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Debt Ceiling Is the Real Cliff

Why aren’t business leaders more concerned about the debt ceiling? Everyone rallied to prevent a fall off the fiscal cliff, but that damage would’ve been contained, while a failure to raise the ceiling would be catastrophic, writes Dan Gross.

There’s always an encore in cabaret and in Washington fiscal crises. The ink was barely dry on the cliff deal—or if you prefer a more up-to-date metaphor, we’d barely disabled our fiscal-cliff countdown widgets—when we started to focus on the next drama: the debt ceiling.

Fiscal Cliff


On the plus side, this latest crisis at least sounds more benign: while you fall off a cliff, you only bump your head into a ceiling. But economically, the ceiling has the capacity to deliver far more damage. Had the U.S. gone over the fiscal cliff, taxes would have reverted to higher levels, and unemployment benefits for some would have ended. But the damage could easily have been undone by a post-cliff deal.

A breach of the debt ceiling, by contrast, and a failure to pay government debts, even for a day or two, would be far more problematic. The Bipartisan Policy Center says the “X” date—the date on which the U.S. will have exhausted its borrowing authority and won’t have sufficient funds to pay all its debt—is between Feb. 15 and March 1.

So what happens when we hit the “X” date? Some people who are expecting government payments wouldn’t get them, and the republic would survive. But if the government refused (or was unable) to pay interest on its bonds for a few days, the republic wouldn’t survive. And neither would the global financial system.

Why not? Treasury bonds, the safest form of capital known to man, are held in huge volumes by U.S. and foreign banks, by the U.S. and foreign central banks, and by companies and savers around the world. A default, or even a quasi-serious threat of default, would cause U.S. bonds to lose a lot of value immediately. That would trigger a round of margin calls, capital flight, and unintended consequences that would make September 2008 seem like a paddle in a swan boat in the Boston Public Garden. The unique role that Treasuries play, and the fact that leveraged institutions (including the Fed and the Bank of China) hold so many of them, means that it’s doubly, triply important not to goof around with America’s promise to pay.

Of course, the markets, as they did with the fiscal-cliff situation, have thus far declined to freak out over the debt ceiling: the VIX, a measure of stock-market volatility, has slumped in the past week. The stock market is surging ahead. And while yields on U.S. government bonds have risen a little so far this year, the bond vigilantes are still blissed out at their all-inclusive resort in Turks & Caicos.

And yet Washington Republicans, with the tacit approval of much of the press corps, seem willing—even eager—to create a new hostage situation. Democrats believe, rightly, that the debt limit has nothing to do with future spending and everything to do with carrying out past tax and spending policies. President Obama doesn’t want to negotiate over it. Republicans are eager to use the debt ceiling as leverage to get President Obama to cut entitlements. And they’re eager to have the conversation—again and again. House Speaker John Boehner even mused about staging a debt-ceiling hostage crisis every month.

Good News

Is Government Finally Hiring?

Public-sector job losses have been dragging down the recovery for years. But there are new signs that the bloodletting is easing up at the state and local levels. Daniel Gross reports.

As the federal government has provided stimulus through extended unemployment benefits, food stamps, and heightened spending in the post-bust years, state and local governments have acted as a counterweight. Revenues fell off a cliff in 2009, and since state and local governments are prohibited from running deficits, they responded by cutting spending and raising taxes. The reduced spending resulted in sharply lower government employment.

Job Fair

Job seekers line up a job fair in Washington, D.C., Dec. 5, 2012. (Bill O'Leary/The Washington Post, via Getty)

According to the Bureau of Labor Statistics, in every month since February 2010, the private sector has added positions. That’s 34 straight months of private-sector job creation, in which companies have added a total of 5.323 million jobs. That’s pretty good, but not nearly enough to recoup all the jobs lost during 2008 and 2009. By contrast, government employment has fallen in virtually every month since May 2010. Between May 2010 and December 2012, the government sector has reduced employment by 1.072 million, or about 4.7 percent. Now, the employment figures in early 2010 were inflated in part by temporary federal census employment. But the tale of decline is clear and obvious. Since the beginning of 2009, local governments have cut 529,000 positions and state governments have cut 126,000 posts.

Amid all the cries of socialism, then, the shape of the economy has subtly shifted. Government spending on defense, entitlements, and social insurance may be up. But the government’s role as a direct employer has declined. In February 2010, 82.6 percent of all jobs in the U.S. were private-sector positions. In December 2012 that proportion had moved up to 83.6 percent.

To be sure, a large chunk of government job cuts can be chalked up to the type of needed efficiency measures that private-sector companies undertook in 2008 and 2009 as they fought a battle for survival. But it’s worth remembering that in prior recoveries—under George W. Bush and Ronald Reagan, for example—government employment generally expanded. It’s not like we suddenly woke up in 2009 and realized we had several hundred thousand redundant teachers, policemen, firefighters, bus drivers, and civil engineers.

But there are signs that the government job carnage may be coming to an end. As the economy has continued to grow—albeit too slow for anyone’s liking—and as the housing market has continued to recover, the revenue picture for state and local governments has improved. Public coffers have been receiving incrementally more payroll taxes, property taxes, corporate income taxes, and sales taxes. According to the Rockefeller Institute for State Government, state revenues in the third quarter of 2012 rose 2.1 percent from the year before. “Tax collections have now risen for 11 straight quarters, beginning with the first quarter of 2010.”

Those are modest gains, and in many states the increased funds are simply going to plug gaping gaps that continue to pop up in budgets. And even if the current-year revenue picture improves, states like Illinois are grappling with massively underfunded pension liabilities. So it’s not as if a bump in revenues will lead to the rapid expansion of employment.

