nothing short of a scam that only increases the influence of the moneyed class in America.  We can't let him get away with it.  We only do so at our peril.  If you don't believe this is a problem, listen to this recording (from This American Life) of an elected official shaking down a lobbyist for money.  

The Farce of Tea Party Patriotism

The other day I was driving down the road and saw a car ahead that sported an array of bumper stickers and two miniature American flags where the dry cleaning is sometimes hung.  One of the bumper stickers advertized the call letters of the Bay Area radio station that features Rush Limbaugh.  Others addressed conservative causes: Defense of Marriage and gun rights to name two.  It was, however, the message placed in the center of the rear windshield that really got my goat.  It said quite simply, “I’m a Patriot.”

It bothers me that conservatives believe they are the only patriots in the country.  It also upsets me that many Christian fundamentalists believe conservatism is consistent with their faith.  Patriotism has nothing to do with such principals.  Here are a few of its aspects that I believe are worth mentioning:

• A truly patriotic American will choose the education of the nation’s children as a higher priority than the amassing of weapons sufficient to destroy the world.
• Patriotism means negotiating in good faith to fix the problems of the nation instead of filibustering away any real chance to solve them.
• A patriot would rather see fellow citizens rehabilitated than demand a warped justice that is no more than institutionalized vengeance that fills prisons.
• Patriots will regulate equal access to economic opportunity instead of prescribed behavior in bed.
• The most patriotic of acts protect the young, old, weak and impoverished and insist that those blessed with good fortune contribute to the cause.
• A patriotic America will accept good advice in order to leave to future generations an un-blighted world. 
• Christian patriots will follow the teachings of Jesus—especially the injunction to love one another—rather than the Mosaic Law that speaks of stoning, condones slavery and depicts women as chattel.

What happened to the patriotism of the Civil Rights Movement and social programs, like the GI Bill, that led to greater access to opportunities and national prosperity?  Ditto Heads don’t have a monopoly on patriotism.  In fact, by their protection of corporate interests and the 1%, they don’t have much of a claim to it, at all.

The Ryan Budget and Territorial Taxation

Have you looked at Paul Ryan’s budget?  Among its many proposals benefiting the ubber-rich at the expense of the poor, it calls for a shift away from our system of taxation based upon worldwide income.  In doing so, the plan would exempt from U.S. taxation foreign profits earned by multinational corporations.  This aspect of the proposal is little understood and has received almost no press coverage, but it speaks volumes about the lengths conservatives will go to enrich the 1%. 

Today, when a U.S. citizen earns interest on investments held in a foreign bank or trust, he’s required to report the income to the IRS, subjecting it to U.S. taxation.  The same is true for corporate profits booked by overseas subsidiaries.  However, tax lawyers and accountants have found sophisticated ways that the rich use to shield income and avoid such liabilities.  This is crucial to note and the subject of an earlier blog I wrote.  If you’re unfamiliar with the issue of transfer pricing, go to this link.  It will be worth your time. 

The problem with Ryan’s proposed shift to a territorial system of taxation goes beyond a loss of revenue, which would be substantial.  (The Tax Policy Center estimates that his plan will result in a $4.6 trillion shortfall in revenue by 2022--$10 trillion if the Bush tax cuts are retained as Ryan proposes).  In my mind, the more significant problem is that it will result in regulatory arbitrage.  What do I mean by that?  Have you ever noticed how many U.S. businesses incorporate in states (Delaware, for example) outside their places of operation?  They often do that in order to take advantage of a less intrusive regulatory environment.  AIG, for example, was able to choose its federal regulator and opted for the Office of Thrift Supervision (it had ingeniously purchased a small S&L to give itself the option).  AIG's management knew it would receive little sophisticated supervision as a result, which was part of the truth behind the company's implosion.  The OTS, which was familiar only with the simple business model of thrifts, was completely unprepared to regulate the complexity of AIG's businesses.  In a similar way, if we allow a shift to territorial taxation, it will encourage our multinational corporations to book more income in less intrusive tax havens and move their operations (and probably more jobs) offshore.  They will do it to enrich shareholders at the expense of workers.

The proposal is moronic and must have been written by the Chamber of Commerce, which cares nothing about working class Americans.  The fact that Paul Ryan is pitching it is an indication that he and the other Republicans who support it are bought by moneyed interests and are party to the institutionalized corruption that jeopardizes the health of our nation.  What is painfully clear in all this is that a faction of America's leadership not only wants to reduce corporate income tax rates, but to eliminate it all together.  But conservatives have no middle ground.  Either corporations are people, in which case they must pay their fair share of income tax and help build the roads, schools and other public projects that benefit them, or they are not people and shouldn't be allowed to fund super pacs that give them the ability to buy elections and elected officials.  

