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Can You Spare 12 Cents For Better U.S. Highways?

Dec. 11 (Bloomberg View) — In the middle of the last century the U.S. started building the Interstate Highway System. It’s now named after President Dwight Eisenhower, who shepherded its passage through Congress in 1956. Connecting the far-flung corners of this large nation, this 47,714-mile network allows commerce to flow freely. The cost of construction, adjusted for inflation, was more than $400 billion. By any imaginable measure, it was a wild success, and soon became the envy of the world.

The construction and maintenance was paid for mainly through levies on sales of vehicles, tires and related goods, and a federal gasoline tax that generates about $28 billion a year for the Highway Trust Fund.

The assumption was that the system’s maintenance and improvements would be paid for by users: Those who drove on the roads and highways. The fairest way to assess that was through a gasoline tax. Drive more or bigger vehicles, you pay more. Seems rather logical.

Fast-forward a half-century.

The gas tax has been stuck in a time warp. It was last raised in 1993, to 18.4 cents a gallon. Despite the passage of more than 20 years, with both ensuing inflation and an aging system that needs ever-more maintenance, there it has stayed. The Highway Trust Fund has been starved of cash, and is the process of going broke.

Ike wouldn’t be happy.

Do we need to recite the cases of deteriorating bridges and buckling roads? It’s become routine to detail the annual ratings of our infrastructure (D+), the loss of life when bridge collapses occur, and the increased costs of delay and loss of productivity. It is also a national embarrassment to see our infrastructure decay because of intentional neglect, short-sightedness and ideology.

Enough already.

Let’s take as a rule of thumb that large-scale public-works projects require annual maintenance equal to about 10 percent of construction costs. Apply that to the national highway system and that implies a trust fund budget of about $50 billion a year. That would require the gas tax to rise to about 30 cents a gallon, with adjustments in the future to account for inflation.

Oil prices have fallen 39 percent in the past five months. Gas prices have fallen more than 50 cents a gallon since 2013, according to the American Automobile Association. It would be painless to raise the gas tax by 12 cents a gallon.

Providing the trust fund with the money it needs would have all sorts of ancillary benefits: Various state and municipalities would have enough money to do local road improvements. Traffic would move more quickly and efficiently. Better highways would increase productivity, and save consumers and businesses billions of dollars a year in wear, tear and damage to vehicles. Updating our highways also might make them safer, reducing injuries and saving lives.

If we as a nation were smart, we should explore ways of making our transportation system more intelligent through the use of existing technology. This would allow us to move greater volumes of traffic more efficiently, saving everyone time and money.

An American who travels to Europe or Asia quickly learns that other nations have leapfrogged the U.S. system.  There are many competitive advantages for companies in Europe and Asia, especially in China. Bringing our highway system into the 21st century would be a boon for the U.S. economy.

Unfortunately, the U.S. highway system doesn’t even meet late 20th-century standards. It is long past due for basic maintenance.

Why Congress takes so little pride in one of the great U.S. accomplishments is beyond my understanding. We should find out soon if Congress is the incompetent Parliament of Whores depicted by P.J. O’Rourke, or whether it can carry out even the most basic of government functions.

Photo: David Shankbone via Wikimedia Commons

 

Zombie Ideas Live On Even Though They’re Wrong

Oct. 20 (Bloomberg View) — We are in the business of making mistakes. The only difference between the winners and the losers is that the winners make small mistakes, while the losers make big mistakes. –Ned Davis

I began my career in finance on a trading desk. You learn some things very early on in that sort of situation. One of the most important things is that while it’s OK to be wrong, it can be fatal to stay wrong.

Unfortunately, that standard doesn’t apply to people whose work isn’t evaluated on a daily and objective basis via their profit and loss results. In many fields, such as politics and policy making, there are lots of shades of gray when it comes to being right or wrong.

And quite bluntly, that is a shame. As a society and a nation, we would all be better off if the people who are consistently wrong paid some sort of price for those errors. Unfortunately, that doesn’t happen enough these days.

Some bad policy decisions will lead to the occasional elected official being turned out of office. That — unfortunately — is the exception, not the rule. I doubt history will rank George W. Bush and Barack Obama among our great presidents, but both were re-elected despite being unpopular. Between gerrymandered congressional districts and apathetic voters, even the most incompetent elected official has almost lifetime tenure.

