Ignore the tabloid jokes about Spitzer’s self-immolation in a prostitution scandal. He’s a guy who can actually see through Wall Street’s bullsh--t, writes Dan Gross.
Former New York governor Eliot Spitzer has declared that he will run for the post of New York City comptroller. Cue the tabloid jokes about Spitzer’s self-immolation in a prostitution scandal. It’s understandable if his past is a deal-breaker for lots of people. It wasn’t simply a matter of indiscretion or infidelity, but lawbreaking and participating in the sex-for-hire industry. Is he electable? Should someone try to seek redemption at the ballot box and in the public arena rather than by doing anonymous good works?
I’m not sure. But it is clear that Spitzer’s professional past, temperament, and skill set match up very nicely with the job for which he’s applying. The comptroller is a sort of hybrid—in-house auditor, fiscal manager, pension administrator, the guy who manages the city’s relationship with Wall Street and the capital markets. (Here’s the official job description.)
(Full disclosure—I have known Spitzer for more than 10 years and have repeatedly crossed paths with him—as an interview subject, as a fellow columnist at Slate, as a guest on his television show, and, most recently, in Chelsea Market a few weeks ago, where we discussed the state of the housing market.)
New York City, along with New York State and many other jurisdictions, engages in the practice of putting crucial financial and money-management decisions in the hands of elected officials, rather than in the hands of career bureaucrats. And because of the city’s size and financial heft, there’s a lot at stake. The comptroller oversees the city’s five public-employee pension funds, which combined have about $140 billion in assets and manage money on behalf of 237,000 retirees and 344,000 employees of the city and related entities. The comptroller also helps deal with bond issuance. New York City has about $41 billion in general-obligation debt outstanding. In 2012, the city issued $8.1 billion in new-money bonds, and sold another $6.6 billion in bonds to refinance existing debt at lower interest rates.
The stakes are extremely high. The costs of poor management in these areas are massive, for all taxpayers. The potential for corruption and debacles is pervasive. Municipal finance has historically been a cesspool of conflicts of interest—investment firms help fund the campaigns of officials who dole out underwriting assignments, and the revolving door swivels rapidly. Money-management assignments are often doled out less on merit and more on personal connections. Wall Street firms have routinely sold financial products and investment strategies to unsophisticated city and state money managers that wind up causing big losses for the taxpayers. Alabama’s largest county effectively filed for bankruptcy after having engaged in a complex derivatives transaction with JPMorgan Chase.
And so the sort of person you’d want in the post is somebody who knows Wall Street inside and out, who can see through the conflicts of interest and b.s. that Wall Street firms peddle, whom Wall Street regards as someone to fear rather than a mark, and who has sufficient financial resources that he or she won’t be tempted to dole out favors to money managers in exchange for the prospect of lucrative post-government employment.
Spitzer fits those requirements perfectly. A child of New York City privilege, and a graduate of Princeton and Harvard Law School, he came from the same milieu as many Wall Streeters. Better than any other elected official, he understood what motivated investment bankers and traders, the language they spoke, and the ways in which their industrial norms could prove damaging to the markets and its participants. That’s what made him such an effective anti–Wall Street crusader when he was attorney general. His staff didn’t need to explain to him how investment-banking firms tied research reports to underwriting assignments. And so a decade ago, while the Securities and Exchange Commission slept, Attorney General Spitzer used his prosecutorial tools to end corrupt practices in investment banking, mutual funds, and insurance.
Thanks to his father’s real-estate empire, Spitzer is also personally well-off. He simply doesn’t need campaign contributions or a promise of employment from the Wall Street firms who want to do business with the city. Firms that want the city’s business will have to suck up to him, rather than the other way around, as is typical.
The U.S. added 195,000 new jobs in June, capping off a surprisingly strong spring. Daniel Gross on the bright spots—and the one measure that’s still really, really depressing.
It’s recovery spring! In the labor market, at least.
The stock market has endured several rough weeks, thanks to global economic turmoil and the prospect of the Federal Reserve scaling back its provision of monetary ether. The U.S. economy is churning ahead in low-growth mode, struggling against the sequester and higher payroll taxes at home and volatility and macroeconomic slowdowns abroad. But the jobs market, the sickest portion of the U.S. economy and a classic lagging indicator, seemed to gather strength between April and June.
Friday morning’s jobs report contained some good news. The economy added 195,000 payroll positions in June, significantly above the pace of recent growth. In addition, as it does every month, the Bureau of Labor Statistics looked back at the prior two months and revised the data. And, as has frequently been the case in recent years, BLS discovered more jobs. The April figure, reported last month as a gain of 149,000, was revised to a gain of 199,000. The May figure, initially reported as a gain of 175,000 jobs, was revised upward to 195,000. For those counting at home, that’s 589,000 new jobs in the past three months. Compared with a year ago, there are 2.293 million more Americans with payroll jobs today. That’s quite decent.
One shift worth noting. In the early years of this recovery, the manufacturing, industrial, and production sectors often led the way in job growth. But this report shows that services, which comprise most of the U.S. economy, are now carrying the baton. Leisure and hospitality added 75,000 posts; profession and business services added 53,000; retail added 37,000 jobs; and employment in financial activities (shudder) rose 17,000. Construction added 13,000 jobs.