A Heavenly Reward

Decades ago I persuaded a high school friend of mine to investigate the Mormon Church and for several months she studied with missionaries, only to decide the teachings weren’t to her liking.  Then years later she visited me after we’d gone separate ways to college.  With a weekend of activities planned, I asked if she would mind a brief stop at a Kinko’s to get copies of a document that I needed for the next day.  It would only take a minute.


When we stepped into the copy shop, however, we noticed that there was only one worker behind the counter and two customers ahead of us.  The other customers—an elderly lady and her granddaughter—had the Kinko’s lady copying what I recognized to be a Book of Remembrance.  A Book of Remembrance is, for active members of the Mormon Church, a family history that has been painstakingly gathered and recorded by the person who possesses it and generally includes a detailed genealogy.  In the case of the elderly woman and her granddaughter, the copy-in-progress was meant as a gift and tender reminder of the importance of family.  However, because the pages were of odd size, the young women behind the counter was copying an impressive stack of paper by hand, one at a time.


The worker looked at me and asked what I needed.  I answered that I wanted twenty copies of a one-page document, all on standard paper.  She then turned to the grandmother and suggested that my job go first, since it would only take a few seconds to complete.  The older woman responded that the next person through the door would then get similar treatment and she would never get her print job done.  I understood the point and told the worker that I could leave my document and come back for copies later.


Once we left the store my friend said something that bothered me.  She said we’d just witnessed the primary reason she could never consider joining a church.  When I pressed her on the point, she answered, “You guys are so focused on personal salvation that you don’t give a shit (her words) about being kind to each other.”


Now, I know the criticism is unfair and exaggerated, but it serves to substantiate a point Jon Meachem recently made in a Time article entitled Rethinking Heaven.  The gist of his point is that the idea of heaven as a place where the righteous earn an eternal reward gives people license to not give a shit (my words now) about the people around them who might need help.  In my mind there are two unfortunate results of a traditional view of heaven:

1. We can justify our lack of assistance to—and empathy for—those who suffer from adverse circumstances because we can say they will have a lasting reward someday if they’re only good enough to deserve it. 
2. In justifying our inaction, we ignore the fact that we serve God best when are in the service of our brothers and sisters here in this life.  In essence, we leave it to God to bless others.  It becomes His responsibility, rather than our own.

As an alternative view to this, Meacham writes:

The scholarly redefinition of heaven as a manifestation of God’s love on earth has been illuminating, for it at once puts believers in closer proximity to the intent of the New Testament authors and should inspire the religious to open their arms more often then they point fingers.  Heaven thus becomes, for now, the reality one creates in the service of the poor, the sick, the enslaved, the oppressed.  It is not paradise in the sky but acts of selflessness and love that bring God’s sacred space and grace to a broken world suffused with tragedy.

To me, it’s no coincidence that the secular governments of Western Europe have stronger social safety nets than that of Middle Eastern countries and yes, the good ole US of A.  Where people believe poverty is just a temporary condition that can be resolved with good behavior and God’s blessing, there is a temptation to devote less attention to the matter.  But therein lies the rub.  In short, if we’re not working to bring a bit of heaven to the unfortunate souls around us, we don’t deserve the heavenly rewards we seek.  

When Saw We Thee?

Jesus once said that there would come a day when He would condemn us for not feeding Him when He was hungry, not clothing Him when He was naked and not ministering to Him when He was sick.  With hearts pierced by guilt, we would reply by asking when we ever saw Him hungry, or naked, or sick.  And He would answer: "Inasmuch as ye did it not to one of the least of these, ye did it not to me."

Christ could very well answer our question the following way: When you supported policies that further enriched the wealthy to the detriment of the poor, when you chose to fund the production of bombs while children died from hunger, when you fought against the one chance the nation had to bring healthcare to each of its citizens, you did it contrary to the gospel's directive to love all your neighbors.

