M&M Mars Candy, Trump and The Estate Tax Giveaway

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[Ed Note: This is a guest post by our tax law expert friend Bob Lord. It is a particularized abject story of exactly what kind of interests are pushing the Trump “Tax Cuts” agenda, why, and how ridiculously corrupt and insulting to the 99.5% of America the effort really is.]

The Mars family has made billions selling us M&Ms, Snickers, and countless other Halloween treats for a century now. But when it comes to paying tax, the Mars family seems to be all tricks and no treats.

In fact, the family’s latest tax trick may have cost the U.S. Treasury a whopping $10 billion. What could $10 billion do? That’s the cost of delivering prenatal care to hundreds of thousands of expectant moms under Medicaid, an essential program that President Trump and the GOP Congress plan to cut by up to $1 trillion.

According to the current U.S. tax code, any American worth $25 billion can expect 40 percent of that, or $10 billion, to go to Uncle Sam in estate tax, the federal levy on the personal fortunes of deep pockets who kick the bucket. Forrest Mars Jr. had a $25-billion fortune when he died in July 2016. But the Mars family has apparently been able to avoid estate tax on that entire $25 billion.

How do we know? Researchers at Forbes and Bloomberg, the two business publications that track America’s billionaire wealth, have some fascinating numbers for us.

Forest Jr. and his two siblings started 2016 with personal fortunes in the vicinity of $25 billion. Now if Forrest’s fortune had been subject to a significant estate tax after he passed on, the collective wealth of his four daughters in 2017 would be substantially less than that $25 billion.

The just-released 2017 Forbes list of America’s 400 richest shows otherwise. Forbes puts the wealth of each of Forest’s four daughters at $6.3 billion, for a total of $25.2 billion. That’s almost identical to the 2017 fortunes of their Aunt Jacqueline and their Uncle John, each at $25.5 billion. The Bloomberg Billionaires Index reports similar numbers.

Should any of this surprise us? Not really. We’re seeing Mars family history repeat itself. Eighteen years ago, Forrest Mars Sr., the original Mars family billionaire, died. The Forbes 400 lists from the years surrounding 1999 show that the Mars family lost no wealth to estate tax back then either.

But the Mars family must at least be paying oodles of income tax, right? Nope. How could that be? This particular tax-avoidance story starts over a century ago, when Frank Mars incorporated his candy business.

Back then, the value of the stock in Mars Inc. had only minimal value. But over the years the stock appreciated considerably in value. By 1988, that appreciation had made the Mars family the wealthiest clan in America. The Mars billionaires still rank as one of America’s wealthiest families, in no small part because none of the gains in the value of the family’s Mars stock have ever been subject to income tax.

Is the Mars family content with its current level of tax savings? Apparently not. The family has joined with 17 other billionaire families and collectively spent $500 million lobbying Congress for reduced taxes on billionaires and the companies they run.

These companies face corporate income tax on their profits. Mars, Inc. has had to pay these taxes over the years. Unlike Mars family members as individuals, the Mars company hasn’t been able to sidestep its tax bills. But the Mars and other billionaire families have found a friend in President Trump and the current Republican-led Congress. The pending Trump-GOP tax plan would take a meat axe to corporate tax rates.

The resulting corporate tax savings, if this plan gets adopted, will likely translate into a multi-billion-dollar tax savings for Mars, Inc. — and a corresponding bump in the net worth of Mars family members.

The real prize for the Mars in the Trump tax plan? That may be in the elimination of the estate tax that the Trump White House is now pushing. Wait, what? How would the repeal of the federal estate tax help a family that’s already avoiding the estate tax?

For America’s ultra-wealthy, repealing the estate tax turns out to be more about the federal income than the federal estate tax. As Mars family history makes painfully clear, tax avoidance vehicles available under current law allow even billionaires to zero out their estate tax.

But billionaires, under current law, do pay an appreciable income tax price for their estate tax avoidance. Assets on which estate tax is avoided carry an offsetting income tax disadvantage. That disadvantage would vanish in a simple estate tax repeal.

What does that mean? Let’s say we have a billionaire who paid $10 million for stock now worth $100 million and does nothing to avoid estate tax on that stock The billionaire never has to pay income tax on that gain. Those who inherit that stock from the billionaire’s taxable estate can sell it for $100 million and not pay any income tax on the gain either.

But if that billionaire stashed that stock into a trust to avoid estate tax, he would forfeit that income tax advantage. The untaxed gain associated with the stock would be passed to the trust beneficiaries. These beneficiaries would face an income tax on the previously untaxed gain when they sell the stock.

If the Trump-GOP estate tax repeal takes the same final form as the estate tax repeal bill introduced in the House of Representatives in 2015, wealthy Americans will get to have it both ways: zero estate tax and the elimination of any untaxed gain at death.

And that would allow the next generation of Mars family members to avoid income tax on over a century’s worth of economic gain. Quite a trick, huh?

So enjoy the candy, America. The Mars family will keep the cash.

Happy Halloween!

[Robert J. Lord, a tax lawyer in Phoenix, Arizona and former Congressional candidate, is an associate fellow at the Institute for Policy Studies.]

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The Slow Death of Neoliberalism: Part 3 The Phillips Curve and Critical Theory

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Part 1.
Part 2.

I described attacks on the Phillips Curve in Part 2. This part discusses the history of the Phillips Curve in detail, and concludes with a discussion of the problems revealed by the failure. The Observations are the fun part if this is too long.

History of the Phillips Curve

This section is based on parts 1-3 of The History of the Phillips Curve: Consensus and Bifurcation by Robert Gordon, an economist at Northwestern, published in the 2008 in the journal Economica at p. 10 et seq. (behind paywall, but available online through your local library). In 1958, William Phillips published a paper which as Gordon puts it,

… replaced discontinuous and qualitative descriptions by a quantitative hypothesis based on an unusually long history of evidence. Since 1861 there had been a regular negative relationship in Britain between the unemployment rate and the growth rate of the nominal wage rate. P. 12.

