The End of Capitalism?

Paul Mason's fascinating article "The End of Capitalism" contains an interesting insight. When detailing the still terrifying details about the 2008 economic crash, the solution to which almost every major power broker thought was austerity, he writes:

Even now many people fail to grasp the true meaning of the word “austerity”. Austerity is not eight years of spending cuts, as in the UK, or even the social catastrophe inflicted on Greece. It means driving the wages, social wages and living standards in the west down for decades until they meet those of the middle class in China and India on the way up.

Mason's nuanced perspective is enlightening, and recommend you read the whole thing. For me, i've always wondered about people who promote austerity; those who essentially insist that we can't have nice things while turning a blind eye to the 1% who have almost all of the nice things. (Of course, those promoting austerity are usually members of the 1%.) Digging deeper, as Mason does, you see how the capitalistic system is not working as intended due to increasing technological capabilities and the lack of an organized resistance (i.e., organized labor). In fact, he points out that the roots of the 2008 crash have snapped back: "The shadow banking system has been reassembled, and is now bigger than it was in 2008. New rules demanding banks hold more reserves have been watered down or delayed."

The whole thing is scary, but he does point out rays of hope for what he terms a "post-capitalistic" system. The need for an evolved system of some form feels right to me, as capitalism hasn't felt healthy for a while - too many "fingers on the scale" influencing what is supposed to be a free market. But I'll let those much more qualified than I continue: read the article at the Guardian here. What do you think?

Diversity was Necessary

I was astounded by the sublimity of this vision [of social Darwinism in business], whose implications spread far beyond the business sphere. Thinking back to my first discussion with Riley, I wondered if this weren't the answer to the question he’d proposed: How was the Christian to reconcile the existence of evil with the unconditional benignancy of God? Or, alternatively, how did the Taoist reconcile the existence of what was not Tao – which represented an affront to its essential nature, even contradicted it – with the primordial unity of all things in Tao? Was it possible that this was the answer? If so, then on both counts the objections were based on a simple narrowness of view. Once the Great Whole was seen, objections flew away like chaff. Evil, then, was the crucible in which the good was tried and proved. The unnatural was the fever which the body suffered internally to purify itself and become well again. The sores and the corrupt places of the economic world, as of the larger, were where the Tao had sent the legions of its influence, its platelets and leukocytes, its antibodies and white corpuscles, to eradicate diversity’s failed experiments, devouring the excesses of the blood. Diversity was necessary to insure the greatest possible perfection, and if it created a few monstrosities as well, then it all provided  for their destruction by natural selection. That was the miracle! Everything was tending towards the good!

- David Payne, Confessions from a Taoist on Wall Street, p. 577

McMansions and the Mortgage Credit

Completed the always painful and frustrating process of doing my taxes last night. As someone that likes to think about good design, I continue to be amazed at the byzantine structure of our tax code. Ostensibly, the many, many (MANY!) rules and regulations in the US tax laws are supposed to push people towards the behaviors that we, as a society, want to encourage. For example, take the home mortgage deduction. Promoting home ownership is a good thing, right? Well, that's what I've always thought, but watching the ecologically disastrous and soul-crushing sprawl taking over our country I've started to have second thoughts.

This rethinking was sparked again by Thomas Frank's "Let them eat McMansions!" article where he claims that "we have sprawl, wars over cheap gas, stagnant wages and longer hours because your boss wants this awful, ugly house." Heh. Beyond the snickering, however, is a darker truth: these ugly opulent houses are damaging to our social fabric. Frank provides plenty of examples in the article, but on tax day, this was the most interesting fact to ponder: what sparked the McMansion trend in the first place? A: Our tax policy!

There have always been grand houses in America. What put them into mass-production in the mid-’80s? The most obvious answer is that decade’s transfer of wealth to professionals and managers, a shift made possible by the top-bracket tax cuts of 1981. Where corporate earnings had previously been spent on skyscrapers and company planes, it now poured into the personal bank accounts of executives. Tax policy then steered those executives’ spending toward residential real estate. According to James K. Galbraith, “The 1986 Tax Reform Act removed the deductibility of non-mortgage interest,” leaving mortgage interest as the only remaining deductible type and thus “creating a powerful incentive for households to try to own their own homes.”

