The Federal Reserve chairman has been working like a dog to keep the economy moving, he told Congress today, but they’re not pulling their weight. He's absolutely right.
You’re doing it wrong!
That was the gist of Federal Reserve Chairman Ben Bernanke’s opening statement in front of the Congressional Joint Economic Committee on Wednesday morning. The Fed is doing its job, but Congress and the White House are being counterproductive.
The economy is moving in the right direction, but not fast enough for anyone’s liking. Asset prices are getting a nice lift—in part from the underlying performance of the economy and in part from the Federal Reserve’s easy money policies. The stock market is at all-time high, auto companies are ramping up production, and home sales are recovering nicely. The National Association of Realtors reported on Wednesday that existing home sales rose 9.7 percent in April from last year. The median price for a home sold in April 2013 was up 11 percent from April 2012. The combination of rising values and consistent mortgage payments means that, with each passing week, more Americans are above water in their mortgages—i.e., they owe less than their homes are worth. And when people have equity in their homes, all sorts of good things happen. They’re able to sell homes and move. They’re more likely to stay current on their mortgage. And as Home Depot noted in a conference call, in which executives discussed the firm’s bang-up quarterly-earnings report, above-water homeowners are much more likely to spend money on home improvements.
While noting the positive developments, Bernanke said the economy is still sort of meh. So what’s the problem? In a word: government. I’ve noted that we are living in a Golden Age of Deficit Reduction™—the combination of higher taxes, the end of the payroll-tax holiday, the sequester, and growth are helping to bring down the deficit rapidly. The Congressional Budget Office now projects the fiscal 2013 deficit will be $642 billion, down $441 billion, or 41 percent from $1.089 trillion in fiscal 2012. That’s huge. But it may be too much, too soon.
Indeed, Bernanke complained that fiscal policy was dampening growth. First, for the last few years, state and local governments, which have to balance budgets every year, have been hacking spending and employment. “Notably, over the past four years, state and local governments have cut civilian government employment by roughly 700,000 jobs, and total government employment has fallen by more than 800,000 jobs over the same period,” Bernanke noted. I’ve dubbed this the “conservative recovery,” since all the jobs growth has come from the private sector. That’s not how it usually goes, even when Republicans are in the White House. Bernanke: “For comparison, over the four years following the trough of the 2001 recession, total government employment rose by more than 500,000 jobs.”
Now that states are doing much better, with many sporting surpluses, the job carnage is ending. But if it’s not one thing, it’s another. While states may be loosening up, Bernanke noted, “at the same time, though, fiscal policy at the federal level has become significantly more restrictive. In particular, the expiration of the payroll-tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.” How much? Bernanke noted that “the deficit-reduction policies in current law will slow the pace of real GDP growth by about 1 1/2 percentage points during 2013, relative to what it would have been otherwise.” That doesn’t sound like much. But 1.5 percent of GDP represents more than $200 billion in economic activity.
Congress, of course, is the main culprit here. But the White House is complicit as well. So too are the professional deficit hawks, who, having failed to encourage a grand bargain, continue to advocate for more cuts in the face of massive deficit reduction. Bernanke suggested that Congress ease up on the whole budget-cutting thing. The U.S. still has long-term issues, Bernanke noted, but that’s no reason to let the sequester continue. To boost short-term growth and ward off giant long-term deficits, “the Congress and the administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”
Tree huggers and deficit hawks rejoice: The federal government is buying up to 10,000 hybrid cars. There’s never been a better time to switch gears, writes Daniel Gross.
Procurement policy we can believe in!
It’s not much of a slogan. But with President Obama’s domestic agenda apparently crippled by recalcitrant Republicans, it’s something for progressives to hang their hat on.
Toyota Prius at a dealership in California. (Denis Poroy/AP)
The federal government is a large buyer of goods and services—security contractors, office space, weapons, paper products. The General Services Administration, handles a good chunk of those acquisitions. And so the decisions it makes can have real-world impacts. By the mere act of placing an order, the government can provide a boost to a specific company, or a set of products. In other words, policy can create demand.
In April, the GSA announced the federal government will buy up to 10,000 new hybrid vehicles.
That’s good news for tree-huggers, auto manufacturers, and deficit hawks—and given the changes in the auto manufacturing world, it’s likely to raise far fewer hackles than it would have a few years ago.
Hybrid cars are hardly an embryonic technology. They’re tried and tested products, with millions of units sold globally. In April, according to Hybridcars.com, more than 42,000 hybrids were sold in the U.S. alone.
The knock on hybrids has been that they tend to cost more than similar models that run only on gasoline. And even with the price of gas pushing $4.00 per gallon, it takes a long time (or a lot of driving) for a purchaser to earn back the higher price paid through lower gas consumption. Buying a hybrid may make moral and environmental sense from day one. But in order for it to produce economic benefits, you’ve got to hold on to the car for several years and drive it a lot. Which is why the most enthusiastic purchasers of hybrids (aside from the bienpensant of Boulder and Berkeley) have been the sort of owners who view vehicle ownership as a long-term business proposition. It’s common to see hybrids in taxi and corporate delivery fleets.
Just when everyone wrote us off as the next Greece, we started shrinking our deficit, then shrunk it some more. Daniel Gross on what’s behind the numbers.
A few funny things happened this spring as the U.S. hurtled along the road to fiscal degeneracy. The annual deficit shrunk by nearly a third, the size of the debt owned by investors began to shrink, and the government borrowed money for free.
