Category Archives: Economics

Corporate Ransom

Economics

 

In a previous life, I served as director of economic development and commerce policy studies at the National Governors Association in Washington, DC.  Among my responsibilities was organizing programs and events related to business, taxation and transportation during the association’s two annual meetings.  These gatherings provided the governors an opportunity to share their perspectives and engage experts before a national audience as most plenary and committee sessions were broadcast on C-SPAN and reported on multiple news outlets.


In February 1992, I was privileged to be part of one of the few sessions at which television cameras and reporters were absent.  The topic was state development incentives.  In attendance were five governors and the chief executive officers of five of the largest U.S. based corporations.  The impetus for bringing these individuals together was growing concern corporations were holding states “hostage” by seeking larger and larger public subsidies in exchange for locating a major facility (e.g. the United Airlines maintenance facility in Indianapolis) or not relocating their headquarters (e.g., Sears in Chicago).


By the end of the discussion, both sides agreed these payments were an inefficient use of public resources and not in the interest of either party.  However, both state governments and businesses were addicted to their use.  And addiction is the perfect analogy.  Development incentives provide a short-term high to the long-term detriment of the health and stability of the users.  Corporations receive tax benefits which amount to a rounding error to businesses with annual revenues in the billions of dollars.  Governments forego revenues which finance infrastructure and public services which support private sector economic activity.


The justification for continuing the practice of, in effect, paying ransom to influence corporate location and relocation decisions can be summarized in two sound bites from the NGA roundtable.  Governors talked about the political pressure they faced to “do something” to improve their respective state economies.  The CEO response was more telling.  “If states did not offer these incentives, we wouldn’t take them.  But how do we tell shareholders we turned down money which improves our bottom line.”


I was reminded of this particular experience as I read about the incentives which Carrier Air Conditioning is receiving to keep a portion of its work force in Indiana.  First, keep in mind Carrier is a subsidiary of United Technologies.  Second,  United Technologies’ net sales in 2015 was $56.6 BILLION (source: 2015 Annual Report).  The dollar value of the tax deferment is estimated at $7.0 million or .012 of one percent of the company’s net sales.

SONY DSC
Former New Stanton VW Plant

In an effort to help governors rethink the efficacy of providing tax incentives, our staff examined the cost/benefit of past state/corporate incentive agreements.  The poster child was the location of Volkswagen’s U.S. manufacturing plant near New Stanton, Pennsylvania in 1978.  To entice VW to chose this location, the State provided over $100 million in property tax exemptions and infrastructure improvements.  Additionally, the state financed VW’s purchase of the site for $40 million.  In return, VW promised to invest $250 million and operate for 30 years.  However, VW shuttered the plant less than 10 years later while expanding North American operations in Chattanooga, Tennessee and Puebla, Mexico.


What is the lesson to take away from the VW saga and similar stories?  The use of industrial incentives does not result in your “selling” your location to the company;  you are only “renting” it.  And as soon as another landlord offers a better deal, your tenant is likely to vacate the premises.  To the workers at Carrier and the communities in which the company operates, enjoy the high.  But be prepared for the “meltdown” when the drug wears off.


For what it’s worth.
Dr. ESP

 

United States of Amnesia

Economics, Politics

 

Is it possible, a major segment of the American electorate has contracted Alzheimer’s disease? Yesterday, the Bureau of Labor Statistics reported the private sector created another 161,000 jobs in October.  And the unemployment rate dropped to 4.9 percent. Equally important, average wages rose 2.8 percent compared to October 2015, the highest annual increase in more than seven years.  October was the 73rd straight month of job growth in the U.S., a new record, with an accumulated creation of 15.5 million private sector jobs.

However, in the “bizarro world” in which Donald Trump lives, the numbers were a “disaster.”  Compared to what?  Take a look at the difference between the day Barack Obama took office and current data.

  • In January 2009, the unemployment rate was 7.8 percent on its way to 10.0 percent by mid-year.  Today it is 4.9 percent.  In 2012, Republican nominee Mitt Romney promised he would bring the unemployment down to 6.0 by the end of his first term.  How is the economy a disaster when the current administration bested that prediction by 1.1 percent?
  • On February 25, 2012, then presidential candidate Newt Gingrich declared, “I am the $2.50 gas president, Obama is the $10.00 gas guy.”  As Donald Trump would say, “WRONG!”  Yesterday, the average national gas price reported by AAA was $2.18.
  • On inauguration day 2009 the Dow Jones industrial average clocked in at 7,949.09.  Yesterday, it closed at 17,888.28.
  • In January 2009, the consumer confidence index was 37.4 (with 100 in 1985 as the base).  Today it is 98.8.
  • In January 2009, the median value of a new home had fallen from $245,000 in mid-2008 to $208,000.  Today, the median value of a new home is $313,000.
  • In response to the 2008 financial collapse, the growth in GDP for 2009 was -2.8 percent.  For the third quarter of 2016, it was 2.9 percent.

