The Progressive Ensign

insights and analytics to build an economy that works for all

Author: Patrick Hill (Page 2 of 17)

Midwest Hit With Tariffs & Shutdown Adds to Years of Recession – Needs A Heartland Venture Marshall Plan

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Photo: heartlandhospice.com

Midwest farmers are declaring bankruptcy at a rate not seen since the Great Recession.  As prices for corn, soybeans, milk and corn decline to decade lows, the Minneapolis Federal Reserve reports that Chapter 12 bankruptcy filings in 5 states of the Ninth District.

Sources: United States Courts – Fed Ninth District, Federal Reserve Ninth District, FedGazette – 11/14/18

The Federal Reserve notes that based on the level of bankruptcies and the trajectory of the increase that bankruptcies will only increase. The government shutdown is exacerbating farmland pain.  The Trump administration announced last summer $12 billion in farmer subsidies.  But, because of the shutdown many farmers applying for subsidies and loans to plan for spring planting are not receiving the money they need. Many farmers and agriculture businesses are affected by the Department of Agriculture shutdown versus coastal states as shown below.

Source: Axios – 1/12/19

China turned to Russia and Brazil for soybeans in particular in the 4th Qtr of last year.  US sales to China dropped to almost zero. As a negotiating tactic, China last week did pledge to buy more soybeans as traders in Chicago noted last week an increase in sales orders. However, when China switched purchases to major suppliers last year it will be difficult for US farmers to unhook those deals already in place. As one farm owner noted, “ it just seems like it’s one thing after another, over and over.”

Heartland challenges have actually been going on for years even before the Great Recession with the loss of millions of manufacturing jobs since China joined the WTO in 2000.  The rural regions of the country have seen their wages grow at half the rate of metro areas.  The opioid epidemic has cost thousands of young workers future careers, unemployment is twice what it is in the East and West. The digital internet infrastructure in rural areas is quite often at analog rates 4 times slower than broad band.  Companies are at a disadvantage versus their metro competitors with slow bandwidth.  Rural region hospitals are closing at an increasing rate leaving many rural people with hundred mile or more drives to the nearest emergency room. Life expectancy in Mississippi is the same as Libya.  Heartland America has been left out the metro mainstream economy for the past 20 years. Our post – The Hallowing Out of Heartland America shows how rural regions have fallen behind in many infrastructure areas including: healthcare, Internet bandwidth, jobs, education with limited upward mobility for young people.

Next Steps:

The Heartland Venture Marshall Plan is similar in concept as the Marshall Plan deployed by the U.S. to rebuild the infrastructure of Europe after WWII, but instead of a government bureaucracy the Silicon Valley style innovation venture model is used.  Venture development is designed to start small, build on successful prototypes and use multiple sources of funding to gain as much support as fast as possible to make the venture a success.  Failure is part of the success fast, try several prototypes, do it, tweak it, try it again until it works or achieves the goals we set for the venture.

Here is a summary of the idea from our post of September 2017:

We propose building a startup non-government organization. We are recommending a difference approach by the Federal government to act as an investor in a non-government organization called a Heartland Development Center.  An HDC acts as a central hub of critical services and infrastructure development while providing a continuous innovation system. The Heartland Development Center acts as a catalyst creating an innovation ecosystem to jumpstart local economics and social structures. HDCs would focus on all the key issues that a region needs to address to rebuild their economy and people’s lives: business formation, education and training, digital infrastructure, affordable housing, engaged local innovation media and health care.

The Federal government would seed the financing of these NGOs in key regions with additional funding from local and state governments, and major corporations who would benefit from the newly available job force tuned to their needs. HDCs would be ‘startup’ organizations installed at Land Grant universities bringing in leaders in their respective fields – ie. business formation – Y Incubator, preventive health – Cleveland Clinic, or training – Opportunity@Work as contractors to the HDC.  These NGOs would establish continuously renewing innovation processes to stay in touch with their citizen – customers and businesses. Administration services would all be contracted using cloud software services for HR, Payroll, Training, Benefits and other internal systems to keep costs down. The HDC startups would be piloted in 3 non metro areas, where they would tune their business and socio economic models for maximum impact, then use those working models to implement HDCs in 25 or more other key regions for 5 – 10 years.”