A cashier counts money at Vidler's 5 & 10 store in East Aurora, N.Y. (David Duprey/AP)
Yes, the Golden Age of Deficit Reduction has begun.
The official April Treasury Monthly Statement comes out on Friday. But the Congressional Budget Office’s monthly review for April, released earlier this week, bears good news. The deficit was $489 billion through the first seven months of fiscal 2013, compared with $720 billion in the first seven months of fiscal 2012, a decline of $230 billion, or 32 percent. Meanwhile, the government collected so much money in April that it paid down about $50 billion of the debt it owes to investors around the world.
While the supply of debt fell, demand remained constant. People still need a safe place to put money in this turbulent world. And so this week, the U.S. government sold $20 billion of 28-day bills with an interest rate of zero. That’s right. Rational people forked over $20 billion in cash to the U.S. Treasury Department, said they’d be back to pick it up on June 6, and didn’t demand any interest.
What in the name of Keynes is going on?
We’ve discussed this before. But it bears repeating: The miracle cure for deficits—last fiscal year it was $1.089 trillion—is growth and higher taxes. Now we’re getting both. In the U.S. today there are two million more people working than a year ago, at slightly higher wages. That translates into more payroll and income taxes. Payroll taxes were raised substantially on January 1, 2013, from 4.2 percent of the first $133,700 to 6.2 percent. And higher taxes on the investment and regular income of very high earners went into effect as well. What’s more, in anticipation of the higher taxes, companies in 2012 shoveled dividends and bonuses out the door in late 2012. In the first few months of 2013, especially in April, people had to pay tax on all that income.
The upshot has been a gusher of income. In the first six months of 2013, revenues rose 12.5 percent from the year before. Meanwhile, thanks to declining spending on unemployment benefits, winding down of two wars, and the sequester, spending fell—about 2.4 percent in the first six months of fiscal 2013. The trends continued—and probably accelerated—in April. CBO estimated that the government reported a surplus of $122 billion in April 2013—more than twice the size of the surplus it notched in April 2012.
Paying a living wage comes at a cost, but it can help the bottom line, says Charney, who has built a retail empire without resorting to cheap overseas labor. Daniel Gross talks to the controversial chief executive.
“The era of cheap labor is coming to an end,” says Dov Charney, the founder and chief executive officer of apparel chain American Apparel.
American Apparel CEO Dov Charney in the company’s manufacturing facilities in downtown Los Angeles in 2010. (Ringo Chiu/Zuma, via Corbis)
For decades, the fabric and garment industries have been engaged in a constant chase for cheaper labor—from the mills of England to New England in the 19th century; to the sweatshops of the Lower East Side of Manhattan a century ago to textile plants in South Carolina in the first half of the 20th century; to the Philippines, South Korea, and China in the second half of the 20th century; and now to places like Bangladesh and Africa.
But every strategy has its limits. And the limit may have been breached in Bangladesh, where the collapse of the Rana Plaza garment factory has claimed the lives of at least 800 people, most of them extremely low-paid workers. The disaster has inspired a backlash and a round of soul-searching.
Charney, who sells $600 million worth of clothes a year, understands the business and the pressures that suppliers face. American Apparel has 249 stores in the U.S. and 20 other countries and manufactures clothing for other companies.
All clothing manufacturers are under intense pressure. Miss a deadline, and you own the goods. “If you’re in Bangladesh and you don’t put the merchandise on a boat by a certain date, you’re done. You’re out of business. You’ll do anything to get those goods out,” says Charney. That mindset encourages cutting corners and pushing employees and facilities to the limit, all while constantly looking for the lowest possible price, he says.
In the 21st century, most companies outsource production to overseas contractors and subcontractors, who scour the globe for the cheapest possible labor. But Charney has borrowed a page from industrialists of the early 20th century, pursuing a strategy of so-called vertical integration, which means it makes almost all the clothes it sells in a factory in Los Angeles. And, as Henry Ford did a century ago, American Apparel strives to pay an above-market wage. The company says, “The average sewer with experience at American Apparel is making about $25,000/yr, or $12 an hour, almost twice the federal minimum.” The company also provide benefits including “subsidized public transport, subsidized lunches, free on-site massages, a bike lending program,” low-cost health insurance, and a medical clinic. In contrast to some other companies that keep information about their supply chains opaque, American Apparel invites people to explore its factory online.
Charney is a controversial character. He has been accused of flaunting norms of employer-employee relationships and has exhibited an openness about sexuality not common among CEOs of publicly held companies. As The New York Times noted in an April 2011 article: “Mr. Charney masturbated in front of a female reporter from now-defunct Jane magazine. In 2008 he was lampooned on ‘Saturday Night Live’ for walking around the office in his underpants.” Charney has also been on the receiving end of several sexual-harassment lawsuits, virtually all of which have been thrown out, dismissed, or settled.
Jamie Dimon is CEO and chairman at JPMorgan Chase, and pressure is mounting for the bank to split the roles. Never gonna happen, writes Daniel Gross—never mind those billions in fines.
Jamie Dimon, the gruff, silver-haired chief executive officer and chairman of JPMorgan Chase, is facing an unlikely challenge.
Photo Illustration: NWDB. Photo: PeskyMonkey/Getty; AP.
The big bank has stuck to the practice of having its CEO also serve as chairman of its board of directors—a circumstance in which the guy who runs the company also runs the entity that is responsible for overseeing, hiring, and firing the CEO, and which has become increasingly unpopular at publicly held companies.