What underlies all of this nonrecourse bad policy? It is much more than corporate lobbying and partisan politics. The worst of today’s political malfeasance is being driven by failed ideologies. Zombie ideas that refuse to die have become enshrined in our collective intellectual legacy. The people behind these have been insulated from the economic costs they impose.

Blame the billionaires.

They are ones who fund the think tanks. These think tanks in turn consider it their jobs to promote the ideology of their benefactors, regardless of its intrinsic value or demonstrable worth.

This theme keeps coming up again and again. About a year ago, I reminded people of a letter written to the Federal Reserve in 2010 warning that the central bank’s asset purchases risk “currency debasement and inflation,” none of which occurred. That meme propagated, leading to a series of articles across the blogosphere and mainstream media. Most recently, Bloomberg News tracked down the signatories to that letter, to see if they were willing to acknowledge that they were wrong. Not a one was willing to admit error. Perhaps the lack of contrition is best summed up by this New York magazine headline, “If Being Wrong About the Economy Is Wrong, I Don’t Wanna Be Right.”

These errors have a persistence that shouldn’t continue once the invalidity of the underlying belief system is demonstrated. But they continue on, as zombie ideas that refuse to die. Consider the following short list of disproven ideas, all based on concepts that originated from or were widely dispersed by think tanks or their benefactors:

• Homo economicus (profit maximizing economic actors)

• Austerity as a virtuous policy during recessions

• The efficient-market hypothesis

• Tax cuts pay for themselves (supply-side economics)

• Self-regulating markets

• Shareholder value

• Rational Investors

Some of the bad ideas that come out of the think-tank world eventually acknowledge that they are untrue by slowly morphing into a new shape.

Let’s consider a few of these bad ideas. The pushback against anthropogenic climate change, or manmade global warming, has gone through a three-step process: First, there were the simple denials: It doesn’t exist, temperatures aren’t rising, etc. The next step was: OK, climate change exists, but it’s a natural phenomenon, not manmade and is caused by sunspots or the end of the Ice Age from 10,000 years ago. The last phase is simply to say, regardless of the cause, it costs too much to do anything about anyway. Grist provides a thorough debunking of denialism in all its forms; if you want a more scholarly approach, try The Oxford Handbook of Climate Change and Society.

We saw a similar progression during the financial crisis, including many attempts to negate the role radical deregulation of financial markets had as an underlying cause of the crisis. American Enterprise Institute’s Peter Wallison and Edward Pinto were the leading proponents of the anything-but-deregulation causation. First, they blamed the Community Reinvestment Act — the anti-redlining legislation that had nothing to do with subprime lending. Next, it was the Department of Housing and Urban Development and the Federal Housing Administration. When that didn’t hold up, they blamed Fannie Mae and Freddie Mac. When most of the subprime loans that went bust were shown to be from private lenders that didn’t follow Fannie or Freddie guidelines, they quietly changed the subject.

As we have noted before, there simply is no penalty for pundits who keep getting it wrong.

As investors, we suffer greatly when we make an error that we fail to reverse. That was what Bridgewater Associates founder Ray Dalio was referring to when he said “More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.” But it’s as true about our society as it is our P&L. The sooner we recognize that, the better off the country will be.

AFP Photo/Timothy A. Clary

Global Warming Battle Is Over Market Share, Not Science

Jan. 27 (Bloomberg) — Last week, the New York Times reported that venerable Dow Jones Industrial Average component Coca-Cola Co. was awakening to the impact of climate change on its business.

The increase in unpredictable weather, droughts, floods and other climate-related events was disrupting the company’s product supply. Some of their “essential ingredients” are now under threat. Global warming, according to the article, is being seen “as a force that contributes to lower gross domestic products, higher food and commodity costs, broken supply chains and increased financial risk.”

This debate is no longer about whether global warming is real (it is) or whether humans are the most likely cause (you are), but rather, some very interesting and different questions that might be more professionally relevant to business: How is this going to affect business? What are the investing consequences? Who will be the financial winners and losers of climate change?

Investors should be considering this as a fight over market share, not a scientific debate. That is the approach taken by McKenzie Funk in a new book, Windfall: The Booming Business of Global Warming. The impact is across many industries. It’s time to throw out your preconceptions of climate change as a fight between green hippies and Big Oil. This is far broader and more complex. And it goes far beyond energy, to include agriculture, insurance, transportation, construction, recreation, real estate, energy exploration, food production, health care minerals and even finance.