Economists see the opportunity to invest in rural regions to jump start a part of the economy in innovative ways. Joseph Stiglitz, nobel prize winning economist for example advocates turning blue collar rural areas into ‘green collar’ hubs focused on developing innovative environmental technologies, systems and services.

Congress sees the need as well, as Congressman Ro Khanna – D-17 California is working on legislation patterned after the land grant college Morrell Act of 1862 to make an investment in technology job development in rural sections of the U.S. Khanna has supported computer programming training in West Virginia and toured the Midwest with Silicon Valley executives and venture capitalists to encourage investments in the Heartland. He points out that there is no need to send jobs to China, Brazil or India when there are people in our Heartland who can do those jobs well and at lower cost than expensive coastal regions.

There is one indicator of the desperation that many rural people feel is the fact that the opioid epidemic has a 50 % greater incidence in the Heartland than in our metro or coastal cities. We need to be building bridges through programs like the Heartland Venture Marshall Plan between our coasts and the inland empire to bring together our people developing consensus and shared experiences. Each HDC would be staffed by a equal mix of apprentice and college graduates from local rural education systems and metro university graduates. They would comprise a ‘Heartland Service Corp’ modeled on the AmeriCorp program with a benefit of complete forgiveness of student debt for two to four years of service depending on the debt balance. We would be building shared experiences of our young people to bridge the gap between inland and coastal cultures. These young people can innovate new opportunities to create an economic future that works for all.

Where Is the Common Good? Our Families is a Good Place to Start

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Image: takemyhandcoaching.com

Everyone has a mother and father (even if they are not living with them now).  Many of us have brothers, sisters, aunts, uncles, grandfathers and grandmothers.  How about looking at local, state and federal government policies and laws through the eyes of our families. Does this healthcare insurance make sense for families?  Does it provide for services, drugs and care from birth to death?  How can we build families as a unit of government services?

Families are really the basic unit of our communities.   A household is in an apartment, or home with a set of family members – as those members define their household.  For many there are multiple generations in a household, aunts, uncles, grandpa and grandma.  Can we start with family as an economic unit too.  How do we support those who have jobs in the household?  Can we support multiple family members having jobs? For example with child care so that Moms can work if they want to.  Can we have more women friendly corporate policies such that a women can move from home to the work world and back without losing pay or career opportunities.  Why not have paid parental leave like most developed countries of the world?

Children in the household need an education in the household to survive in this world.  Why not make pre kinder programs available for all families not just wealthy ones.  Why not offer public education that is equal across communities not just rich ones getting the good teachers and supplies?  Why not offer a college education or high quality apprenticeship programs to all children regardless of community at no cost to the family or limited cost. When are we going to invest in our children to the level that we did in the 1970s when states spent 3 or 4 times what they spend now secondary and higher education. 

When a household job holder is out of work what happens?  How can we support that person get another job, offer health insurance when they need it between jobs as no additional cost. When will we make companies that layoff workers do so in an equitable way along with manager and executive layoffs?  How do we get equitable pay for employees that is at a livable wage instead of 300 % less than executive pay.  In the 1950s executive pay was 50 % higher than the average worker, it worked then why not now.  Instead of allowing corporations to take the money they make off the hard work of employees, and funded by customers to throw stock buyback money down the drain – take those funds and fund equal education for all or healthcare for all.

Family time together needs to be supported, in Europe they have the full month of August off to be together with their families or friends.  Instead, US workers work the most number of hours in a year of all workers in the world.  Germany does fine with an economy that provides a good standard of living for all workers and they have 5 weeks off each year.

