Because poor people just don’t eat lobster

Image courtesy of Tom Curtis/FreeDigitalPhotos.net

Henry Blodget, a once-disgraced securities analyst, is now a successful and widely read blogger at Business Insider, a company he founded to provide news and insight about business, politics, the economy, technology, pop culture and other trends.

Whether he ever subscribed to the Cult of Capitalism, we don’t know. But if he did, he’s no longer drinking that KoolAid. In a recent post in which he bestows the Scrooge Award on Corporate America, Blodget provides data showing that American companies are now achieving the largest profit margins in history, while paying the lowest wages in history as a percent of the U.S. economy.

He writes:

“If you happen to be an owner of a big American corporation, these charts could be construed as good news: You’re coining it! If you happen to be a rank-and-file employee, however, – or someone hoping to be such an employee – this is bad news: You’re sharing less than ever before in the success of American industry.”

He points out the problem with this – one that’s been addressed many times before: If the working class that accounts for more than two-thirds of consumer spending is slowly being choked by stagnant incomes and lack of spending money, the economy itself is going to suffer a low, slow and painful suffocation as well.

He emphasizes the point by noting how some of our most successful corporations like Walmart, Starbucks and McDonald’s, have policies specifically designed to keep their employees living at or near poverty in order to maximize profits.

Just yesterday (Dec. 4 2012), for example, the Washington Post reported that the CEO of Darden Restaurants Inc., owner of Red Lobster, Olive Garden and LongHorn Steakhouse, complained in an earnings advisory that profits were down because of … drum roll … Obamacare. Actually, he admitted, it wasn’t the federal Affordable Health Care Act directly. It was all the bad publicity the restaurant chain received after trying to avoid providing health care to its employees by cutting their hours down to part-time.

The company isn’t scheduled to release earnings for another 10 days (Dec. 14, 2012) so it didn’t provide actual earnings numbers. But it is expecting earnings of about 25 cents a share on continuing operations –  a fraction of what it earned in 2010, when profits exceeded $400 million, according to Fortune and CNN Money.

The irony is that if Darden had simply put the money into its employees’ hands in the form of the required health coverage, its customers might not be staying away and, perhaps, even its employees might be able to afford to eat the company’s own dog food (that’s a Silicon Valley expression; not a judgment on the company’s food – which does, in our opinion, pretty much suck). Sure, under Obamacare the company’s profits might be down, but its business might be up. Go figure.

Blodget’s crowning point might be this:

“This is a private-sector issue, not a government issue. This is about persuading American companies to share more of their wealth with their employees, so the government doesn’t have to get involved. As many conservatives are fond of observing, the government cannot solve all the problems in this country. The private sector has to do it. So, it’s time the private sector started doing it.”

 

Obama: Government is not a business

Finally, somebody with a really big soap box has taken on the fundamental assumption of the cult of capitalism.

Mitt Romney’s primary campaign position has been that his business experience will allow him fix what’s wrong with the federal government. While Gov. Romney may be a well-qualified presidential prospect, treating government like a business is unrealistic, simplistic and likely to exacerbate the nation’s largest societal problems.

When taking questions at the close of the NATO Summit in Chicago earlier this week, President Obama concisely confronted the assumption that what the United States needs is a government run like a business. As quoted in a variety of media, including this ABC news report, Obama said:

“Understand that their [business executives'] priority is to maximize profits. And that’s not always going to be good for communities or businesses or workers. And the reason this is relevant to the campaign is because my opponent, Governor Romney, his main calling card for why he thinks he should be president is his business experience. You know, he’s not going out there touting his experience in Massachusetts. He’s saying ‘I’m a business guy. I know how to fix it.’ And this is his business…”

Obama continued, by saying, when one is president…

“…as opposed to the head of private equity firm, then your job is not simply to maximize profits, your job is to figure out how everybody in the country has a fair shot. Your job is to think about those workers who get laid off and how are we’re paying for their retraining…. My job is to take into account everybody, not just some.”

While it’s the first time Pres. Obama may have said it so clearly, it’s not the first time the point has been made. In a February Wall Street Journal commentary, Robert Reilly, a former Reagan special assistant, wrote:

When Mr. Romney was running for president four years ago, he said in an interview that the first thing he would do in the White House would be to bring in some business consultants. In other words, Washington is a management problem.

This is a profoundly mistaken Republican notion that goes back at least to Herbert Hoover, a successful mining engineer, businessman and progressive politician who was an advocate of the “Efficiency Movement,” an attempt to manage government better.

…Mr. Romney has a tendency to treat his business autobiography as a policy prescription… Like Hoover, Mr. Romney wants to be president because he thinks he can manage things better. But my advice to any person who seeks to move American politics through his ability to succeed in business is: Stay home. It will be better for you and for your country.