With a showdown coming up on May 21, The Wall Street Journal is reporting that some big shareholders are threatening to withhold their votes. Three giant institutions that collectively control about 12 percent of the bank’s shares—BlackRock, Vanguard, and Fidelity—have not yet decided whether they will vote for Dimon to continue in both roles. “Although the vote is nonbinding, directors could face pressure to act if more than half of shareholders want the positions divided,” WSJ reports. Last year, WSJ noted, 40 percent of the bank’s shareholders supported a proposal to split the role.
Dimon shouldn’t worry too much. Sure, the age of the imperial CEO may be coming to an end, in corporate America as a whole and in Wall Street in particular; many CEOs are on short leashes, battling declining tenures and increasingly aggressive boards and outsider shareholders. But Dimon, 57, who has been running JPMorgan Chase since the beginning of 2006, is an exception in many ways.
Duff McDonald’s excellent biography of Dimon was aptly titled Last Man Standing, in part because Dimon was one of the few Wall Street executives to emerge through the 2008 financial crisis with his job, fortune, and reputation intact. JPMorgan Chase, like every other bank, made plenty of poor, ultimately costly decisions in the credit boom years. But under Dimon, the bank made less of them than all of its peers, and it had more capital going into the bust. While the bank availed itself of TARP funds and all sorts of crisis-era programs aimed at helping the banks, Dimon and JPMorgan Chase always claimed that they didn’t really need the help.
That was bollocks, of course. The bank issued tens of billions of dollars in low-cost debt guaranteed by the Federal Deposit Insurance Corporation and benefited mightily from the government’s decision to assume formally the debts of Fannie Mae and Freddie Mac. Absent the extraordinary assistance from the Federal Reserve, the Treasury Department, and the American taxpayer, every bank—including JPMorgan Chase—would have gone bust in late 2008 or early 2009.
Meanwhile, events since the crisis have proven that JPMorgan Chase wasn’t (and isn’t) particularly well managed. As Nina Strochlic documents, the bank has repeatedly been forced to settle consumer lawsuits and regulatory charges and investigations relating to: dealings with mortgage borrowers and mortgage investors; foreclosing on active-duty military personnel; rigging bids in the municipal bond market; financial dealing with countries covered by U.S. sanctions; and overcharging for checking overdrafts. The total tab for the company’s missteps has run in the billions.
Unemployment is down to a four-year low, as the U.S. economy steams ahead in turbulent times. Daniel Gross on why the dip will look even better in hindsight.
The U.S. economy continues to steam ahead amid turbulent seas. Or at least that’s my takeaway from Friday morning’s job report.
The economy added 165,000 payroll jobs in April—good, but not great, though better than many analysts expected. Strength was seen in business and professional services (73,000 new jobs), food and drinking establishments (38,000), and retail (29,000). You don’t need to have a Ph.D. in economics to understand how more people working at more jobs for slightly more pay leads to increased demand, which in turn leads to hiring. Compared with a year ago, then, there are 2.077 million more Americans with payroll jobs. That’s not enough to claw back all the jobs lost in 2008 and 2009—the last time there were this many private-sector workers was back in September 2008, before the Lehman Brothers crisis. But the jobs numbers are moving in the right direction.
A job seeker (left) meets with a recruiter during a job fair at the Alameda County Office of Education in Hayward, California, in April. (Justin Sullivan/Getty)
The unemployment rate, which is calculated from the separate Bureau of Labor Statistics household survey, fell from 7.6 percent in March to 7.5 percent in April. Now, in past months, analysts have been quick to dismiss declines in the unemployment rate when the decline is a function of people leaving the labor force. (After all, if the labor force declines, the unemployment rate could fall even if the number of people who say they’re working stays the same.) But in fact, in April the labor force grew by more than 200,000 from March. And it is up by nearly 800,000 from a year ago. More people are looking for work and more people are finding it. The number of people in the household survey reporting themselves as being employed rose by 291,000 in April.
While it looks pretty good at first blush, the April jobs figure is likely to look even better in hindsight. After reporting the monthly figure, the BLS then revises the figure in each of the next two months. And since the economy began growing again in 2009, the trend has generally been for BLS to revise these figures higher. Justin Wolfers of the University of Michigan noted that over the course of 2010, BLS added 480,000 jobs through such revisions, 340,000 in 2011, and 330,000 in 2012. So far, this year is no different. The February figure, originally reported as 236,000, was revised upward to 268,000 in March. Today, the BLS revised that figure up to an impressive 332,000. March’s payroll-jobs figure, originally reported as an anemic gain of 88,000, was revised to 136,000. In effect, BLS discovered an additional 114,000 jobs in the economy.
The jobs growth is good. But wage growth is less impressive. One of the major—and frustrating—features of this recovery has been that capital is beating the living daylights out of labor. Companies have been able to rack up record profits and are demanding that employers work harder and more productively without necessarily paying them more. Why? There’s a lot of slack in the labor force, unions have declined in power, and there’s a pervasive sense among CEOs that they just don’t need to pay more. This trend continued last month. “In April,” BLS noted, “average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $23.87. Over the year, average hourly earnings have risen by 45 cents, or 1.9 percent.” That’s weak. And we are nearing a point where we will really need companies to start giving it up if the expansion is going to continue.