The unemployment rate, which is calculated from the household survey (in which BLS calls up people and asks them about their employment status), held steady at 7.6 percent in June. While the number of people reporting themselves as employed rose by 160,000 in the month, the labor force grew by 177,000 jobs. In the past year, the labor force has actually grown by nearly 700,000, a reversal of a troubling trend.
So here’s the dichotomy. It’s a pretty good time to have a job in the U.S. Firings, layoffs, and bankruptcies are trending down, which means employees are less fearful about their short-term prospects. And with the labor market tightening ever so slightly, companies finally have to pay a little more. The outstanding feature of this expansion has been that wages have continued to slide even as corporate profits have boomed. June provided some evidence that this trend may be starting to reverse. Average weekly earnings rose by 0.4 percent in June from May, and are up 2.2 percent since June 2012. By recent standards, that’s a significant raise.
But it’s still a bad time not to have a job. There is a huge amount of slack in the U.S. labor market. The official unemployment rate may be holding steady at 7.6 percent, but BLS also compiles alternate measures of “labor underutilization.” When it conducts its household survey, it asks people whether they are working part-time but would prefer to be working full-time, whether they’re discouraged, or only marginally attached to the workforce. The so-called U-6 measure takes into account all these frustrations. In June, the U-6 stood at 14.3 percent from May, and down only slightly from 14.8 percent in June 2012.
One final note. For months, we’ve been suggesting that the end of austerity-induced unemployment is at hand. Over the past few years, state, local, and federal budget cuts have led to the loss of nearly a million public-sector jobs—which doesn’t usually happen in a typical recovery. Over the past few years, I’ve dubbed this as “conservative recovery,” because the private sector adds jobs each month while the public sector cuts them. June was no different. The private sector added 202,000 jobs, while the vast government sector cut 7,000 jobs. The federal government cut 5,000 jobs and state governments slashed 15,000 positions. But in one bright spot, local government added 13,000 jobs in June, and has added 29,000 jobs in the past two months.
The infamous pair plans to cash in on Bitcoins with a new trust, but it’s not clear whether the setup will work with a digital currency. What is clear is that the Winklevii are too immersed in Silicon Valley’s culture of insta-fortunes to consider trying a real business.
The Winklevoss twins, Cameron and Tyler, immortalized in The Social Network as the Winklevii, are back in the news. Seeking to cash in on the craze for Bitcoin, the alternative digital currency, they announced Monday their intent to sell shares to the public in the Winklevoss Bitcoin Trust. (Here’s the prospectus.) The offering of about 1 million shares at about $20 each is for an exchange-traded fund—kind of like a mutual fund that trades like a stock. The idea is that people buy the shares, and the Winklevoss Bitcoin Trust uses the money to buy Bitcoins.
Michael Loccisano/Getty, George Frey/Getty
I had three thoughts upon reading the prospectus: (1) Dudes, really? (2) A tweet: faux business guys set up a faux hedge fund to invest in faux currency. (3) This is why you shouldn’t send rich kids from Greenwich to Harvard and then to Silicon Valley.
The Winklevii will go down in history for having played a much-disputed role in the origins of Facebook. In the world’s first recorded allegation of square-jawed crew dudes being victimized by hoodie-wearing computer scientists, the Winklevoss twins claimed that Mark Zuckerberg had essentially stolen their idea. The twins walked away with a settlement that gave them $20 million in cash and shares that are worth a few hundred million dollars.
Rather than use the cash to lead the lives of playboys, the Winklevoss twins have decided the best revenge is entrepreneurship. They want the world to see them as tech nerds, not crew dudes. “It’s always been this David and Goliath, blueblooded jocks versus this hacker kid, when really it’s a fight or dispute between privileged parties,” Cameron told The New York Times. “The similarities between us and Zuckerberg are actually greater than the dissimilarities.”
They’ve set up a venture-capital firm that has made investments in Hukkster, which allows you to track favorite items on shopping sites and then lets you know when they go on sale, and SumZero—founded by their Harvard compadre Divya Narendra, also depicted in The Social Network—an online community for financial professionals to exchange research ideas. (Think of it as a virtual manifestation of the Greenwich Country Club.) Both seem like decent, if derivative, ideas.
The Winklevoss twins further amped up their nerdiness by plunging into the strange world of Bitcoin. In April they let it be known that, in the words of The New York Times, they had “amassed since last summer what appears to be one of the single largest portfolios of the digital money, whose wild gyrations have Silicon Valley and Wall Street talking.” Of course, at about the time they were disclosing their big position, Bitcoin started to crash. “We have elected to put our money and faith in a mathematical framework that is free of politics and human error,” Tyler Winklevoss said.
Now they’re setting up a financial mechanism that will give average joes the ability to get in on the Bitcoin action. In exchange, an entity controlled by the Winklevoss twins will get an unspecified sponsor’s fee.
In business, it’s OK to be a sexist, a felon, or an adulterer. But a racist? Uh-uh—especially if your brand has a national reach. Daniel Gross on Paula Deen’s swift fall.
Paula Deen has come undone.
