Drumbeats on Social Security

by Dollars and Sense

The New York Times had something of a scare-mongering front-page article on Social Security the other day. The new reason for concern, the Times suggested, is that payout is expected to exceed pay-in this year. But as Dean Baker pointed out on his Beat the Press blog, "this fact makes absolutely no difference for the program since it holds more than $2.5 trillion in government bonds." Dean goes on:

In spite of the statements by the experts cited in the article, the second paragraph told readers that this event marked: "an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office." Nothing in the article or in the structure of the program suggests that there is any importance whatsoever to this threshold.

Read the full post, in which Dean responds to challenges from commenters.

Meanwhile, the Times included a discussion of Social Security in its online feature, Room for Debate, albeit under the question-begging headline "Simple Steps to Fix Social Security"; the Times seems to welcome debate among experts on Social Security, as long as they agree that it is broken!

Economist Teresa Ghilarducci, who has written about pensions for Dollars & Sense ("When Bad Things Happen to Good Pensions," from our May/June 2005 issue), didn't take the Times' bait. The headline to her contribution to the debate states simply that "The Program Isn't Broken." The adjustment she recommends is the same one John Miller recommended in our March/April 2008 issue (Go Ahead and Lift the Cap), which is to raise the cap on taxable earnings from 85% to 100%:

Because baby boomers pay more payroll tax than the system is paying out in benefits, boomers have saved for their own retirement most of their working years. They may have run up their credit cards, but they saved through the Social Security system. These excess payroll taxes bought special-issue government bonds that always paid above the market rate for risk-free government noncallable bonds; these bonds were created especially for the Social Security taxpayers.

Gradually increase the taxable earnings base from 85 percent of earnings to 100 percent.

In 2016, we are going to cash them out like every retired person does with their retirement money. When a person cashes out their pension fund it is not called "a problem" and neither is redeeming the assets in the Social Security system a problem.

In another 25 or so years, the system will not have enough money in the system to pay full benefits. Now that would be a problem. And there are two types of fixes: cut benefits or raise revenue. Given that pensions have collapsed and are not getting better any time soon and more old people are going to be poor, benefit cuts are off the table.

Since most of the earnings growth in the last two decades went to the top paid people, those earning much more than the Social Security taxable salary of $106,800 the system lost revenue. A quick fix is to gradually increase the taxable earnings base from current coverage of just 85 percent of earnings to 100 percent by 2045. That would solve the entire predicted Social Security deficit for 75 years. Done.

Well done, Teresa.

More on the coming drumbeat to mess with Social Security over at AlterNet: Alan Greenspan and the New York Times Are Gunning for Your Social Security, by Zach Carter.

For more background, see Ellen Frank, John Miller, and Doug Orr on Social Security in the D&S archives.

Labels: New York Times, pensions, privatization, Social Security, Teresa Ghilarducci

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
3/28/2010 11:51:00 AM 1 comments

 

Underwater, But Will They Leave the Pool?

by Dollars and Sense

Some remarkable honesty about the class (although of course without using that term) dynamics of capitalism showed up in Saturday’s NY Times, in a piece by Richard Thaler about mortgage defaults:

Much has been said about the high rate of home foreclosures, but the most interesting question may be this: Why is the mortgage default rate so low?

After all, millions of American homeowners are “underwater,” meaning that they owe more on their mortgages than their homes are worth. In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them.

A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.

Some homeowners may keep paying because they think it’s immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be “simply a speculator—and one who is not honoring his obligation.” (The irony of a former investment banker denouncing speculation seems to have been lost on him.)

But does this really come down to a question of morality?

A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.

Read the rest here.

An interesting detail from the piece is that in a number of states mortgages are “nonrecourse” by law, meaning the lender is entitled to the house but nothing else in case a borrower defaults. So borrowers in those states basically have the right to walk away, a right for which they pay an estimated $800 extra in closing costs per $100,000 borrowed.

Labels: Brent White, foreclosures, mortgage banking, mortgage default, New York Times, Richard Thaler, underwater mortgages

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
1/25/2010 12:41:00 PM 0 comments

 

Rebound ... in Bankers' Pay

by Dollars and Sense

From the New York Times (6/23):


The Times doesn’t say whether or not these figures are inflation-adjusted. But even if they’re not: are you making 40% more than you were in 1998, even in nominal terms—as the analysis projects bankers will in 2009? We’re not.

The chart accompanies a piece on Citigroup raising employees’ salaries to make up for their smaller bonuses:

Citigroup Has a Plan to Fatten Salaries

After all those losses and bailouts, rank-and-file employees of Citigroup are getting some good news: their salaries are going up.

The troubled banking giant, which to many symbolizes the troubles in the nation’s financial industry, intends to raise workers’ base salaries by as much as 50 percent this year to offset smaller annual bonuses, according to people with direct knowledge of the plan.