In a recent Newsweek article, Andrew Sullivan tells us to, "forget the church, follow Jesus."  Seeing how Christian fundamentalists fight against the most basic aspects of Christ's teachings, Sullivan's admonition is arguably good advice.  In speaking of those teachings, he says:

What were those doctrines? Not the supernatural claims that, fused with politics and power, gave successive generations wars, inquisitions, pogroms, reformations, and counterreformations. Jesus’ doctrines were the practical commandments, the truly radical ideas that immediately leap out in the simple stories he told and which he exemplified in everything he did. Not simply love one another, but love your enemy and forgive those who harm you; give up all material wealth; love the ineffable Being behind all things, and know that this Being is actually your truest Father, in whose image you were made. Above all: give up power over others, because power, if it is to be effective, ultimately requires the threat of violence, and violence is incompatible with the total acceptance and love of all other human beings that is at the sacred heart of Jesus’ teaching. 

 To this I add, Amen.

Who's Running the Show?

When I was a young undergraduate studying economics, I thought the globalization of industries would benefit the world. My reckoning was this: As corporations expand across borders, nations will be motivated to find peaceable and well-reasoned solutions to problems. At the time, there was still a Soviet Union and the Cold War remained a fact of life. It seemed to me then that a real war would be less probable if Exxon was drilling Siberian oil wells and GE was building Moscow’s power plants. How could anyone chose to train bombs on the global enterprises that created economic prosperity?

Today I have a different view of the growing concentration of economic power. As a recent Time article states:

National governments have, over the past several decades, seen the most basic pillars of their power erode. Globalization has undermined their efforts to manage their borders. The ability to control their own currency has been lost but for all but a handful of major powers. Fewer than two dozen have the ability to sustainably project force beyond their borders. Meanwhile, corporations play against one another as they venue-shop for more attractive tax or regulatory regimes. This regulatory arbitrage undermines nations’ ability to enforce their own laws

This has occurred, in part, because corporations are amoral constructs created for a single purpose: to generate profits for shareholders. While we all recognize this to be the case, we’ve drank Ivan Boesky’s Kool-Aid in our belief that greed is good and the invisible hand works a kind of magic. Yet, can we reconcile this notion with an Apple executive’s recent assertion that, “We don’t have an obligation to solve America’s problems,” when that same company expects American taxpayers to protect its intellectual property rights and shipping lanes?

Corporations, as I said before, are amoral. They’re not evil, but unless regulated to do so, few will spend time considering societal needs beyond the needs of their shareholders. If they had a social conscience, we wouldn’t need regulators and regulations, but they are devoid of consciousness and intent. That being said, we’ve given them more rights than people possess. Here’s a case in point: The 14th Amendment was established to protect freed slaves and give them equal protections under the law. However, of the 288 cases brought under its terms, all but 19 have dealt with the interests of corporations. It has been used to block certain taxes, limit punitive damages, and define advertising copy as speech worthy of protection.

The Supreme Court’s decision in Citizen’s United only expands the influence of corporations by giving their well-heeled shareholders free reign to buy votes through unlimited PAC donations. Of the $60 million of PAC money raised since January 2011, 80% came from just 196 donors. More shocking, one of every four dollars came from just five people: Harold Simmons, owner of Contran, Las Vegas casino mogul Sheldon Adelson, Houston home builder and Swift Boater Bob Perry and PayPal co-founder Peter Thiel.

Isn’t it obvious that we no longer live in a nation where each person exercises a single vote in matters of great importance? We now have a dollar-per-vote system that is controlled by amoral corporations that care only to perpetuate their shareholder-enriching ways.

Repatriation of Offshore Corporate Profits

Yesterday Mitt Romney made a statement about the repatriation of corporate profits that got me hopping mad.  It angered me, in part, because Romney certainly understands the issue better than most people, but obfuscated the truth in order to score political points with an unknowing public.  He said that as president he would encourage the return of a trillion dollars currently held by foreign subsidiaries of US corporations so the funds could be invested in jobs here, rather than in outside markets.  Presumably he would do this by reducing, or eliminating, the income tax on repatriated dollars.  According to him, these dollars arise when a US corporation establishes an offshore presence—his example was an auto plant in China—from which it generates profits.  These profits, he said, will be invested in foreign markets if not brought back to the US.

This analysis is disingenuous on so many levels.  The first is related to how the profits are derived.  Romney is right when he says they’re generated by the foreign operations of US corporations, but what he failed to say is that in most cases the profits arise through something called transfer pricing associated with interactions with shell companies.  Transfer pricing is an important aspect of the tax and treasury operations of many global businesses.  In fact, it’s so important that people who understand its ins-and-outs are paid as if they were professional athletes.