Today we have the highest level of wealth concentration since 1929, we know what happened after that year, the stock market crashed, companies went of business, unemployment was over 20 %, many people starved.  Unless, we take dramatic steps to share the benefits of our economy for all, it will crash again, causing great pain and suffering to many for 5 to 10 years as the economy rebalances wealth and reverts to the mean of wealth for the past 88 years. Throughout history, societies become prosperous, the rich take control of government and resources and eventually those that are left out revolt or the economic model becomes too top heavy to work and deflation, depression and decline takes place.  Then, as wealth rebalances the industrious are rewarded again and the society begins to grow again on a solid foundation.  That foundation is the family. There is another benefit to putting families first. We are actually all part of the same family of humanity, maybe when we put the focus on families we will treat each other with respect, understanding and civility.

Corporate Debt Bubble Increases Probability of Recession

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Image: knowledge.wharton.upenn.edu

S & P 500 corporations have been borrowing money to buyback stock and increase dividends to investors.  Increasing their debt bubble could increase the probability of defaults. Research shows that defaults spike when the corporate debt to GDP ratio exceeds 44 %.

Sources: Bloomberg, S & P, The Wall Street Journal, The Daily Shot – 1/9/19

When companies take on so much debt defaults become a real possibility when sales fall, or profits are squeezed as debt payments become due. Apple recently announced that iPhone sales were falling in China and has decided to cut production of all iPhones by 10 %. Apple has plenty of cash, but their suppliers may not. Fedex in December announced plans to offer domestic employees buyouts because ‘global trade has slowed in recent months and the company expects trade to slow further.’ We can expect more reduced earnings and sales guidance beginning next week when 4th quarter reports begin coming in.

Sources: Gavekal Data/Macrobond, The Wall Street Journal, The Daily Shot – 1/9/19

When corporate debt to GDP ratios close in on 44 % or exceed that level recessions are likely to follow as the chart above shows.  There is much discussion in the financial press about whether there will be a recession or not.  It seems quite possible that record corporate debt combined with a likely fall off of sales in the 1st quarter of 2019 due to pull up buying by companies in the 4th quarter of 2018, will cause an economic slowdown or recession.  The slowdown is made much worse by corporations overindulging in debt to finance stock buybacks and dividend distributions. Plus, turning around these companies will be more difficult as defaults spiral downward, more companies are forced to close or layoff workers.  As workers are laid off they reduce spending, then reduced spending causes broad sectors of the economy to experience sales and profit declines.

Next Steps:

Where is the oversight of spendthrift management policies?  Directors are likely on stock bonus plans too, so they enjoy seeing the stock price goosed by share buybacks.  Where is a voice of moderation looking out for the long term viability of the company for customers, employees, shareholders and communities going to come from?  We need a national dialog on how to improve corporate governance taking into account the needs of all parties represented to reign in profligate borrowing .  Certainly, corporate executives did not start the trade war but they have borrowed way too much placing their firms in peril. It is management’s responsibility to look out for the interests of all effected by company success or failure.

Drug Insurers Reap $9 billion Windfall from Overestimates

Photo: healthinsurance.org

Major drug insurers like United Health Group, CVS Health, and Humana make estimate bids to Medicare for reimbursement for the cost of Part D prescription drug benefits.  From 2006 until 2015 the Wall Street Journal examined industry records and found that insurers reaped an additional $9 billion from overestimates of drug insurance costs.

Sources: Centers for Medicare and Medicaid Services, The Wall Street Journal – 1/4/19

From 2010 to 2017 overall Part D spending rose faster than all other Medicare components by 49 %. The bids from insurers include their profit margins and administrative costs.  Medicare reimburses the firms monthly. When the year ends, Medicare audits the estimate totals versus the actuals and requests the overpayments be returned.  However, the way the payment terms are setup the insurers are not required by pay the full amount of the overestimate.  In 2015 insurers overestimated their Part D costs by $2.2 billion and were allowed to keep $1.06 billion.

The size and continuous overestimate pattern seems unusual.  The overestimates are extraordinary to the tune of a million to one according to Memorial Sloan Kettering analysts who completed record examinations for The Wall Street Journal. Peter Bach, director of Sloan Kettering’s Center for Health Policy and Outcomes, noted, “Insurance companies use heaps of data to predict future spending. If truly unpredictable events were blowing up their statistical models, the proportion of overestimates to underestimates would be closer to 50/50.”  Dr. Bach concluded, “If they start missing in one particular direction over and over they are doing it on purpose.”