Why Parliament is wrong: Murdoch is perfectly fit

The United Kingdom’s Parliament had it exactly wrong when its report on the News Corp. phone hacking scandal declared media mogul Rupert Murdoch unfit “to exercise the stewardship of a major international company.

Murdoch, 81, has built one of the world’s largest and most powerful media companies, with unmatched global influence. Its holdings include such U.S. powerhouses as The Wall Street Journal, Harper Collins Publishing, Fox Broadcasting and 20th Century Fox. Worldwide, it earned just shy of $3 billion last year on revenue of $33.4 billion.

Although its financials took a tumble in 2009 – like every other major media company during the recession – News Corp. has shown nothing but solid growth over the years. If a global corporation’s primary mission is to deliver growth and profit for its owners/investors, then you can’t argue Murdoch has been anything but successful.

What Parliament really seems to mean – and what they should have said – is that Murdoch’s success was achieved in a manner incompatible with the interests of society. Specifically, it believes News Corp. has violated laws and widely accepted  rules of behavior by building power through the hacking of private phone and e-mail messages, the buying and bullying of public officials and other behaviors that – legal or not – are widely consider anti-social and unethical.

These accusations are not only pointed at his now-shuttered News of the World operation, but also other global holdings. They are intended to paint his entire empire with broad strokes of conspiracy, influence peddling, and amoral greed.

Is anybody surprised by this? Murdoch is commonly described as a ruthless competitor (def.: having no pity, merciless, cruel). He sees himself as being on a mission to upend individuals and institutions with whom he disagrees, according to a 2010 profile in New York magazine. And since the 1980s, he has built his empire by toppling adversaries like so many dominoes.

Guess what? This is not unique in the corporate world.

The real point is that this is precisely why the Cult of Capitalism has it wrong.

The main theme of the Cult of Capitalism – of which Murdoch is both a respected symbol and a hands-on activist – is that the world would be more efficient and much improved if markets were unshackled from burdensome regulation.

What this episode reveals yet again is the questionable outcome when that assumption is put in practice.

If you’re OK with the Parliamentary conclusion that the social power of Murdoch’s media empire has been built on anti-social behavior, then congratulations: You’re qualified for membership in the cult.

Otherwise, the logical conclusion is that the game of capitalism – like all other games – requires some rules (and referees to enforce them) that assure corporations achieve success within a range of behaviors that are generally seen to be compatible with society.

In a message to employees, Murdoch  – the embodiment of unfettered capitalism – agrees to be bounded by these rules. But don’t expect any real change from him.

If News Corp. and others choose to play safely within societal boundaries, it’s only because those boundaries are well defined and enforced by regulators. Within the Cult of Capitalism, that practice is still referred to as wasteful and job-killing government spending.

Why Bob Reich believes our worst immorality is in the board room

Bob Reich, former Secretary of Labor to Pres. Clinton, is an economist and professor. Here he explains why he believes corporate board rooms are the source of America’s most threatening immorality.

The whole thing is well worth reading but here’s one good quote:

Americans are entitled to their own religious views about gay marriage, contraception, out-of-wedlock births, abortion, and God. We can be truly free only if we’re confident we can go about our private lives without being monitored or intruded upon by government, and can practice whatever faith (or lack of faith) we wish regardless of the religious beliefs of others…. But abuses of public trust such as we’ve witnessed for years on [Wall] Street and in the executive suites of our largest corporations are not matters of private morality. They’re violations of public morality. They undermine the integrity of our economy and democracy. They’ve led millions of Americans to conclude the game is rigged.

He concludes: It’s time once again to save capitalism from its own excesses — and to base a new era of reform on public morality and common sense.

Myths dispelled: Capitalism is extremely efficient

Followers of the Cult of Capitalism will tell you the free-market system is extremely efficient.

In truth, it’s terribly inefficient. How else can you explain, as a friend recently pointed out, the existence of more than 6,000 market research firms in the United States – all targeting the same 500 multinational companies (to use just one example)?

Most of these firms exist at a subsistence level – not winning enough work to thrive, but winning just enough to stay in business for another day … month … year. How much capital is wasted in this slow, painful process of financial evolution?

Efficiency would be a handful of market research firms; a few fast-food chains; 1 super-duper-discount-mega-chain; a couple airlines, etc. It would save a lot of money, reduce risk for investors and prevent people from wasting years building businesses that ultimately will fail. But that wouldn’t be capitalism and it would be horribly dysfunctional – as has already been demonstrated by the fall of the Soviet Union.

The free market system is ruthlessly effective. But with the amount of untold wealth that it wastes every day – allowing people to pour money into dreams that will never be realized – you simply can’t call it efficient.