Phillips fitted a curve to data from the period 1861-1913, and plotted data for the remaining periods, through 1957 against that curve to find disagreements. Phillips found that his curve was close across the entire time except for a couple of years that he explains away. Here’s the curve Phillips fitted to his data:

1) wt = -.90 + 9.64U-1.39

Gordon says “… the inflation rate would be expected to equal the growth rate of wages minus the long-term growth rate of productivity.” P. 12.

1a) p = w – k

For some reason p is inflation and k is productivity. Upper case letters are levels and lower case letters are rates of change. So equation 1 can be written

2) p = -.90 + 9.64U-1.39 – k.

Paul Samuelson and Robert Solow discussed the Phillips results in the US context in a 1960 article. They found no similar data for the US, but they did some estimates and suggested that the PC doesn’t fit their data for several periods, and that it can shift up and down. Phillips estimated that an unemployment rate of about 2.5% was consistent with zero-inflation, while Samuelson and Solow think it might have been 3% pre-World War II and was about 5-6% in the early 60s.

With this seal of approval, the idea was incorporated into econometric models in two equations. In one, the PC was embodied and other variables were added, including demand, unemployment, the rate of change of unemployment, taxes, expected inflation and others in different combinations. This result was fed into an equation that calculates inflation based on wage levels, price levels and trend productivity. Gordon explains that

The reduced form of this approach implied that the inflation rate depended on the level and rate of change of unemployment, perhaps other measures of demand, and lagged inflation.

This is followed by a long discussion of the views of the Chicago School, which Gordon dismisses as utter failures. Moving along to 1975, Gordon turns to efforts to modify the Phillips Curve by adding supply and demand shocks. The price of oil shot up in 1973 because of OPEC. The demand for oil doesn’t decrease quickly in the short run, so people spend more on oil and less on other things. The Phillips Curve didn’t predict the results. Gordon says

The required condition for continued full employment is the opening of a gap between the growth rate of nominal GDP and the growth rate of the nominal wage to make room for the increased nominal spending on oil. P. 21, cite omitted.

That means wages must fall, Gordon says, or we have to add money to the economy, but the latter would lead to inflation. What we actually did, he says, was wage rigidity, increased unemployment, and some nominal (meaning not adjusted for inflation) GDP growth. Gordon then developed and published this version of the Phillips Curve:

3. pt = Ept + b(Ut – UtN) + zt + et

The second U term is the “natural” rate of unemployment, which I’m not going to take up. The z term represents cost-push pressure from unions and supply monopolies. The e term is apparently a constant but it seems odd that it might vary over time. Gordon explains that this version incorporates inertia, the idea that if there’s inflation in one period, there will be inflation in the next. It also reflects supply and demand issues, like wage and price rigidity.

Gordon then mentions in passing that the wage equation (Equation 1a) is only valid if labor’s share of the GDP is fixed, but it isn’t. Here’s a chart from FRED

That problem, says Gordon, is “fruitfully ignored”. We don’t need to consider wages, we just look at prices. With these changes, we can understand the past by explaining away variations with negative or “beneficial supply shocks” and other variables. Gordon says that Equation 3 is foundation of the mainstream model. There is a related model, the New Keynesian Phillips Curve which is similar except that it incorporates future expectations of inflation, and makes no specific provision for supply and demand shocks. I assume these in some combination are the models used by the Fed, and heavily criticized as discussed in Part 2.

Observations

The concept is replaced by the formula, the cause by rules and
probability. Dialectic of Enlightenment, Horkheimer and Adorno,p. 3.

1. Phillips was working off empirical data when he fitted his curve, data about inflation and the rate of growth of wages. There are some theoretical issues in the preparation of that data. But the only abstract theory he adds to his data is Equation 1a, which Gordon says has a solid base in intuition. At the time he was writing, Phillips would only have seen data supporting that theory. We have new information:

As it happens, and perhaps not surprisingly, Phillips’ Equation 1 doesn’t work on US data. Gordon himself and others start adding things to make the Philips Curve work. They are convinced that there is a link between unemployment and inflation, and that they just need to add the relevant variables from their theoretical arsenal to get it to come out. Some focus on expectations, others on supply and demand shocks, and others add taxes or something else. Once they get those pesky variables set up, it’s just a matter of solving for constants. The point is to fit a curve to the actual data, not to use the actual data to see what’s happening. The concept connected to the real world is gone, replaced by the formula. The cause is replaced by the rules of economics.

2. If we set inflation at 0 in Equation 1a, the rate of wage growth is equal to the rate of productivity growth. As the above chart shows, this relationship broke about 50 years ago. If all the gains from productivity are not going to labor, they are going to capital. Of course, capital takes several forms, for example, housing, agricultural land and other domestic capital. See, Piketty, Capital in the Twenty-First Century, Figure 4.6. When you think about it, it seems almost impossible that some of the gains from productivity weren’t going to capital all along. But in the current economy, it’s obvious that companies like Facebook can provide vastly more services with disproportionally fewer additional employees, few of whom are well paid, so that most of the gains from increased sales go to capital. Or, suppose that manufacturing is outsourced, reducing labor costs. Some of the gains might go to cutting prices but surely some go to capital. Let’s rewrite Equation 1a to reflect this, using γ for the growth rate capital.

1b) p = w + γ – k.

Using Equation 1b instead of 1a, we would have this instead of Equation 2:

4) p = -.90 + 9.64U-1.39 + γ – k.

This equation focuses attention on the changes in the return to capital. That issue never seems to trouble most economists, but the rate of return to capital is the central focus of Piketty’s Capital In The Twenty-First Century. This chart from the Center on Budget and Political Priorities shows that top wealth started on its climb at the same time wages diverged from productivity, which supports the idea that gains from productivity are going to capital:

It also calls attention to the fact that nowhere in Gordon’s paper is there a mention of power, market power, political power, or social power, all of which Piketty talks about. Actually, hidden away in Gordon’s article is a backhanded reference to power. Equation 3 (Equation 7 in Gordon’s paper) includes a term “…zt to represent ‘cost-push pressure by unions, oil sheiks, or bauxite barons’”. P. 22. Obviously Gordon understands that the power to control the price of goods and services could create a negative supply shock, and the loss of control could produce a beneficial supply shock. P. 25. However, this is not explicit, and it certainly doesn’t deal with our current economy, in which almost all goods and services are dominated by a small number of gigantic companies exercising a significant degree of price control.