The chronic overestimates are particularly a problem in the direct subsidy part of the program as the following chart shows versus the reinsurance program where estimates are far more accurate.

Sources: Medicare, The Wall Street Journal – 1/4/19

Congress designed the program in 2003 where the federal government and seniors would pay for drug insurance while the program would be operated by private companies.  Legislators were concerned that insurers would not want to participate so they allowed for companies to hold back overestimated reimbursement funds.  The private companies bear all the risk in the direct subsidy program, yet in the reinsurance program for high cost drugs Medicare bears the risk on underestimates causing losses.

Insurers can gain major benefits by overestimating on the routine drug costs they cover.  Companies can keep any overestimated funds up to 5 % of their guess.  In some cases they can keep more than 5 % based on a Medicare formula. Medicare steps in if the insurers experience a greater than 5 %  loss in their estimate.

Next Steps:

From 2006 to 2015 Medicare spent $652 billion on the Part D program, with its cost increasing by 49 % over that period.  Costs must be controlled by private insurers to keep premiums low for seniors and cost overruns limited for the federal government.  There is too much reward built into the present direct subsidy program.  Why not do as many corporations do for contracts that estimate costs and then must be reconciled at the end of the year?  Return all the funds that are overestimated.  Chronic overestimating companies would be hit with a penalty for overestimating reimbursement based on the opportunity cost of funds over reimbursed monthly payments. Medicare should reward the accurate estimating companies with positive ratings on their prices, and make clear who the violators are.  Making the programs more competitive would bring down costs and require that companies be more accurate in their drug reimbursement estimates.

We see the pricing of drugs via insurers and pharmacy benefit companies as being too opaque to clearly design a fair pricing system. Congress needs to pass a ‘simple pricing’ sunshine bill to make drug pricing clear and accurate for all consumers and the government.  Medicare should be able to use its leverage covering millions of seniors to negotiate a reduction in drug and insurance costs.  California announced today a policy just signed by the newly installed governor, Gavin Newson, authorizing the California Medicaid administration to negotiate drug prices for all 13 million patients enrolled as a block and invites private employers to join the block. Drug companies and insurers need to shift their focus to make pricing programs more equitable for patients and payers or the face increased calls for price regulation.

Only 27 % of Workers Received Raises in Past Year

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Photo: fortune.com

Last month, Bankrate.com completed a survey of 1,000 workers from all income levels across the U.S. and found that only 27 % of existing full time and part time workers had received wage increases. For all the recent news about wage inflation, from the worker perspective they just aren’t seeing the wage increases.  The wage inflation reported by government surveys is an average and does not take into account income levels.  The higher paid workers are getting the raises so the average moves up.

Sources: Bankrate.com, Marketwatch – 12/14/18

If a worker changed jobs then the pay raise figure rises by 5 %, though from our perspective that still seems low.  When  workers change jobs shouldn’t they be receiving a raise in this tight labor market?  This trend seems to indicate that wage leverage for workers is still quite low compared to the power businesses have over wage increases.  As we have noted in the past businesses enjoy leverage over workers by automating jobs, Internet access to hundreds of candidates nationwide and outsourcing of non-core functions.  Plus, executive power is increasingly concentrated with mergers and acquisitions cutting down the number of competitors that workers can chose to work.

Pew Research reports most pay raises going to the top 10 %,while non-supervisory and production workers barely received any wage increases.

Sources: U.S. Bureau of Labor Statistics, Pew Research – 8/7/18

Real wages (taking into account inflation) have risen 4.3 % since 2000 for the lower quarter in income. Yet, for the top 10 % wages have increased by 15.7 % or $2,112 per year. Some of the pressure employers feel is from increased health insurance costs and adding non-wage benefits to keep pace with competitors.  The reality is that wages are what workers have to use to make the majority of their payments for housing, food, and necessities.  Plus, wages for the top 10 % keep going up anyway, so why don’t workers get the same rate of wage increases?