Paula Deen appears on NBC News’s “Today” show, June 26, 2013. (Peter Kramer/NBC/NBC NewsWire via Getty)
First came details of a lawsuit in which a former employee alleged racial insensitivity on the part of Deen. Then came her amateurish, tentative apologies on YouTube. A mawkish attempt at self-exculpation in an interview on the Today Show with Matt Lauer didn’t go much better.
Instantly, a bevy of Fortune 500 companies that were more than happy to do business with Deen, have dropped her like a hot (sweet) potato. The sharp and swift fall makes for a concise case study on the impact of reputation on a personal brand.
Deen may have been known to most laypeople as a television chef and cookbook author. But the beauty of today’s world is that you can quickly leverage fame gained in one arena into others. She had a show on the Food Network, restaurants, a line of cookware sold in Walmart, Home Depot, Target, and other stores, cookbooks, an endorsement deal with the pork giant Smithfield. Deen was also able to mine commercial gold out of self-inflicted wounds. Critics had long warned that a diet larded with pork, butter, cream, and sugar could lead to diabetes. Lo and behold, after Deen revealed that she had diabetes, she signed a deal with pharmaceutical firm Novo Nordisk to help promote a diabetes drug.
Within a week, all of it—well, almost all of it—has melted away. Giant corporations that were happy to plaster Deen’s face on their products and stock their goods in their store have run away. Political correctness run amok? No. It illustrates a larger truth. In 2013, no national brand, in any industry, can afford to have an association with a person who expresses racial animus, or who taints a company with the stain of racial animus. It’s just not acceptable. It is OK for endorsers and business partners to be gamblers (Michael Jordan), convicted felons (Martha Stewart), or adulterers (too many to name). The commercial culture will tolerate multiple divorces, trips to rehab, and all sorts of boorish behavior. You can even recommend that people eat really unhealthful diets. But the hint of racism is simply a deal-killer. No questions asked.
Here’s your checklist of former Paula Deen sponsors who have cut ties with the embattled celebrity chef.
Of course, companies will be more likely to stick with an employee, or a business partner, if they are minting money. Over his long career, Rush Limbaugh has suffered astonishingly little blowback for off-color remarks. (It was sexism that got him into the most trouble with advertisers.) But in Deen’s case, her ratings at the Food Network were already slipping. Deen’s show had been running for 11 years (a close approximation of the life expectancy of people who subsist solely on her cuisine), which is an extremely long time. But as The Wall Street Journal reported, Deen’s show was slipping: “Ratings for Ms. Deen’s show “Paula’s Best Dishes” were down 15% in total viewers—and 22% in the 18–49 demographic that advertisers care most about—for the 2012–13 season, compared with last season, according to Nielsen ratings provided by Horizon Media.”
Let’s not forget: the case that brought down DOMA was essentially about taxes. Daniel Gross on why gay couples can finally look forward to April 15—and what it will mean for federal coffers.
It’s safe to say that no federal tax season will be greeted with as much joy and glee as next spring’s. Thanks to today’s Supreme Court rulings on gay marriage, in April 2014 gay couples residing in states where gay marriage and same-sex partnerships are legal will be able to file joint returns.
Many of the economic arguments made for gay marriage revolve around the notion of stimulus—let gay people marry, and they’ll spend money throwing fabulous bashes, providing employment to caterers, florists, and hotels. Maybe. If that money weren’t spent on weddings, it would likely be spent on other goods and services. But there’s something to be said for simply making our systems more fair and less arbitrary, regardless of the effect on national finances or employment.
Wednesday’s rulings are a step in that direction. As things go, the right of two adults to file a joint tax return, or of one adult to file a return as “head of household,” might appear to be symbolic. After all, married people often file separate returns. But it means something. Marriage is, among other things, a set of financial relationships that helps delineate how to create and preserve wealth, how to share property and pass it on, how to create financial security and deal with retirement and health care. The tax code—what we choose to tax, which activities get preferential treatment, which activities are singled out for opprobrium—actually says a lot about us as a society.
And until today, the federal tax code generally treated gay people as second-class citizens.
The case that helped bring down the Defense of Marriage Act, was, at root, a tax case. When Thea Spyer died in 2009, her partner, Edith Windsor, was angered that she was liable for federal estate taxes on assets left to her by Spyer. Instead of benefiting from the provision of the Internal Revenue Code that lets spouses inherit unlimited amounts of assets from predeceased spouses, Windsor received a federal-estate-tax exemption on only the first $3.5 million of assets. On the sums above that amount, Windsor had to pay more than $363,000 in federal estate taxes.
It sounds like a 1 percent problem. But there’s a principle at stake here. Because it refused to recognize her marriage as valid, the federal government essentially confiscated a chunk of Windsor’s property. And the government’s refusal to recognize gay marriage as legitimate enshrined this attitude throughout the tax code.
After hearing the Supreme Court ruling that declared DOMA unconstitutional, plaintiff Edith Windsor explained why she took her case to the Supreme Court.
The Federal Reserve says the economy is getting better. So why are investors so miserable?