The way transfer pricing works is by first establishing a shell company in a tax haven—the Cayman Islands, for example.  The shell company is then caused to purchase important licenses or other rights that are central to the corporation’s operation.  High tech companies are especially fond of selling software licenses to their offshore entities.  Since the shell companies have no assets, they must raise cash to purchase the licenses, but this is generally accomplished through intercompany loans.  These transactions—the selling of licenses and the borrowings—are, of course, transactions only on paper. 

Here is what a corporation is then able to do.  Every time a product is sold, it owes its foreign shell company a licensing fee, which appears as an expense on the corporation’s income statement and thereby reduces its taxable income.  In other words, this is essentially a means to avoid the payment of tax.  The shell company, on the other hand, is located in a tax haven, and though it receives revenue, it incurs no tax liability.  It can use a portion of the fees it receives to make interest and principal payments on the intercompany loan.  Over time, however, the shell company records substantial excess cash balances that in a real sense represents the parent company's deferred tax obligation. 

If the corporation wishes to repatriate the balances, it can do so through a dividend payment, but that would be a taxable event.  However, teams of tax accountants and lawyers work to come up with other ingenious ways to move cash around, including intercompany lending from the shell company to the parent.  I mention this for several reasons.  First, the repatriation of corporate cash is an issue that arises primarily because global companies have found creative ways to AVOID their tax obligations.  Second, allowing the repatriation to occur in a tax-advantaged manner, as Romney suggests, only gives corporations more reason to continue with the practice.  Third, corporations can find creative ways to return cash to their home operations, but they won't do so until domestic demand increases and requires expansion.  The tax-free repatriation of cash is another example of how conservatives are only interested in supporting corporate and other well-heeled interests and should be flatly rejected.  


Finally, Romney and other conservatives say repatriated dollars will be invested in such a way that it will result in job creation here.  If that's the case, why haven't corporations used the over $2 trillion contained in domestic corporate bank accounts to grow manufacturing?  US corporations are generating tremendous profits due to efficiencies gained through massive layoffs.  They're sitting on those profits and will continue to do so until Americans begin to consume again.  The key to overcoming our economic malaise is not to allow corporations to withhold contributions into the community pot that benefits us all, but to put more cash in the pockets of the middleclass.  It's time corporations pay their fair share. 

Economic Externalities

In my last entry, I mentioned that a focus on financial metrics, such as ROI (Return on Investment) and ROE (Return on Equity), can result in a reduction in the quality of our lives.  While transactions that achieve targeted returns lead to the enriching of shareholders, the same transactions can also have a range of impacts on the wellbeing of others.  These impacts can be beneficial, but are often costly. 

This transaction spillover is often called an economic externality.  Some economists define an externality as the result of undefined property rights.  For example, no one owns the air we breathe and so no one bears the burden of its cleanup.  As a result, we pollute it without regard to the costs of our actions.  If we were somehow able to assign ownership rights—legally and otherwise—in a way that requires the owners of the sky to bear the costs of dirty air, they would be far more interested in keeping it clean.  To do so, they would exact a toll on others who use the resource.  In other words, if the sky’s owners were made to cover the costs of pollution (such as medical expenses associated with emphysema, or the costs of restoring coral reefs damaged by acidity) they would, in turn, charge users of the air in a way that would provide a return over incurred costs. 

While air pollution is certainly an example of a negative externality, the issue goes deeper than a lack of ownership rights as we traditionally recognize them.  When a private equity company purchases a plant, for example, it legally acquires the right to do a number of things to the assets it now owns.  The new shareholders can downsize the plant’s operations, move contracted production to offshore facilities, sell off some of its component pieces, and siphon away excess pension assets.  These actions can ring up huge transactional returns, in part, because the shareholders are not made to own the external costs they cause others to bear.  Since the private equity firm doesn’t bear the long-term costs of a worker’s unemployment, for instance, it doesn’t care about the resulting layoffs.  However, someone has to bear such costs.  Who?  Let me mention one: taxpayers who are the eventual payers of unemployment benefits.  In other words, you and I pay for a portion of the return shareholders achieve.    

When investors are allowed to look solely at ROI or ROE in making transactional decisions, they evaluate the potential for personal returns, without considering impacts to society.  This is a mistake.  The costs of transactions can be far-ranging and well in excess of the gains made by a small number of people.  Think, for example, about the multi-million dollar bonuses paid to the developers of mortgage derivatives.  Think also of how those derivatives sunk our economy and caused us to lose a ton of home equity and 401K value.  This explains, in part, why an economic rising tide doesn’t float all boats and can result in huge wealth disparities, the likes of which our nation has been experiencing. 