Why? Well, fiscal policy—the sequester, declining defense spending, higher taxes—is now acting as a drag on the economy. April was the first full month in which the effects of the sequester would be seen in employment. The federal government cut 8,000 jobs in April. More broadly, what I’ve dubbed the “conservative recovery” is still intact. Each month for the past three years, the private sector has added positions, and each month for the last three years, the public sector—federal, state, and local government—cuts jobs.
This dynamic usually doesn’t happen in an economic expansion. But it’s been going on for a few years thanks to austerity at the federal level and the continual needs of state and local governments to balance their budgets. In April, while the private sector added 176,000 jobs, the public sector cut 11,000 jobs—8,000 from federal payrolls, 1,000 from state payrolls, and 2,000 from local government payrolls. The budget picture may be improving across the country, but it’s not leading to more government employment yet. Since February 2010, the private sector has added 6.78 million jobs. Since May 2010, the public sector has cut 1.147 million jobs.
It may not be the Marshall yet, but the Blackstone Group founder tells Daniel Gross he’s looking for ‘future thought leaders’ for his Schwarzman Scholars program to send to study in China.
The Schwarzman. It doesn’t have quite the same ring as the Rhodes or the Marshall. Yet.
Stephen Schwarzman, the chairman and CEO of the Blackstone Group, gives a speech at a news conference April 21 for the launch of the Schwarzman Scholars at the Great Hall of the People in Beijing. (China Daily/Landov)
Last week Blackstone Group co-founder Stephen Schwarzman announced the creation of the eponymous Schwarzman Scholars program, which will fund scholarships to send bright young Americans to study at Tsinghua University in Beijing. The idea? Take a bunch of members of the future elite in their protean state and give them exposure to what is now the world’s most populous country and what is likely to be the world’s largest economy. You don’t have to be an Asian-studies major, or know Mandarin, or be interested in economics and business. “We’re looking for thought leaders, and whether they’ve evidenced interest in Asia is not particularly germane,” Schwarzman tells The Daily Beast.
Schwarzman, a 66-year-old billionaire, has deep connections in China. The country’s sovereign wealth fund, China Investment Corporation, in 2007 paid $3 billion for a big chunk of Blackstone Group. (The investment is so far a losing one for the fund.) Schwarzman is on the advisory board of the school of management at Tsinghua University, which was founded in 1911 to prepare Chinese students to study in the U.S. Blackstone is an active investor in China. “The Chinese can say my last name, which is a quite a surprise to me,” Schwarzman said. (Stephen is apparently a little more difficult, as he has a Chinese first name.)
Tsinghua’s president first approached Schwarzman in 2010 and asked him to consider creating a program that would attract more international students for the university’s 100th anniversary in 2011. “The problem was addressing the potential tensions that would develop between China and the developed world, as a result of China growing at two to three times the rate of the developed world,” he said. Rolling this trend forward, Schwarzman foresaw an “increasing probability of trade tensions and economic tensions and potentially military tensions.”
One way to alleviate tensions would be to create something like the Rhodes Scholarship Program, which sends 32 American students to British universities for a year and whose alumni include former president Bill Clinton. “We’ll take those types of candidates to China so that they get immersed in that environment, learn to understand it on a firsthand basis, and give them a special look at it,” Schwarzman says. Beyond taking classes, Schwarzman scholars will meet Chinese leaders, travel to various regions of China, and have a mentor assigned to them. “They’ll go to the mentor’s place of work, see how businesses operate, and meet their families,” Schwarzman says. “And that would be another mechanism for these students getting a unique look besides getting a master’s degree.” The first class of scholars will fly over to Beijing—in coach, Schwarzman notes—in June 2016.
The program is just getting started (the website can be seen here) and is seeking to raise $300 million. Schwarzman kicked in $100 million; donors including companies such as BP, Boeing, General Electric, JPMorgan Chase, and people like hedge-fund managers Ray Dalio of Bridgewater Associates have committed another $100 million; and Schwarzman is looking for $100 million more. In classic private equity fashion, Schwarzman has leveraged his contribution into a naming opportunity. (His name is also on the main building of the New York Public Library, to which he contributed $100 million.)
There is, of course, a big difference between the Schwarzman Scholarship on one hand and the Rhodes and Marshall Scholarships on the other: the destination. Many American universities have rushed into new geographic areas that have not been traditional outposts of freedom of expression and academic inquiry—i.e., the Persian Gulf and Asia. Schwarzman said he has no concerns about sending students to a Chinese university for graduate study. “They’ve made the development of their universities into world-scale standards as a major governmental priority,” he said. “And to do that and attract Western students of the type that we are discussing, there has to be free and open discourse in the classroom.” Sure, he acknowledges, “there will be some limitations as they encounter the greater society, and that’s part of the educational experience.”
China’s slowdown. Apple’s shame. The collapse of gold. Oh, and a terrorist attack. Just as we’re feeling optimistic, volatility has returned. Daniel Gross on those evil Black Swans.
So I leave the country for a week and all hell breaks loose. The Boston Marathon is bombed. The markets gyrate crazily. China, which has been growing like mad for the last two decades, announces a sharp slowdown in its growth rate in the first quarter of 2013. Gold, the ultimate hedge against instability and volatility, plummets, falling more than 13 percent in a couple of trading days. Apple’s stock, the apple of so many investors’ eyes, falls nearly 8 percent during the week, contributing to a 28 percent year-to-date decline. (Here’s the ugly six-month chart.)
A trader calls out an order on the floor of the New York Stock Exchange on April 19. (Richard Drew/AP)
Yes, volatility is back. The VIX, a tradable index that measures volatility in the stock market—a.k.a. the fear index—spiked more than 40 percent last Monday, only to plummet and then soar again in the ensuing days. In fact, it never really left.