Essentially, those with extra money look to take advantage of a legal tax haven by sinking more and more of it into ever growing houses. And so this is what the market provides! I'm actually in the market for a house right now - a "mid-level home," meaning ~2000 square feet, with 3-4 bedrooms and a half-acre or so of land.  It's shocking how few new houses meet these specifications.

Health Care Sucks

So I recently spent some time in a hospital. (Everyone's doing fine, thanks.) It was an awful experience that drove home everything that I hate about health care, mainly:

• The cold demeanor of most of the doctors you deal with. The nurses are where you get both the real information and the real compassion.
• The discomfort about almost every aspect of the experience. From the beds to the bland food to the shared rooms, the entire experience seems to optimize your discomfort.
• The lack of transparency about what the cost of the services you're receiving, making it a confusing and bewildering experience. To that end, you need to be constantly vigilant about what the doctors are doing, since they don't seem to make decisions based on cost or need. For example, one test was scheduled simply because I have a tattoo, notwithstanding that it's 10 years old and i've had a clean bill of health since then.  

The whole thing was topped off with what was some really incompetent behavior from the attending physician, which i'm not calm enough about quite yet to detail here. Perhaps another time.

Coincidentally, I read a quote from Stephen Brill that seems to sum up why the whole experience is so bewildering - mainly, because you're not in charge:

There is no such thing as a free market in healthcare, if one defines a free market as a place where there is some balance of power between the buyer and the seller. Instead, health care is - except when Medicare is the buyer - a lopsided seller's market. That became clear at both ends of the money trails I followed - from the patients' lack of any knowledge of what they were buying or its prices, much less any leverage to bargain over it, to the sellers' ability and willingness to charge absurdly high prices on everything from gauze pads to ambulance services to cancer wonder drugs.

I have to read Brill's expose on health care costs - from what I hear, it's an excellent piece of writing.

Warren on the Warpath

This is the type of behavior that I was hoping to see from our newly minted senator when I voted for her:

At a hearing on Thursday examining the oversight of the Dodd-Frank Act, Ms. Warren grilled top banking regulators on their response to Wall Street wrongdoing. Ms. Warren, a Democrat from Massachusetts who helped create the Obama administration’s new consumer protection agency, pressed government officials to justify how they police big banks.
“If they can break the law and drag in billions in profits and then turn around and settle paying out of those profits, then they don’t have much incentive to follow the law,” she declared, receiving a smattering of applause from the gallery. “The question I really want to ask is about how tough you are.”
What followed was the Congressional equivalent of a “Ferris Bueller’s Day Off” moment. “Anyone?” she asked, receiving silence in reply.

Here's hoping that she can help add some real teeth to our financial regulations and rein in our out of control banking system.

What's Wrong With This Picture?

Can any one explain the logic behind this to me?

Earlier this month, the Facebook Inc. released its first “10-K” annual financial report since going public last year. Hidden in the report’s footnotes is an amazing admission: despite $1.1 billion in U.S. profits in 2012, Facebook did not pay even a dime in federal and state income taxes.
Instead, Facebook says it will receive net tax refunds totaling $429 million.

What value are we, as a society, getting from subsidizing (i.e., protecting it from Federal taxes) Facebook?

A La Carte Sports Pricing Now!

On the unbundled cable front, hardballtalk speculates that the complete arrogance of the Dodgers new cable deal might spend the death toll for bundled cable:

To pay for [the reported $8B deal], Time Warner is going to charge other carriers (Direct TV, Dish Network, other cable systems) $4 or $5 per subscriber for the right to carry the new Los Angeles Dodgers network they’re operating, with those costs passed on to the other carriers’ customers. This is how all sports TV rights deals go. ...
Many — probably most — of the customers who are seeing their cable bill go up are not Dodgers fans. They just want to watch Nick Jr. or History Channel or BBC America or any number of other channels. But, because you can’t (for the most part anyway) pick and choose which channels you get, the non-sports watchers are helping subsidize the sports watchers.
Joe Flint and Bill Shaikin of the L.A. Times ... talk to one former TV executive who thinks that such a pattern is unsustainable:

“[“a la carte”] is the solution everyone should be looking at seriously,” said Derek Chang, a former senior executive at satellite broadcaster DirecTV. Such a move, he added, may be the only way to lower the cost of TV sports. “Ultimately the market for fees would then reset.”