 

Banks: 54 fees and 100 pages of disclosure

People are running away from banks like never before, according to the Pew Charitable Trusts. The reason? In large part, it’s the way they’re being treated: service charges, overdraft fees and minimum balance requirements.

Banks have been piling on these expenses to offset the cost of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act– which was passed by Congress essentially to prevent the same banks from playing roulette with their customers’ money.

According to a New York Times editorial:

The Pew Charitable Trust recently found that banks had a staggering array of fees — as many as 54 — for such things as asking for customer assistance, online transfers or depositing large amounts in coins. Even careful consumers would have trouble finding fee information in disclosure documents that can run more than 100 pages long.

So the new federal Consumer Financial Protection Bureau is starting to get pressure to create even more rules for banks to follow – to make the fees more understandable.

The Cult of Capitalism says the free market can take care of these things by itself. If people don’t like the fees, the Cult says, they’ll take their business elsewhere.

So what if the market speaks and nobody listens?  For better or worse, that’s usually when the regulators step in.

Cult of Capitalism: So wrong about the Post Office

The Cult of Capitalism is a slavish belief that the profit motive can cure all ills. Plans by the U.S. Postal Service to cut costs by slowing down first-class mail delivery drew out this textbook example late last year from Boston Globe columnist Jeff Jacoby.

Yet with all its privileges, the Postal Service is struggling, while UPS and FedEx flourish. Why? Because they have something invaluable that the post office lacks: Competitors.

… What is killing the post office is the lack of genuine, head-to-head competition that forces vendors to compete for customers by pushing quality up and holding prices down. Only in a government-sheltered monopoly like the Postal Service would labor costs remain as bloated as they have, year in and year out.

Jacoby may be right in that it’s time to allow unfettered competition between the Post Office and its private-sector peers. But typical of the Cult of Capitalism, gross oversimplification of the issue brings him to the conclusion from the opposite direction.

The problem isn’t that the Postal Service doesn’t have competition; it does – and plenty of it. The problem is that the Postal Service is being forced to compete with its hands bound. But to untie its hands and let it really fight would bring members of the Cult to a shocking reality: the only thing that will allow overnight delivery of a first-class letter for anything close to 44 cents is a government subsidy. The free market won’t touch it.

The Cult of Capitalism will always trot out selected facts to defend its position, and Jacoby’s chosen fact is a comparison of labor costs:

In the 1960s, a stunning 83 percent of the agency’s total budget went to wages and benefits. Three decades later, after billions of dollars had been spent on automation, labor costs still accounted for 82 percent of the budget. And in 2011? “Decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs,’’ The New York Times recently reported . “Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors.’’

Perhaps the Postal Service has a cost-of-labor issue, but using FedEx and UPS as benchmarks is is not as straight-forward a comparison as he’d have us believe. That’s because FedEx and UPS do vastly different work, even if they look similar at a superficial level. In addition to express delivery, FedEx runs three other businesses – all of which require less labor than doorstep delivery: truckload freight, less-than-truckload freight, and supply chain services.

The Postal Service isn’t allowed to branch out into such work.

At UPS, domestic package service – most comparable to what the Post Office does – accounts for just 60% of annual revenue. The rest comes from other businesses that require fewer workers.

According to its own literature, UPS employs 400,000 people (that’s all employees – not just its unionized delivery personnel) and makes roughly 8.5 million stops a day. According to a fact sheet from the Post Office, (where employment has been cut 13 percent in the last two years alone and nearly 50% in the last decade) it makes 150 million daily stops with 574,000 employees.

When you compare the two that way, the Postal Service doesn’t seem all that bloated: it makes 1,760% more deliveries with just 43% more workers. No-layoff clauses in a union contract may cost money the Post Office doesn’t have, but are these the heart of the problem?

Of course not. The real problem is that the world has changed and the Postal Service hasn’t been allowed to adjust by raising rates as needed, changing product mixes or entering new businesses. Though it has experienced a devastating drop in mail volume since the advent of e-mail, Jacoby won’t allow that has much to do with it.

Newspapers have had a similar experience, losing half their income over the past six years to Craig’s List, Google Ad Words and other digital forms of marketing. So where is Jacoby’s column proclaiming the real issue is that journalists are paid too much and the Boston Globe‘s problems could be solved if only there were a couple more newspapers to go after the same local advertisers?

UPS’s U.S. delivery service brings in about $30 billion in annual revenue. If the Postal Service was paid dollar for dollar what UPS gets for its delivery services, its annual revenue should be in excess of $400 billion. But it’s not; in 2010 the Post Office brought in $67 billion.

All of a sudden, the Post Office is looking like a pretty good deal – even if you factor in the projected $5 billion shortfall that has prompted it to cut back on services.