The tweaking Gordon describes might work for a while, but as the degree of price control through monopoly and oligopoly power increases, and γ becomes a bigger factor, the tweaks quit working.

3. Let’s put this in a larger context. For many economists, the Phillips Curve is structural. But why would you think so? It seems more likely that the relationship holds in a certain set of social conditions, including legislation and regulation, power conditions, and people’s attitudes. A logical use of the data is to work out the conditions that must exist to make it so. That’s how Piketty approaches his inequality data.

It’s a mistake to use a coincidence to predict the future. It seems to be a particular problem in economics. Even people who seem to know better continue to believe in the Phillips Curve. Here’s the President of the Boston Fed, Eric Rosengren:

A number of papers at the conference highlighted that some of the economic relationships that are frequently assumed to be stable over time have proven to be not so stable as we have come out of the financial crisis. These structural changes mean that if you tried to have a model that was fairly invariant to these changes, or a process that was invariant to these changes, there would start being big misses in monetary policy.

He goes on to explain that we have to raise interest rates because maybe not the Phillips Curve, but when employment goes up, inflation goes up. Rosengren knows there’s a problem, but he doesn’t have any idea of how to cope, so he keeps doing what he thinks he knows is right. It’s another example of Horkheimer and Adorno’s statement in action.

Updated to define γ more exactly.

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As Journalism and Democracy Struggle, New America Caves to Google

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In my analysis of the role of outside influence peddling on last year’s election, I harped on a number of issues. In addition to focusing on the long-standing right wing noise machine (Breitbart didn’t need Vladimir Putin to learn how to rat-fuck), I also noted that all of our politics is too easily driven by paid influence, whether from Russia, Qatar, or Defense Contractors. Finally, and perhaps most importantly, to the extent that fake news affected the election, it did so because the United States has allowed a handful of companies — chiefly, Facebook and Google — to concentrate power in Silicon Valley.

So to sum up this part of my argument: First, the history of journalism is about the history of certain market conditions, conditions which always get at least influenced by the state, but which in so-called capitalist countries also tend to produce bottle necks of power. In the 50s, it was the elite. Now it’s Silicon Valley. And that’s true not just here! The bottle-neck of power for much of the world is Silicon Valley. To understand what dictates the kinds of stories you get from a particular media environment, you need to understand where the bottle-necks are. Today’s bottle-neck has created both what people like to call “fake news” and a whole bunch of other toxins.

If we’re going to account for the weaknesses of our democracy, we need to account for the way our discourse gets channeled through two enormous companies whose primary interest is profit, not democracy.

Recent events at New America, which describes itself as “a think tank and civic enterprise committed to renewing American politics, prosperity, and purpose in the Digital Age,” demonstrate the risk.

When one of the leading commenters on the risk of concentration, Barry Lynn, applauded the EU’s judgment against Google — which is a major funder for New America — the think tank pulled his statement and fired him and his team.

The New America Foundation has received more than $21 million from Google; its parent company’s executive chairman, Eric Schmidt; and his family’s foundation since the think tank’s founding in 1999. That money helped to establish New America as an elite voice in policy debates on the American left.

But not long after one of New America’s scholars posted a statement on the think tank’s website praising the European Union’s penalty against Google, Mr. Schmidt, who had chaired New America until 2016, communicated his displeasure with the statement to the group’s president, Anne-Marie Slaughter, according to the scholar.

The statement disappeared from New America’s website, only to be reposted without explanation a few hours later. But word of Mr. Schmidt’s displeasure rippled through New America, which employs more than 200 people, including dozens of researchers, writers and scholars, most of whom work in sleek Washington offices where the main conference room is called the “Eric Schmidt Ideas Lab.” The episode left some people concerned that Google intended to discontinue funding, while others worried whether the think tank could truly be independent if it had to worry about offending its donors.

Those worries seemed to be substantiated a couple of days later, when Ms. Slaughter summoned the scholar who wrote the critical statement, Barry Lynn, to her office. He ran a New America initiative called Open Markets that has led a growing chorus of liberal criticism of the market dominance of telecom and tech giants, including Google, which is now part of a larger corporate entity known as Alphabet, for which Mr. Schmidt serves as executive chairman.

Ms. Slaughter told Mr. Lynn that “the time has come for Open Markets and New America to part ways,” according to an email from Ms. Slaughter to Mr. Lynn. The email suggested that the entire Open Markets team — nearly 10 full-time employees and unpaid fellows — would be exiled from New America.

New America insists that Google didn’t pull the plug on some of the most important (and still meager) work criticizing concentration.

New America’s executive vice president, Tyra Mariani, said it was “a mutual decision for Barry to spin out his Open Markets program,” and that the move was not in any way influenced by Google or Mr. Schmidt.

But this is in no way the first time they’ve catered to Google’s preferred policies. I’ve run up against it indirectly in surveillance fights, and others have far more directly.

So here we have a think tank which is doing necessary work carving out space on the left for policy. But it can’t investigate one of the most basic threats to our democracy, because doing so would quickly identify the danger of Google.

I get the need to attract and keep funding. But if this lefty think tank can’t research one of the forces that led to the election of Donald Trump, what good can it do?

Update: Here’s a link to Lynn’s new site. 

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[Photo: STIL via Unsplash]

Angry Mom: Oh, Honey — If Anybody’s ‘Out of Touch’, It’s You

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I wasn’t going to waste my time on the over-privileged, excessively-pampered trophy wife Treasury Secretary Steve Mnuchin stupidly took with him on a recent taxpayer-funded business trip.

But after thinking about her rude, snotty, and insanely ill-informed reply to someone who took issue with her gross display of wealth, I think I should expend a few words.

Mrs. Mnuchin believes she and her spouse contribute more to the country than whomever it was who critiqued her behavior.

No. They and their kind are leeches. Bloodsuckers. Literally part of the great vampire squid empire Matt Taibbi described.

They do not add value to this country. They chew at its foundations in great, monster-sized bites.

And they believe they are entitled to do so.

But they’re wealthy! Look at all the money they have, one might say.

What did they do to make that wealth? They inherited much of it, especially in his case — they had access to pre-existing capital.