As I wrote about here, bundled cable makes a mockery out of capitalism, because there's no mechanism by which the consumer can let the supplier know the true value of their product. To reiterate my example, I pay Verison something like $45 extra a month for their "Basic Plus" package (or whatever meaningless name it's called) just so I can have access to NESN and Red Sox games. I get a shitload of extra channels with that package, but do I watch any of them? Hell no. I'd happily pay for NESN alone, but that's just not possible. Stop subsidizing bad programming! Split apart the bundles and institute a la carte cable pricing and let the market do its work!

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Amazon is Scary

While I continue to purchase from Amazon, it truly is eerie how much cost cutting they do. Which is why I had to laugh when I read this from Matthew Yglesias:

Amazon kept up its streak of being awesome this afternoon by announcing a 45 percent year-on-year decline in profits measuring Q4 2012 against Q4 2011. Not because sales went down, mind you. They're up. Revenue is up. The company's razor-thin profit margins just got even thinner, and in total the company lost $39 million in 2012.
The company's shares are down a bit today, but the company's stock is taking a much less catastrophic plunge in already-meager profits than Apple, whose stock plunged simply because its Q4 profits increased at an unexpectedly slow rate. That's because Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers. The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. Amazon sells things to people at prices that seem impossible because it actually is impossible to make money that way. And the competitive pressure of needing to square off against Amazon cuts profit margins at other companies, thus benefiting people who don't even buy anything from Amazon.
It's a truly remarkable American success story. But if you own a competing firm, you should be terrified. Competition is always scary, but competition against a juggernaut that seems to have permission from its shareholders to not turn any profits is really frightening.

One wonders how long they keep the cost-cutting and market-cornering before they truly do begin to flex their muscles and honestly dictate terms.

Qu'est-ce que Libor?

I'm not entirely sure, but everything that I read talks about it as one of the biggest financial crimes in history. Check out this graphic for details.

Break up the big banks!

The Modern Bookstore

A good article about the Harvard Book Store and how it's thriving in the age of amazon. Money quote:

Imagine for a moment what it would feel like if people walked into your company and used the lobby to call your competitors and buy their products. That’s standard consumer behavior in a bookstore. People browse, find a book they like, pull out their smart phone, and order online.
Making an intuitive leap, Jeff wondered if the opposite could be true? Maybe access to the vast universe of digital content could also save the bookstore. Maybe the bookstore, while limited in inventory, could evolve in the digital world and become a destination where people had access to every digitized book ever published.
To truly compete, he would also have to solve consumer’s expectations for instant gratification and delivery. Jeff needed a complete production, distribution, and fulfillment model. He has likely shocked a lot of people by building one in his own backyard.
Essentially, Jeff installed a printing press to close the inventory gap with Amazon.

I haven't been there are regularly since i moved out to the suburbs of Boston, but highly recommend dropping by the store if you're in the area. Their used book department in particular is excellent.

Romney's Bane

I didn't realize exactly the kind of business Bain Capital, Mitt Romney's company, conducted. Here's some details from the New York Post:

Romney's private equity firm, Bain Capital, bought companies and often increased short-term earnings so those businesses could then borrow enormous amounts of money. That borrowed money was used to pay Bain dividends. Then those businesses needed to maintain that high level of earnings to pay their debts...

• Bain in 1988 put $5 million down to buy Stage Stores, and in the mid-'90s took it public, collecting $100 million from stock offerings. Stage filed for bankruptcy in 2000.
• Bain in 1992 bought American Pad & Paper (AMPAD), investing $5 million, and collected $100 million from dividends. The business filed for bankruptcy in 2000.
• Bain in 1993 invested $60 million when buying GS Industries, and received $65 million from dividends. GS filed for bankruptcy in 2001.
• Bain in 1997 invested $46 million when buying Details, and made $93 million from stock offerings. The company filed for bankruptcy in 2003.