In fact, the ROI metric, in connection with Wall Street’s focus on quarterly results, is at the center of our nation’s loss of good manufacturing jobs.  What’s incredibly problematic about this is that when manufacturing jobs leave our country, so does manufacturing technology.  We tell China, or India, to figure out how to make things cheaply.  While today they have the advantage of having low-cost workforces, eventually that won’t be the case, but we’ve handed them the ability to ride a manufacturing learning curve that we may never be able to follow.  In short, if we aren’t making things, we’ll forget how things are made, which is another external cost not embedded in our short-sighted ROI metric. 

Perhaps no cost is as ignored and misunderstood as the cost of a bad education.  During government budget discussions, it seems that our schools and teachers invariably get the short end of the stick.  What’s the effect of this?  As I’ve mentioned before, McKinsey and Company estimates that the cost of the black verse white achievement divide alone was as much as $525 billion in lost GDP in 2008.  When we shortchange our children, we incur external costs that few seem to recognize.  It’s delineated not only in lost productivity, but increased incarceration, unwanted pregnancies, heightened drug use and other social costs.  Some people respond to this assertion by saying money doesn’t produce a good education.  But if that’s true, why do the rich put their kids in private schools?  Warren Buffet has been known to say he’d like to eliminate private schools altogether.  By doing so, he reasons, the rich will become part owners of public education and finally be made to contribute to heightened general achievement.  Embedded in this idea are two important implications: 1) What the well-to-do want from public education doesn’t affect them or their families, because they don’t use it and 2) The fact that education has become bifurcated in this country ensures the continuation of a moneyed class. 

So what does all this have to do with a New Christian Ethic?  After Christ’s crucifixion, His followers lived communally and there were no poor among them.  Don’t take my word for that, but read Acts 4:34-35, which tells how the people sold their belongings and distributed their resources according to need.  The historian, Elaine Pagels, describes a remarkable people, who practiced literally Christ’s admonition to feed the hungry, clothe the naked and minister to the sick.  As I’ve mentioned before, when plagues struck cities, they were the few who remained behind to practice charitable acts of service, even though it put them in harm’s way.  I’d love to encourage us all to be as noble, but I don’t think it’s possible—we’re too far gone—but let’s at least look out for what Jesus called “the least of these”, the people who need our help.  That can’t be done by encouraging the continuation of a system that allows the rich to further enrich themselves at the expense of the less fortunate.  

The Pursuit of Shareholder Wealth

One of the last deals Drexel Burnham Lambert closed before it was forced into bankruptcy was the debt issuance for a petrochemical company called Rexene Corporation.  The gist of the transaction was this: Rexene issued $500 million in bridge financing that it used to pay a special $7 per share dividend.  Essentially, the company borrowed a ton of money simply to pass the cash on to shareholders.  None of it went for for plant expansion, R&D or any other production purpose.  In terms of a corollary, it was like a man taking out a second mortgage—jeopardizing the well-being of his family—in order to pay for a mistress’s boob job. 

When I heard about the deal in one of our morning meetings, I asked a simple question: Who are the shareholders?  I was treated with disdain for asking it, but I remained persistent.  Finally I was told that 80% of Rexene’s shares were held by three trusts.  As far as I was concerned, that wasn’t much of an answer, either.  Eventually I learned that the primary beneficiary of the trusts was Drexel!  In other words, the investment bank was causing a manufacturer it owned to go into debt—dangerously so, as is evidenced by what happened later—in order to pay Drexel half a billion dollars.  As alarming as that may seem, it gets worse: Within two years, Rexene sought Chapter 11 bankruptcy protection due to its excessive debt load and employee layoffs resulted.  It should also be noted that no part of the transaction was deemed illegal.  It would still be legal today.  In fact, similar transactions occur all the time. 

This is the kind of capitalism that many who wish to protect the interests of Wall Street want to perpetuate.  Why do plants shut down and pension benefits evaporate?  It often happens when someone with a spreadsheet and a mandate to further enrich the moneyed class, recognizes that the breakup value of a company exceeds its stock price.  A process is then put in motion that’s meant to serve only one constituency.  In the search for the last damn buck, Bain Capital and others of its ilk cancel pension benefits in order to raid assets meant to support retired employees.  It’s not capitalism, but a cancer. 