The culturally constructed ignorance known as “agnotology” has been driven primarily by the oil and coal industries. Funk argues that we are about to move beyond that faux debate to a more important battle between even larger interests. Consider:

  • Insurers stand to make larger payouts because of more severe weather and more frequent natural disasters. However, this will inevitably lead to appreciable higher insurance premiums and potentially rising profits.
  • The travel and hotel industry is facing specific challenges. Ski resorts that were in prime snow making areas may find themselves no longer ideally located; warm weather destinations boasting access to reefs for snorkeling and scuba diving have troubles as reefs die out.
  • Energy exploration and mining is about to get a huge boost as formerly inaccessible Arctic regions are soon to have huge untapped resources exposed. Shipping across formerly unnavigable seas could alter transportation costs and ship designs.

  • Energy should no longer be thought of as a fight between clean sources (wind, solar) and dirty carbon (oil, coal) but rather a hierarchy of energy, with natural gas likely to be the big winner.
  • Agriculture is turning to genetically modified crops to create drought-resistant and heat-tolerant varieties. Disease carrying insects are now traveling farther north, creating a potential health care problem.

These changes haven’t gone unnoticed by financial service firms. As Wired magazine reported in its February issue, firms such as Schroders Plc and Summit Global Management Inc. have plowed into water rights and farmland. The expectations are that “drought and food shortages can mean big profit.” Jeremy Grantham has made similar observations and GM crops.

My perspective on global warming is different from some. As a car and boat enthusiast, the various gasoline-powered vehicles I own crank out a few thousand horsepower and generate a not-insignificant amount of pollution. However, I don’t pretend climate change is a hoax or that it won’t matter in the future. So long as creating pollution is cheap and legal, we won’t see many people changing personal behavior. The most likely fix for this is some form of a carbon tax.

But the bigger issue is the financial consequences. Investors are going to see companies increasingly affected by climate change. For those of you who still are fighting the science — sorry to tell you, the debate has moved on. This is rapidly becoming a fight over market share, with big shifts in cost structure, revenue and profits.

Too many people have had their heads in the sand. It is time to start making some decisions based on possible investing outcomes, not pseudo-science. To those who figure this out, a green fortune awaits — in both senses of the word.

(Barry Ritholtz writes about finance, the economy and the business world for Bloomberg View.)

Photo via Wikimedia Commons

Always Low Wages? Walmart May Have Some Choices

Dec. 18 (Bloomberg) — We’ve already looked at the benefit to McDonald’s of having its workers subsidized by state and federal aid. Now, its Walmart’s turn. Recall our discussion last month on the related subject of “How McDonald’s and Walmart Became Welfare Queens.” We learned that employees of these two companies are often the largest recipients of aid in their states.

McDonald’s recently found itself in the spotlight, courtesy of its “McResource” line — the company help line that helps its poverty-level, full-time employees enroll in various welfare programs. A recording of that McResource line sparked outrage, driving this issue into public view.

More recently, Walmart’s holiday public-relations headache began when a Canton, Ohio, store decided to hold a food drive for needy local families for the holidays. What made this a PR nightmare was that the needy families were full-time Walmart employees who were working in the store holding the food drive.

Thus, our questions over the arc of these columns about some of the largest retailers in America — Walmart is the single largest private employer in the country; McDonald’s, the largest fast-food chain – are simply this:

—What should it mean to be employed full-time in America?

—Should taxpayers be supplementing the salaries of these often minimum-wage workers at large profitable firms?

—What would it mean if higher salaries were mandated by an increased minimum wage?

Walmart has 2.2 million employees, including 1.3 million hourly workers. It employs 1.2 million people in the U.S. alone. Gross revenue is $475 billion, generating profits of $17.20 billion. It dominates the discount retail space, and according to Bloomberg, has a 66.70 percent market share.

The size of Walmart is sometimes difficult to visualize. To put it into some context, consider the following: 100 million shoppers patronize Walmart stores every week. Walmart has twice the number of employees as the U.S. Postal Service, a larger global computer network than the Pentagon, and the world’s largest fleet of trucks. Americans spend about $36 million dollars per hour at the stores. Walmart now sells more food than any other company in the world, capturing one of every four dollars spent on food in the U.S. The average American family of four spends over $4,000 a year there. Each week, it has 200 million customers at more than 10,400 stores in 27 countries. If the company were an independent country, it would be the 25th largest economy in the world.