Romney's Bain invested 22 percent of the money it raised from 1987-95 in these five businesses, making a $578 million profit.

This is exactly the kind of shenanigans that give Wall Street a bad name. I don't see any job creation in this - I just see the conscious looting and destruction of companies for the sole purpose of building shareholder wealth.

Hat Tip: The Daily Dish

Making Money from Money, not Work

Brian Beutler at TPM explains why Romney is so reticent to provide his tax returns to the public: he suspects that it will not only let people know just how stinking rich he is (hint: he's probably in the 1%), but also drive home that money fund managers make a lot of investment profit that is not taxed at the normal tax rates:

In private equity, fund managers are typically compensated with both a fee (two percent of assets) and substantial share (20 percent) of the fund’s profits. Those profits are called “carried interest” and they’re classified as long-term capital gains, which are taxed at 15 percent — much lower than wage income, on which the top marginal rate is 35 percent. But unlike the fund’s main investors, the manager typically doesn’t put up more than a nominal share of the fund’s actual capital. In other words, this so-called “carried interest loophole” allows private equity fund managers to treat the money they make in exchange for their labor as if it was a return on an investment — even though they haven’t made such an investment at all.

This kind of information is not really common knowledge. To me, these types of rules are so byzantine, and so unused by regular folks, that exposing them is a good thing, even if it might not be politically expedient to Mitt Romney.

Why no Corporate Bankruptcy Stigma?

James Surowieck , writing in the New Yorker, makes a good point about walking away from debts as a corporation and as a private person:

Paying your debts is, as a rule, a good thing. But the double standard here is obvious and offensive. Homeowners are getting lambasted for doing what companies do on a regular basis. Walking away from real-estate obligations in particular is common in the corporate world, and real-estate developers are notorious for abandoning properties that no longer make economic sense.

I had never really thought of this before, but Surowieck makes some really great points. He even offers a potential corporate/private solution to the dept issue:

They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting). And there are plenty of useful ideas out there for how banks could do this without taxpayer subsidies and without rewarding the irresponsible. For instance, Eric Posner and Luigi Zingales, of the University of Chicago, suggest that, in exchange for writing down mortgages in hard-hit areas, lenders would take an ownership stake in a house, getting a percentage of the capital gain when it was eventually sold.

Time for another Tab Dump!

I'm laid up today, recovering from a minor surgerical operation, and you benefit because it's gives me the time to present you with another tab dump! As always, i'd love to write more about these items but just haven't been able to scrape together the time.