The recovery from eight years of trickle down economics (tax cuts for the wealthy) and deregulation has been steady but, sadly, all Americans have not seen the benefits.  However, it requires a total memory lapse to believe economic policies which contributed to the 2008-09 recession will cure it.

Unfortunately, that’s not the only things Americans seem to have forgotten.  More recently they have shelved their visceral response to many of the things the Republican nominee has said and done during the course of the campaign.  The common denominator appears to be instances when Trump is unscripted.  Here are a few examples and the how voters reacted to them.

  • On June 16, 2016, Breitbart News (managed by now Trump campaign chairman Steve Bannon) reported 50 percent of those surveyed in a Morning Consult survey thought Trump’s comments about Judge Curiel (a Mexican-American judge born in Indiana) were racist.  Another 19 percent said his comments were unacceptable.
  • A Gallup poll following both national party conventions found 44 percent of Americans viewed the Democratic party as more favorable after Philadelphia while only 35 percent of Americans had a more positive view of the Republican party after Cleveland.
  • On August 3, 2016, the Daily Standard reported 69 percent of those surveyed in a Fox News poll believed Donald Trump response to the Khan family, whose son died in Iraq, was “out of bounds.”
  • CNN/ORC poll of debate watchers had Clinton winning the first presidential debate 62 to 27 percent.
  • CNN/ORC poll of debate watchers had Clinton winning the second presidential debate (the town hall debate) 57 to 34 percent.
  • CNN/ORC poll of debate watchers had Clinton winning the third presidential debate 52 percent to 39 percent.

Immediately following many of these events, members of his own party recognized Trump’s actions were outside the political norm or even standards of decency.  In reference to Trump’s attack on Judge Curiel, House Speaker Paul Ryan referred to the candidate’s comments as the definition of racism.  This week he announced he had voted for the party’s nominee.  Following release of the Access Hollywood tape, Utah Congressman Jason Chaffetz said:

My wife, Julie and I, we have a 15-year-old daughter. Do you think I can look her in the eye and tell her that I endorsed Donald Trump for president when he acts like this and his apology? That was no apology, that was an apology for getting caught.

On October 26, Chaffetz announced he too would be voting for Trump.  [NOTE: Chaffetz chairs the House Oversight and Government Reform Committee and has promised to continue the investigations into Secretary Clinton’s use of private email.  Ironically, ABC News reported in March 2015, Congressman Chaffetz’ official business card lists a GMAIL.COM address rather than his official HOUSE.GOV address.  Instead of “lock her up,” maybe the Republican rallying cry should be, “Hyp, Hyp, Hypocracy!”]

And the list goes on.  Florida Senator Marco Rubio seems to have forgotten he once characterized Trump as a “con-man.”  Texas Senator Ted Cruz has demonstrated a similar lapse of memory about how disgusted he was when Trump vilified his wife or referenced a story in the National Enquirer about how Cruz’s father was involved in JFK’s assassination.

I would be more forgiving if Trump supporters were more consistent in their memory lapses.  However, the veracity of an Alzheimer’s diagnosis is suspect when they cannot recall anything that happened in the last 18 months, but have no problem with the most minute details of every Clinton conspiracy theory, even those from 30 years ago.

For what it’s worth.
Dr. ESP

 

Catch Them If You Can

Economics, Politics

 

SPOILER ALERT: At the end of the movie Catch Me If You Can, Leonardo di Caprio’s character Frank Abagnale, Jr., a master forger, ends up working for the FBI.  Why?  Because he knew the counterfeit game better than most of the other criminals the FBI pursued.

I’ve been thinking about this movie a lot lately.  Last August, organizers conducted DEF CON 24, the oldest and largest hackers convention in the U.S.  On their FAQ page, there is the following question, “Do criminals go to DEF CON?”  The response?

Yes. They also go to high school, college, work in your workplace, and the government. There are also lawyers, law enforcement agents, civil libertarians, cryptographers, and hackers in attendance. Ssshhh. Don’t tell anyone.