Wage stagnation has been happening for years.  Since 1964 an analysis of wages for production and non – supervisory workers by Pew Research shows that today’s wages have just not kept up with inflation.

Source: U.S. Bureau of Labor Statistics, Pew Research – 8/7/18

Next Steps:

For all the discussion in the financial media about a wage inflation spiral the reality is that structurally workers in the lower 80 % income bracket are not getting their fair share of the economic pie. While, there have been federal laws proposed for limiting CEO pay Portland, Oregon has passed a law with a limit for executives at 150 % of worker pay or tax penalties are paid. Regulating pay in this way seems to be micro managing pay scales. However, we have a fundamental issue with pure capitalism of the American economy not delivering wealth to the vast majority of workers. In the 1970s, 1980s workers were receiving wage increases at 6 %, 7 % and sometimes 8 %.  After the Great Recession workers are just averaging 2 % to 2.5 % in wage increases.  Globalization caused outsourcing of manufacturing jobs held by the working class which hallowed out good paying lower education jobs. Millions of manufacturing job have been lost and not replaced.  Our economy is 70 % services based with highly educated knowledge workers receiving most of the benefits. Ending stock buybacks would certainly put more cash into corporate coffers to distribute to workers – but will executives raise wages?  Raising wages is an expense on the corporate ledger, and executives are paid to increase profits not reduce them. Executives are at the pinnacle of their power. Yet, as a society we have to fundamentally rethink how we make the economy work for all not just the few at the top of the corporate pyramid.

Recovery Friendly Companies Rebuild Labor Force

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Photo: mswcareers.com

One of the major challenges today in building our labor force participation rate is the millions of young people we are losing to drug addiction.  New Hampshire is leading the way with 70 recovery friendly companies  participating in a program for recovering drug and alcohol addicts to begin working by receiving training and then a job with decent pay. These workplaces are willing to accept employment gaps and brushes with the law.  The firms view addiction as a medical problem – like maternity or surgery.  Their work environment openly encourages discussion of addiction and paths toward recovery offering mutual support for recovering employees.

Work provides a sense of self-worth and self-respect to people on a recovery path.  Plus, addicts join a community, ending the isolation they feel from their substance abuse.  In a supportive community they can stay sober and learn about the lifestyle changes they need to make to stay sober. There are about 22 million Americans in recovery according to U.S government data.  Yet, with a low 3.7 % unemployment rates 9.2 % of workers in recovery are involuntarily unemployed notes theRecovery Research Institute at Massachusetts General Hospital.

New Hampshire experienced the third highest rate of overdose deaths in the U.S. in 2016.  Taking the challenge of recovery head on, the state now has over 60,000 recovering addicts working and a state unemployment rate of 2.7%.

“Most thoughtful business leaders want to do the right thing by their employees when it comes to addiction, and to [addiction in] their families,” observed KeithFlynn, the spokesman for the New Hampshire Business and Industry Association. The idea for the came from Gov. Chris Sununu when he was operating a ski resort where one of his employees had an addiction problem.  Instead of viewing the addiction as a reason to fire the employee, he developed a program of recovery and continued work. When Sununu become governor in 2016 he set about developing the program now in place.  The program helps 60,000 recovering substance abuse users and their families, while opening up a new group of prospective workers to New Hampshire businesses.  It is time that we looked at addiction as a medical problem instead of a criminal one, and developed programs nationwide to turn the lives of addicts around while increasing the labor force participation rate.

David Sawyer, a PersianGulf War veteran, summed up his experience at a New Hampshire recovery friendly company this way,

“Is it finding work through recovery, or finding recovery through work?” he posed a question, continued by noting “I don’t think recovery would have been so successful if I hadn’t been working.”

Drug Companies Want a $4 Billion Break: No Way!

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Image: youtube.com

Major drug companies are lobbying Congress to reduce the $4 billion increase in costs due to raising the discount for seniors purchasing drugs at the ‘donut hole’ level in Medicare Part D to 70 % from 50 %. The provisions for an increase in the discount was included in a spending bill passed by Congress last February.