Someone recently left a comment about one my blogs, saying the notion that a rising tide lifts all boats is a truism.  Really?  Well, tell that to the collateral damaged workers of our nation who have suffered most from our lust for efficiency.  Who gains from plant closings that inevitably occur in the holy wake of enhancing shareholder value?  Not the people who lose jobs.  Not suppliers to the plants.  Not the communities that are decimated.  The beneficiary is Wall Street.  Then we add insult to injury by telling the moneyed class that they can pay a lower tax rate on their investment returns than the percent paid by those who’ve lost their working-class jobs.  If we’re experiencing class warfare, the first atomic bomb was dropped by the 1%, who discovered a range of ingenious ways to steal from the middle class and have learned to protect their positions by paying off politicians.

In this context, why would the majority of us vote for anyone who supported such a system?  And why would we trust someone who spent most of his adult life in search of the last damn buck?  I don’t fault people for their successes—unless, of course, their successes came at the expense of others.  No matter how cleverly the process is decorated, it’s theft and only an ignorant public would find it laudable.  There are things more important than Return on Investment that Wall Street can’t be made to understand.  In fact, a maniacal focus on metrics such as ROI and ROE are primary reasons for a decline in the quality of our lives. 

In my next blog, I plan to write about that last point and the problem of economic externalities. 

I Have Another Novel Out!

Thanks to those who have purchased my novel, Autumn Run.  Sales have surpassed the publisher's expectations, which has prompted the early release of my second novel, Wall Street Preoccupied.  As the title suggests, it is timely in that it deals with an issue of concern to many who are dealing with the impact of a struggling economy. 

The following is a synopsis of the book.

__________________________

When his father dies unexpectedly, high-powered investment banker, Tucker Landis, returns to his boyhood home in Cold Dog, Alaska and learns that he has inherited the family business, a salmon packing facility called Inlet Song. Since the plant is essential to the town’s economy, Tucker is caught between his obligations to a community he left years ago and responsibilities at the New York investment bank where he works.

Tucker chooses to manage the plant until he can sell it, but Inlet Song—and the out-of-work call girls who run the butchering line—are almost more than he can handle. Just as he thinks his career on Wall Street has come to an end, he is offered the opportunity of a lifetime, but before he can accept it, Tucker must answer a question posed by the woman he has loved since childhood.

While you’re off in search of wealth, will you settle for position and money instead?

We All Want the Same Thing

Have you noticed how much the Tea Party and Occupy Wall Street have in common?  Both movements are about disenfranchisement and distrust of those in power.  You would think they’d be working together, but they don’t.  Why?  The reason has to do with their divergent views regarding the government’s role in our lives.  While the Tea Party believes government invariably fails and is best when it leaves people alone, Occupy Wall Street sees government as having a role in regulating and leveling the economic playing field. 

Who’s right?

When I was working for Lehman Brothers, both the U.S. and U.K. governments deregulated their financial sectors in a way that many believed would result in a “Big Bang,” an explosion of availability to cheap sources of capital.  One aspect of the U.S. version was the dismantling of Glass Steagall, which had been in place since the Great Depression and was meant to separate depository institutions, such as banks, from securities firms.  The reason for Glass Steagall was to protect deposits (and depositors) from the high-risk and highly leveraged businesses that investment banks practice.

The result of this deregulation was apparent in the bailout taxpayers were required to endure when the nation’s biggest banks teetered on the verge of bankruptcy.  The effort was deemed necessary when depositories were in jeopardy of sustaining significant losses.  The choice we had was to payoff depositors through the FDIC insurance fund, or bail out the institutions that held the deposits.  Either way, taxpayers were going to fit the bill.  Clearly there had been a role for the government that was missed through deregulation. 

The Tea Party’s desire to drown the federal government in a bathtub will lead to increases in the wealth and influence of the rich and a new Gilded Age.  The history of the Gilded Age was one in which politicians were bought, public resources were sacrificed for the gain of a few, and the interests of the many were trampled upon.  Do we really want to go back to that?  Without a return to sanity, the alternative will be economic collapse, or violent revolution. 

It’s my greatest hope that people forming the two movements making the most headlines today realize that, in many respects, they want the same thing.  Furthermore, I hope they learn to work together to make government (perhaps a smaller government) more responsive to the needs of people, rather than to the interests of corporations, which are amoral and self-interested constructs and not people, at all. 