Meanwhile, nearly half of this country’s citizens can’t put their hands on $400 or more in cash in the event of an emergency.

This, in spite of the fact roughly half of the country has some money in an investment account. Let me guess that much of this is a 401K established through an employer and it’s not liquid. It’s also money managed by financial industry professionals like Steve Mnuchin who don’t do a lot actively with the Average Joe’s 401K but use them in the aggregate to take positions in the stock market while skimming off a living through fees — and the Average Joe only has $104,000 saved by the time they retire, on which to live the rest of their life.

Yeah, but these Mnuchins must have worked hard to get through those private schools, one might say.

Prove it. How many times do these uber wealthy ever really show anybody their grades to get a six-figure entry-level job out of college? Mnuchin’s father was a partner at Goldman Sachs. Mnuchin himself rubbed shoulders with a network of uber wealthy as a member of Yale’s Skull and Bones society. With that background it’s not hard to get one’s foot in the door AND draw a salary more than twice that of the Average Joe.

Ditto for Mrs. Mnuchin, who also attended private schools in Scotland and a private university in the U.S.

Average Joe or Josephine doesn’t have either the family money to go to expensive private prep schools or attend a four-year university without being massively in debt. The Average Joe Junior who graduated last year had more than $37,000 of student loan debt which will take them on average 10-21 years to pay off.

(Gee, I wonder who benefits from the interest on these loans…Bueller? Bueller?)

Deplaning from her taxpayer-subsidized flight, Mrs. Mnuchin’s attire, from the top of her over-processed hair to the ends of her manicured toes, was roughly equal in cost to the average student loan debt — her Birkin handbag alone costs about $20,000.

The same Average Joe/Josephine/Junior also faces a job market with deeply entrenched wage stagnation, making savings difficult after paying on school loans.

They also face difficulty before they graduate if they hold down a minimum wage job; there’s no place in the U.S. where rent on a one-bedroom apartment is affordable for a full-time minimum wage worker, let alone one who is trying to go to school full-time.

After graduation, long-stagnant entry level wages may help ease the pinch, but then there’s the challenge of rising health care costs which have not abated even though the ACA makes access to health insurance easier.

Good luck finding a way to afford having children. Diapers alone will cost $750 to $1200 a year.

Don’t even get me started on transportation costs. And Boomer-aged pundits pule about Millennials killing all the things…

But surely these uber wealthy people must have earned some of their wealth, one might foolishly claim.

Oh, yes, definitely. They earned it by capturing legislatures and regulatory bodies, and by putting a squeeze play on both investment analysts and regulations. They’ve used them to insure they never actually pay taxes appropriate to the amount of public resources they or their investment portfolio consumed. They’ve demanded quarter-after-quarter profits off the backs of the Average Joe/Josephine/Junior, insisting corporate management maintain low wages to offset other rising costs like rent. They’ll reward upper management with ridiculous compensation packages if they can maintain profits and sack them if they don’t. And then because foreign investors are driving up the price of property, they sink those profits into the same bubble and continue to lean on corporate management for profits even as they increase other business costs through increased rents.

They earned that wealth by sucking the lifeblood out of the kind of people Mrs. Mnuchin talk down to so defensively, even after they’d just paid for her air travel.

I would be so incredibly embarrassed as a parent if my adult children ever acted like Mrs. Mnuchin — blind and stupid about her privilege, ungrateful to the people upon whom her lifestyle has been built, wasteful of an opportunity to be a better human.

And incredibly out of touch with Americans.

And I’d be just as embarrassed if my kids ever acted like Mr. Mnuchin, too, but that’s another chapter.

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Three Things: Non-Nuclear Proliferation

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The entire social media universe has been panicking over Fearless Leader’s whacked-out statement on North Korea at the end of his bigly speech yesterday on opioids. His hyperbole was on par with his decades of hawkishness about nuclear weapons, so both unsurprising while infuriating.

What I want to know: did he say what he did to distract from the Trump-Russia investigation underway, and/or did he say what he did roughly 30 minutes before the stock market closed for somebody’s benefit? I’d love to know who might have been short selling yesterday afternoon and this morning after his recent petulant tweet hyping the stock market’s record highs. Things don’t look good today, either, in spite of calming noises from Secretary of Exxon Tillerson.

[source: Google Finance]

Whatever. Let’s look at some non-nuclear matters.

~ 3 ~

The New York Times’ op-ed, Our Broken Economy, trended yesterday morning on Twitter and is still making waves today. It’s a pretty good read with compelling charts, if not very deep. Morons across the internet have misinterpreted what it tells us, which is that income has stagnated or fallen for the majority of the U.S. while the income of the uppermost 1% to .01% has skyrocketed in less than a decade. Loss of leverage in wage negotiations due to union busting and the skyrocketing cost of secondary education have held back the lower 80%.

What has most recently ‘weaponized’ the growth of income, while destroying any illusion of the American dream? In my opinion, three things contributed the most:

— the loss of Glass-Steagall Act and the subsequent unmooring of the financial industry from risk-reducing practices which siloed capital;

— Citizens United, which exacerbated the trend toward regulatory capture;

— the financial crash of 2008 and the subsequent loss of wealth for the lower 80% in terms of savings, investments, and property ownership.

But a fourth, rapidly growing factor is making difference and may also be exploding as an unintended consequence of legislation passed in 2007 requiring a larger percentage of margin on commodities trading. Algorithmic trading, conducted out of sight, skimming from every trade, on stocks rather than on commodities and at inhuman speed and scale, has increased unearned wealth but only for the very wealthiest.

Matt Bruenig says we must confront capital. Yes, but I think the appeal to do so is based in fairness, a universal ethic. A system which distorts pricing by not allocating true and full costs of the commons consumed to products and services  sold is unfair. It is not a ‘free market’ and certainly not a fair when the playing field isn’t level and not every business pays for what it consumes of the commons.

And it’s not fair when businesses deliberately suppress wages below workers’ real cost of living. That’s slavery. We don’t need charts to tell us something is wrong when the prevailing wage won’t provide meager shelter and food.