At the World Economic Forum in Davos in January, the big takeaway was that the rolling economic crises of the preceding years were contained. The global economy was poised for a year of decent growth. Global stock markets were buoyant, with America’s nosing to new records. The issues that had caused so much angst in the preceding year—concerns over America’s growth, worries over sovereign debt crises in Europe—had generally been put to rest.
Despite the tendency of economists and corporate executives to make bold, certain forecasts for the coming year, or coming two years, economic affairs generally don’t unfold in a rational, linear manner. We are constantly being presented with seemingly random events, flocks of so-called Black Swans. Underneath the most placid waters, there are vicious currents and tides, and underwater volcanoes that are constantly erupting.
In late December—or even in late February—nobody would have predicted the procession of events that unfolded in late March and early April: the collapse of Cyprus; the apparent humbling of Apple; a sharp slowdown in China; a puncturing of a gold bubble; the rise and fall of a bizarre alternate currency called Bitcoin; Japan’s extremely aggressive move for quantitative easing in a belated, desperate attempt to spur inflation and growth; a horrifying attack on the Boston Marathon. Back then, the beard-strokers and chin-tuggers were fixated on the developments that seemed to be right in front of their faces, like the negative impact of the payroll tax and the sequester, or the prospect that the U.S. Federal Reserve might begin to curtail its easy-money policies in the face of a strengthening jobs market.
Lakshman Achuthan of the Economic Cycles Research Institute notes that a great deal of economic forecasting consist of simple extrapolation from existing trends. But in the last few weeks we’ve seen a series of sharp discontinuities, events that don’t fit into an existing narrative. This volatility can be very damaging to individuals who make leveraged bets on the continuation of a strong existing trend. Like if you borrowed money to buy gold futures. Hedge-fund manager John Paulson soared to prominence and phenomenal wealth by betting against subprime mortgages before the financial crisis, and then by plunging into gold after the crisis. As Bloomberg reported, the decline in gold so far this year has cost him about $1.5 billion personally. Investors in his concentrated gold fund have likely lost even more. A similar fate would have befallen those who borrowed against their homes to purchase calls on Apple stock last summer.
April has also provided a case study in the volatility of the reputation and fame of others who rose to prominence in the financial crisis. In their bestselling book, This Time Is Different, economists Ken Rogoff and Carmen Reinhart exhaustively and dispassionately delve into the history of what happens to national economies in the wake of financial crises. Many of their findings—especially the fact that when national debt rises above 90 percent of GDP, economies slip into prolonged periods of slow growth—were seized upon as ironclad rules by the global claque of pro-austerity policymakers. Their research translated into phenomenal book sales and admiring features. But earlier this month, three scholars at the University of Massachusetts debunked several of the findings of Rogoff and Reinhart. It turns out the original scholarship involved a crucial Excel coding error and omitted important data. With the econo-blogosphere abuzz, Rogoff and Reinhart were forced to concede some errors and sheepishly walk back a portion of their conclusions. Pointing to a spike in Google searches for the two authors, University of Michigan economist Justin Wolfers tweeted: “fame, then infamy.”
There’s been no grand bargain. And you’ll never get deficit hawks to admit it. But in four years Obama has presided over a remarkable deficit reduction, says Daniel Gross.
This is the Golden Age of deficit reduction. Really.
You wouldn’t know it if you listen to the professional deficit hawks, who have plowed hundreds of millions of dollars and countless op-eds into a fruitless effort to drive a grand bargain on taxes and spending. But it is. Policy is nobody’s idea of optimal. But nonetheless the gridlock of the past few years has produced spending restraint and higher tax rates. President Obama has proposed more of both in the budget he released on Wednesday. The sequester has just kicked in. And sustained economic growth, the miracle deficit cure, continues to work its magic. The expansion is now in its 46th month.
President Barack Obama waves as he boards Air Force One at San Francisco International Airport in San Francisco on April 4, 2013, for a return trip to Washington. (Jeff Chiu/AP)
While the national debt mounts, I’ve noted that the primary deficit—the annual mismatch between revenues and expenditures—is melting away. Check out the March Treasury Monthly Statement, which was released Wednesday. In March 2013, the government collected $186 billion in revenues and spent $292.5 billion, for a deficit of about $106 billion. Pretty bad. But in March 2012, revenues were substantially lower and spending was significantly higher. Then, revenues were $171.2 billion and spending was $369.37 billion, for a deficit of $198 billion. From last March to this March, revenues rose 8 percent while spending fell 21 percent, and the monthly deficit shrank 46 percent.
Now, monthly numbers can move around—if a big tax payment comes in on March 31 one year and arrives on April 1 the next year, or if a benefits payment that went out on March 1, 2012, instead went out on Feb. 28, 2013. So it’s useful to look at the trend. The fiscal year is now six months old. And guess what? It shows more deficit melting. Through the first six months of this fiscal year, revenues are $1.196 trillion, up 12.5 percent from $1.063 trillion in the first six months of fiscal 2012. Meanwhile, the government has spent $1.797 trillion in the first six months of fiscal 2013, down 2.4 percent compared with the first six months of fiscal 2012. The deficit for the first half of the fiscal year is $600.5 billion, down 22.5 percent from $775 billion in the first half of fiscal 2012.