The shift means that most Citigroup employees will make as much money as they did in 2008, although some might earn more and others less. The company also plans to award millions of new stock options to employees in an effort to retain workers and neutralize a precipitous drop in the value of their stock holdings.

Like Citigroup, financial companies, like Bank of America and Morgan Stanley, are raising employees’ base salaries to try to shift attention away from bonuses and curb excessive risk-taking. So are banks like UBS and other European competitors.

...

Indeed, despite the simmering anger over Wall Street pay, some of the 10 big banks that repaid their federal aid this month—a big step toward disentangling themselves from the government—are gearing up to pay outsize bonuses. For many, profits are up, despite the troubled economy. On Monday, Goldman Sachs, which returned $10 billion of bailout funds, denied reports that it planned to pay out the highest bonuses in its 140-year history.

Read the article here.

Labels: Bank of America, Citibank, Citigroup, compensation, Morgan Stanley, New York Times

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
6/24/2009 10:36:00 AM 0 comments

 

The Business Press MIA Before the Crisis

by Dollars and Sense

From the current Columbia Journalism Review: a detailed review of whether the U.S. business press was paying attention in the years leading up to the financial crisis. The brief answer is—no.

These are grim times for the nation’s financial media. Not only must they witness the unraveling of their own business, they must at the same time fend off charges that they failed to cover adequately their central beat—finance—during the years prior to an implosion that is forcing millions of low-income strivers into undeserved poverty and the entire world into an economic winter. ...

We’re dealing with a financial press that is ... a battered and buffeted institution that in the last decade saw its fortunes and status plummet as the institutions it covered ruled the earth and bent the government. The press, I believe, began to suffer from a form of Stockholm Syndrome. ...

The record shows that the press published its hardest-hitting investigations of lenders and Wall Street between 2000–2003, for reasons I will attempt to explain below, then lapsed into useful-but-not-sufficient consumer- and investor-oriented stories during the critical years of 2004–2006. Missing are investigative stories that confront directly powerful institutions about basic business practices while those institutions were still powerful. This is not a detail. This is the watchdog that didn’t bark.

To the contrary, the record is clogged with feature stories about banks (“Countrywide Writes Mortgages for the Masses,” WSJ, 12/21/04) and Wall Street firms (“Distinct Culture at Bear Stearns Helps It Surmount a Grim Market,” The New York Times, 3/28/03) that covered the central players in this drama but wrote about anything but abusive lending and how it was funded. Far from warnings, the message here was: “All clear.”

The story ends with a short list of lessons to be learned. Here there is a nod to the alternative press, but barely:

Fifth, seek alternatives. Read Mother Jones, or something, once in a while.

Read the whole article here.

Labels: business press, Columbia Journalism Review, financial crisis, New York Times, Wall Street Journal

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
6/18/2009 12:26:00 AM 0 comments

 

The Big Banks' Fuzzy Math

by Dollars and Sense

There's less than meets the eye to the latest reports of bank profits. Most of it appears to be the result of accounting shell games and TARP money passed through AIG. With the government handing them nearly free money and lots of people wanting to borrow it and pay interest, why can't they make an honest buck?

And if you can't answer that, then maybe it's time to talk nationalization.

--df

From the NYT:

Bank Profits Appear Out of Thin Air
By ANDREW ROSS SORKIN

This is starting to feel like amateur hour for aspiring magicians.

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be - presto! - better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn't buy it for a second.

With Goldman Sachs, the disappearing month of December didn't quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that's sort of like saying you're richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as "a testament to the value and breadth of the franchise."

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch's assets it acquired last quarter to prices that were higher than Merrill kept them.

"Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won't be pretty," he said.

Investors reacted by throwing tomatoes. Bank of America's stock plunged 24 percent, as did other bank stocks. They've had enough.

Why can't anybody read the room here? After all the financial wizardry that got the country - actually, the world - into trouble, why don't these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

What's particularly puzzling is why the banks don't just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That's the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.

"If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit," said Professor Finkelstein of the Tuck School. "And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.'s that populate corner offices?"

Labels: Andrew Ross Sorkin, bank failures, bank nationalization, Citibank, Merrill Lynch, New York Times, Sydney Finkelstein

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
4/22/2009 03:35:00 PM 0 comments

 

Wage Theft (NYT, ABC News!)

by Dollars and Sense

Kim Bobo, director of Interfaith Worker Justice and author of Wage Theft in America (which we excerpted here and here), appeared on Good Morning America yesterday:



Plus, Tuesday's New York Times had a great article by Steven Greenhouse on nonenforcement of labor regulations by the Labor Department. The GAO report that is the focus of the article actually uses the term "wage theft":

Labor Agency Is Failing Workers, Report Says

By STEVEN GREENHOUSE | March 24, 2009

The federal agency charged with enforcing minimum wage, overtime and many other labor laws is failing in that role, leaving millions of workers vulnerable, Congressional auditors have found.