Given the sheer size of Walmart, how it pays “associates” is likely to have an outsize impact on their local and state communities, according to a number of studies.

Walmart’s low wages have led to full-time employees seeking public assistance. These are not the 47 percent, lazy, unmotivated bums. Rather, these are people working physical, often difficult jobs. They receive $2.66 billion in government help each year (including $1 billion in health care assistance). That works out to about $5,815 per worker. And about $420,000 per store. But the federal and state aid varies widely; in Wisconsin, a study found that it was at least $904,542 a year per store. (See the accompanying chart.)

Why, I keep asking myself, do we effectively want to subsidize a private company’s employees? Wouldn’t it make much more sense to raise the minimum wage to a level that a full-time worker could support the average American family of four? Just $11.33 puts a 40-hour employee over the poverty line. The costs of this increase would be borne by the company and its consumers — not the taxpayer.

Perhaps the most ironic aspect of this are the advantages to the retailer of higher associate salaries. Some stores have discovered that raising wages provides a competitive advantage. Retailers like Trader Joe’s and Costco pay significantly more than their giant competitor. At Costco, employees earn 40 percent more than at Walmart’s Sam’s Club. Average employee wages at the warehouse retailer are $21.96 per hour, and most of Costco’s U.S. employees are eligible for benefits.

The “underinvestment in labor” is part of the reason Walmart has such enormous turnover. Estimated as high as 70 percent, the retailer incurs enormous costs for recruitment, administration and training.

A Harvard Business School study found higher wages decreased employee turnover, increased morale, and improved customer satisfaction ratings. This adds up to increased sales and improved profitability for the retailer.

Can Walmart afford to increase employees’ salaries? Let’s crunch the numbers. The retail giant does $474.88 billion a year in sales; across their 2,200,000 employees, that nets out to $213,255 sales per employee. Given a 5.93 percent operating margin, that nets out to $12,646.02 profit margin per employee. Adding $3 per hour per full-time employee would consume almost half of that profit. But that before any potential increase in productivity, reduced turnover costs and higher revenues.

The question before us is not whether or not Walmart should voluntarily increase its wages to capture these benefits. That is a business decision for the owners and management to make.

Rather, the present issue is whether or not we as taxpayers should be funding private companies paying below-poverty wages. My view is we should put the full costs of shopping at Walmart back where they belong: On the customers and the company itself.

AFP Photo/Scott Olson

No, Sales Didn’t Fall 2.7 Percent On Thanksgiving

Dec. 2 (Bloomberg) — One would hope that after a decade of people lamenting the poor reporting of Thanksgiving weekend retail data, the news media might learn to do better. Yet we see few, if any, signs that reporters understand the misleading press releases put out by the retail industry and its flacks.

The innumeracy of the media has not been greatly exaggerated.

The Wall Street Journal, the New York Times and others reported industry estimates of sales as if they were grounded in fact. As we discussed last week (“Ignore the Black Friday Hype“), these shopper surveys and measures of foot traffic have in the past had no predictive value relative to retail sales. Their track records are fairly awful. The National Retail Federation has been especially terrible in its forecasts. A coin flip — 50/50 chance of getting it right — has much greater accuracy than these surveys.

Let’s look at each of these reports to see if we can identify where they went awry.

WSJ: Holiday Sales Sag Despite Blitz of Deals

“Retail spending over Thanksgiving weekend dropped for the first time in at least seven years, the industry’s main trade group said …”

It may have said so, but we do not have any reliable data yet as to how much was spent over the holiday weekend. What the WSJ was reporting were answers to a survey question as to what shoppers recalled spending last year over Thanksgiving weekend – – $423.55 — versus what they thought they would spend this holiday weekend — $407.02.

Neither shopper number is based on any review of actual spending; these are figures that random shoppers literally make up on the spot. They are made without the benefits of looking at checking account balances or credit card statements. History informs us that neither guess is remotely accurate.

One would imagine that the best-read business publication in America would be able to handle analyses of this sort easily. Over the years, I have witnessed other sorts of innumeracy from the Journal when it pays attention to to industry flacks. The one that stands out most was confusing the annual seasonality of home sales with a housing recovery (see this and this).