~ 2 ~

The effect of Michigan’s criminal state government on Flint doesn’t remain in Flint. More than 70 new cases of Legionnaires disease have been reported in southeastern Michigan; this time the state’s health authorities have been prompt about reporting them, unlike the shoddy reporting around cases 2-3 years ago directly related to the water in Flint.

I will bet good money many of these new cases have a link to Flint since the water system has still not been completely replaced.

Eclectablog reminds us Flint’s Water Crisis is now at Day 678 and the city has yet to be made whole though Michigan’s Gov. Rick Snyder admitted he knew that Flint’s drinking water was poisoned with lead. There are still Flint residents who cannot drink their tap water without the use of a water filter.

Given the outbreak of Legionnaires disease, I wonder how many more Michiganders may actually sicken and die because of Rick Snyder’s handling of Flint’s financial emergency and the water system.

~ 1 ~

You might already have read about the lawsuit filed against Disney for its failure to protect children’s privacy; I know Marcy tweeted about it. More than 40 applications Disney developed and sold collect information without consent about the kids using them, putting them at risk, in violation of the Children’s Online Privacy Protection Act (COPPA).

But here’s what really bugs me about this on top of the privacy problems: Disney not only had a history with violating COPPA; the government went after them in 2011 and 2014 for problems with Playdom and MarvelKids. Disney must have known competitors Mattel and VTech had problems with their network-enabled electronic toys breaching children’s privacy circa November 2015. Why did Disney fail to remediate their 43 applications more than 18 months ago when both Mattel and VTech were under fire?

Disclosure: I own Disney stock. And yes, I’m thinking shareholders should be pissed off about this failure to disclose a material risk in financial reports BEFORE parents filed a lawsuit.

~ 0 ~

That’s it for now. See you tomorrow if we haven’t already been fried to a crisp. This is an open thread – treat each other nicely.

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Three Things: Killing Oil, Too Money, Kaspersky’s World

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Too much going on here today but the existing threads are getting too deep and a couple are drifting off-topic. Here’s three quick things to chew on and an open thread.

~ 3 ~

The marketplace will bring death to oil long before the government. (Bloomberg). But will governments — US and oil-producing countries alike — get in the way of alternative energy in spite of the market demanding more alternatives to fossil fuels? With this trend away from combustion engines pressing on them, fossil fuel producers are shifting toward increased LNG for use in electricity production; this only shifts CO2 creation from vehicles to power plants. Will the market put an end to that, too?

~ 2 ~

There’s too much money out there if Delta can order multiple planes configured for all-first class service. I just spoke with a friend earlier today about round-trip fares from a major Midwest airport to major cities in Europe; they were quite high even with a departure date more than a month out, and higher than they had seen in a while. Fuel prices haven’t increased that much over the last year; low oil prices are threatening pipelines as financing construction costs more than the return on oil. Somewhere between slack fuel prices, firm fares and demand, Delta’s making enough money to build these let-them-eat-cake planes.

One could argue that if buyers have the money they can have whatever they want — except that taxpayers finance the infrastructure including essential safety regulatory system which will now protect the few and not the many while increasing congestion. Too money — somebody needs to pay more taxes to support the infrastructure they’re using.

~ 1 ~

Kaspersky Labs is releasing around the globe a free version of their antivirus software (Reuters). It won’t replace the paid version of their AV software, providing only very basic protection. I’m not using it, though, for two reasons: if it’s like Kaspersky’s existing free tool, it will send messages back to the parent company about infections it finds — and possibly more. Congress and the U.S. intelligence community may have concerns about Kaspersky Lab’s vulnerability to the Russian government; I’m more concerned about Kaspersky Lab having been breached at least once in 2015, compromising data in their systems. Your mileage may vary; use under advisement.

~ 0 ~

That’s it for now. This is an open thread. Behave.

P.S. The fight against attacks on the health care system isn’t over. Call your senator at (202) 224-3121. Other tools for your use in this post.

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‘Look, You Can Live on Minimum Wage!’ Say Modern Slavers

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[Sample budget via McDonald’s and VISA]

Jesus fecking Christ on a pogo stick. I can’t believe McDonald’s and VISA were stupid enough to put together this oh-so-helpful budget estimate showing how fast food workers can get by and still have money left over.

After looking it over, here’s my assessment: A couple corporations need to do drug testing among white-collar staff. Somebody had to be be out of their gourd to think this was accurate, let alone an effective marketing tool to promote their businesses.

As many folks have pointed out, an immediate glaring error on this ‘budget cheat sheet’ is the lack of heating/cooling expenses. Sure, some apartment complexes included HVAC in the rent they charge, but this can’t be assumed as a norm.

Every line item included is grossly flawed. I’ll look at three points:

1) First job’s NET salary of $1105 based on an estimated 21% income tax equals ~$1400 gross salary. Based on current federal minimum wage of $7.25 per hour, that’s ~193 hours worked in a month, or ~44.6 hours a week.

This is NOT a part-time job. Most fast food jobs are deliberately limited to under 32 hours a week to avoid paying unemployment taxes or other benefits.

2) Second job’s NET salary of $955 — HAHAHAHAHAHAH Right. That’s another ~167 hours of labor per month at current federal minimum wage and 21% income tax rate.

To make this sample budget work, either two people MUST live together, MUST work a combined ~83 hours a week at current federal minimum wage. Or one person must do all this and simply have no time to do anything beyond eat/sleep/bathe/maybe laundry.

If two people lived together to make this budget work, they MUST share a tiny/cheap/ratty car, or hope like hell there’s public transportation which costs less than $150 a month to get to/from ~83 hours of work, grocery store, school, so on.

The rest of the assumptions in this budget are just plain trash. Like health insurance for two people versus one. Or savings of $100 which is really half that, spread between two people, as is the discretionary daily spending.

Some trollish account said, “But nobody stays at minimum wage forever! They get pay increases!” Sure…now person working First Job only has to work 43 hours a week instead of ~44.6. The average wage at McDonald’s is $8.25 — but does that include assistant managers and shift managers? Does this include people who’ve worked at McD’s for years? Let’s be real: most fast food workers are closer to the federal minimum wage.

Perhaps with pay increase a person working BOTH jobs only has to work ~80 hours a week instead of ~83. Give me a fucking break.