In a report scheduled to be released Wednesday, the Government Accountability Office found that the agency, the Labor Department's Wage and Hour Division, had mishandled 9 of the 10 cases brought by a team of undercover agents posing as aggrieved workers.

In one case, the division failed to investigate a complaint that under-age children in Modesto, Calif., were working during school hours at a meatpacking plant with dangerous machinery, the G.A.O., the nonpartisan auditing arm of Congress, found.

When an undercover agent posing as a dishwasher called four times to complain about not being paid overtime for 19 weeks, the division's office in Miami failed to return his calls for four months, and when it did, the report said, an official told him it would take 8 to 10 months to begin investigating his case.

"This investigation clearly shows that Labor has left thousands of actual victims of wage theft who sought federal government assistance with nowhere to turn," the report said. "Unfortunately, far too often the result is unscrupulous employers' taking advantage of our country's low-wage workers."

The report pointed to a cavalier attitude by many Wage and Hour Division investigators, saying they often dropped cases when employers did not return calls and sometimes told complaining workers that they should file lawsuits, an often expensive and arduous process, especially for low-wage workers.

During the nine-month investigation, the report said, 5 of the 10 labor complaints that undercover agents filed were not recorded in the Wage and Hour Division's database, and three were not investigated. In two cases, officials recorded that employers had paid back wages, even though they had not.

The accountability office also investigated hundreds of cases that it said the Wage and Hour Division had mishandled. In one, the division waited 22 months to investigate a complaint from a group of restaurant workers. Ultimately, investigators found that the workers were owed $230,000 because managers had made them work off the clock and had misappropriated tips. When the restaurant agreed to pay back wages but not the tips, investigators simply closed the case.

In another case, the accountability office found that workers at a boarding school in Montana were not paid more than $200,000 in overtime. But when the employer offered to pay only $1,000 in back wages as the two-year statute of limitations approached, the division dropped the case.

"We have a crisis in wage theft, and the Department of Labor has not been aggressive enough in recent years," said Kim Bobo, executive director of Interfaith Worker Justice, a group that advocates for low-wage workers. "The new secretary of labor says she's the new sheriff in town, but I'm concerned she's facing the wild, wild West of wage theft."

Read the rest of the article.

Labels: ABC News, Department of Labor, GAO, Interfaith Worker Justice, Kim Bobo, New York Times, Steven Greenhouse, wage theft

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
3/26/2009 12:14:00 PM 0 comments

 

NYT Missing It on Women's Paychecks

by Dollars and Sense

From D&S collective member Amy Benjamin:

The gender gap in pay is as persistent as ever, according to an article in Sunday's New York Times (Freud couldn't have written a better title: "Why Is Her Paycheck Smaller?"). On the whole, women across all income levels experience pay gaps with their male professional counterparts. What are the reasons? According to the Times,

Economists believe that discrimination as well as personal choices within occupations are two major factors. They also attribute part of the gap to men having more experience and logging more hours.

Really? What is meant by "personal choices", anyway? The blog Feminist Philosophers points out the vague answers provided by the NY Times,

We don't know what "men having more years of experience" is supposed to consist in. Are the average ages higher for the men? Or is it independent of the fact that in many fields woman are relative newcomers? And the logging more hours: Are they suggesting that men worked longer days, or are they thinking that women tend to take off more time? Or what? Are we seeing the ramifications of an inequality of responsibility for the home? Is pregnancy a significant problem? (Duh.) What's going on if having a baby can cost you 20 to 40% of your salary? Doesn't think look like more than an individual’s problem resulting from "personal choices"?

Another feminist blog, Jezebel, also argues that the Times gets it wrong:

If you're not catching it, "personal choices" is code for "entering and leaving the work force for children" and "logging more hours" isn't the same as having more experience, it's "not taking time off for your kids." Of course, those of us who have actually—as single, childless women—logged more hours, had more experience and never left the work force and yet still somehow magically experienced pay discrimination, well, we're obvious outliers.

The "personal choices" excuse--code for childrearing--has long been seen as a dangerous, and false, argument. On the surface, it fails to account for persistence of the wage gap across the diversity of womens' experiences and levels of competencies. More importantly, it waters down the realities of structural sexism and heterosexism that result in workplace discriminations, including but not limited to wage inequity.

In times of recession, women suffer more from the wage gap and greater rates of unemployment, as an article in the Nov/Dec issue of D&S pointed out. Salon.com has also pointed out recently that feminists need to weigh in on the recession and its effects on women. Conversations about unequal pay must be conversations about discrimination based on gender, race, and class.