Jacoby has a complaint about that too. He writes:

 ”In 1990, the Postal Service launched a nationwide plan to intentionally slow down mail delivery,’’ policy analyst James Bovard wrote in his 1994 book, “Lost Rights.’’ First-class letters were already taking 20 percent longer to reach their destination than they had in 1969, but Postmaster General Anthony Frank assured Congress that the reduction in delivery standards would “improve our ability to deliver local mail on time.’’ In the weird logic and language of the American postal system, the key to success was to give the public less for its money.

What’s weird is that anyone sees this as weird; reducing value is one of the most familiar levers that businesses pull to manage profitability. In the most recent recession and many before it, there has been no shortage of reporting on food companies’ stealthy reductions in package sizes to offset rising costs. In response to new regulation, banks have been reducing the value they deliver too by raising fees of all sorts. Let’s not even talk about how the airlines are cutting back on perks (if you call luggage a perk) to compensate for high fuel costs. Customers never like it, which is why such changes tend to be disclosed only after everybody has already noticed.

The Postal Service doesn’t have that luxury. It must seek Congressional approval to act competitively, and when it does, the Cult gets apoplectic. Jacoby writes:

Most significant of all, it has a legal monopoly on the delivery of mail: The federal Private Express statutes make it a crime for any private carrier to deliver letters. The only exception is for “extremely urgent’’ letters, and even those may be delivered by a private company only if it’s willing to charge a much higher rate than the Postal Service would have charged.

This overlooks the minor point that FedEx and UPS do, in fact, deliver letters. Eight ounces or less in a flat envelope with “urgent” stamped on it; the sender defines what’s urgent, and nobody checks his or her reasoning.

Yes, those companies charge far more than 44 cents. But is that because they must?

The actual cost depends on how far the letter is traveling (wonder what Jacoby would say if the Postal Service floated that idea). But the base price for a letter from Chicago to Ada, Michigan – a journey of less than 200 miles – is $19.90 at UPS and $17.15 at FedEx. Then they both tack on roughly $7 in discretionary surcharges for fuel and rural/residential delivery. These surcharges aren’t required by law – just by the companies’ own policies. Final price: nearly $26.

So UPS and FedEx do, in fact, deliver the equivalent of first-class mail. And they do, in fact, charge more for it than required by law (which, by the way, I don’t begrudge). So why does anyone suppose these companies are itching to get their hands on more volume if it means dropping the price by 98.3%?

UPS is happy to deliver as fast as first-class mail – for $25.

There is no doubt the Postal Service is in crisis. The Cult of Capitalism’s cure is to allow FedEx and UPS to compete with it – ignoring the point that it already happens.

The Cult has it backwards. The Postal Service isn’t running a deficit because it lacks competitors, but because it’s not allowed to compete effectively. The Germans faced the same issue in the 1990s and privatized their own national mail service. It’s now called Deutsche Post and, globally, it’s the toughest competitor for both UPS and FedEx.

FedEx and UPS have thrived by being flexible as the world changes; by charging a premium for overnight and Saturday delivery; and by charging extra for delivery at inconvenient locations – without asking anyone for permission.

Let the Post Office do these things. Or let it eliminate its $5 billion cost problem overnight – by raising the price of a first-class stamp by 15 cents. Congress wouldn’t allow it, and the Cult of Capitalism would be outraged. But it would still be a heckuva value.

 

 

 

BigBadBiz and the Cult of Capitalism

I am a happy capitalist. Businesses accomplish many great things and our society could not exist without their constant contributions.

But if you’re looking for examples of this, look somewhere else. That information is so abundant it has helped to form a mystique around the supposed healing powers of money – a Cult of Capitalism that believes the profit motive can solve any problem.

This belief touches all of us every day. It affects where we shop and what we buy, and influences what information we tune in and tune out. Based on the assumption of profit’s power, we select our associates and friends, what work we do, and even who we marry and how we raise our children. The Cult of Capitalism is as tangible in daily life as the weather, and unless you’ve planned an outdoor wedding, it’s more important.

It also affects how we vote and what we expect from our government – from the town council right on up to the feds. The notion that government should run more like a business has been stated so many times that it is now accepted without skepticism or question.

It assumes that the biggest issues in government are process problems resulting from some combination of ignorance, ineptitude, corruption and greed. It implies that society’s biggest problems can be solved by reframing them as business questions for skilled money-makers.

But that belief is wrong, and businesses prove it every day by doing things in the pursuit of greater profit that even go against their own self interest. The hothouse of capitalism may foster healthy competition and drive innovation, but it also allows ignorance, ineptitude, corruption and greed to flourish.

While businesses do many great things, many great businesses do terrible things.

Capitalism can be both wonderful and horrible – often at the same time. It should be respected, known and understood. But not worshipped or revered. And certainly not summoned to do work for which it is ill suited. There is a mystique about the all-curative power of profit, and BigBadBiz.org exists to set the record straight.