Federal Reserve Chairman Ben Bernanke made a little news today. No, he didn’t shed any light as to whether he will be serving another term once his current term expires next January. (We can safely assume he won’t.) And no, he didn’t announce a significant, imminent change in the policy under which the central bank buys $85 billion of securities in a month. In its statement, the Federal Open Market Committee, the Fed’s policy-making body, basically said there would be no change to the quantitative easing policy, designed to keep interest rates low and support the economy.
A trader works in a booth on the floor of the New York Stock Exchange as Federal Reserve Chairman Ben Bernanke speaks on television on June 19. (Richard Drew/AP)
Bernanke essentially said that he and his colleagues are now believers in the Recovery Spring theory—the heretical idea that the U.S. economy is powering ahead at a pretty good clip. In fact, the economy has been doing well enough for long enough that Bernanke said he could envision a time when the Fed wouldn’t have to support the economy by buying billions in long-term securities each month. Without giving concrete commitments, Bernanke said that if the economy continues to perform as the Federal Reserve expects, the taper—a reduction in the rate of asset purchases—could start later this year. Eschewing specific triggers, he nonetheless outlined some targets. When unemployment falls below 7 percent, the Fed would consider reducing the pace of asset purchases and ending them. When unemployment falls below 6.5 percent, the Fed might start considering rates.
In fact, the overall picture from inside the Fed is one that readers of this column may recognize—a relatively optimistic take on America’s short- and long-term prospects. Bernanke and his colleagues have been looking at the same data we’ve been looking at: the steady rise in jobs, consumption, and retail sales; the continuing recovery in housing; and even the coming end of state and local austerity.
There’s still the problem of the federal government, though, with its needless sequester. “The main headwinds to growth are, as you know, federal fiscal policy,” said Bernanke during today’s press conference. But given the headwind created by budget cuts and tax increases, he said, the fact that the economy is moving ahead is indicative that things are basically sound.
In fact, this spring, the Fed—like some other smart folks—has become more sanguine about America’s prospects. Check out the Fed’s projections for economic conditions for the next couple of years. Compared with the March forecasts, the June forecasts assume a slightly higher rate of growth, and slightly lower rates of unemployment and inflation. Recovery Spring!
All that sounds pretty good. But as Bernanke spoke, investors freaked out a little bit. The Dow Jones industrial average fell a little more than 200 points, or about 1.3 percent, by Wednesday’s close. And interest rates on government bonds rose. That is to say, investors were dumping both stocks and bonds. Which sounds only half right, given Bernanke’s forecast. If the economy is getting stronger, you would expect signs of inflation to pick up, and that would boost interest rates. What’s more, should the Fed reduce its asset purchases, it would remove a big player from the market. The rational reaction to both of these moves is to sell bonds.
But stocks are in large measure a bet on future economic growth. So if Bernanke is more optimistic about growth, why were investors suddenly more pessimistic about stocks? It’s basically a knee-jerk reaction. Think of stock investors like caffeine addicts who are told that the substance that improves their life and helps them get through the day is going to be less available in the future. Imagine someone told you you’d have to taper your coffee consumption. You’d throw a fit and be miserable. Well, the Fed has been like Starbucks for stock investors for the last several years. By buying bonds and keeping interest rates at rock-bottom levels, the Fed made stocks seem more attractive. The Fed’s efforts have also supported economic activity, which is good for stocks. And the last four years, in which the stock market has doubled as the Fed has relentlessly expanded its balance sheet, have conditioned stock investors to rely on the central bank.
Save the planet, turn a profit. That’s the thinking of Mosaic, a company that lets you invest in solar panels, and promises a pretty decent return. Daniel Gross gives it a whirl.
It’s hard to get a 4.5 percent annual return on your money without taking too much risk. Banks pay less than 1 percent. Blue-chip stocks pay dividends at about2 percent. The U.S. government borrows for about 30 years at 3 percent.
But I found one way to get a decent interest rate while also boosting my personal green credentials: I bought a very small piece of a solar electric power plant in New Jersey.
Solar power is growing by leaps and bounds. But it requires a large personal investment—i.e. spend $15,000, take advantage of tax credits and rebates to put a small system on your roof. And it only pays to put panels homes that have south-facing roofs and aren’t surrounded by trees. Or it requires a large corporate investment, like the giant retailers putting arrays on their giant roofs, or the huge farms sprouting in the desert. There are very few options for people with limited resources.
That’s where Mosaic comes in. Essentially, it’s crowdsourcing investments for small-scale solar projects, like a Kickstarter for green energy. But it isn’t seeking donations, and it’s not offering silly rewards like tote bags or invitations to launch parties. Rather, it’s offering fixed financial returns, much like a corporate bond, or a bond backed by a mortgage. It’s an example of financial engineering meeting electrical engineering. “Our mission is to create shared prosperity through clean energy,” said Mosaic’s CEO Dan Rosen. “We see a huge opportunity for transitioning our world to clean energy ahead of us and we want to make it possible for communities to prosper from this massive transformation.”
When you construct a solar energy system, you’re basically constructing a stream of income that will flow over a period of many years. But you need a lot of money up front in order to build it. Mosaic is trying to bridge that gap. Among the many models being used to finance solar development is one in which a company builds and owns the solar array on the roof of another company’s store, or a government building, or a public agency, and then agrees to sell the power to the building owner at a fixed price for a long period of time. Mosaic is in the business of providing financing to the people who build the arrays. It raises funds not from venture capitalists or banks, but from individuals. And as the solar array owner receives revenue, it pays back the loan that Mosaic made. Mosaic then makes payments back to its investors. (Here’s a brief description of how it works.)