The last six months of the fiscal year are always good ones for the government, as tax payments tend to produce surpluses in April and again in September. Should the current trends continue for the rest of the year, we’ll be looking at an annual deficit of about $850 billion for fiscal year 2013, down from $1.089 trillion in fiscal 2012. (The Obama administration projects a $972 billion deficit for the current fiscal year, but it will surely be less than that.) Put another way, that’s $240 billion in deficit reduction in a single fiscal year—in the absence of a grand bargain. The reduction is even more impressive when you consider that in fiscal 2009, the deficit was more than $1.4 trillion. It’s hard to envision a time in recent history when the deficit has shrunk so much in dollar terms in the space of four years.
And in theory, there’s more to come. The budget Obama presented, which is naturally dead on arrival, continues the spending restraint. Next year it projects spending will rise 2.5 percent. It aims to increase revenues by doing things like getting rid of the absurd carried-interest tax break for private equity and hedge-fund managers. Should all the proposals become law, the administration projects revenues will rise nearly 12 percent in fiscal 2014, leaving a deficit of $744 billion.
That’s still big. But it would represent as a decline of 47 percent in four years. And what ultimately matters isn’t the sheer size of the annual deficit but its size in relation to the economy. That’s shrinking too. The ratio of the primary deficit to GDP has been falling rapidly, from 10.1 percent of GDP in 2009 to a projected 6 percent in fiscal 2013 (it’ll probably be less), and 4.4 percent of GDP in fiscal 2014.
Employees shouldn’t be taxed on free food because it’s not pay, it’s a way to keeping them at their desks or on the assembly line.
There’s no such thing as a free lunch—even when it’s free. The Internal Revenue Service is giving Google a hard time about its practice of providing free lunch to employees at its facilities and simply deducting the costs as an expense—rather than treating the food taxable compensation to the engineers who chow down on turkey wraps every day. My colleague Megan McArdle argues that the IRS isn’t out of order in doing so.
The theory is this: people have to buy food with their own money. When a company buys $50 of food each week and gives it to an employee, it has the same net financial effect of giving the employee $50 in cash. Therefore, the food should be seen as taxable income.
But as someone who has long investigated the links between corporate culture, tax policy, and free food, I see it differently. My 24 years in the workplace, and countless trips to factories, corporate campuses, and offices around the world, have convinced me that workplace-provided food isn’t a different form of pay. Rather, it’s an instrument of social control. Companies use people’s basic needs and desire to consume calories as a way of channeling their efforts toward the greater corporate good.
For lots of workers, food and drink—caffeine, sugar, carbs, proteins—are fuel, no less than the electricity that powers the computers and telephones. And it is in the best interest of companies to ensure that employees are fueled efficiently. Encourage people to wander outside for a slice of pizza at lunchtime, and they might be apt to take a long walk, or idle in the park. In New York, a coffee break involves waiting for an elevator, going outside, and then waiting on line. If you provide people with the calories and caffeine they need to get through the day, you eliminate time-consuming breaks. Take away people’s excuse for not working, and you boost productivity.
Before he became the anti-junk-food mayor of New York City, Michael Bloomberg was a pioneer in the corporate provision of junk food. For decades, Bloomberg has made available to employees—at no charge—the entire contents of a convenience store. What started as coffee, chips, and cookies (snacks, not meals), quickly expanded to things that were like meals (fresh fruit, cereal and oatmeal for breakfast, cans of tuna fish, soup, and noodle packets for lunch).
At many workplaces, food and snacks are deployed selectively – as morale builders. Companies routinely order in pizzas when teams are crashing on a deadline, or provide meals on nights when the entire staff has to stay late. Again, this is not a way of paying employees. Rather, it’s a way of reducing the friction and hardship involved in working overtime and under unusual circumstances.
Many companies run cafeterias where the meals aren’t free, but are subsidized: Time Inc., Sears, Goldman Sachs, and factories all over the place. These corporate food courts and chow lines aren’t another way of paying people. Rather, they serve a corporate goal. If you run a factory five miles from town or your offices are in a huge campus a few miles from stores, you want to keep people on the premises to ensure maximum productivity. If you’re running a precision manufacturing operations, you need people on the lines at precisely the right times. Providing meals on-site—free, subsidized, or market rate—is a way of ensuring that workers will be in the right place at the right time.
The family-owned company that revived Pabst Blue Ribbon has been given the go-ahead to purchase Hostess out of bankruptcy. The new owners share their plans to bring the Twinkie—and profitability—back to life.
It’s hard to imagine Twinkies, Sno-Balls, and other Hostess products dying. After all, preservatives have given them a shelf life that rivals that of fine wine. But last fall it seemed as if the spongy, sickly-sweet confections would disappear from the face of the earth. In November, as management and labor feuded over how to reduce the liabilities of Interstate Bakeries, the bankrupt parent company of Hostess, the company announced it would cease operations and consider liquidating. Fearful customers rushed out to hoard Twinkies.
Hostess Twinkies sit on a table on September 22, 2004, in San Francisco. (Justin Sullivan/Getty)
But last month, the Metropouloses, a family of entrepreneurs with a long track record of turning around wounded and orphaned brands, were given approval by a bankruptcy court to acquire control of Hostess. Once the deal closes, they’ll aim to do for Twinkies what they have done with Pabst Blue Ribbon—reposition the brand to a new generation of customers while retaining die-hard fans.