Still, some analysts believe that the trend of rising revenues and continuing growth will put state and local government in a position to recall some of those teachers and other workers fired in the past three years. Marissa di Natale, an economist at Moody’s, told Fortune that she expects state governments to add 70,000 positions in 2013. USA Today reported that Moody’s says state and local governments will add 220,000 jobs in 2013.


Al Jazeera Bought Current? Meh

The Qatar-based news network bought Al Gore’s experiment. Cue the expected freakouts. But isn’t foreign direct investment as American as apple pie? Daniel Gross on why those who don’t like the deal can just change the channel.

Let’s all calm down about the catastrophic geo-politico-media-financial import of Al Jazeera buying Current.



It is easy to see the purchase of Current TV by Al Jazeera for a reported $500 million as simply the latest in a dreary set of data points. Yet another sign of decline: we’re progressively selling our birthright and assets to foreigners who may not share our values and interests.

But foreign direct investment has been an important contributor to the recapitalization of post-bust America. And I’m not simply talking about the central banks of China and Japan buying U.S. government debt. The flow of funds into the U.S.—purchasing companies, factories, real estate, building new entities from scratch—has been relentless. The U.S. generally leads the world in foreign direct investment. According to the Organization for International Investment, FDI rose from $158.6 billion in 2009 to $236.2 billion in 2010, and fell slightly to $228 billion in 2011. Of course, the FDI crown will not be ours forever. As recently as 2010, the U.S. received twice as much FDI as China did. In the first half of 2012, the OECD notes (PDF), FDI in the U.S. was running at a slower pace than in 2011, and the U.S. was trailing China.

Think of Fiat buying Chrysler, Indian outsourcer Inofsys opening software development  centers in the U.S., Russian oligarchs buying trophy assets like insanely expensive condominiums and NBA franchises. Here’s a nice list from CNBC on iconic brands that are now foreign-owned.

FDI is part of the larger story of how engagement with the world has helped the U.S. rise from the depths of the financial crisis. Exports are up about 50 percent on a monthly basis since the low of April 2009. (The steady flow of FDI is, in fact, a key pillar of anti-declinist arguments, like the one I made in my book, Better, Stronger, Faster)

Why are foreign companies so willing and eager to pay so much to get into the U.S.? For all America’s problems, no other country boasts the same combination of size and wealth. No other country has as many well off consumers as the U.S. does. Having a presence in the U.S. market is incredibly valuable. It’s hard to be big in the world if you are not going to be big in the United States. What’s more, despite all the squawks you here, the U.S. is a remarkably secure place to invest. Property rights are protected, our system is relatively uncorrupt, and the government isn’t likely to snatch your business and pack you off to jail if you cause trouble. We don’t have coups, and the U.S. dollar is an extremely stable currency by global standards.

This transaction shows that the eyeballs of Americans remain remarkably valuable. Think about it. In purchasing Current, Al Jazeera is simply doing what many foreigners are doing these days: paying a high market price to gain access to what it views as a very valuable market. It has paid $500 million to have access to 40 million eyeballs—or $12.50 per subscriber.


Wall Street’s Fiscal Yawn

House Republicans are unlikely to make a fiscal-cliff deal until they start hearing from CEOs and investors. And that’s not happening yet.

So of course the pro forma meeting between President Obama and congressional leaders ended Friday without a deal, or even a new proposal. And why should it have? Obama, the Senate, and the House Republicans have made their positions abundantly clear. With about 78 hours left to go before Jan. 1, 2013, it seems that both sides prefer going over the cliff to compromising further (in the Democrats’ case) or compromising at all (in the Republicans’ case.) (In the Senate, Majority Leader Harry Reid and Minority Leader Mitch McConnell are continuing to discuss a potential deal.)

Obama Fiscal Cliff White House Press Conference

U.S. President Barack Obama speaks on ongoing "fiscal cliff" negotiations during press conference in Washington, DC, Dec. 19, 2012 . (Win McNamee / Getty)

When news broke in the late afternoon that the White House was not going to make an offer for a small, cliff-avoiding deal, the Dow Jones Industrial Average, which had been trading down about 50 points all day, dropped an additional 100 points. The movement raises serious questions about the intelligence of people trading based on what they think will happen at these meetings. But the reaction—down about 1 percent—was also quite muted and lame. And that’s part of the reason there hasn’t been a deal yet. If people are hoping the markets and the private sector will push the public sector into a deal to avoid the economically damaging cliff, they’re going to have to wait a few more weeks. Too many entities in the private sector are either in denial about the situation, or are not yet feeling the pain.

Let’s start with denial. Earlier this week, I argued that Starbucks’ initiative to encourage bipartisanship by having baristas scrawl the words “come together” on coffee cups was likely to fail. Friday afternoon, I received an email from Marriott International CEO Arne Sorensen. “Leaders need to reach a balanced deal now, before we go off the fiscal cliff at year end, and without creating a new set of future conditions that recreate a new fiscal cliff in the future,” he noted.

Of course, there are a host of balanced plans out there. The White House keeps proposing them. The Senate has passed one. The two parties agreed on spending cuts of $1.5 trillion in 2011. But the House Republicans aren’t interested in a balanced plan because they believe taxes are already high enough. When House Speaker John Boehner presented them with the possibility of voting on a wildly unbalanced plan—one that preserved Bush tax cuts for everyone making $1 million or less—the rank and file told him to forget it.

Instead of distributing emails to journalists or making blog posts, CEOs who are really interested in a deal should get on the phone to Republican elected officials and ask, order, and beg them to make a deal that will effectively raise taxes on the CEOs. And CEOs are not nearly at that point of desperation.