Started in 2011, and based in Oakland, Mosaic did a bunch of pilot projects in California—like putting 120 panels on the Asian Resource Center in Oakland, California. Then at the beginning of this year, it launched real projects, like one in which 293 investors kicked in $95,275 (that’s an average of $325) to build a 78 kilowatt installation on an affordable housing project in Salinas, California.
To learn about Mosaic in more detail, I opened an account. Most of the projects are available only to investors who live in California. But some are available for people out of state. So I was eligible to buy a piece of a $350,000 loan backing a 487-kilowatt, 1,694-panel system that was constructed on a convention center in Wildwood, New Jersey, and went into operation last year. The promised return: 4.5 percent interest, and the return of principal over a 114-month period.
I hate to say I told you so, but I told you so. The golden age of deficit reduction has arrived. But will Republicans ever admit the truth? Unlikely.
It may not seem like it, but the Golden Age of Deficit Reduction we’ve been writing about is truly upon us.
Though the monthly treasury statement shows a $139 billion deficit for the month of May, a look inside the data shows why we are entering a brief age of deficit-reduction nirvana. (Jacquelyn Martin/AP)
The May monthly treasury statement came out on Wednesday. And while it shows a hefty $139 billion deficit for the month of May, a look inside the data shows why we are entering a brief age of deficit-reduction nirvana.
Many analysts believed the huge revenue gains seen in the first few months of 2013 would wilt away as winter turned into spring. Higher taxes and a gusher of dividends and other income in 2012 helped create huge tax liabilities that people had to pay in the early months of 2013. Yet in May, revenues again rose sharply from May 2012. They came in at $197.2 billion, compared with $180.7 billion in May 2012, or up 9.1 percent. Through the year thus far, revenues are up 15 percent from the year before.
The spending side was a little different. In general, the trend so far this year has been for spending to be down a bit, thanks to the sequester, and less spending on defense and unemployment benefits. But there was a wrinkle in May. As Treasury noted, “since June 1, 2013, the normal date for these expenditures fell on a non-business day, outlays for military active duty and retirement, Veterans’ benefits, Supplemental Security Income and Medicare payments to Health Maintenance Organizations moved to May 31, 2013.” As a result, spending for the month rose sharply from last year, to $335.9 billion, up 10 percent. Thus far this year, spending is up about 1 percent.
So what makes this a golden age? Well, according to Thomas Simons of Jefferies & Co., without the shift in spending, “the [May] deficit would have been approximately $103 billion.” That’s significantly lower than the $124.6 billion deficit reported in May 2012.
Next, consider that for the next four months, assuming no big shocks or great changes, the government will essentially break even. That hasn’t been done in well over a decade. In the first eight months of the fiscal year the deficit was $626 billion, down about 25 percent from the first eight months of fiscal 2012. But the Congressional Budget Office is predicting that’s all the red ink we’ll print this fiscal year. It is projecting the deficit for the entire fiscal year will be $642 billion.
Why? Well, as the economy continues to expand, revenues will continue to rise and spending will fall. The government often reports smaller monthly surpluses, and occasionally surpluses, in June and September, as people and companies make quarterly payments. But it will likely come in with a big surplus this June, in part because some spending that usually takes place in June was pushed into May and in part because Treasury is anticipating a humongous $59 billion dividend from the government-owned mortgage company Fannie Mae. Combined with an anticipated surplus in September, the gusher of revenues anticipated in June will more than wipe out the anticipated deficits for July and August.
The consulting firm that employed leaker Edward Snowden still has the support of investors. Daniel Gross on why this isn’t surprising.
How much does it cost you if one of your employees goes rogue and screws over your business client? If you’re Booz Allen Hamilton, the government contractor that employed leaker Edward Snowden, about $60 million.
On Monday, investors in Booz Allen, which is publicly traded, had their first opportunity to react to the bombshell news that broke over the weekend. And the reaction was something close to a shrug. The stock closed at $17.54, down about 2.55 percent from Friday’s closing price of $18. Given the company’s market capitalization of $2.41 billion, it lost about $64 million in value. Through midday Tuesday, the stock was down less than 1 percent.
Booz Allen cyberfacility, September 25, 2012; floor of the NYSE, June 11, 2013. (Jeffrey MacMillan/Washington Post, via Getty; Andrew Burton/Getty)
Snowden, who earned $122,000 a year from Booz Allen until the firm fired him yesterday, willfully leaked information. You would think such a breach in protocol and client-relationship management might be a disaster. After all, the U.S. government provides virtually all of the company’s revenues, and the national-security apparatus places a very high value on the ability to keep secrets. Booz Allen clearly failed to supervise Snowden adequately, or to make an accurate judgment about this particular employee’s willingness to abide by the terms of his employment. The result has been a huge black eye for the government, which will now incur significant financial and reputation costs. Imagine you were a law firm and a paralegal disclosed sensitive information from a major client. Or if an investment bank blew a high-profile public offering. Or if a seafood restaurant routinely served spoiled fish. The market would exact a swift punishment.