Pharma companies and major corporations with billions of dollars stashed overseas said that if tax rates were cut on dollars transferred to the U.S they would raise wages, increase R & D spending and reduce prices.  Most companies did not deliver on their promises or benefits to patients either. Instead, they increased the size of their stock buybacks by 4 to 5 times in the case of the largest stock buyback company, Amgen.

Sources: SEC, The Wall Street Journal – 12/6/18

Only two of the top ten companies actually reduced share buy backs since January of this year.  Corporations overall are expected to complete over $1 trillion of stock buy backs by December 31st Goldman Sachs estimates.

Over a dozen Democratic members of the House ofRepresentatives sent letters to five top pharma companies with data showing new increases in drug prices while increasing share buy backs.  The drug industry responded that they were reducing prices, increasing R & D spending and raising employee wages.  Merck, CEO, Kenneth Frazier said in a reply, “We view the legislation (tax cut) as providing us with more flexibility to deploy capital in support of our strategy to invent new medicines that address key unmet medical needs, ultimately benefiting patients.”  The reality is that prices for the most popular drugs are still going up.

AbbVie raised the price of Humira by 9.7 % in January the Democrats pointed out in their letter to the firm.   Inflation for this past year is 2.4 % that drug increase is nearly 4 times the rate of overall consumer price increases in the U.S. economy. AbbVie sent a reply to the Congressmen outlining many programs using their tax cut funds including: a $1000 salary increase to non-executive employees, plans to invest $2.5 billion in capital projects in the U.S. over the next five years, $100 million healthcare and housing for people in Puerto Rico, an $100 million to the Ronald McDonald House to fund lodging for pediatric cancer patients and their families.

Next Steps:

Drug costs hit seniors particularly hard because they need the medication, and they are on fixed incomes.  Drug companies have to do better by ending what the SEC called, “stock price manipulation”,  before the Safe Harbor policy in 1982 allowed stock buybacks. Billions of dollars are wasted to goose the price of stocks to benefit executives and big investors.  Investors are misled by earnings reports using fewer stock shares to compute earnings per share, often used to assess company performance. Patients are hurt by price increases, Humira costs patients $50,000 per year for the standard treatment if they have no insurance coverage.  Stock buybacks by pharma companies must stop, the price gouging of patients and insurers needs to end.

Another economy that drug companies should adopt is to end direct-to-consumer advertising of prescription drugs.  Over 150 countries do not allow prescription drug advertising, only the U.S. and New Zealand allow advertising directly to patients to create “pull” sales from patients requesting a drug from their doctor.  According to Kantar media, drug manufacturers spent $6 billion on direct to consumer television advertising in 2017, a 64 % jump from 2012. The billions being spent on DTC advertising are better spent on reducing drug prices. We applaud the moves by AbbVie in raising employee salaries, donations to Puerto Rico and Ronald McDonald house, these are excellent steps.  Many drug firms have foundations that offer patients with low incomes a way to obtain their medicines for free or little cost.  The difficult aspect of most of these drug-for-free programs is they require large volumes of paper work, with major time delays when the patient needs to the drug immediately. Drug company executives need to see the light on what is happening, the price gravy train and waste of stock buyback funds gleaned from patients needs to end.   Why wait for legislation? We appeal to CEOs – make the right moves now. See that taking responsibility for solving the cost crisis you have created will be far better for your firm, patients and insurers. You may get a solution you don’t want if you wait for Congress to pass legislation.

What Ever Happened to Integrity and Service In Our Leaders?

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Photo: wikipedia

Our 41st President, George Herbert Walker Bush passed away quietly at his home in Houston this past evening. He was 94 years old. His legacy is multifaceted yet in contrast to today’s political discourse his integrity stands out. House Speaker Paul D. Ryan’s described Bush as “great in his character, leading with decency and integrity.”  Integrity defined by linguists focus on two character elements: adhering to a set of moral principles and character definition.  Integrity is seen in leaders who are humble enough to continuously learn from their mistakes, listen to others and are honest to themselves and others.