Instead of one day with the Dow down 150 points, we will need several days in a row where the Dow is down several hundred points. That will cause CEOs’ net worth to fall sharply, making options worthless, and render corporations incapable of issuing new debt or stock, striking alliances, or doing deals. When traders walk into work feeling nauseous because futures are down so low, and when Grand Central Station at 4:30 p.m. looks like a casting call for one of those zombie television shows— half-dead creatures staggering around, their hair a mess, clothes ripped—that’s when private-sector pressure for a deal will really start to mount.

As time runs out before the fiscal cliff deadline, President Obama told the press Friday he is still determined to 'get this done.'


Retailers’ Very Happy Holidays

Events have overshadowed the year-end shopping season. But consumers are spending freely—even if they’re not clogging the malls.

Last week, I had to make my way to 30 Rock for an appearance on MSNBC, and I almost missed my hit. Why? I had forgotten about the need to allot an extra 10 minutes to wade through the crowds in front of Saks Fifth Avenue, to fight through the hordes of tourists and locals thronging the midway at Rockefeller Center, gawking at the tree, watching the skaters, and swinging massive shopping bags like maces.

Christmas shopping season is thriving and powered by online sales

FedEx employee, James Johnson, sorts through items being shipped through the Fedex World Service Center on Dec. 10, 2012, in Doral, Fla. (Joe Raedle/Getty)

It’s been easy to forget that the holiday shopping season is hurtling toward its close. Our attention has been occupied by far more serious matters that make shopping seem irrelevant, even crass—Hurricane Sandy, the fiscal cliff, the Newtown tragedy.

Nonetheless, the season remains vital to retailers because they rack up huge sales in this five-week period. Back in October, the National Retail Federation projected sales would rise 4.1 percent to $586.1 billion. A good rise, better than average. It looks like it is going to live up to the solid expectations.

The frenzy that started with the shopping season encroaching onto Thanksgiving and the usual Black Friday stampedes subsided rather quickly. That’s in part because people tend to front-load their holiday purchases. Also, Hanukkah came early this year. Then, real life intervened.

We may not have seen the same number of reporters doing standups at the mall this year. But the underlying trends that support strong spending growth are intact. Jobs, wages, and rising housing prices tend to translate into rising retail sales and spending. And that is what we have generally seen throughout 2012. Retail sales were up (PDF) a solid 0.3 percent in November from October. On Friday, the Commerce Department reported that personal income rose an impressive 0.6 percent in November from October, while personal consumption expenditures (the engine that drives the economy) increased 0.4 percent. Translation: more wages were paid, more money was spent, and more money was saved. Americans are quietly going about their business—working, paying bills and mortgages, and shopping.

The International Council of Shopping Centers, along with Goldman Sachs, measures same-store sales at bricks-and-mortar retail outlets. The ICSC’s index for the last several weeks can be seen here. Sales fell off after Black Friday, declining (on a week-to-week basis) in the periods that ended Dec. 1 and Dec. 8. But they bounced back strongly last week, up 4.3 percent from the week before. On a year-over-year basis, however, for the past four weeks, same-store sales have been up 3.3 percent on average. That’s solid, but not spectacular.

But these days, looking for the enthusiasm of holiday shoppers at malls is increasingly like looking to tabulate the enthusiasm of voters by going to polling stations on Election Day. So much of the activity in both realms now happens elsewhere.


Markets Ignore Fiscal-Cliff Drama

Investors are shrugging off the fiscal chaos in Washington because they’ve become used to the brawling—and because this week’s economic data had good news.

Washington is obsessed with the fiscal cliff. But nobody else seems to care.

Markets Ignore Fiscal-Cliff Drama

John Liotti (R), works with fellow traders on the floor of the New York Stock Exchange Thursday, Dec. 20, 2012. (Richard Drew/AP)

Not the stock markets, not global bond investors, not consumers, and not businesses. In fact, it’s quite possible that, given where we are in the economy cycle, and given what is driving the economy, Washington’s ability to hurt activity in the non-Beltway economy may be quite limited. And, that, paradoxically, is limiting the outside pressure on politicians to cut a deal.

What do I mean? On Thursday and Friday, almost everybody in the politico-financial complex was riveted by the absurd action at the Capitol. House Speaker John Boehner spent the week engineering a faux-confrontation over the fiscal cliff by plotting to pass a symbolic and futile measure to extend Bush-era tax cuts for everyone making $1 million or less.  But he couldn’t sell it to his own caucus. Chaos.

Meanwhile, in the real world, several pieces of data indicated that people were generally ignoring the fiscal-cliff hostage situation and getting on with things. On Thursday, the National Association of Realtors reported that existing home sales rose 5.9 percent in November from the year before. In the most bullish monthly report in years, NAR reported that prices were up (more than 10 percent from the year before), inventory was down to levels not seen in half a decade, and the proportion of distressed sales was slipping. Evidently, the uncertainty surrounding the election and the fiscal cliff didn’t deter people from buying homes.

On Friday, two more pieces of data bore witness to the fundamental strength of the U.S. economy. The Commerce Department reported that personal income rose an impressive 0.6 percent in November from October, while personal consumption expenditures (the engine that drives the economy) rose 0.4 percent. The savings rate also increased. Translation: more wages were paid, more money was spent, and more money was saved.

At the same time, there was good news from the industrial economy. Orders for durable goods bounced back in November, rising 0.7 percent from October. Compared with 2011, orders are up 4.5 percent through the first 11 months of 2012. Evidently, the uncertainty surrounding the election and the fiscal cliff didn’t stop businesses from placing orders.