3) Transportation and insurance combined = $250 — HAHAHAHAHAHAH Right, again. I checked Progressive’s website calculator for insurance on a vehicle only, assuming a 2007 4-door Honda Civic, personal use, unmarried single male driver age 18-24 living alone, who lived in the same rented home for 1-3 years, had driven for more than 3 years, had insurance for 1-3 years, assuming a 20-year old male student living in Lansing, Michigan. Car insurance alone was $219 per month AND +$400 was required upfront before coverage began.

Maybe bundling renter’s insurance would help but the cost McDonald’s and VISA used in their example budget for insurance and a used car loan is simply unmoored from reality.

And perhaps insurance is cheaper in other parts of the country, but I will bet good money some other line item in that budget increases. Like the cost of an annual automobile license (higher in FL than MI) or a mandatory vehicle emissions test (required in CA but not MI).

Roughly 50% of Americans can’t get their hands on $400 cash for an emergency. Imagine if your insurer dropped you and you’re a fast food worker living to this prospective budget. That’s where VISA comes in with an opportunity to finance your emergency, compounding the stranglehold minimum wage has on your life.

God help you if you’re trying to put yourself through college without scholarships or family assistance. Even the imaginary example student attending Lansing Community College will pay more than $65,500 for four years. How long will it take to get through a four-year degree if one works ~83 hours a week? How long will it take to pay off school loans if one manages to break out of fast food service work after graduation — let’s say they double or triple their wages to $14.50 or $21.75 hour? This prospective student faces somewhere between 12 and 15 years of payments ranging from $950 to $1050 per month, and payments may begin as early as NOW while attending school at $650 per month.

You will be in debt for much of your adult life. There will be no extra money for anything.

Maybe the rare avocado toast, if you can find one marked down in the Damaged bin or live someplace warm where fallen avocados can be found for free. And maybe if you can afford bread this week.

“But millennials buying pricey iPhones!” some out-of-touch jackass might say. Let’s say you’re a fast food worker who might have to change housing at any time because rent has increased dramatically in your city. Even my example dude in innocuous Lansing faces a +7% increase in rent each year though his wages have been stagnant. Your entire life — telephone, computer, internet access, records, more — resides in a single, portable device. Of course you’ll pay more for a phone which hails a tow truck when your ratty little car breaks down, or finds you a quick cash gig (or a plasma blood bank) to pay for repairs. That phone is your lifeline, the lifesaver you can count on unlike white-collar jerk-offs who have no clue what you’re going through to survive.

And God help you if you get sick or injured. You can’t count on your elected officials to make sure you’ll be healthy enough to show up to work those ~83 hours a week.

Indentured servitude, without a contract, that’s what this budget reflects. Product marketing by modern slavers.

And they can’t understand why millennials are killing so many things like fast food businesses. They simply can’t afford them.

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Death of the Car(go) Cult(ure)

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I had an epiphany recently. It sneaked up on me, right about the time I let go of my comfortable illusion of middle-class security and embraced the fact I may be faced with more than $26,000 per year in health care premiums and untold thousands in out-of-pocket deductibles and medication expenses. It could be more than my household income, forcing me to draw down on retirement savings nearly ten years prematurely.

Ticking off monthly expenses — what things could be reduced or eliminated in my household to make up for the additional health care expenses if some mutant abomination of AHCA passes — I came to an abrupt conclusion.

I don’t need a car anymore.

It costs more to own a car at my personal disposal than calling a car-for-hire, whether Uber or Lyft or local cab service.

I had to sit down after that. For nearly fifty years I’ve thought I needed a car, that every American aspired to vehicle ownership, save for big city residents for whom cars would be unmanageable. My entrance to adulthood was marked by the ability to drive a car; my personal freedom hinged upon being able to get away in my own vehicle.

But now? I might be trapped by a car. My six-year-old grocery-getter Mom mobile cost me more than I invested in the stock market the year it was manufactured — it’s worth a fraction of its original value, while my stock is worth several times over. My investment in wheels won’t pay for my future health.

I thought about my kids and the reality they face; only four years separates these two siblings, but a massive cultural shift occurred between them. My 23-year-old daughter drove off like the wind when I gave her my car keys seven years ago; she saw her first vehicle as freedom, just as I did when I was her age. She just signed her first lease on a vehicle, though; after crunching the numbers on new cars, it didn’t make sense to buy one. Leasing a car would yield a lower total cost to operate than buying one. She’s also not stuck with trying to sell it in a couple years when an electric vehicle might be preferred.

This isn’t an earth-shattering shift, but it’s a tectonic move; no one in my family has ever leased a vehicle. We have always bought and owned them over the last four generations.

And now my son. One might assume he was a car buff living here in the backyard of the Big Three Automakers, the progeny of one family which made its fortunes in auto parts and spawn of another family in which two successive generations made a living engineering in automobile manufacturing.

But no — he dragged his feet for nearly three years getting his license. He just didn’t care to get it; the only reason he got a driver’s permit was that everyone else his age had done so. He had the public school bus to get him to class every day, and me to get him to every intramural event. Why should he bother when he had it so good?

Especially when it came to the annoying expense of having his own vehicle. Being in a high-risk group — male, 16-25, driving more than 25 miles a week — he might pay more in insurance each year than the purchase price of the car he would drive. And then gas, which was near $4.00/gallon when he got his permit. And car washes, tires, wipers, oil changes, other increasingly frequent car repairs, and so on…this was not freedom.

His sister had been fortunate to land an internship for the duration of her college career, which helped defray automobile expenses. This has not been the case for her brother because of their different academic pursuits. He works at a summer job, stashing as much of his paycheck away for the academic year while living on his tips during the season. The paycheck and tips combined from his summer service job do not equal the amount his sister made each year; he simply cannot afford a car of his own.

We don’t know how long this may be the case, either. His prospects are different from his sister’s given his field of study. He may need to pursue a master’s degree immediately after he gets his bachelor’s. Leads on internships for his junior year of college are good, but the pay may be less than his sister made at the same point in their studies. A car of his own is a very iffy prospect for years.