Perhaps these stand out because the Journal generally does a good job, and has columns like Carl Bialik’s The Numbers Guy (he’s now going to fivethirtyeight.com) to put data into better context.

NYT: Gloomy Numbers for Holiday Shopping’s Big Weekend

“Over the course of the weekend, consumers spent about $1.7 billion less on holiday shopping than they did the year before, according to the National Retail Federation, a retail trade organization.”

No, they did not spend $1.7 billion less. (We don’t know yet). The most you can say with any degree of accuracy is that shoppers said they were planning on spending about 3 percent less this year. However, shoppers’ declared intentions in years past have been anything but accurate. This has been true whether they expect to spend more or spend less. Humans are simply terrible at predicting their own behavior; you are not that good at recalling your own past behavior, either.

Unfortunately, the Times also pulled a lot of the NRF press release verbatim. The “paper of record” was acting more like the stenographer of record.

(Even data-driven Bloomberg News isn’t blameless, reporting ShopperTrak’s foot-traffic surveys as if they have some sort of predictive value.)

The media seem to get this wrong every year. Last year, there were glimmers of hope as we saw lots of smart and skeptical reporting (“Black Friday Skepticism (Finally!) Goes Mainstream“). I wonder if green and inexperienced reporters are simply thrown onto this beat with no guidance, no institutional memory to aid them.

It seems the media has relapsed. This year the skepticism evaporated, and mostly negative reporting has occurred with no factual basis for it. Investors are advised that media reports of holiday shopping are unreliable and inaccurate.

AFP Photo/Robyn Beck

How McDonald’s And Walmart Became Welfare Queens

Nov. 13 (Bloomberg) — It seems that welfare queens are back in the news these days. The old stereotype was an inner-city unwed mother — that’s dogwhistle-speak for black — having multiple babies to get ever bigger welfare checks (throw in a new Cadillac and the myth is complete). Regardless, welfare reform of the 1990s ended that narrative.

No, the new welfare queens are even bigger, richer and less deserving of taxpayer support. The two biggest welfare queens in America today are Walmart and McDonald’s.

This issue has become more known as we learn just how far some companies have gone in putting their employees on public assistance. According to one study, American fast-food workers receive more than $7 billion dollars in public assistance. As it turns out, McDonald’s has a “McResource” line that helps employees and their families enroll in various state and local assistance programs. It exploded into the public when a recording of the McResource line advocated that full-time employees sign up for food stamps and welfare.

Walmart, the nation’s largest private-sector employer, is also the biggest consumer of taxpayer supported aid. According to Florida congressman Alan Grayson, in many states, Walmart employees are the largest group of Medicaid recipients. They are also the single biggest group of food stamp recipients. Walmart’s “associates” are paid so little, according to Grayson, that they receive $1,000 on average in public assistance. These amount to massive taxpayer subsidies for private companies.

Why are profitable, dividend-paying firms receiving taxpayer subsidies? The short answer is, because they can. The longer answer is more complex and nuanced.

Both McDonald’s and Walmart are engaging in perfectly legal behavior. The system was set up long ago in ways that failed to imagine companies doing this. Yes, they are taking advantage of the taxpayer, but they are also operating within the law.

Which means it is time to change those outdated rules.

The simplest solution is to raise the minimum wage. If full-time employees are living below the poverty level — especially those with children — its no surprise that they are going to need public assistance. Raising the minimum wage over a period of time will eliminate much of this corporate welfare. The costs will be slightly higher prices at fast-food restaurants and low-end retailers.

The next proposal is more severe: Charge back the amount of public assistance any employee receives to the company he or she works for. It would be separate from tax filings, and simply be a direct penalty charged to the firm. I doubt there is much political will for this proposal, but I can see some people — especially on the left — supporting it.

The most radical idea is bit of pure fantasy: Guarantee every person in America a minimum salary. That is a proposal under discussion today in Switzerland. Its hard to even imagine such a concept gaining traction in the U.S. outside of the Great Depression era.

My politics are pretty middle-of-the-road, and I find myself offended by subsidizing profitable companies this way. As a taxpayer, there are much better things I would like to see my monies go towards. Some rule changes are needed to end this wasteful spending.

We should get corporate welfare queens off of the public teat. Regardless of your politics, it is an issue that politicians on both the left and the right can agree upon.

Photo: JKCarl via Wikimedia Commons