The data points released today led forecasting firm Macroeconomic Advisers to raise its projection for fourth-quarter economic growth from an anemic 1.0 percent, to a more respectable 1.5 percent. The fundamentals may not be particularly strong, but they’re pretty solid.


It’s Not Just Business

There should be no surprise that Republicans are incapable of compromising on a fiscal cliff deal. When it comes to taxes, for the GOP it’s a matter of theology—not business.

This is not a business transaction. Those of us in the press who follow both business and politics tend to think there are certain similarities between the two realms. But the fiscal cliff hostage situation, now in its brutal 44th day, is highlighting one of the key differences.


Speaker John Boehner, R-Ohio, conducts his weekly news conference in the Capitol Visitor Center where he fielded questions on the "fiscal cliff" negotiations and gun control laws. (Tom Williams/Getty)

In business, when two sides want to make a deal, or have to make a deal, there’s a certain protocol that is followed. The two sides stake out their positions. They argue, threaten, charm, and cajole. Ultimately, if there is a zone of agreement—an array of outcomes that are acceptable to both sides—then the two parties will cut a deal and meet in the middle. This is what happens when a stock trades, or when people get hired, when companies are sold. I offer 10, you bid nine. We have a deal at $9.50. If there is no mutually acceptable price, the two sides simply walk away.

Politics is often transactional in just this way, especially on issues of spending. But when it comes to issues of taxes, and when Republicans are involved, it’s less business than theology. People don’t tend to compromise on theology. And we don’t expect them to. When a Catholic who believes in the Holy Trinity meets a Jew who believes in Adonai, they don’t shake hands, meet in the middle, and agree that there are two divine figures, a sort of Holy Duo. They agree to disagree, and then coexist.

People in our world too frequently fail to take professionals at their words. The modern Republican Party doesn’t believe in raising taxes. Full stop.

In fact, as a rule, its members believes that taxes are too high. When they get in power, Republicans try to cut taxes, regardless of the economic or fiscal situation. George W. Bush may have had a failed presidency in many ways, but you can’t deny his success at reducing taxes on income, capital gains, dividends, and estates. When they are out of power Republicans agitate to cut taxes and oppose tax increases. When they run for office, they promise to cut taxes and oppose tax increases.

And when confronted with the prospect of massive tax increases that will result from mere inaction, they have proven, thus far, unwilling to take evasive action if it means raising taxes on anybody.

It’s a widely held belief that Grover Norquist and the Club for Growth act as modern-day Komissars, enforcing a rigid anti-tax ideology. But for Republicans in general, and for the Republicans in the House in particular, the overwhelming majority of whom come from safe, conservative districts, their arms don’t need to be twisted.

End of an Era

Bye, Bye, Big Board

A 12-year-old upstart based out of Atlanta—gasp!—has bought the 220-year-old icon of capitalism, the New York Stock Exchange. Daniel Gross on how much trading has changed—and why traders couldn’t keep up.

And here we thought Big Bird was the New York-based media icon who was endangered in 2012. Turns out it was the Big Board. The New York Stock Exchange, the 220-year-old icon of American capitalism, the fortress-like building that houses the animal spirits of the nations’ investors, the place whose old-school bells signal the opening and closing of the trading day, and whose floors housing anguished faces on days of crashes, and big smiles on up days—it has been sold to ... an upstart derivatives exchange based in Atlanta that is too young for a bar mitzvah.

NYSE agreed Thursday to be purchased by IntercontinentalExchange in a cash-and-stock deal worth $8.2 billion.

The deal was more of a coup de grace than a coup.

The NYSE, like some other prestigious New York-based legacy brands (publishers, retailers, newspapers) is an analog business in an increasingly digital world. Until relatively recently, stock trading in the U.S. worked the way it always had. Buyers and sellers would meet, first under a Buttonwood tree in 1792, and then on the floors, to trade stocks. People would gather around to watch the action. Professional middle-men would pocket a piece of the action. CNBC began to broadcast from the floor, vastly increasing the audience and cementing the centrality of the NYSE In our investing culture.

But massive paradigm shifts have rendered the NYSE a bit player. Over the past 40 years, technology has slowly eroded the business model and primacy of the NYSE. On the NASDAQ, which gained critical mass in the 1970s, buyers and sellers could essentially meet online, without much human intervention. It became the destination of choice for technology companies, many of which have risen from tiny start-ups to the world’s largest: Microsoft, Google, Apple, and Intel. (Today NASDAQ has a tiny physical footprint in Times Square, which is really a television studio and some computers.) Meanwhile, technology enabled the rise of discount brokers, and the trading of stocks in increments of decimal points rather than fractions. That was bad news for the middle-men, the people who owned NYSE seats and the guys in the funny jackets who worked on the floor.  As was the case with so many other businesses, it turned out that machines could do the job more quickly and cheaply.

In the past decade, the technological revolution increased in pace. Alternate electronic stock exchanges, like BATS, which started in a strip mall outside Kansas City, allowed traders to conduct deals quickly for even less money. These upstarts appealed to the high-frequency traders who have come to dominate the market. The action in today’s market is no longer about a savvy mutual fund working with a specialist to place orders for a block of shares, and relying on a trusted hand to do so without tipping off the market. Now it’s computers, run by algoirthms, trading hundreds of shares—hundreds of times per minute—on a range of exchanges. That’s where the action is today. As a result, covering the “stock markets” by standing on the floor of the NYSE and looking at the action is a little like covering an election by standing at polling places—when 80 percent of the population votes by mail.