But government contracting is a different ballgame. When a company screws up, the government delivers a slap on the wrist—and then awards the company with new contracts. Based on recent history, investors could be forgiven for having a blasé attitude about Booz Allen’s prospects. Overcharging and being overbudget on high-profile fighter contracts hasn’t stopped Lockheed Martin from getting lucrative new high-profile contracts. A 2011 government report found that Boeing overcharged the Army for spare helicopter parts; This morning, Boeing announced it received a $4 billion contract to make helicopters for the Army.
Halliburton and its subsidiaries had a series of problems providing services in Iraq. But the revelations didn’t sink its stock. And in 2010 its subsidiary KBR got a fat no-bid contract to provide services in Iraq.
The reality is that these contractors have become, in effect, arms of the government. The national-security and defense apparatus needs them to carry out essential operations as much as the private companies need their federal benefactor to deliver returns to the shareholder. Government agencies these days simply lack the resources, permissions, and wherewithal to hire all the people they need to conduct operations. Using contractors is a necessity.
On the one hand, it is a fiercely competitive industry in which big firms compete with one another. On the other hand, the fix is in. The government spreads its contracts around between large companies. Small businesses and start-ups have a tough time competing for the biggest of the contracts. And there is a limited number of domestic large players, especially in sensitive defense areas. Lobbying also plays an important role. Big contractors hire lobbyists, make campaign donations, and advertise in the publications that politicos read—all in an effort to work the system to their disadvantage.
It’s hard to see why else the state would propose a measure to lay a special tax on owners of hybrid and electric cars, writes Daniel Gross.
For a while there, North Carolina had progressives fooled. In 2008, its voters pulled the chain for President Obama (even if by a very narrow minority). The popular show Dawson’s Creek was filmed there. The ever-expanding Research Triangle drew thousands of out-of-staters who brought their Northeast modes of consumption and values.
Electric hybrid cars are plugged-in to charge during a demonstration of the vehicles. (Elaine Thompson/AP)
But in recent years, the state has taken a few steps backward. Last fall, North Carolina reverted to form and voted for Mitt Romney. Voters also swept Republicans into the governorship and control of the state legislature. And they’ve set about slashing unemployment benefits, and taking a host of other nonprogressive actions. As Mary Curtis notes in The Washington Post, the new regime’s agenda has included: “the decision to reject federal funds to expand Medicaid, the reduction of state unemployment benefits, proposals that would cut funding from public education and provide vouchers for private schools, a voter ID bill, and efforts to restart the death penalty and repeal North Carolina’s Racial Justice Act.”
Now North Carolina’s legislators are going after another progressive favorite: hybrid cars.
What? The state Senate has passed a measure that would single out hybrid and electric car drivers for special treatment. (The House will consider the measure but hasn’t acted yet.) Here’s the reasoning. The state relies on gas taxes to fund highway construction. But gas consumption has been falling, in part because the American auto fleet has been getting more efficient. In effect, people who drive cars that get 50 miles per gallon are contributing only half as much to the upkeep of roads as people who drive cars that get 25 miles per gallon. And so the North Carolina Senate is suggesting that people who drive hybrids pay an extra $50 for the annual registration fee, and that folks who drive all-electric cars pay an extra $100. This Prius tax would raise about $1.5 million each year.
Of course, the government is punishing people who are making more efficient use of a polluting, scarce, and expensive energy source. But even if it were a good to punish efficiency, North Carolina would be missing the target by taxing only hybrids and electric cars. There has been a quiet revolution in the American (and international) auto industry in recent years. Thanks to innovations in materials, engines, and transmission systems, consumers now have a dozens of high-mileage vehicles to choose from: electric cars, hybrids, and plain old sedans and coupes. The manual Dodge Dart, for example, gets 39 miles per gallon. The 2014 Chevrolet Cruze Eco that runs on diesel will get 47 miles per gallon. In fact, there are plenty of hybrids on the market that get worse mileage than regular vehicles. The Ford Escape hybrid gets about 30 miles per gallon on the highway. The Chevrolet Tahoe Hybrid gets only 23 miles per gallon on the highway. The drivers of those hybrids are already paying their fair share for the upkeep of the state’s roads.
If the principle is that those who use less gas to get around should pay a disproportionate amount of tax, then the legislature should single out anyone who drives a car that gets above a certain number of miles per gallon. Or they could go the route of taxing people based on usage—effectively, a toll for the number of miles you drive.
North Carolina’s beef, it turns out, isn’t really with hybrids. It’s with more fuel-efficient cars, or, as others might describe it, with progress.
The NSA leaker might have been a rogue Booz Allen Hamilton employee. But he made the company’s biggest client, the U.S. government, look terrible—and that can’t be good for business, says Daniel Gross.
Booz Allen's cyber facility on September 25, 2012 in Annapolis Junction, Maryland. (Jeffrey MacMillan/The Washington Post via Getty)
On Sunday, The Guardian reported that Edward Snowden, a Booz Allen Hamilton employee who previously worked for the CIA and NSA, was the individual who leaked information about the government’s extensive surveillance of digital communications. Now holed up in Hong Kong, Snowden claimed he had the ability to access the email and communications of pretty much anyone, even the president.