Over the last few decades Greek immigrant Dean Metropoulos has bought, restructured, revived, and sold a series of packaged food brands, including Chef Boyardee, Vlasic Pickles, Bumblebee Tuna, Aunt Jemima, Duncan Hines, and Log Cabin. His success has made him a billionaire; he ranks No. 377 on the Forbes 400. His two millennial sons, Daren (29) and Evan (32), grew up in Stowe, Vermont, and Greenwich, Connecticut, and are now principals with their father in Metropoulos & Co. The two are co-CEOs of Pabst Brewing Company, and they are helping to lead the reinvention of Hostess.
While they have been involved with many well-known brands, the Metropouloses (Metropouli?) have a relatively low media profile. Their firm doesn’t have a corporate website. And they’re not big on the private-equity conference circuit.
But they’ve as scored a big hit with Pabst, which they acquired in May 2010 for $250 million. PBR was already on the upswing when Metropoulos & Co. acquired it. The long-neglected brand had been adopted by hipsters and was growing smartly in a U.S. beer market that had long since gone flat. After the acquisition, they repaired relationships with distributors, fixed the pricing, brought the company’s information technology systems into the 21st century, and focused on smart, inexpensive guerrilla and field marketing: employing people with tattoos to go to music festivals and events.
“Pabst has become a lifestyle brand, much like Monster Energy and Red Bull,” said Daren Metropoulos. “There is a trend-setting community, 21 and over, that prides themselves on being trendsetters. They revolted against horses being jammed down their throats and 30-second commercials.” PBR, Evan noted, is now sold at retailers like Whole Foods alongside craft brands.
There’s more to the company than PBR—it owns dozens of smaller, regional brands, many of which are growing rapidly. “We’ve seen the same organic growth in Rainier in the Pacific Northwest, Bohemian in Maryland, and Lone Star in Texas,” said Evan Metropoulos. And they haven’t shied away from enlisting celebrities in high-profile marketing campaigns: Snoop Dogg has become associated with Colt 45, and Will Ferrell has starred in Old Milwaukee commercials.
Roz Brewer leads the retail giant’s Sam’s Club division, and she has used her perch to help clear a path for future women leaders. She shared her secrets at the Women in the World Summit.
One of the phone calls that mattered the most to Rosalind Brewer on the day she was named CEO of Sam’s Clubs in February 2012 came from another CEO—Ursula Burns of Xerox. Burns, a member of the extremely small sorority of African-American female leaders of large organizations, reached out to congratulate Brewer on her new position.
“That really brought me back to center and reminded me that you have to give back and recognize the successes of other women,” Brewer said Friday at Newsweek and The Daily Beast’s fourth annual Women in the World Summit, where she was interviewed by Pat Mitchell, the president and CEO of the Paley Center for Media.
Sam’s Club, a $54 billion retail chain owned and operated by Walmart, has 600 outlets and more than 100,000 employees around the world. Brewer is the first woman and the first African-American to run a division of Walmart. The discussion centered on Brewer’s efforts to harness the power of the world’s largest retailer to create new opportunities for women across the globe.
In her rise from Detroit to Bentonville, Brewer—a member of the first generation of her family to attend college—says she has relied on women mentors. When she worked as a corporate engineer early in her career, a senior executive took Brewer under her wing. “She taught me about the unwritten rules of these kinds of jobs,” said Brewer, who majored in chemistry at Spelman College. “She was the one who spent the time telling me how to watch out and what to expect. I’ll never forget that.” Before joining Walmart in 2005, Brewer worked at Kimberly-Clark Corp., where she rose from the laboratory to become president of its Global Nonwovens sector.
One of the most significant pieces of assistance woman can offer younger women in the corporate world is to encourage them to find and use their voice. “There was a time in my career when I was quiet, even though I knew the answers to the questions,” Brewer said. “So when I mentor young women, I constantly tell them about leading with your voice and your guts.”
Brewer, a 50-year-old wife and mother of two, invests time in mentoring women through several avenues. At Spelman College, where she sits on the board of trustees, both Walmart and Brewer’s family have sponsored scholarships. “I do a lot of work at my alma mater,” she said. “There’s nothing greater that I can do than go to the commencement exercises and see 400 African-American women graduating.”
Sam’s Club also works intensively to train female entrepreneurs and businesspeople to be suppliers to the massive chain. Brewer cited the example of Rose Hill, an organic farmer in Alabama who has become a supplier to the company and is now teaching other women about sustainable farming. “We’re extending ourselves, teaching women how to grow their business,” she said.
Mindful of the way others like Burns have extended themselves to her, she is always conscious of the need to extend herself. A great deal of the mentoring Brewer does happens during the work day, as she walks the aisles of Sam’s Clubs, talking and listening to associates. In addition to discussing inventory, customer behavior, and logistics, “I share my story, I talk openly about my family, and I spend time making sure that they know” what is possible, Brewer said. “I create road maps for the people who work for me, because it’s not easy. I need to clear the barriers.”
Of all the bizarro products Pizza Hut has launched (remember the P’Zone?), the new ‘Crazy Cheesy Crust’ pizza might be the craziest yet—or the most brilliant. Daniel Gross reports.
When people say the U.S. has lost its capacity to innovate, I point them toward the fast-food sector. It’s an industry that Americans pioneered and continue to dominate. Homegrown brands are expanding throughout the developing world. The uniform customer experiences they provide are triumphs of industrial engineering and efficiency systems management. And they are constantly spending money to create and introduce new products.