Outside of the New York Stock Exchange

The facade of the New York Stock Exchange is framed by the NYSE holiday tree, on Dec. 20, 2012. (Richard Drew/AP)

A second trend harmed the NYSE. In the NYSE’s heyday, in the 1950s and 1960s, U.S. stocks were pretty much where the action was. These days, however, sophisticated investors and those with large pools of capital are trading in everything but U.S. equities. The hot action in today’s markets is in foreign stocks, in government and corporate bonds, and especially in derivatives of all sorts—futures, options, structured products. The volatility and spreads in these markets is far greater than it is for stocks, and therefore so is the potential for profits.


Cerberus Takes A Stand

It’s not just rich corporate guys in New York who’ll take a hit when the private-equity giant pulls out of gunmaker Freedom Group. Dan Gross on how the win for gun regulation advocates hurts some civil servants.

It took a while, but the owner of Freedom Group, the weapons conglomerate that makes the Bushmaster weapon used in last Friday’s assault in Newtown, Connecticut, finally said something.

Former Treasury Secretary John Snow

Former Treasury secretary John Snow speaks at the National Press Club on July 18, 2007, in Washington, D.C. John Snow is the chairman of Cerberus Capital Management LP. (Brendan Smialowski/Bloomberg via Getty Images)

At 1 a.m. on Tuesday morning, more than 80 hours after the event, Cerberus Capital, the high-profile private-equity firm that owns Freedom Group, issued a statement. Cerberus expressed sadness and attempted to distance itself from the assault, noting that Freedom Group “does not sell weapons or ammunition directly to consumers, through gun shows or otherwise.” It continued: “We do not believe that Freedom Group or any single company or individual can prevent senseless violence or the illegal use or procurement of firearms and ammunition.”

But you don’t need a weatherman to know which way the wind blows. Cerberus recognizes that the Sandy Hook even was a “watershed event that has raised the national debate on gun control to an unprecedented level.” And this higher level of public debate is making Cerberus uncomfortable. “As a Firm, we are investors, not statesmen or policy makers.” So rather than get involved in a messy debate, it is cutting Freedom Group loose.

“We have determined to immediately engage in a formal process to sell our investment in Freedom Group.” That way, Cerberus can give the money back to its investors, and go about its business “without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so.”

While welcome, the statement is troubling. And while it is tempting, even satisfying, to lash out at a secretive private-equity firm that profits from the sale of automatic weapons, a deeper look should cause us to pose questions to others, and to ourselves. The rich guys in New York weren’t the only beneficiaries of Freedom Group’s growth. In fact, many of the indirect beneficiaries are people of much more humble means.

Let’s start with the obvious.  Cerberus claims that “as a firm, we are investors, not statesmen or policy makers.” But of course, Cerberus’s small leadership team includes statesmen and former policymakers like Dan Quayle, a former vice president of the United States, and John Snow, a former Treasury secretary. In recent years, Cerberus has purposely become involved with companies that benefit from, and rely on, public policy. One of its more successful investments has been in Air Canada, for example.

Private-equity executives, including the folks at Cerberus, have very strong opinions on matters of public policy when it comes to tax rates, the treatment of carried interest, and entitlement spending. Cerberus executives, including its founder, Stephen Feinberg, have given heavily to political campaigns (virtually all of it to Republicans). For people who chose to operate in regulated industries, who choose to invest in government contractors, and who participate in the political process at a high level to suddenly plead a lack of interest and competency in such areas now that there’s a national debate on gun control is highly convenient.

Filthy Rich

A Good Year for Gun Makers

Adam Lanza killed up to 27 people with the Bushmaster .223. The gun’s manufacturer—and its private-equity honchos—have said nothing, while reaping huge profits, reports Daniel Gross.

Freedom Group is having a pretty good year. The economy may be stuck in a low gear, but the company's sales are growing rapidly—up 20%, to $237.9 million, in the third quarter of 2012 compared to the same period last year. Thanks to a “considerable increase” in demand for Freedom Group’s core products, the company told investors, “the market is expanding quicker than the industry can increase production.”

Those core products? Guns and ammo.


Several .223 caliber rounds are shown near a Bushmaster XM-15. (Joe Raedle/Getty)

Freedom’s “family” includes Remington, maker of sniper rifles and shotguns; Advanced Armament, maker of silencers; Para USA, maker of 9mm pistols; and Bushmaster, the company behind the Bushmaster .223 semi-automatic rifle that authorities say Adam Lanza used to kill up to 27 people at close range at Sandy Hook Elementary School last week. “With a Bushmaster for security and home defense, you can sleep tight knowing that your loved ones are protected,” reads its website. “Bushmaster offers everything you need to ensure the safety of you and your family.”

Freedom Group, based in Madison, N.C., might have been just another American success story, quietly introducing new products, innovating, and seeking new customers, largely out of public view. But that might change in the wake of the Newtown shooting and ongoing debate about the future of guns in this country.

Same goes for a private-equity firm called Cerberus Capital. Based thousands of miles away in New York City, Cerberus owns Freedom Group. It has about $20 billion in assets, and a leadership team that includes former vice president Dan Quayle and former treasury secretary John Snow. Its billionaire founder, Stephen Feinberg, is a major Republican donor, giving $217,000 in campaign donations in the past three cycles, according to That included $100,000 in August to Friends of the Majority, a Republican super PAC; $9,800 to Rep. Ben Quayle (son of Dan); $30,800 to the Republican National Committee in October; $58,500 to the National Republican Senatorial Committee, and $7,500 to Mitt Romney.