Let’s face it: my son’s life is closer to that of the overwhelming number of American’s his age than my daughter’s is to her cohort. This is the shift in our culture, one in which we begin to let go of personal and family automobiles as a norm.

The more I thought about it, the more disturbed I became. Both of my kids will leave college without any debt; I spent what should probably have been my retirement health care savings on their tuition and board. In contrast, my prospective son-in-law carries $40,000 in debt after his graduation this month. Thankfully he has a good job and can pay it down quickly, but what of all other college students in the U.S.? The overwhelming majority will be saddled with a similar or greater amount of debt and middling jobs. They’re part of nearly 50% of America which cannot muster $400 cash in the event of an emergency, perhaps part of the 53% participating in the stock market but still one of the precarious.

These youngsters will be hard pressed to juggle health insurance premiums and deductibles under AHCA with massive college tuition debt and rising rents.

They will be hard pressed to buy a car outright. Screw all of those idiotic “Millennials are killing everything!” opinion pieces; their parents and grandparents have done little to ensure college would not burden them as much or more than an automobile payment.

Or a mortgage. I realized, too, that I am financing and paying taxes on a garage and a driveway I rarely use. I must trek out and shovel tons of snow every year to keep that rarely-used driveway clean; when it’s too much to do by hand, I break out the gas-guzzling, exhaust-belching snowblower.

All in service to a rapidly depreciating fossil-fueled demi-god with a deteriorating finish and in need of an oil change. I’ve become an adherent of a cargo cult, who has for too long believed that possessing this object would yield some greater blessing from the great god of capitalism. Instead of throwing several handfuls of dollars per mile traveled into a gaping maw I should be riding my bike or taking a bus.

When the rest of the U.S. wakes up to this same reality, the real earth-shattering shift will begin. Perhaps it already has.

What happens to a people when they lose their religion? We’re about to find out.
__________
Food for thought:
U.S. automakers question possible excess capacity – but is the challenge too much manufacturing capacity or too little buyers’ capacity due to decades of stagnant wages?

If carmakers like Volvo are already committed to switching completely to electric while entire cities and countries are forcing fossil fuel’s phase out, are potential car buyers simply driving their gas guzzlers to death until the industry has completely migrated?

Or maybe the future isn’t on the road but in the air; will buyers save their pennies for a flying car?

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Stagnant Wages And Slow Productivity Growth

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This article on productivity at Forum Economics says that there has been a global slowdown in productivity growth, and discusses some common explanations. As I pointed out, there is every reason to think that the actual slowdown in productivity growth is greater than the numbers suggest. That’s because productivity grows when output increases while hours worked remains the same or declines, as happens when firms exercise market power to increase prices without changed costs. Forum Economics argues that if productivity growth slows down, workers will not be able to improve their standards of living, explaining:

Household income is dependent on wages, which are consequently dependent on a firm’s ability to grow through greater productivity. The widening gap in productivity would account for the widening gap in household income and consequently, social equality.

At one level, this is just a version of the economic maxim that markets pay people what they are worth. In this case, the argument is that the productive people get the increased rewards. In the case of exercise of market power, this means that some people benefit from exercise of market power, and we know it isn’t the producers of the goods and services; it’s the people at the top, holders of debt and equity, and financiers.

At another level, it says that companies can’t pay higher wages unless workers increase their productivity. And certainly not at the expense of returns to capital.

Economists used to think there was some magic connection between productivity and wages. That was generally true for some time. But, as this This chart shows the relationship between wages and productivity split beginning around 1980, while productivity was growing rapidly.

That’s just after Paul Volker, then Fed Chair, raised interest rates to ludicrous levels. At the same time, economists were preaching that the problem facing the economy was inadequate levels of capital. So Reagan and the Republicans, along with plenty of complicit Democrats, slashed taxes on the rich, reduced regulations, deregulated industries, and clobbered unions. At the same time, they increased taxes on the working people of the country by increasing FICA taxes.

That worked. According to this 2012 report from Bain & Co.:

By 2010, global capital had swollen to some $600 trillion, tripling over the past two decades. Today, total financial assets are nearly 10 times the value of the global output of all goods and services. …

Our analysis leads us to conclude that for the balance of the decade, markets will generally continue to grapple with an environment of capital superabundance.

This article estimates total financial assets at about $294 Trillion in 2014. And, of course, banks have an almost unlimited capacity to lend for any useful purpose. There is certainly no shortage of capital today.

Once capital achieves a new baseline of return, it doesn’t drop back without a bitter fight, sometimes just political, but always with the threat or reality of physical violence. That’s how labor got its share in the first place, a fact no one wants to talk about. When was the last time you heard an economist discuss the violence in the coal fields, the violence that won miners safer working conditions and better wages. Once labor loses its power, workers can’t defend themselves, and can’t force the rich to share the benefits that flow from any level of productivity, whether or not that level is increasing. And indeed, the rich are now taking all the gains from productivity and more, the labor participation rate is at pre-1980 levels, and wages have been stagnant for decades. Even so, all discussion about wages is centered around increasing productivity, as if it mattered to workers when all the benefits flow to the richest among us.

One school of thought blames workers, saying they have to increase their training and preparation for the work force. A kinder version blames hysterisis effects, the idea that when workers are unemployed for extended periods, they lose their skills. The Republican answer is invest in yourself, borrow money, and get that training. Of course, you take all the risks, for example, whether you can master the schooling, or figure out what training might get you a job, or find a school that will actually train you, and by the way, if you fail, you still have to pay until you die. The Democratic version is jobs training, but that’s only sporadically available, and it’s always underfunded and rarely useful, thanks to the neoliberals in both parties. As to the older people in the workforce who can’t retrain, and can’t move to where there are jobs, both parties do nothing. We don’t just blame the victims, we ignore them, and treat them as losers who deserve nothing.

Many of the 23 economic writers cited in the Focus Economics article, and the other experts it discusses, say the problem is inadequate business investment. So the solutions offered are centered around stimulating demand and cutting taxes and regulations. No one explains how this solves the problem of the rich taking all the gains.