Guess who else goes to DEF CON.  Every major technology company and the U.S. military.  Many are sponsors and host lavish parties where they wine and dine the best of the best among the attendees. Why?  They are recruiting new hires. Surprised?  You shouldn’t be.  As Michael Carleone tells a confidante in Godfather II,  “My father taught me many things. He taught me — keep your friends close but your enemies closer.”

As I read excerpts from the WikiLeaks alledged transcripts of Hillary Clinton’s speeches, I was reminded of Frank Abagnale and Michael Corleone.  Below is an excerpt of a speech at a Goldman Sachs symposium, which has come under attacks from both the far right and far left.

 There’s nothing magic about regulations, too much is bad, too little is bad. How do you get to the golden key, how do we figure out what works? And the people that know the industry better than anybody are the people who work in the industry.  [Goldman Sachs AIMS Alternative Investments Symposium, 10/24/13]

As I did in my last post, I again have to draw on personal experience.  In 1996, I was named lead staff for the National Governors Association to recommend the rules and regulations to implement the Hazardous Materials Transportation Uniform Safety Act (HMTUSA).  The trucking industry had petitioned Congress to preempt state regulation of the movement of hazardous materials because the administration burden of keeping track of and complying with 48 different standards within the mainland states was overly burdensome.

And they were right.  I needed no more proof than seeing the multiple loose-leaf binders of state and local regulations submitted as evidence by a lobbyist for the American Trucking Associations.  In lieu of preempting state authority, HMTUSA charged the states with developing a uniform set of standards.

The staff was assisted by a steering committee consisting of representatives from several state executive and legislative branches.  In addition, representatives of the trucking industry and environmental community were invited to all of the working sessions.  Unexpectedly, many of the staff recommendations which led to the final agreement among the states began as private conversations with the trucking industry.  For example, the uniform safety standards approved by the steering committee were more stringent than those imposed by the federal government and the overwhelming majority of states prior to the Act’s passage.  This would not have happened without communications with the trucking representatives outside of regular committee meetings. As Secretary Clinton suggests above, the “golden key” to finding common ground came partially from those who knew their industry best.

There was one other industry concession which sealed the deal.  The trucking companies acknowledged the individual states had the right to set the penalties for violation of the uniform standards when a vehicle traveled on their respective highways.  In other words, leaders in the trucking industry recognized their role and responsibility to ensure the safe transportation of dangerous substances. Furthermore, they expected their drivers and companies would be punished for violations and assessed damages.

So, there is value in having representatives of the banking industry at the table to address some of the legitimate issues which have been raised about Dodd-Frank.  IF AND ONLY IF, they agree they are bound to the new standards and are liable personally and organizationally for criminal and civil violations.

For what it’s worth.
Dr. ESP

 

Why Trump Has Gone Nuclear

Economics

 

And why it won’t work.

As this election cycle comes to an end, and barring a major reversal of fortunes, Donald Trump will not be the next president of the United States.  Rather than exit with some modicum of dignity, he has elected to up the ante, trashing anyone and everyone who has abandoned his “crusade.”  Pundits attribute this to energizing his base of die-hard supporters.  However, is it more likely he views his constituents as potential consumers rather than voters?

Why do I say this?  A recent article in Fortune magazine reports there has been a 16 percent drop in business at Trump hotels, resorts and golf courses.  The target market for these properties is consistent with the demographics of business and political leaders who have publicly pulled their support for Trump.  His most ardent supporters are not the typical Trump property patrons.  Therefore, if the Trump family wants to capitalize financially on his electoral base after November 8, one should expect a number of new Trump branded products which are more likely to appear in discount stores than in Nordstrom’s or Tiffany’s.

So the question is, “Will people who were willing to spend their hard-earned money on ‘Make America Great Again’ baseball caps and t-shirts eat at a fast-food chain called TrumpBurgers and purchase low-priced, Chinese manufactured Trump clothing at Walmart?”  If 50 million Trump voters can be converted into 50 million customers, one might argue this may actually be one of the family’s most brilliant business ventures.

There’s just one potential problem.  When companies introduce new product lines, a concern is that the new items will ‘cannibalize’ the revenues from currently offered goods and services.  Now I must admit, I would not expect patrons of the new Trump International Hotel and Trump Doral Golf Club to stop going there because they are spending discretionary income on TrumpBurgers.  But there is historical precedence of what happens when a company with high-end products tries to enter a lower-income market.