Cerberus itself is much like any other private-equity firm. It is agnostic about the type of business it invests in. Cerberus’s portfolio includes manufacturers, airlines, time-share companies, banks, and health-care firms. The company’s modus operandi is “centered on integrity, patience, and a unique business model that applies significant financial and operational resources across the firm’s investment strategies.” Of course, some important details are missing from the Cerberus website. It doesn’t note that two of its largest and most high-profile acquisitions—GMAC in 2006 and Chrysler in 2007—ended in disaster. (You won’t find Chrysler or GMAC, which the firm allowed to go bankrupt and left taxpayers on the hook for $1 billion and counting, in its list of case studies) And you won’t learn that one of its investment strategies has involved building a company that makes weapons—the type used by military organizations, hunters, recreational shooters, and occasionally murderers.

In this New York Times piece, Natasha Singer described how Cerberus, starting with Bushmaster, acquired several gun and ammunition brands, including Remington, Marlin Firearms, and Dakota Arms. Together, they have made Freedom Group “the most powerful and mysterious force in the American commercial gun industry today.” Typically, private-equity firms seek to cash out of their investments through initial public offerings or sales to other companies. Neither has happened with Freedom. But Cerberus, the Times noted, did receive a return on investment in 2010, when Freedom sold about $225 million in debt “to pay itself a special dividend used to buy back preferred stock from Cerberus.”           


Finally! GOP Caves on Taxing Rich

Boehner, McConnell, and other key Republicans are signaling they’ll agree to make the top 2 percent pay more. Many GOP House members still aren’t on board, but they need to realize the war over higher taxes on the rich is over, says Daniel Gross.

Fiscal cliff hostage situation, day 40. It’s taken six weeks, but President Obama has finally got the Republican House leader to make the case for a more progressive tax system. In an effort to resolve the fiscal cliff impasse, John Boehner reportedly has offered to raise income-tax rates on people who make more than $1 million a year—but if, and only if, Obama agrees to entitlement cuts. In addition, The Washington Post reported, Boehner also has offered to take the toxic debt-ceiling debate off the table for a year.


House Speaker John Boehner (center) walks to a news conference last week in Washington, D.C. (Andrew Harrer/Bloomberg via Getty Images )

Like those Japanese soldiers holed up in caves on Pacific islands in 1945, the House Republicans don’t seem to grasp that the war over higher taxes on the rich is effectively over. This war ended, of course, with the election. Because it meant there would be no President Romney to demand the continuation of low tax rates. And because the Republicans, failing to take back the Senate, had no way to move legislation on their own preserving the Bush tax cut. And because the Republicans instantly lost hope of repealing Obamacare, which levies higher payroll and investment taxes on the wealthy. And because for the second straight time, the nation’s voters elected to office a president who had campaigned on the explicit promise to raise taxes on those making $250,000 or more.

And yet, it took several weeks for the reality to set in. The initial Republican orthodoxy seemed to be that Obama’s reward for winning a second term should be to capitulate to Republicans on taxes and propose deeply unpopular entitlement cuts. But as the fiscal cliff hostage situation has dragged on, and as the Obama administration has developed an effective stiff arm, the Republican mood has shifted from denial to acceptance—especially in the Senate.

Several Senate Republicans have come out and said the best course might simply be to cut a deal with Obama to preserve the low tax rates for the overwhelming majority of taxpayers and to let the top 2 percent who earn more than $250,000 in taxable income per year shell out a little more. Even Minority Leader Mitch McConnell, the most hardened partisan warrior in the Senate, seems to be backing this plan. And that’s a pretty major concession.

But the House Republicans—a very conservative bunch who generally hail from safe districts—aren’t quite on board. And Speaker Boehner is reluctant to get out too far ahead of his caucus in advance of an impending intraparty election early next year. So his proposal to soak the very rich, while welcome, doesn’t really advance the ball much. Sure, this marks a step toward Obama’s position. But keep in mind, the president gets much larger tax increases on a broader swath of the very rich without entitlement cuts come Jan. 1.

The Republicans want Obama to own the unpopular cuts to Social Security and Medicare they have long wanted to impose. In exchange for agreeing to the higher tax rates on the seven-figure crowd, Boehner wants, according to Politico, “to use a new method of calculating benefits for entitlement programs known as ‘chained CPI,’ which would slow the growth of Medicare and other federal health programs and save hundreds of billions over the next decade.” Unlike Paul Ryan’s proposals, which would protect those over 55—the core Republican constituency—from any significant changes, this suggestion would affect people who currently rely on the program. The Republicans, of course, want Obama to own those changes. (I wouldn’t put it past them to then run against Democrats in coming election for making benefits more stingy.)

For his part, Obama doesn’t mind owning the higher tax rates on the wealthy. He ran on them twice. But he does want Republicans to own them, too. Obama isn’t simply waiting for his interlocutors to concede the inevitability of higher taxes on the rich; he’d prefer for them to make the case for a more progressive tax system. And not just through some vague promises of future reform and the closing of loopholes and the capping of deductions that can’t be named. No, he wants Republicans to throw the rich under the bus.


U.S. Industry Thriving

The latest data show U.S. industry shrugged off the effects of Sandy.

In recent weeks, it has been fashionable (and even rational) to fret about the U.S. industrial economy. Sure, consumers are doing better. But businesses, who are freaked out by the fiscal crisis, and who are being impacted by slow growth outside the U.S., aren’t doing quite as well. And that could put a damper on growth. Earlier this week, for example, the Commerce Department reported that exports fell in October.

Friday morning, however, we got two pieces of data that should allay those concerns, at least for now. First, Markit published its flash manufacturing purchasing managers index (PMI). This data point, which is not be confused with the more popular ISM purchasing managers index, is a relatively crude one. They call up managers at companies and ask if their business, orders, employment, and exports are expanding this month or declining. A reading of above 50 indicates the sector is expanding. A reading below 50 indicates the sector is declining.