Former President Barack Obama noted about President Bush’s life that he was:

a patriot and humble servant with a legacy of service that may never be matched, even though he’d want all of us to try.”

“While our hearts are heavy today, they are also filled with gratitude. Not merely for the years he spent as our forty-first President, but for the more than 70 years he spent in devoted service to the country he loved.”

Bush demonstrated a level of dedicated service to his country that few have matched. He was the youngest Navy aviator to fly in WWII.  Shot down over the Pacific he was rescued. Later he continued a career of public service in the House of Representatives, Ambassador to the U.N., U.S. Envoy to China, Director of the CIA and Vice – President among many positions he held in 70 years of public service.

His service did not stop at his one term presidency.  One unusual partnership developed 20 years after his presidency with the man who pushed him out of office, Bill Clinton.  In 2004, Bush’s son George W. Bush asked his father and Clinton to tour the devastation after a huge tsunami hit Sri Lanka, Indonesia and Thailand.  They discovered during the two week tour how much they had in common including an unlikely support of several education programs. After Hurricane Katrina in 2008 they two joined together in raising over $130 million in relief.  When the program eventually was not needed, the funds were distributed evenly to the two men who then gave them to charities in the U.S. Gulf coast region. Bush observed on his relationship with Clinton that “politics does not have to be mean and ugly”.  Seems like light years ago from our perspective today.

Reflecting on the recent death of another great Navy flyer, Senator John McCain, it seems impossible to miss that with the passing of these two men our country is losing not just the people but the values of service and integrity they exemplified.  We hope during this coming week of memorials and remembrances that George H.W. Bush’s character traits of selfless service, integrity, honor and a humble love of all people is reborn, not lost on this generation.

GM: Case Study to End Share Buy Backs

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Image: GM Lordstown plant to be closed – gmauthority.com

Yesterday, GM announced a series of plant closings and layoffs of 15,000 workers in North America.  GM attributed the need to shift its focus to electric car development, trucks and SUVs that consumers were buying, as sedan sales are falling.  Actually, auto sales worldwide have been dropping for the past year.

Source: Bloomberg – 11/27/18

Jesse Colombo, analyst at Clarity Financial notes that while GM’s announcement focused on electric car development the plant shutdowns and layoffs really were driven by of slowing auto sales.  The auto market has been shifting rapidly with the development of driverless cars, ride sharing reducing the need to own a car, and urbanization causing policy makers to fund more public transit. The auto maker announced that it will end production of the Chevy Volt electric sedan with sales falling short of targets. GM has targeted gig economy drivers for ride sharing companies like Uber and Lyft by offering an on demand service for the Chevy Volt at $225 per week in Austin.  It is not clear what will happen with this on demand service marketing beta test with Volt production being halted.  GM has partnered with Lyft, and made a $500 million dollar investment in the ride sharing company 2 years ago.  Thus, GM has made some investments in key new markets and technologies, yet is behind in adjusting to sedan sales which fell by 11 % in third quarter.

At the same time the auto market is undergoing rapid change, GM executives have been taking care of themselves as a first priority.  Wolf Richter, editor of the Wolf Report blog reports that GM spent $13.9 billion in stock buy backs since 2014.

Sources: Wolf Richter, Wolfstreet.com, Y- Charts, Marketwatch – 11/27/18

GM stock purchases took shares off the market to reduce supply, while expecting stock demand would move the share price up.  However, as Richter notes GM share price has actually fallen 10 % in that four year period. So, much for boosting the price of shares to pad the executive stock compensation plan.  Instead of investing in new technologies, research, new plants, employee training, increasing wages and other key transition programs GM completely wasted $13.9 billion dollars.  Poor management judgement is now causing 15,000 workers to lose their jobs in the U.S. and Canada.  While we will not know over the last four years if good business investments would have prevented all the layoffs it is certain the economic damage to Midwest and Canadian communities could have been significantly mitigated.