Labels: feminism, gender, New York Times, pay gap, sexism, unemployment

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
3/03/2009 12:49:00 PM 1 comments

 

Lines Swell At Food Banks

by Dollars and Sense

Another sobering sign of the times from the Times. Highlights both the lack of a safety net in the United States as well as the shame associated with falling on hard times, even during the greatest global economic crisis in a generation:

Newly Poor Swell Lines at Food Banks

MORRISTOWN, N.J.-Once a crutch for the most needy, food pantries have responded to the deepening recession by opening their doors to what Rosemary Gilmartin, who runs the Interfaith Food Pantry here, described as "the next layer of people" - a rapidly expanding roster of child-care workers, nurse’s aides, real estate agents and secretaries facing a financial crisis for the first time.

Demand at food banks across the country increased by 30 percent in 2008 from the previous year, according to a survey by Feeding America, which distributes more than two billion pounds of food every year. And instead of their usual drop in customers after the holidays, many pantries in upscale suburbs this year are seeing the opposite.

Here in Morris County, one of the wealthiest counties in the country, the Interfaith pantry opened for an extra night last week to accommodate the growing crowds. Among the first-time visitors were Cindy Dreeszen and her husband, who both have steady jobs - his at a movie theater and hers at a government office - with a combined annual income of about $55,000.

But with a 17-month-old son, another baby on the way, and, as Ms. Dreeszen put it, "the cost of everything going up and up,” the couple showed up in search of free groceries.

"I didn’t think we’d even be allowed to come here," said Ms. Dreeszen, 41, glancing around at the shelves of fruit, whole-wheat pasta and baby food. "This is totally something that I never expected to happen, to have to resort to this."

Full story here.

Labels: economic crisis, economic indicators, food pantry, food security, New York Times

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
2/24/2009 04:28:00 PM 0 comments

 

Steel Industry Looking For $1 Trillion

by Dollars and Sense

The next contender in the category of "too big to fail" appears to be Big Steel. Through the first three quarters of 2008, the steel industry was going gangbusters. By late December, however, weekly production had fallen by more than 50% from August levels. Prices have fallen like lead. Tens of thousands of workers, mostly unionized, have been temporarily laid off, with future prospects exceedingly grim. Now industry execs are praying for an Obama miracle of government investment and subsidies.

From the New York Times:

The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes - and it is now in collapse - so will go the national economy.

That maxim once applied to Detroit's Big Three car companies, when they dominated American manufacturing. Now they are losing ground in good times and bad, and steel has replaced autos as the industry to watch for an early sign that a severe recession is beginning to lift.

The industry itself is turning to government for orders that, until the September collapse, had come from manufacturers and builders. Its executives are waiting anxiously for details of President-elect Barack Obama's stimulus plan, and adding their voices to pleas for a huge public investment program - up to $1 trillion over two years — intended to lift demand for steel to build highways, bridges, electric power grids, schools, hospitals, water treatment plants and rapid transit.

The rest of the article is here.

Labels: New York Times, Steel industry

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
1/02/2009 11:58:00 PM 2 comments

 

FT Falls Down on IndyMac Fraud

by Dollars and Sense

The Financial Times had a rather pithy piece (see below in full) on the fraud at IndyMac, reported in yesterday's New York Times (and re-reported here).

A reminder about what this story is all about: apparently, last May the western regional director/senior regular from the Office of Thrift Supervision, Darrel Dochow, allowed IndyMac "to record $18m of a $50m capital infusion from its holding company as first-quarter capital," which made it possible for the bank to retain its "well-capitalized" status. IndyMac failed in July.

What is most scandalous about this is that Dochow is a veteran of the S&L crisis, and actually served time for the role he played. Here's what the NYT said yesterday:

Mr. Dochow played a central role in the savings-and-loan scandal of the 1980s, overriding a recommendation by federal bank examiners in San Francisco to seize Lincoln Savings, the giant savings and loan owned by Charles Keating. Lincoln became one of the biggest institutions to collapse. Mr. Keating served four and a half years in prison before his fraud and racketeering convictions were overturned. He later pleaded guilty to more limited charges, and was sentenced to the time already served.

Um, how did this guy get a job as a banking regulator again?

If you got your information about all this from the Financial Times, you wouldn't know a thing about Dochow's back-story. And the FT even appears to downplay the fraud: "Bankers say the practice of backdating capital has been relatively common, but backdating is typically limited to a few days or weeks, not six, as in IndyMac's case."

At least they (like the NYT) included the nice quote from Republican Charles Grassley: "The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them."

Here is the whole article:

IndyMac allowed to backdate its capital

By Saskia Scholtes in New York | December 23 2008 19:28

One of the main US banking regulators allowed banks to backdate transactions so as to maintain "well capitalised" status and avoid regulatory restrictions, the Treasury department's watchdog arm has said.

The practice came to light as part of a routine federal investigation into the failure of IndyMac, one of five lenders regulated by the Office of Thrift Supervision to be wound down this year.

IndyMac suffered a run on its $19bn in customer deposits in July after Senator Chuck Schumer, chairman of Congress's joint economic committee, made public a letter he had written to regulators questioning the lender's viability.