Occupy Oakland

Today I went to Oakland to visit the site of the Occupy protests.  I went there, in part, to disprove with my own eyes Sean Hannity’s assertions that there was public defecation and sexual assaults occurring there.  Rest assured that Hannity, and not Frank Ogawa Plaza, is full of crap.

The square has been covered with straw and a tent city has been established.  Some of the more noticeable aspects of the gathering include a small library containing a hundred or more books, an area where donated food is cached and prepared for anyone who needs it, and a tent where medical services are provided.  Hand-written placards encourage people to clean up after themselves.  The demonstrators are mostly young, but they fit every demographic imaginable and their reasons for dissatisfaction are also varied. 

Cardboard signs are posted throughout the square.  Yes, they speak of the lack of economic opportunities for mainstream Americans, but they also remind us of the destruction of our environment, the prohibitive cost of education, the war in the Middle East.  Along the perimeter of the square the people have demonstrated their desire for peace in a powerful way: They’ve planted flowers. 

I caught myself hoping that the flowers, like the movement, will be allowed to grow.

One of the protest signs, in particular, caught my eye.  It simply said: Join a credit union.  In recent months the large banks have lost deposits that are now going to credit unions.  I believe this to be a positive development.  When we put cash in a credit union, we're not cutomers.  We're members and part owners of the institution.  As I've said elsewhere in this blog, giving people ownership is an important part of the solution to our economic malaise. 

Responding to Anonymous

Someone recently left a simple anonymous  comment on one of my postings.  It was this:

Thank God, because he'll fix these problems!

Here is my response.

Life isn't fair, which is arguably an implication of believing in a God who defines what is fair, is powerful enough to destroy all that’s unfair, but allows the most virulent incarnations of unfairness to flourish anyway.

Ah, you say, but that’s just the problem of pain, a conundrum of faith you’ve already contemplated to your satisfaction. Some people—perhaps you included—resolve the paradox by saying God is infinitely wise and knows that goodness is possible only in the presence of its opposite. How can anyone, for instance, be judged righteous, who hasn’t recognized and overcome evil? To this you might add another, supremely comforting, idea: While mortality is pain-filled and subject to corruption, it’s but a blink of an eye compared to the eternal reward that awaits the just. Fairness will come in the hereafter.

But do you see the problem with that notion? I’m not referring to the inexplicable narrative of how God creates a world and populates it with children He loves, only to watch them kill and brutalize each other. Rather, I speak of the license it gives the living to do likewise, to simply witness the evil and say: “Thank God, for the pain is only for a moment and He will right these wrongs.” This shining article of faith serves as a salve on the conscience and a boast to all who hear it, but it’s also an excuse to do nothing. The living could mitigate life’s unfairness, but too many abide by a tainted premise: While shit rains, I can wait for God’s will to manifest itself, there’s no need for an umbrella.

And so faith waits.

We pray for peace—just like we pray for the hungry, the naked and the sick—but rarely do we become the miracles we seek. Help for the displaced pales beside the wars, pogroms, class boundaries and other weapons of alienation that displace even more. All the while our faith waits for the end times, or a miracle, or some other divine response to prayer’s equivalent of kicking the ball into God’s court.  I would rather we had no faith in a hereafter at all and worked to bring heaven here.  Maybe our world would be more caring and sharing then.  

Institutionalized Corruption

Here is information made available by the Center for Responsive Politics regarding the connection between political contributions and campaign success.  In each case the numbers reflect the percentage of winning candidates who also raised and spent the most money during their campaigns.

·        In 2004

o   98% of House seats (were won by the candidates spending the most money)

o   88% of Senate seats

·        In 2006

o   94% of House seats

o   73% of Senate seats

·        In 2008

o   93% of House seats

o   86% of Senate seats

·        In 2010

o   85% of House seats

o   83% of Senate seats

The correlation between campaign funding and election success is indisputable—the more money that is raised, the more likely a candidate will be elected.  People like Rush Limbaugh claim this isn’t a problem because money, they say, reflects the popularity of candidates.  However, ever since the 2010 Supreme Court ruling in Citizens United v. Federal Election Commission, money can be sourced from deep corporate pockets that are controlled by a small number of individuals who have interests that run counter to that of mainstream Americans. 

There are so many reasons why this is problematic.  Retired Supreme Court justice John Paul Stevens was—and continues to be—critical of the ruling that gave corporations the same freedom of speech granted to individuals and therefore lifted restrictions on the amount of campaign contributions they can make.  As part of his dissenting opinion he said, “The decision is at war with the views of generations of Americans.”  He has since argued that the ruling could afford protection to acts similar to those of Tokyo Rose and the Watergate burglars. 