Next Steps:

Goldman Sachs estimates that S & P 500 corporations will complete $1.0 trillion dollars in stock buybacks this year.  One trillion dollars will be wasted by U.S. corporations as productivity investments have lagged over the past 5 years, and average real wages have been stagnant for the 80 % in income since the Great Recession.  As the GM example demonstrates, besides hurting employee wages, making U.S. companies less competitive and inflating stock prices now workers are losing jobs due to executive mismanagement and myopia on stock price.

Prior to 1982, the Securities Act of 1934 held that stock buybacks were a form of ‘stock price manipulation’ and were not allowed by the SEC.  This policy was overturned by an E.F. Hutton executive, John Shad as SEC Chairman appointed by President Reagan.  He created a ‘safe harbor’ policy where corporations could purchase their own stock, only a certain times during the trading day, with disclosure quarterly and blackout periods prior to earnings reports. Corporations have used buy backs since then but stock buy backs took off in 2015 to $695 billion and almost doubled to $1 trillion for 2018.

We recommend an end to the stock buyback safe harbor provisions and a return to the pre-1982 policy, management in many corporations has lost their bearings on why the company exists – first priorities being workers, their families, customer communities, society and the nation not their own compensation plan. Making the corporation profitable and valuable to shareholders is a means to achieving our societal goals of a decent wage, quality housing, and the ability of families to support their children.  In October, we posted an analysis on how major corporations like Boeing, GE and American Airlines underfunded their pension plans while executing  billions of dollars in stock buy backs. Executives need to take responsibility for full funding of all pensions not wasting money on stock buy backs. It  is time with so many middle class and economic investment needs that corporations receive a direct SEC policy shift to end stock buy backs.

Truth Has Lost It’s Most Important Defender – POTUS

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Image: spjla.org

Just before Thanksgiving, the FBI briefed the president on what actually happened to Washington Post columnist Jama Khosshoggi, that the Crown Prince of Saudi Arabia had to know and give the order for his murder in the Saudi Turkish Consulate.

Instead of defending the constitutional right of freedom of speech and the press and those that work so diligently at revealing and publishing the truth – POTUS defended the brutal killing of Khosshogi.  In a wholly greedy, self-serving, money grabbing (as Dickens would put it) way he talked about how important Saudi oil was to the U.S and for the kingdom to keep buying U.S. arms – killing thousands of innocent Yemeni people along the way.

The Truth lost its most important defender today.  We all lost out to geo politics and power in its most naked way.  The message being sent by our President is: “as long as you keep paying us and buying our stuff you can kill anybody you want and we will look the other way, including journalists”.  Historians will look back on this event as the low point for Truth in this country and the defense of the Press.

Our founding  fathers knew that a strong press was crucial to keep government in check from overreaching with its power over the people.  Jefferson and Madison believed in the American experiment that a well-informed citizenry will in the end make wise decisions about who and how they should be governed.

This president with all his demagoguery, scapegoating, bullying and no respect for the truth has taken the moral level of our country to a new low – in our eyes and the eyes of the world. He passed the 5,000 mark in falsehoods, misleading statements and just plain lies as recorded by the Washington Post this past September.  He has actually increased the number of falsehoods as he was campaigning for candidates he backed to an average of 32 per day from 8 per day up to his 601st day in office.

Journalists are under attack around the world, in the first 6 months of 2018 there has been 47 journalists killed worldwide almost the same number as for all of 2017.

Source: Statista – 2018

With nearly double the number of deaths through June 2018 journalists have a target on their backs.  Our POTUS did not help the situation by sending the message that dictators can kill journalists and there is no consequence.  When worldwide we a renewed focus on the truth, instead we are giving a green light to the creation of lie after lie.

Our national leaders need to be defending journalists throughout the world and in the U.S in particular because they are the investigators, researchers and messengers of truth.  Truth is the fresh air of democracy.  Our democracy cannot survive as a representative government when the truth and those who find and express the truth are under attack.

Congress and our national leaders need to take action to show the Saudi government that we want a relationship with the nation, not their present brutal leader, and the Saudi people.  We must defend the Truth, Liberty and Freedom wherever it is under attack in the world.

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