In a letter sent on Monday to the Senate finance committee, Eric Thorson, the Treasury's inspector-general, wrote that the OTS allowed IndyMac Bank to record $18m of a $50m capital infusion from its holding company as first-quarter capital, in spite of the fact that the transaction happened on May 9—six weeks into the second quarter.

The infusion meant that IndyMac's capital ratio was recorded as being above 10 per cent, a threshold that marks the difference between a bank being considered "well capitalised" and "adequately capitalised". The capital transaction is not seen as a significant contributory factor to the bank's failure.

Mr Thorson said the inquiry had uncovered other incidents of backdating capital infusions but did not specify which banks had been involved.

"The role of the Office of Thrift Supervision, as the name says, is to supervise these banks, not conspire with them," said Charles Grassley, the top Republican on the Senate finance committee.

The report called into question "the real financial condition of other banks" and "the independence of the Office of Thrift Supervision", he added.

Darrel Dochow, a senior regulator at the OTS, has been removed from his role as director of the West Coast region for permitting the IndyMac transaction to be recorded. An investigation is continuing.

Bankers say the practice of backdating capital has been relatively common, but backdating is typically limited to a few days or weeks, not six, as in IndyMac's case.

"It is unclear what information OTS had at the time and what its basis was for allowing the capital infusion to be recorded for the quarter ending March 31," Mr Thorson wrote.

"A separate inquiry as to a motive for approving and recording this transaction in the manner it was recorded is still ongoing."

Mr Thorson wrote that while there was some support in accounting rules for allowing backdating of capital infusions, that support was limited to instances in which the transaction was both planned and executable at the end of the quarter in which it was booked.

Ernst & Young, IndyMac's auditors, also agreed to acknowledge the $18m infusion as first-quarter capital, according to Mr Thorson.

The OTS also oversaw Washington Mutual, which in September became the biggest bank failure in US history.

Labels: Charles Grassley, Darrel W. Dochow, Financial Times, fraud, IndyMac, New York Times, Office of Thrift Supervision

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
12/24/2008 03:46:00 PM 0 comments

 

More on the Myth of the $73/hour Auto Worker

by Dollars and Sense

Hat-tip to D&S collective member, Dave Ryan (exiled on the West Coast) for two more responses to the claim bandied about in the MSS that auto workers make upwards of $70/hour.

First is this piece from Eric Boehlert at Media Matters for America:

The media myth: Detroit's $70-an-hour autoworker

It's been one week since New York Times financial columnist Andrew Ross Sorkin wrote that at General Motors, "the average worker was paid about $70 an hour, including health care and pension costs."

The nugget was part of a column in which Sorkin argued that the government should not bail out the ailing Big Three automakers and that they instead should embrace bankruptcy.

Sorkin's point was that labor costs were out of control -- workers enjoyed "gold-plated benefits" -- and that during bankruptcy, the auto companies could address those runaway wages.

As I mentioned, it's been one week since the column appeared, which seems like plenty of time for Sorkin and the Times to correct the misleading $70-an-hour claim. But to date, there's been no clarification from the newspaper of record or from Sorkin himself.

And he isn't alone. Appearing on NPR last week, Times senior business correspondent Micheline Maynard told listeners that the "hourly wage" of Detroit's union autoworkers had been driven up "towards $80 an hour."

Click here for the rest of the article.

The New York Times did end up debunking the myth, but it was a couple of days ago in David Leonhardt's often excellent column "Economic Scene". Here is the crucial bit from the column, $73 an Hour: Adding It Up:

Let's start with the numbers. The $73-an-hour figure comes from the car companies themselves. As part of their public relations strategy during labor negotiations, the companies put out various charts and reports explaining what they paid their workers. Wall Street analysts have done similar calculations.

The calculations show, accurately enough, that for every hour a unionized worker puts in, one of the Big Three really does spend about $73 on compensation. So the number isn't made up. But it is the combination of three very different categories.

The first category is simply cash payments, which is what many people imagine when they hear the word "compensation." It includes wages, overtime and vacation pay, and comes to about $40 an hour. (The numbers vary a bit by company and year. That's why $73 is sometimes $70 or $77.)

The second category is fringe benefits, like health insurance and pensions. These benefits have real value, even if they don't show up on a weekly paycheck. At the Big Three, the benefits amount to $15 an hour or so.

Add the two together, and you get the true hourly compensation of Detroit's unionized work force: roughly $55 an hour. It's a little more than twice as much as the typical American worker makes, benefits included. The more relevant comparison, though, is probably to Honda's or Toyota's (nonunionized) workers. They make in the neighborhood of $45 an hour, and most of the gap stems from their less generous benefits.

The third category is the cost of benefits for retirees. These are essentially fixed costs that have no relation to how many vehicles the companies make. But they are a real cost, so the companies add them into the mix—dividing those costs by the total hours of the current work force, to get a figure of $15 or so—and end up at roughly $70 an hour.