Markit’s manufacturing reading came in at 54.2, better than expectations. This represented an eight-month high, a reversal of the recent declining trend. And it suggests that a fair amount of November’s weakness was due to the aftermath of Sandy, not to something fundamentally wrong in the U.S. manufacturing economy. The index found that new orders, exports, and employment are all growing more rapidly than they were in November.

At roughly the same time, the Federal Reserve reported its November readings for industrial production and capacity utilization. The release can be seen here. Here, again, the news was surprisingly positive. In November, industrial production rose 1.1 percent, after having fallen .7 percent in October. Compared with November 2012, industrial production was up 2. 5 percent. In other words, despite the damage caused by Sandy, America’s mines, utilities, and factories increased their output at a decent clip in November.

In addition, there was good news on the capacity utilization front. Capacity utilization refers to the amount of the nation’s productive capacity that is in use in any given month. The higher the reading the better. It means less stuff and equipment (and people) are sitting around not doing anything. Capacity utilization rose in November to 78.4 percent, from 77.7 percent in October. That’s still below the levels of 2007. But it represents progress. And it is even more impressive when you consider that industrial capacity has actually grown in the U.S in the past year. Compared with a year ago, we have more invested in productive capacity, and more of it is being used.

All of which is further evidence that the drama over the fiscal cliff has not been inhibiting work around the country to a substantial degree.


A Little Apple Goes a Long Way

The company is being tweaked for its relatively measly investment in U.S. manufacturing. But the impact of $100 million on the economy is nothing to sneeze at, writes Daniel Gross.

Apple CEO Tim Cook created a brief stir this week when he announced the company would be making a small investment in U.S. manufacturing. 

In an interview with Bloomberg Businessweek’s Josh Tyrangiel, Cook defended Apple’s reputation as a manufacturing outsourcer. “It’s not known well that the engine for the iPhone and iPad is made in the U.S., and many of these are also exported—the engine, the processor. The glass is made in Kentucky,” he said. “And next year we are going to bring some production to the U.S. on the Mac. We could have quickly maybe done just assembly, but it’s broader, because we wanted to do something more substantial. So we’ll literally invest over $100 million. This doesn’t mean that Apple will do it ourselves, but we’ll be working with people, and we’ll be investing our money.”

Critics were quick to note that, in the scheme of things, that’s a drop in the bucket. Apple’s annual capital-expenditures budget approaches $10 billion. And even a sizable investment in high-tech manufacturing won’t create a lot of jobs. The manufacturing plant could create about 200 permanent jobs, which seems like a paltry bang for $100 million bucks. As Paul Krugman noted, the construction of manufacturing plants in the U.S. these days often creates more jobs for robots than for people.

But we shouldn’t be so quick to dismiss Apple’s seemingly token investment in U.S. manufacturing. The overall impact on the economy—and on jobs—is likely to be far larger.

Manufacturing is different from other economic sectors. Set up a service like a hedge fund, or a consulting firm, and you’ll need a computer, an assistant, some office space (or maybe not), and a few service providers. Set up a manufacturing firm, however, and you call all sorts of other professions into action. You’ll be acquiring raw materials and shipping them out, buying and maintaining expensive machines. The jobs created go beyond the factory floor—factories hire people to do security, to install and fix the robots, to move goods to and from the factory, to feed workers and maintain the grounds. They buy a lot of electricity, heat, and water from local utilities; they purchase packaging and shipping materials; they fill up truck trailers and railcars. Long story short: when you make stuff, you end up having a pretty broad impact.

So, yes, manufacturing jobs have historically paid higher wages. But it’s really this ability to have a larger impact—the so-called “multiplier effect”—that gets the blood of economic development officials pumping. As this report from the National Association of Manufacturers suggests (see page 18), a dollar of sales of a manufactured products leads to $1.40  in output elsewhere in the economy.

And even in this age of global business, a lot of that activity tends to happen close to the home of the factory. A few years ago, the technology company NCR decided to start a factory to build ATMs and kiosks in Columbus, Ga. Part of its plan is to have as many suppliers as possible within a 250-mile radius. It’s much more efficient to do business that way, even if cheaper sources could be found overseas. And so its decision to build and assemble in Georgia means more work for safe manufacturers in North Carolina and for steel and component manufacturers around the South. The heavier the equipment, the more likely the suppliers are to be local. Wind turbines are the most extreme example. It’s really difficult to ship massive blades over long distances. So when Vestas, the Danish company that makes giant wind turbines, built production facilities in Colorado and elsewhere, it was followed by many of its suppliers.


Apple CEO Tim Cook speaks during an event in October in San Jose. (Marcio Jose Sanchez / AP Photo)

Last Laugh

Jack Welch Was Right!

It’s true—September’s employment numbers weren’t as good as we initially thought. Also in today’s report: hiring powers through Sandy’s headwinds. Daniel Gross sifts through the data.

The jobs report actually came in quite good.  Even in the aftermath of Hurricane Sandy, the economy managed to add 146,000 payroll jobs in November, and the unemployment rate fell to 7.7 percent. That’s been par for the course for the past two years—decent, but not enough to pick up much of the slack in the labor force. And it is rare to have one with unambiguous good news.

Let’s start with the main number: the number of jobs created. There was great fear that Hurricane Sandy would wreak havoc on the numbers, and on the labor market in highly populated East-Coast states like New Jersey and New York. But that, and the impending fiscal cliff and political uncertainty, didn’t seem to deter hiring. Compared with a year ago, there are 1.89 million more Americans with payroll jobs today. Since February 2010, the economy has created more than 4.6 million jobs.