There are few outside the box observations. A couple of the writers think maybe the problem is that there are too many low-productivity jobs available, and too few high-productivity jobs. People see the available jobs as dead-end, and their treatment as demeaning, and they don’t do more than the absolute minimum necessary to get that minuscule paycheck. Another writer points out that the next wave of capital investment is not going to make people more productive, it’s going to replace them. I assume he means industrial robots, for the short term at least.

Another suggests that we are already very efficient at a lot of things, and in those areas, improvements in productivity won’t make much difference. In areas we aren’t very efficient at, it’s going to require something enormous to make a difference, or we would already done it. John Quiggan says that the financial sector has separated itself from the productive sector, which seems true. You can almost hear the words “Vampire Squid”. All these are intractable problems.

But I think the problem is different. The economic orthodoxy is that capital is always efficient, while labor is always bloated, lazy, indifferent, greedy, demanding, corrupt and insufferable. That was and is the rallying cry of the union-busters, and you can hear it today. That is a perfect description of the capitalists of today. They don’t want to take risks. They want protected markets, special tax treatment, immunity from criminal prosecution and civil suits, and they have the money to pay off politicians to get that and more. They want all the money. They don’t want to pay their share. They want the right to wreck the economy with impunity. They want the right to screw consumers into the ground. They want the right to destroy the environment. And they want to make all the decisions about the future.

We have the power to solve that problem if we have the will.

Update: after I posted, I ran across this astonishing article by Michael Hiltzik at the Los Angeles Times, discussing the reaction of Wall Street analysts to American Airlines decision to increase pay to its pilots and flight attendants. Do read it.

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The Productivity Problem

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Productivity growth is apparently trending downward around the globe. The problem is addressed in Focus Economics, Why is Productivity Growth So Low: 23 Economic Experts Weigh In. The author, whose name I can’t find, begins by explaining the problem as economists see it.

Productivity is considered by some to be the most important area of economics and yet one of the least understood. Its simplest definition is output per hour worked, however, productivity in the real world is not that simple. Productivity is a major factor in an economy’s ability to grow and therefore is the greatest determinant of the standard of living for a given person or group of people. It is the reason why a worker today makes much more than a century ago, because each hour of work produces more output of goods and services.

It’s certainly true that the concept is important. The simple definition gives us the rough idea but the details are very difficult indeed. The text gives us the example of productivity at a branch bank.

Bill Conerly put it well in an article for Forbes: “Take banking, for example. Your checking account is clear as mud. The bank provides to you the service of processing checks, for which you don’t pay (aside from exorbitant fees for bounced checks and stop-payments). However, the bank does not pay you a market rate of interest on the money you keep in your checking account. It’s a trade: free services in exchange for free account balances. Government statisticians estimate the dollar value of the trade, so that the productivity of bankers can be assessed, but the figures are not very precise.

At least in that example, we can see how productivity improvement at a bank might improve your standard of living, perhaps indirectly by enabling the bank to pay a bit more interest on your checking account. Here are three different kinds of examples, in which we can see how improvements in reported productivity result in worse outcomes for us.

Productivity is defined as the ratio of output to hours worked. Output is measured by receipts to the producer. Hours worked are collected by the Census Bureau.

1. A pharmaceutical company raises the price of its generic drugs with no change in its costs. Its receipts go up while hours worked remain the same. Under the definition, productivity goes up.

2. A high frequency trading company inserts itself into an increasing number of purchases of securities on stock exchanges. The purchaser pays a higher price. The HFT company has higher revenue but hours worked remain the same. Again, by this definition, productivity goes up.

3. Two dominant corporations in the same industry merge. The new company fires a lot of people. Hours worked go down. Prices remain the same in the short run, and rise as the new entity exercises oligopoly power. With hours down and receipts up, productivity rises by definition.

Are these examples realistic? In the medicine example, this article lays out the issues. For those interested, this chart shows the value of pharmaceuticals and medicines shipped by manufacturers beginning in 2000. It shows that there was a steady rise, with a sudden jump in 2013. This chart shows that per capita expenditure on pharmaceuticals and other medical products has nearly doubled since 2000.

It’s likely that there are several causes for this, not least the startling prices sought for new drugs. Government productivity figures do not take into account any improvement in the results that new drugs bring, although quality adjustments are made in calculating inflation figures. Given the increased pressure from insurers and doctors to switch to generics, and increased focus on drug prices as a problem, it’s reasonable to see this data and various reports as support for my drugs example. But it’s hard to put a dollar value on it.

On the second example, here’s an article from CFA Magazine written in 2011, detailing the costs of high frequency trading. More recent reports say that the problems are going away, and who knows because it’s hidden behind a wall of words mostly from the people who run the systems and their friends at the exchanges, and the captured SEC. Here’s a review of the literature (behind a paywall), which concludes with this: “This suggests that the identified economic benefits of HFTs (market making, venue competition, more trading opportunities) outweigh their economic costs (large-order predation and run games).” For my purposes, it’s clear that the older article tells us that initially, at least, HFT operated as my example suggests, raising productivity without doing anything useful.

As to the third example, the impact of private equity on employment is everywhere, and the concentration of economic power in oligopoly control of most industries is obvious. Dave Dayen has been writing about it for some time; here’s a recent example. Oligopolistic control also reduces paychecks for the remaining workers.

In these examples, and I could produce many more, productivity as defined by economists goes up but individual consumers are worse off. That is maddening. Once upon a time, we might have thought we could just ignore this kind of thing as an insignificant part of GNP, but that’s not true today, either in the US or globally. The economy, measured by output, is growing, but it is the opposite of the notion of productivity as good for society: it makes people’s lives worse. Except, of course, for a few rich people.

My three examples are exercises of market power. Here’s a long but worthwhile discussion of the harm it does and its increasing presence in the economy. Market power is not the same as rent-seeking, which is usually defined as an effort to get the government to give special treatment to one of a number of competitors. Both are damaging and both inflate productivity figures.

My examples show that reported productivity growth is most likely higher than the kind of productivity growth that the author discusses, the kind that increases the amount of goods and services available in the economy. It’s not unusual for an economics writer to assume only good people operate in the capitalist economy, and ignore the crooks and the cheats. Suppose the author is right that rising productivity that makes for a better life. If real productivity growth is even lower than the low reported productivity growth, his logic explains why life is getting worse for most of us.

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