The crucial point, though, is this $15 isn't mainly a reflection of how generous the retiree benefits are. It's a reflection of how many retirees there are. The Big Three built up a huge pool of retirees long before Honda and Toyota opened plants in this country. You'd never know this by looking at the graphic behind Wolf Blitzer on CNN last week, contrasting the "$73/hour" pay of Detroit's workers with the "up to $48/hour" pay of workers at the Japanese companies.

These retirees make up arguably Detroit's best case for a bailout. The Big Three and the U.A.W. had the bad luck of helping to create the middle class in a country where individual companies—as opposed to all of society—must shoulder much of the burden of paying for retirement.

Of course, another way to address these costs would be to have universal, single-payer health care.

Dean Baker pointed out, on his blog Beat the Press, the weaknesses in the argument that the high costs of a unionized workforce is to blame for the Big Three's failure:

The U.S. auto industry is on life-support and the Post knows who the culprits are: the unions. It told readers that: "over the past three decades, they have lost ground to more agile foreign rivals that favored smaller cars built by non-unionized labor at lower wages."

Actually, many of these cars were built in unionized factories in Japan, South Korea, and Germany. Unions didn't keep foreign manufacturers from producing high-quality popular cars in these countries. Even when these companies set up shop in the U.S. they have been able to work well with unions. Toyota operated a plant in California where the workers were represented by the UAW for decades (it may still be open).

There may have been problems with the way the Big Three management dealt with unions, but other car companies have been able to operate very effectively with a unionized workforce.

Labels: auto industry, Dave Ryan, David Leonhardt, Dean Baker, Eric Boehlert, Media Matters, New York Times, UAW, unions

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
12/12/2008 04:09:00 PM 2 comments

 

Beware Fudged Facts About US Auto Wages

by Dollars and Sense

From EPI:

With some senators turning down a rescue package for the auto industry based on their demands for immediate wage cuts for the people who build the autos, it's important that journalists are clear about what the wages levels actually are. Widespread claims that autoworkers currently receive over $70 per hour are false.

In a recent New York Times story, reporter David Leonhardt explains in detail. A graphic that accompanies his story shows that at Ford, whose figures are comparable to the other two companies, the average worker’s current compensation (wages plus benefits) adds up to $55 per hour. Of that amount, about $12 is the cost of benefits like health care, while wage-related costs such as paid holidays, vacation, sick days and overtime add about $14. The average wages that show up in current workers' paychecks average $29 per hour before taxes – a solid, middle-class income, to be sure, but far from the $70 that many are claiming.

So where does the claim of $70-plus per-hour come from? The only way to get to that number is to add in the "legacy costs" – the health and pension benefits paid to the huge number of Big Three former employees who are now retired. At Ford these costs add another $16 per hour to the company’s cost calculations.

The Times graphic shows that, compared to the Big Three, Japanese carmakers' US plants pay an average base wage that is about $3 less per hour, and average compensation is about $10 less per hour, mostly because of less generous benefits.

Labels: auto industry, EPI, New York Times, wages

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
12/12/2008 03:16:00 PM 0 comments

 

Horrific Retail Sales; More Bankruptcies?

by Dollars and Sense

From the New York Times; hat tip to (and opening comment by) Yves Smith (which is significant: she doesn't shock easily):

Friday, November 7, 2008
"Retailers Report a Sales Collapse"

The unusually dramatic headline comes from the New York Times. Note this drop was a not a surprise to some analysts such as Gary Shilling, who predicted a marked fall in retail sales, which when you allow for the fact that gas and food are not terribly discretionary, implies much greater declines in apparel and other categories.

The story also reports that deep discounting is not enticing many consumers to buy. And why should it? Broke is broke.

From the New York Times:

Sales at the nation's largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains and signaling that this will probably be the weakest Christmas shopping season in decades.

The remarkable slowdown hit luxury chains that sell $5,000 designer dresses as badly as stores that offer $18 packs of underwear, suggesting that consumers at all income levels are snapping their wallets shut.

Sales at Neiman Marcus, the luxury department store, dropped nearly 28 percent in October compared with the same month last year. Sales fell 20 percent at Abercrombie & Fitch, nearly 17 percent at Saks, 16 percent at Gap and nearly that much at Nordstrom.

Of the more than two dozen major retailers that reported on Thursday, most had sales declines at stores open at least a year, the majority of the decreases in double digits. Deep discounters like Wal-Mart and BJ's Wholesale Club reported gains...

"October was every bit as bad we feared," said John D. Morris, a retailing analyst with Wachovia. "Maybe worse. October's numbers were so disappointing, particularly in the final week, which had to leave retailers in a state of high anxiety going into the holiday season."

Indeed, the situation for retailers is so dire that it is creating opportunity for any consumers in a mood to spend money. Seven weeks before Christmas, stores are offering eye-catching bargains as they struggle to move merchandise.