The economy has shown an impressive and consistent ability to create jobs in a period of enormous uncertainly and recurring crises. Last month, the growth was driven by retail (52,000 jobs), health care (22,000 jobs), and professional services (18,000 jobs). The influence of Sandy could likely be seen in the fact that the construction sector lost 20,000 jobs in the month.

One more interesting item in the payroll data. For months we’ve been discussing the “conservative recovery.” Every month for the past couple of years, the private sector has been adding jobs, occasionally at an impressive rate. And nearly every month, the public sector—state, local, and federal government—has been cutting jobs. All in, over the past two years, the public sector has cut about one million jobs. The conservative recovery continued in November. But there are signs that the effects of austerity on employment may be coming to an end. In November, government cut just 1,000 positions, after having reduced employment by 51,000 in October.

Employee at Gap

Employee Mary Mah folds flannel shirts at a Gap store in San Francisco, Nov. 14, 2012. (Paul Morris / Bloomberg via Getty Images )

Now for the bad news. The work week and wages barely budged. Over the past 12 months, average hourly earnings have risen by a meager 1.7 percent. That’s not really keeping up with inflation. More significantly, the apparently good news about the unemployment rate comes with a few caveats. The unemployment rate is calculated from the household survey, in which BLS calls up people and asks whether they have been working or not. It calculates the rate by dividing those who are working by those who say they are in the workforce. If people get discouraged, or drop out of the workforce, or stop looking, then the rate can fall even if the number of people who say they are working falls. And that’s what seems to have happened last month. The unemployment rate fell, from 7.8 percent to 7.7 percent. But that happened because the labor force fell by about 350,000, while the number of people saying they were working fell by about 122,000. That’s bad news. But the household survey data is notoriously volatile and bumpy.  

One final note. Jack Welch was right. The September jobs report wasn’t as strong as it initially seemed. Each month, when it reports the numbers, BLS revises the data from the previous two months. So September’s number, originally reported as a gain of 114,000 and revised in November to a gain of 148,000, was revised downward to 132,000. The October figure, originally reported as a gain of 171,000, was revised down to a gain of 138,000. In other words, revisions found there were about 49,000 fewer jobs in the economy than previously thought.


Fiscal Cliff, Day 30

A month after the election, the Senate is a forum for performance art, CEOs are throwing money away—and Obama and Boehner appear stalled. Things aren’t looking good, writes Daniel Gross.

Fiscal cliff hostage situation. Day 30. It was a day for dada and futile symbolic gestures.

Fiscal Cliff, Day 31

U.S. Sen. Jim DeMint (R-S.C.) talks on the phone in his office on Capitol Hill on Thursday. DeMint announced that he will resign from the Senate to become the president of the Heritage Foundation. (Alex Wong / Getty Images)

Jim DeMint, Republican senator from South Carolina, Tea Party favorite, scourge of the Washington establishment, up and quit his post—to become head of ... a Washington institution, the Heritage Foundation. Heritage, it will be recalled, helped come up with the idea of an individual mandate for health insurance many years ago. And so DeMint, an implacable foe of Obamacare, will now get paid to run the organization that helped incubate Obamacare.

In the Senate, which increasingly resembles a forum for performance art, Americans were given a lesson in civics. Senate Minority Leader Mitch McConnell in 2011 had proposed a solution to the warfare over the debt ceiling. Congress would pass a law that would let the president raise the debt ceiling on his own. Then Congress could vote to disapprove and stop him from raising the debt ceiling. But the president could then veto that measure, and the override attempt would fail. So, everybody would be happy: the president would get his debt, and Congress would get its outrage. Today, McConnell, in an effort to taunt Democrats in the Senate, introduced the measure and challenged the Senate to vote on it. He figured Democrats would think it was a bad idea. But when Democrats took him up on the offer and agreed to vote, McConnell decided it wasn’t a good idea after all. And so he filibustered the legislation he had just introduced.

The debt ceiling, of course, has precisely nothing to do with avoiding the fiscal cliff or tax reform. And President Obama, buttressed by his newly discovered spine, has essentially said as much. As he said Wednesday: “If Congress in any way suggests that they’re going to tie negotiations to debt-ceiling votes and take us to the brink of default once again as part of a budget negotiation—which, by the way, we had never done in our history until we did it last year—I will not play that game.” So in other words, the Senate spent the day arguing about a part of the fiscal cliff deal that the president says can’t be a part of the fiscal cliff deal. (#dada)

Meanwhile, in corporate America, preparations for the fiscal cliff continued. Chief executive officers have been thronging the Home Depot and Lowe’s, buying up the biggest shovels they can find. And they are putting the tools to work, shoveling cash out the door in the form of (lightly taxed until Jan. 1, 2013) dividends. Late Thursday, McGraw-Hill, the parent company of Standard & Poor’s, said it would pay out a special $2.50-per-share dividend (about $700 million) on Dec. 27. CEOs may be a little slow on the uptake, but they can clearly see that the current low rates on dividends are not going to survive the cliff.

In Washington, we are told, formal talks between the two parties that must make a deal—Obama and House Speaker John Boehner—resumed after a week of silence with a telephone call. Staff-level talks continued. Very little word leaked out. It could mean that they were doing nothing. But it could also mean that they are doing something. As Rick Klein of ABC News (@rickklein) tweeted: “Very litle news committed on #fiscalcliff today. which probably means the most productive day yet on negotiations.”

As the sun set on day 30 of the fiscal cliff hostage crisis, I went out into the front yard, scared off the deer, and tied a yellow ribbon around the old oak tree.

About the Author

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Daniel Gross

Daniel Gross is a columnist and global business editor at The Daily Beast.

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