In the 1970s, Rolex decided that they had an opportunity to expand their customer base by offering their watches at a discount through membership stores such as Fedco and Gemco (precursors of Costco and Sam’s Club).  The experiment failed dramatically.  Sales at the new outlets did not materialize.  More importantly, Rolex’s traditional market declined as high-end consumers felt the brand had been compromised.

One might expect the same thing to happen if the Trump organization starts catering to its carry-forward (pun intended) constituents targeted during the final 28 days of the presidential campaign.  Per the Fortune article, people most likely to plop down $780/night at Trump International are already indicating they may not want to be associated with the owner’s name.  That trend can only be expected to accelerate if the brand, once synonymous with luxury and wealth, is further compromised by appearing on mass-market goods.  And it takes a lot of low-margin discount goods to make up for the profits from one $780/night hotel room.

For what it’s worth.
Dr. ESP

 

Donald Trump’s Best Investment

Economics, Politics

 

There has been a lot of discussion whether there was any quid pro quo  associated with donations to the Clinton Family Foundation while Hillary Clinton was Secretary of State. The Merriam-Webster Dictionary defines the term as “something that is given to you or done for you in return for something you have given to or done for someone else.”

To date, there is no evidence the State Department granted any value that would not have otherwise been available to the donor.  In some cases, a donor’s request was denied based on the substance of the inquiry and departmental policy.  At best, a donor’s contribution may have increased the probability the department would consider the request.  If one stretches the definition of quid pro quo to include this kind of access or consideration, every politician and businessperson in America is technically guilt of similar transgressions.  Every loyalty program offered by airlines and hotels is a quid pro quo.  

The American justice system would be inundated with nuisance law suits if the exchange of value was broadly defined as questionable political or commercial behavior.  Perhaps this is why the Supreme Court unanimously overturned former Virginia Governor Bob McDonnell’s corruption conviction earlier this year.  Chief Justice John Roberts wrote the decision which included the following:

Officials might wonder whether they could respond to even the most commonplace requests for assistance, and citizens with legitimate concerns might shrink from participating in democratic discourse.

So how do we distinguish between preferential treatment in the course of doing business versus potentially criminal behavior associated with the exchange of goods and services?  One red flag might be whether there is another violation of laws or regulations by the individual who initiates the exchange.  This is where Donald Trump enters the discussion.

Consider the following.

  • Since 2008, more than 20 individuals previously enrolled in Trump University in Florida filed suit alleging fraud totaling over $500,000 in payments to the unaccredited entity.
  • In 2010, Pam Bondi was elected State Attorney General in Florida.
  • In 2013, Bondi announced she was considering joining the New York attorney general’s class action suit against Trump University.
  • Three days later, Trump’s charitable foundation made a $25,000 donation to Bondi’s re-election campaign.  NOTE:  The IRS charged the foundation with several violations including illegal political activity and failure to report the donation.  The Trump foundation was fined $2,500 for violations of Section 501(c)(3) of the IRS code which governs charitable foundations.
  • Following the donation, Attorney General Bondi declined to pursue charges against the Trump Institute, a Florida affiliate of Trump University.
  • A follow-up report in the Washington Post revealed the foundation listed the $25,000 as a donation to a non-existent non-profit in Kansas.
  • The Trump foundation attributed the donation to a clerical error and paid the fine.  Bondi’s campaign treasurer claimed he had unsuccessfully tried to return the donation.

You might be asking, “Shouldn’t you have titled this post ‘A REAL Case of Quid Pro Quo’?” No, and here is why!  Based on a 2016 survey of 391 lawyers, class action defense attorney Carlton Fields reported a routine class action suit costs the defendant an average of $8.5 million in legal fees.  As the complexity of the class action increases, legal costs can exceed $1.0 billion.  Including the IRS fine, avoiding a Florida class action suit cost the Trump Foundation a total of $27,500.  Taking the lowest cost of a class action defense in the Fields survey ($300,000), this represents a 1091 percent return on investment in three days.

There is one other consideration.  Although Trump started the foundation with royalties from The Art of the Deal, it has been reported he has not made additional contributions from personal resources for several years.  Therefore, the illegal contribution and fine were paid with other people’s money.  In other words, Trump’s personal return of investment is actually infinite (potential legal defense fees divided by ZERO).

I wonder if this episode will appear in the next edition of The Art of the Deal.

UPDATE:  After being exposed, Trump paid the fine out of personal funds and reimbursed his foundation for the $25,000 illegal contribution.  One more example of Trump settling without admitting he did anything wrong and blaming staff for a clerical error.

For what it’s worth.
Dr. ESP