Read the rest of the post

Labels: financial crisis, New York Times, retail, Yves Smith

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
11/07/2008 10:32:00 AM 0 comments

 

Misplaced Blame

by Dollars and Sense

Today's New York Times responds to arguments that the Community Reinvestment Act is responsible for the current financial crisis. We addressed those arguments two weeks ago, when we noticed increased traffic to Jim Campen's 1997 article about the act.

In recent weeks, Republicans in Congress have been blaming a lot of things, besides themselves, for the subprime mortgage debacle. And many of these same Republicans have long wanted to abolish the Community Reinvestment Act, a landmark law that helped to rebuild some of the nation's most desolate communities by requiring banks to lend, invest and open branches in low-income areas that had historically been written off.

These two goals have converged in a new attempt to blame the law for the financial crisis.

The act, passed in 1977, is one of the most successful community revitalization programs in the country's history. According to a recent report by the National Community Reinvestment Coalition, an advocacy group in Washington, the act has encouraged lenders to invest more than $4.5 trillion in minority and low-income areas.

This money helped to remake devastated neighborhoods like the South Bronx, helping to finance new housing and businesses. It has helped provide essential services in such neighborhoods, including medical centers and housing for the elderly and disabled—projects that the private sector too often refused to back.

But you can hardly pick up a newspaper or turn on the television these days without hearing critics argue that the act created the current mess we're in by forcing banks to lend to people in poor areas who were bad credit risks. Representative Steve King of Iowa has introduced legislation that would repeal the act.

The charges do not hold up. First, how could a 30-plus-year-old law be responsible for a crisis that has occurred only in recent years? Then there's the fact that the regulatory guidance issued under the reinvestment act and other banking laws actually impose restraints on the riskiest kinds of subprime lending.

In addition, subprime lending was not driven by banks, which are covered by the act. Rather, most subprime lending was driven by independent mortgage lending companies, which the act does not cover, and, to a lesser extent, by bank affiliates and subsidiaries that are not fully covered by the act. By some estimates, nonbank lenders and bank affiliates and subsidiaries may have originated 75 percent or more of the riskiest subprime loans.

A study released this week by the Center for Community Capital at the University of North Carolina in Chapel Hill shows that people of similar financial profiles were three to five times more likely to default when they received high-priced subprime mortgages than when they got bank loans made under the Community Reinvestment Act.

Labels: Community Reinvestment Act, financial crisis, New York Times

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
10/15/2008 09:49:00 AM 0 comments

 

Auto Industry Hit Hard

by Dollars and Sense

The NYTimes reports today that the crisis in the credit market is hitting the auto industry particularly hard.

The virtual lockdown on credit is hurting Detroit’s Big Three and other automakers at every level. More consumers cannot get auto loans. Dealers are hard-pressed to secure financing for new inventories. The auto companies themselves are running short of cash and can hardly afford to borrow more at interest rates as high as 20 percent.

U.S. car sales are hitting double digit declines this year, with no bottom in sight. Potential car buyers (an already dwindling group) are having a harder time than ever getting a loan. This year only 63% of car loan applications are being approved, compared to 83% in 2007. For subprime borrowers, the situation is even worse: only 22% are getting loans approved this year, versus 67% last year.

Those that are getting loans are paying much higher rates.

Auto dealers are already choking on bloated inventories of gas-guzzling SUVs and can't get financing to stock up on more popular models. This year 600 out of the country's 20,770 car dealerships have gone bankrupt, including Bill Heard Enterprises, formerly the top-selling GM dealership in the country.

Japanese car-makers aren't faring much better. After two years of non-stop growth in US sales, sales are quickly heading downward. According to the Washington Post, the decline of US sales are leading the entire Japanese economy into a recession.

Labels: auto industry, credit crisis, New York Times, recession, subprime lending, Washington Post

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
10/01/2008 10:04:00 AM 0 comments

 

The Banks and Private Equity

by Dollars and Sense

A good editorial from today's New York Times, cautioning against private equity firms' efforts to get the Fed to relax bank ownership regulations. The current issue of Dollars & Sense includes a feature article by a former industry insider that exposes how an already favorable regulatory landscape allows private equity firms to reap megaprofits at the expense of the companies they buy and sell and the communities that depend on them.

The Banks and Private Equity

Many banks are ailing, lamed by hundreds of billions of dollars in bad loans and poor investments and hamstrung by the prospect of continued multibillion- dollar losses.

There is no painless solution. If banks retrench by making fewer loans, families and businesses are hurt and with them, the broader economy. If banks cope by building bigger cushions against losses, shareholders take the hit in the form of lower dividends, lower earnings per share, lower stock prices or some combination.

Yet, for the past month, some private equity firms have been promoting what they claim would be a relatively pain-free fix of the nation’s banks. And the Federal Reserve — which must know that if it sounds too good to be true, it probably is — has yet to say no, as it should.