• Like TNC, I'd love for the iPad to have a real competitor, if only so that the prices might drop enough so that I could afford one. Alas, Jakob Nielsen, one of the best usability experts out there (highly recommend subscribing to his newsletter!) "denounced the [amazon] Fire, saying it offered 'a disappointingly poor' experience. For users whose fingers are not as slender as toothpicks, he warned, the screen could be particularly frustrating to manipulate. "I feel the Fire is going to be a failure," Mr. Nielsen, of the Nielsen Norman Group, a Silicon Valley consulting firm, said in an interview. "I can't recommend buying it."
• Not that I’d ever watch the show, but pulling adverts from the All-American Muslim "reality" show just because the conservative Florida Family Association says that the show is “...propaganda that riskily hides the Islamic agenda's clear and present danger to American liberties and traditional values” is just madness. Shame on Lowes for succumbing to the bigots.
• Never underestimate the power of money when it comes to stealing personal and public property for private profit when natural resources are involved. Case in point: Pennsylvania. As Atrios says: “My first thought when I heard about the natural gas discoveries in PA was,'uh oh, we're fucked.'”
• Harvard physicist Lisa Randall talks about extra dimensions: “There could be more to the universe than the three dimensions we are familiar with. They are hidden from us in some way, perhaps because they're tiny or warped. But even if they're invisible, they could affect what we actually observe in the universe. There are lots of things we cannot see with the naked eye that turn out to be based in reality. ... our idea is there's an extra dimension that's so warped, the masses would be big in one place and small in another. In other words, gravity could be weaker in one place and stronger in another. If so, it could be a natural explanation both for why particles masses are what they are, and why gravity is so much weaker than the other elementary forces we observe.”
• How animals see color. The most interesting are birds:
  “Birds… possess rich color vision, in many cases better than our own. Most birds have four cone visual pigments, although this varies. In general, birds have an additional ultraviolet pigment in their cones and many more cones than we have. Furthermore the visual pigments that would be similar to ours span different wavelengths. Their visual experience is richer than our own in ways impossible to describe or understand. Not only do they see more colors, but the interpretation of colors would be different. Think of combining different colors of paint—if you combine more colors radiating from the same object, like a flower, you will see different colors. A hummingbird, then, would see a red flower as a different color because of the ultraviolet channel input.
  You may ask what good are these extra color channels in birds? Of course, it’s hard to know completely since we can’t even understand the perception of the color “ultraviolet,” but here is an example. When a mouse is being hunted by a hawk, it will often urinate out of fear and to make itself as light as possible for escape. Mouse urine radiates ultraviolet and that actually helps the hawk follow the mouse trail. Fresher urine radiates more ultraviolet light. The ultraviolet arrow will point to lunch for the hawk.”
• Sounds Good to Me Too - one of the best music blogs out there - have started to post their best albums of the year. 
• Why we invented monsters. This article is one big slice of awesome, combining a treasure trove of bizarre myths ("In Aboriginal myth, there is a creature with the body of a human, the head of a snake, and the suckers of an octopus") with an analysis of the best monster of all - the dragon. In short, "anthropologist David E. Jones argues that the image of the dragon is composed of the salient body parts of three predator species that hunted and killed our tree-dwelling African primate ancestors for about sixty million years ... the leopard, the python, and the eagle. ... ancient primates evolved alarm calls to identify each of the three predators, with each call triggering the defensive response appropriate to the nature of the attack mode of the specific predator. ... [these creatures] were merged into a hybrid creature that had the salient predatory features of each: the face of a feline, the body of a snake, and the talons of a raptor. ...Because the image combined features from three dominant predators, it could quickly send the neural message very dangerous animal."

Money Man Brown

As someone who ran quite infamously as a man who drove a beat up truck (and IMO not much else), Scott Brown sure has quickly turned into quite the money man:

Next week, Brown backers are slated to hold at least two fundraisers to fill the coffers of Scott PAC and his campaign. On Dec. 7, his campaign is hosting a money bash at the National Theater, where the play “Jersey Boys” is currently running. And on Dec. 11, Scott PAC is holding a fundraiser at Fed Ex Field when the Washington Redskins take on the New England Patriots. ...
Even though Brown’s campaign had over $10.5 million in the bank as of Sept. 30, lobbyists are in overdrive to raise millions more because [Elizabeth] Warren’s campaign is off to a fast start and a new poll shows her with a slight edge over Brown.
Deep-pocketed GOP allies such as Crossroads GPS, the Karl Rove-founded group backed by secret donors, have sought to help Brown with negative TV spots against Warren.

Brown's been trying to paint himself as a moderate ever since he entered office, and to the extent that he hasn't been associated with the Tea Party, he's succeeded. However, he's had an unimpressive term to date and speaks the same depressingly Randian language as just about every other Republican out there.

Elizabeth Warren and her progressive policies are just about everything that I hope for in a candidate. I'm excited to vote for her. Here's hoping that enough of my Massachusetts brethren feel the same.

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Why Big Companies Die

I found truth in this article by Peggy Noonan. She makes two basic points. One is from Steve Jobs:

[Jobs] has a theory about “why decline happens” at great companies: “The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesman, because they’re the ones who can move the needle on revenues.” So salesmen are put in charge, and product engineers and designers feel demoted: Their efforts are no longer at the white-hot center of the company’s daily life. They “turn off.”

Noonan adds "accountants and the money men" to Jobs' theory:

...[they] search the firm high and low to find new and ingenious ways to cut costs or even eliminate paying taxes. The activities of these people further dispirit the creators, the product engineers and designers, and also crimp the firm’s ability to add value to its customers. But because the accountants appear to be adding to the firm’s short-term profitability, as a class they are also celebrated and well-rewarded, even as their activities systematically kill the firm’s future.