However, the bigger problem as I see it is that it violates the premise that a person has a single vote.  When corporations are allowed to fund PACs without restriction, it gives powerful CEOs and Board Chairmen the ability to influence a disproportionately large number of votes in a way that could likely run counter to the interests of their employees.  This can result in what many have called institutionalized corruption.  As Fareed Zakaria has recently said:

Special interests pay politicians vast amounts of cash for their campaigns, and in return they get favorable exemptions or credits in the tax code.  In other countries, this sort of bribery takes place underneath bridges and with cash in brown envelopes.  In America it is institutionalized and legal, but it is the same—cash for politicians in return for favorable treatment from the government.  The U.S. tax system is not simply corrupt; it is corrupt in a deceptive manner that has degraded the entire system of American government.  Congress is able to funnel vast sums of money to its favored funders through the tax code without anyone realizing it. 

Please, Tea Party Christians, realize that what your favorite officials are doing to protect corporations is not only bad for America, but reflects the worst kind of corruption.  In light of the recent CBO report on the growing wealth inequality among us, it’s clear that their actions will only line the pockets of the rich and force the middleclass to pay for corporate mistakes.  It will protect the behavior of the CEO of Whirlpool, who acquired a primary competitor, only to close many of its plants and cancel the pension benefits of the people who’d worked there. 

Is that the behavior you want to protect?

Occupy Wall Street

Most people think the phrase, “It takes money to make money” to be a truism, and in doing so they make apparent their belief that the economic rules regulating our world are rigged.  Statistics seem to prove this view out.  Over the last decade, the wealthy have gotten richer, while the middle-class have lost net worth through diminished home equity and 401K balances.  While many Tea Party members believe this to be unfair, they think our government is part of the problem, and they're so steeped in cynicism that many aim for the dismantling of our government, despite its duty to protect and defend. They cheer when Grover Nordquist says we must drown the government in a bathtub and they fight against nearly all regulation, believing that government is best when it stays out of the way.

Now the same people are criticizing the Occupy Wall Street movement, which protests the economic reality that says the wealthy need not shoulder a commensurate obligation to maintain the nation's well-being.  Why conservatives choose to protect Wall Street interests can only be explained by their need for the campaign contributions big business lavishes on its cronies.  But here's their dilemma: They must either 1) acknowledge that there's something wrong about bankers getting bailed out while regular people get foreclosed upon and do something about it, or 2) argue that the perception is incorrect.  The former will require regulation from a government that they demand to be less intrusive, and the latter can't be advisable, since the belief that our system is corrupt is central to the Tea Party's suspicious worldview.  

I was once a Wall Street banker--in fact, I was one of those guys who used to buy mortgages and turn them into various derivative instruments--but I applaud Occupy's efforts.  We, as a nation, must force corporate leaders to act responsibly and penalize them for reckless behavior that jeopardizes the livelihoods of employees and society in general.  That said, I believe Occupy's endgame is misplaced.  To say the bailout of the nation's largest banks was wrong (and that we should never do it again) is to say we must accept the consequence of a drastic loss of market liquidity and a world-wide economic collapse.  Sure, we could have punished bank CEOs by letting their institutions fail, but would that have been the right course of action for the tellers and other employees who would have lost their jobs, or the borrowers who needed loans?  Would that have been the best thing for an already weak economy that required improved market confidence to operate properly?  

Second, I don't see how charging bank CEOs with crimes will lead to anything good.  I suspect any such effort will cost a lot of money and only demonstrate how poorly judgment had been exercised.  And as far as I know there are no laws prohibiting stupidity.  In a way, shareholders and boards of directors share much of the blame.  They approved our current system whereby a CEO is paid handsomely for taking idiotic risks that happen to work out but won't claw back compensation for decisions that backfire.  In a way, the real problem we face is accounting related.  We need to ensure that when a CEO is paid millions of dollars, the company is clean of hidden liabilities that can come back to haunt it.  In other words, CEOs should only receive significant performance bonuses after the results of their gambling are fully manifest and liabilities associated with risk taking are eliminated.  It would also help if, as is the case for many European companies, boards of directors included employee representatives.  These actions would result in more responsible behavior.  
 
If CEOs want to take huge risks that have the potential of destroying capital, let's tell them to use their own money.