Focus now will undoubtedly shift as well to Booz Allen, which has been a huge beneficiary of the boom in defense and national security contracting. The company is one of the many firms that hangs around the Beltway and hoovers up jobs large and small from government agencies. A for-profit company, it gets virtually all its revenue from the federal government. (It should not be confused with Booz & Co., the management consulting firm that was spun off as a separate entity in 2008.) Booz Allen Hamilton’s major clients include, according to the company, “the Department of Defense, all branches of the U.S. military, the U.S. Intelligence Community, and civil agencies such as the Department of Homeland Security, the Department of Energy, the Department of Health and Human Services, the Department of the Treasury, and the Environmental Protection Agency.” Among the things it helps these agencies do is “addressing complex and pressing challenges such as combating global terrorism, improving cyber capabilities, transforming the healthcare system, improving efficiency and managing change within the government, and protecting the environment.”
The value proposition of Booz and others is that it is supposed to carry out many functions that governments used to—for less money and hassle while ensuring superior performance and impeccable security. In its most recently concluded fiscal year, it collected $5.76 billion in revenue and reported a healthy operating profit of $446 million. After paying $149 million in income taxes, it was left with net income of $219 million.
Essentially, Booz Allen is a conduit for taxpayer money to contractors, shareholders, and employees, many of whom, like Snowden, are highly paid. The Guardian pegged his salary at $200,000. According to the company’s proxy filing, CEO Ralph Shrader earned a $1,162,500 salary last year, plus nearly $2 million in stock awards and other compensation.
To a large degree, Booz Allen Hamilton is a low-risk, high-reward type of business. It doesn’t assume all that much financial risk. And it doesn’t have to worry too much about collecting its bills. Its main client, the government, isn’t in danger of going bankrupt.
Edward Snowden explains why he leaked top secret information.
Fueled by solid economic growth, Turkey’s stock market has been on a fantastic run. The government’s ham-handed efforts to crush protests have caused investors to flee.
The hardline tactics that the Turkish government has taken to crush protests in Taksim Square in Istanbul have taken a toll on the image of Prime Minister Recep Tayyip Erdogan. But they’ve also taken a toll on the image of Turkey’s booming corporate sector. In recent years, Turkey has been a bright spot in the global economy. A rising middle class, a stable financial sector, and growing economic integration with Europe (to the west) and the Middle East (to the, um, east) have spurred rapid growth in recent years. And that has made the Turkish stock market a solid performer.
An elderly scrap collector pulls her trolley in front of a Turkish bank in Istanbul on June 4. (Thanassis Stavrakis/AP)
But bull runs can come to end quickly, especially when violence erupts on the streets. Below are three-month and one-year charts of the iShares MSCI Turkey Investable Market Index Fund, which tracks the performance of major Turkey-based companies. Both show impressive bull runs that came to an abrupt end when the protests in Taksim Square got out of control. The index has fallen about 20 percent in the past month.
Ignore the nail-biters saying we buy too much oil from ugly places; the latest numbers show we’re buying less and making more.
For years, geopolitical analysts have warned of the twin deficits that threaten America. There’s the federal budget deficit, which gobbles up resources and forces the U.S. to borrow ever-greater amounts of money from China. And there’s the trade deficit, which means Americans are sending their hard-earned dollars to buy stuff (plastic products, clothes, oil) from unfriendly regimes. These twin deficits enrich our frenemies and impoverish present and future Americans. The good news! Both of these mortal threats are declining.
For the last several months, we’ve been banging on about the Golden Age of Deficit Reduction. As the expansion chugs toward its four-year anniversary, tax revenues are rising and federal spending is falling. The deficit for the current fiscal year is now projected to come in at about $642 billion, down 41 percent from the $1.089 trillion in fiscal 2012. By now, it’s not exactly news.
But data released yesterday shows the U.S. is also making some progress on the trade front—especially when it comes to shipping dollars to the Middle East, Venezuela, and other hostile climates in exchange for oil. Here are the numbers. In April, the U.S. exported $187.4 billion of goods and services and imported $227.7 billion of goods and services, leaving a trade deficit of $40.3 billion. That’s a lot. But the trade deficit has been falling in the past couple of years. It fell 4 percent in 2012 from 2011. And through the first four months of 2013, the trade deficit, at $164 billion, is 13.5 percent smaller than it was in the first four months of 2012. In real terms, and as a percentage of gross domestic product, the trade deficit is falling.
Why? First, exports are rising. Even though America tends to get down on itself, the U.S. is in fact a global export powerhouse. The megatrend of continuing global growth has translated into rising demand for American-made planes and grains, and for American hotel and dormitory rooms. U.S. exports rose 4.6 percent in 2012 to a record $2.2 trillion. Through the first four months of 2013, even with the global economy slowing, exports are still up 2 percent.
That’s one side. The other side, of course, is imports. The U.S. doesn’t so much have a trade problem as it has a China-and-oil trade problem. We have a big trade deficit because we import a lot of stuff from China and a lot of oil to feed our transportation and industrial complexes. In 2011 the U.S. imported $250 billion of petroleum products and exported $68 billion of petroleum products, leaving a deficit of $184 billion in that sector.