When the people that do the work aren't valued, then the products suffer, and what is a company without it's products? It's why I think Agile Scrum is such an effective software development process; by pushing decisions down to the lowest possible level, you let people who are actually informed about the subjects (the "boots on the ground") make informed decisions rather than choosing directions based on executive summaries or spreadsheets. While you have to be careful to keep the focus on the customer (don't let the Inmates Run the Asylum), Jobs demonstrated that keeping a company's focus on adding customer value - another goal of Agile Scrum - is a path to continued success.

OWS and Police Brutality

I've been enjoying the story of the Occupy Wall Street movement the last few months. I think that the movement is important if only because it draws more attention to the huge issue of income inequality of this country.

However, i've been watching the increasing conflict between the police and the movement with dismay, not only because it's obviously horrible for all of the people involved but also because it dilutes the economic message of the movement. As Josh Marshall puts it:

"...something seemed to have changed in the previous couple weeks — basically that the dominant imagery had become about confrontations with the police rather than the core economic messages which had been more dominant previously. In most cases it didn’t seem to be the fault of the OWS protesters. It was peaceful or mainly peaceful protests getting met by excessive police responses. But still, at the level of imagery and message, the end result can be the same. ...

The issue of police brutality and militarized or quasi-militarized policing is a legitimate and very important issue, entirely unto itself. But the the campus police at Davis or the NYPD for that matter aren’t what’s driving the rising inequality of American society."

I hope that this trend doesn't continue, because IMO American inequality is the premier problem facing our country today. If it's not addressed soon, expect the unrest and strife to continue - and if anything, escalate.

Where Do You Buy Your Stuff?

Grist has been doing an expose on Wal-Mart recently, and today's installment examines the poor quality of the stuff we're buying these days. Long story short: Wal-Mart profits from selling sheer volumes of stuff, so they induce manufacturers to cut corners to lower costs. These lower costs mean people buy more, but they also mean that the quality is lessened, so that stuff wears out faster, meaning you have to buy more stuff. Buying all this stuff at Wal-Mart gives them more control over the market, making the whole thing a vicious circle:

Prices on general household goods have fallen by about one-third since the mid-1990s. Given how awash in stuff we were in those boom years, it's shocking just how much more we buy now. Since 1995, the number of toasters and other small electro-thermal appliances sold in the U.S. each year increased from 188 million to 279 million. The average household now buys a new TV every 2.5 years, up from every 3.4 years in the early 1990s. We buy more than 2 billion bath towels a year, up from 1.4 billion in 1994. And on and on.
While there are certainly factors beyond Walmart that have contributed to this ever-expanding avalanche of consumption, the company has been a major driver of the trend. Its growth and profitability rest on fueling an ever-faster churn of products, from factory to shelf to house to landfill.
In a paper [PDF] that came out last year, three business professors illustrate how inducing manufacturers to cut product quality enhances Walmart's competitive position. "Because lower quality products are usually cheaper to produce, it is often argued that discount retailers induce lower quality in order to drive down prices. Our model suggests, however, that the competitive and bargaining position effects provide incentives to induce lower quality regardless of changes in production costs," the authors write. In other words, getting manufacturers to make shoddier products doesn't just mean that Walmart can offer super-cheap wares; it also helps Walmart marginalize its competitors and gain more dominance over its suppliers.

It's one of the reasons I never shop there.

Capitalism vs. Too Big to Fail

I love Tim Carney's argument:

These banks' credit is rated higher than they would be in a free market, meaning they profit from the expectation of a bailout, if necessary. So banks profit largely through activities that do not create value or efficiencies. They profit through financial games that rest on government favors. Many Occupy Wall Street protestors demonize all profit. Conservatives defend profit-seeking as the engine that creates prosperity for all of society. But the big banks have rigged the game so that they profit without creating value. In fact, they profit from activities that weaken the economy by creating instability.

Hat Tip the Daily Dish.

Our Shit's Fucked Up

Business Insider has a great primer on why the Occupy Wall Street movement really has something to complain about. The economic disparity in our country at the moment is truly disheartening.

Fun fact: Title a reference to both this instantly classic sign and the great Warren Zevon song.