Private equity firms say they are ready to invest huge amounts in ailing banks — provided the Fed eases up on the regulations that would otherwise apply to such large investments. The firms’ desire to jump in makes perfect sense. Bank shares are cheap now, but for the most part, are likely to rebound when the economy improves. The firms’ push for easier rules, however, is a dangerous power grab, and should be rejected.

Under current rules, if an investment firm owns 25 percent or more of a bank, it is considered, properly, a bank holding company, subject to the same federal requirements and responsibilities as a fully regulated bank. If a firm owns between 10 percent and 25 percent of a bank, it is typically barred from controlling the bank’s management. To place a director on a bank’s board, an investor’s ownership stake must be less than 10 percent. The rules exist to prevent conflicts of interest and concentration of economic power. They protect consumers and businesses who rely on well-regulated banks, as well as taxpayers, who stand behind the government’s various subsidies and guarantees to banks.

To maximize their profits, private equity firms want to own more than 9.9 percent of the banks they have their eye on and they want more managerial control — and they want it all without regulation. They argue that because they tend to be shorter-term investors, problems that the rules address are unlikely to occur on their watch. That is a weak argument. It does not necessarily take a great deal of time to do damage. And as the financial crisis demonstrates daily, decisions and actions taken by unregulated and poorly supervised firms can prove disastrous years later.

Worse, the private equity firms are exploiting the desperation of banks and regulators. They know that banks are desperate to raise capital and that doing so is a painful process bankers would rather avoid. They also know that regulators and other government officials, many of whom where asleep on the job as the financial crisis developed, want to avoid the political fallout and economic pain of bank weakness and failure.

Federal regulators would be wrong to cave. Now, when there is great uncertainty about which institutions are too big or too interconnected to fail, is exactly the wrong time to allow less transparency and less regulation. And with confidence in the financial system badly shaken, it would be a mistake to signal to global markets and American citizens that the government is willing to put expediency above long-term stability.

Held to the same rules as other investors, private equity firms may choose to invest less. Some banks may have a tougher time repairing the damage to their institutions. Some banks will fail. That, unfortunately, is what happens in a financial crisis.

Labels: banking regulation, New York Times, private equity, The Fed

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
8/03/2008 08:30:00 PM 1 comments

 

IMF = Death

by Dollars and Sense

A new study in the journal PLoS of Medicine by Cambridge researcher David Stuckler reports that the rise in rates of tuberculosis in Eastern Europe is strongly associated with a country's receipt of loans from the IMF.

The authors speculate that this a result of country's reducing their expenditures on health care to qualify for the loans.

According to the NYT

"The researchers studied health records in 21 countries and found that obtaining an I.M.F. loan was associated with a 13.9 percent increase in new cases of tuberculosis each year, a 13.3 percent increase in the number of people living with the disease and a 16.6 percent increase in the number of tuberculosis deaths.

The study, being published online Tuesday in the journal PLoS Medicine, statistically controlled for numerous other factors that affect tuberculosis rates, including the prevalence of AIDS, inflation rates, urbanization, unemployment rates, the age of the population and improved surveillance."

The report notes that every .9% increase in mortality from TB was correlated with a 1% increase in credit from the Fund .

Labels: health care, IMF, New York Times, Tuberculosis

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
7/21/2008 07:40:00 PM 1 comments

 

Monique Harden responds to the Times

by Dollars and Sense

Environmental activist Monique Harden, whom D&S collective member Ben Greenberg interviewed for our March/April 2006 special issue on Katrina, co-wrote an excellent letter to the editor of the New York Times:

April 15, 2007
Home to New Orleans (1 Letter)

To the Editor:

An April 10 news article praises Edward J. Blakely, the executive director of New Orleans’s Office of Recovery Management, for having a “clinical, outsider’s eye” when in fact his eye is blind to the human rights of New Orleanians displaced by Hurricane Katrina.

According to the United Nations Guiding Principles on Internal Displacement, people forced to flee their communities as a result of a natural disaster are “internally displaced persons” who have the human right to return to their communities.

In your article, Dr. Blakely pointedly denounces the right of return, describes New Orleanians as “buffoons” whose culture is rife with racism, and hopes that “new Americans” will replace New Orleanians trapped outside the city.

History has shown that violating the human rights of a group of people begins with disparaging their character, expressing contempt for their culture and portraying them as unworthy of the places they live.

Dr. Blakely’s recovery agenda denigrates the humanity of people struggling to find a way home to New Orleans.

Monique Harden
Nathalie Walker
New Orleans, April 11, 2007
The writers are co-directors of Advocates for Environmental Human Rights.

Thank you, Monique and Nathalie, for taking the Times to task for praising this "outsider's" perspective.

Labels: Edward J. Blakely, katrina, Monique Harden, New Orleans, New York Times, right of return

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
4/16/2007 03:18:00 PM 0 comments