But something has happened in the past few years. There has been a quiet, unappreciated revolution in energy production and consumption. Domestic energy production, especially oil production, is booming. Thanks to developments like the Bakken Shale in North Dakota and the use of fracking to get at oil all over the country, the U.S. in 2012 produced 28 percent more oil than it did in 2007, and more than it has in any year since 1995.
If demand was simply staying constant, we’d have a lot less use for imported oil. But domestic demand for petroleum, and for gasoline in particular, is falling. We’ve written before about the revolution in efficiency for automobiles. Beyond marketing hybrids and electric cars, automakers have been making a concerted and successful effort to boost the efficiency of new vehicles. And so as the American auto fleet slowly turns over, it gets more efficient. According to researchers at the University of Michigan, the average mileage of the fleet sold in May was 24.8 miles per gallon, a modern-day record, and up more than 20 percent from late 2008. Meanwhile, school buses, trucking fleets, and delivery vehicles are being converted to run on compressed natural gas. And with every day, smart, stylish people are seeking nonpetroleum alternatives, from trains to bike sharing.
Tesla’s making money, sales have doubled, and prices for plug-ins and hybrids are coming down in a big way. Is this the green market’s Model T moment?
“I would build a motorcar for the great multitude.”
A Tesla Roadster Sport sits in a Chicago dealership showroom in 2011. (Scott Olson/Getty)
That’s what Henry Ford proclaimed early in his career. Ford, of course, is associated with the democratization of the automobile; the Model T was the first mass-owned car. But Ford started off as a luxury-car maker—making high-tech, impractical, very expensive vehicles for the very rich.
That’s how it often goes when new technologies hit the market: they’re produced in small batches at a high cost. But as the companies increase production, as unit volumes rise, and as competitors enter the field and innovate further, the cost of the products falls, and falls, and falls again—to the point where the middle class can afford them. That’s what happened with the telephone, the car, the television, the personal computer, the mobile phone. A century after the Model T took the nation by storm, could the same process be happening with electric cars?
The high price of the Tesla Model S—about $60,000—is inhibiting more widespread adoption. But the more practice it gets making cars, and the more volume ramps up, the greater the ability to cut prices. This week, Tesla CEO Elon Musk said the company is aiming to produce a version of the Tesla that would retail for about $30,000 in “probably three to five years.”
Meanwhile, other electric and plug-in hybrid makers aren’t sitting still. With the advent of the Nissan Leaf, the Chevrolet Volt, the Tesla, and plug-in hybrids from Toyota and Ford, there are now more than a handful of cars on the market that rely in part, or entirely, on electricity. (Cadillac appears to be joining the fray as well.) And as they ramp up production and fight with each other for customers, they are effectively lowering the price of the vehicles.
New Yorkers can gripe about it all they want, but the city’s new bike system is cheap, easy, and even a little fun.
New York City’s new bicycle-sharing system, Citi Bike—a.k.a. the Mike Bikes, after Mayor Michael Bloomberg—has been the source of great anticipation, fear, and derision. The rollout was delayed by Hurricane Sandy and software glitches. New Yorkers moaned about the loss of parking spaces as room was made for bike docks. Tabloid reporters eagerly awaited the first thefts, which they duly reported.
Dan Gross; Susan Watts/NYDN-Getty
But the haters and critics were generally missing the point. This is a major addition of transportation infrastructure to New York. And compared with some other projects (the Second Avenue subway line has been under construction for decades), it’s cheap and relatively unobtrusive. The cost to taxpayers is negligible. Sponsors, namely Citi (hence Citi Bike) and MasterCard, helped pay for the rollout, and, as New York City notes, “sponsorship and revenues will cover the entire equipment and operations cost of the system.”
I’ve been excited about the prospect of bike sharing for a while. My office is on the far west side of Manhattan, not particularly close to any subway station, and adjacent to the unobstructed bike path that goes along the West Side Highway. A bike-sharing system would offer a way to shorten the trek to and from Grand Central Station, whence my train departs, all while getting some exercise, avoiding expensive cabs, and being carbon-free.
I signed up in early May—$95 for an annual membership—and received my key last week. On CNBC yesterday I showed it to the skeptical New Jersey–based hosts.
Laura Glenn-Hershey gets a Citi Bike bicycle from a station near Union Square as the bike-sharing system is launched in New York on May 27, 2013. (Stan Honda/AFP-Getty)
On Monday the bike-sharing system was opened to annual members like me. So this morning I gave it a trial run. As my train rolled into Grand Central at about 7:15, I opened up the free app on my (natch!) iPhone and found there was a station at 43rd Street and Vanderbilt, just outside Grand Central, with several bikes available, and that the docking station across from my building on 18th Street and 11th Avenue had several open slots.
With an Ohio Walmart hosting a holiday food drive for its own workers, The Daily Beast's Michael Tomasky criticizes the notoriously stingy company for not paying them more.
Hailed as a perfect answer to the evils of fiat money, the virtual currency has come crashing down because the invisible hand is paralyzed without government.