Behold the latest offering from Pizza Hut, announced on Wednesday: the “Crazy Cheesy Crust.” It’s the usual Pizza Hut mélange of dough, tomato sauce, and cheese. Except the crust, “the element of a pizza that Pizza Hut has a rich tradition of revolutionizing all around the world,” is now outfitted with 16 dough pockets, each filled with a mixture of five molten cheeses.
Now, “crazy” seems to be something of a theme at Yum Brands, the parent company of Pizza Hut, Taco Bell, and KFC. Last month, we wrote about the triumph of the Doritos Locos Taco. (For those of you who didn’t take Spanish, loco means “crazy” in Spanish.) “It wasn’t intentional,” notes Kurt Kane, chief marketing officer at Pizza Hut, of his crazy pizza. “We picked up a lot of the language consumers used as they were trying it. This is really a consumer-named idea.” (There’s no truth to the rumor KFC is preparing to test The Colonel’s Meshugganeh Kosher Chicken.)
Of course, it’s easy to look askance at the endless iterations of core products—the many flavors of Doritos, the dozens of varieties of Oreos, new twists on Coca-Cola. But such new wrinkles are vital if established brands are to remain successful, keep existing customers happy, and attract new ones. And in a crowded market, Pizza Hut—the market leader in the vast U.S. pizza category—can’t afford to let its guard down.
Yum Brands has enjoyed phenomenal growth outside the U.S. in recent years. Here’s the most recent quarterly report. Last year in China, Pizza Hut Casual Dining same-stores sales rose 10 percent on the year and 7 percent in the fourth quarter. At the end of 2012, there were 12,757 Pizza Huts: 987 in China, 310 in India, 5,251 elsewhere outside the U.S., and 6,209 in the U.S. All in, 604 outlets were added over the course of 2012.
But in the U.S., Pizza Hut has struggled a bit. In 2011, the average U.S. system unit had sales of $875,000 (compared with $1.28 million for Taco Bell). Total combined Pizza Hut company and franchise sales were $5.5 billion in 2011, about what they were in 2008. For all of 2012, same-store sales at U.S. Pizza Huts rose 3 percent. And in the fourth quarter, same-store sales actually fell one percent from the fourth quarter of 2011. That’s bad news in an environment when costs for labor, benefits, and raw ingredients are rising.
And so it seems that some reinvention of the menu would be in order. Yes, Pizza Hut’s menu now includes wings. But the company doesn’t go for out-of-the-box innovations like making a taco shell out of a Dorito, or adding salads and coffee, as McDonald’s has done. If you go to the press room and scroll through the releases, you won’t be bombarded with new product releases. By and large, it offers not-too-revolutionary twists on the Holy Trinity of dough, cheese, and sauce that has fueled millions of study sessions, post-Little League chowfests, and work meetings. “It’s always a combination of dough, sauce, and cheese,” said Kane, the chief marketing officer. “But there are a lot of ways you can make it new time and time again.
With revenues rising more rapidly than spending, deficits are evaporating in state capitals—and governors are having fun again, reports Daniel Gross.
This spring, budget surpluses are blossoming across America. We’ve noted that the combination of employment growth and tax increases is boosting federal revenues significantly—13 percent in the first five months of the current fiscal year. Combined with a bit of fiscal discipline, the higher revenues are helping to reduce the (still massive) federal budget deficit.
But America’s 50 states aren’t permitted to run deficits. So each year, state legislatures pass, and governors sign, budgets for the next fiscal year in which expenditure are supposed to align with expected revenues. Then, they wait and hope that the revenues actually materialize.
That’s happening—and more. In the current fiscal year (fiscal 2013, which started last spring or summer in most states), the level of spending rose just 2.2 percent from fiscal 2012, according to the National Association of State Budget Officers (NASBO). That’s far below the historical average of 5.6 percent growth per year. But state revenues are growing more rapidly than spending. In the fourth quarter of 2012, according to the Nelson A. Rockefeller Institute of Government, state tax receipts were up 5.7 percent from the fourth quarter of 2011. For the full year, revenues probably rose about 4 percent. Now, late 2012 tax receipts were boosted in part because so many companies rushed dividend payments out the door to avoid the prospect of higher taxes.
Still, with revenues rising more rapidly than spending, deficits are evaporating in state capitals. “It’s likely most states will end the year with a slight surplus,” said Brian Sigritz, director of state fiscal studies at NASBO.
Surpluses are showing up in places you’d expect. North Dakota, currently enjoying an energy and agricultural boom, is projecting a $1.6 billion surplus over its two-year budgeting cycle. Texas, another resource-rich state, foresees an $8.8 billion surplus over its current two-year budget cycle.
But the Rust Belt is also regaining some of its fiscal shine. Ohio is expecting a $1 billion surplus for the current fiscal year. Wisconsin is looking at $484 million in black ink. Other states with surpluses include Iowa ($800 million) and Tennessee ($580 million). West Virginia completed its 2011–12 fiscal year with a surplus of about $88 million.
Some of the coastal states whose finances were hit hardest by collapsing housing markets and persistently high unemployment are also making a comeback. For the past several years, California’s massive, recurring deficits have made life miserable for politicians and inspired comparisons to Greece. Thanks to tough spending cuts, higher taxes, and a general recovery, California’s finances are on the mend. “California expects to take in $2.4 billion more in revenue than it will spend this fiscal year, which ends June 30,” Tami Luhby of CNN Money reported. "After paying off a shortfall from last year and setting aside funds for upcoming obligations, it’s on track to end the year with a $36 million surplus." Florida, another state that has had to deal with harsh cuts to rein in deficits, is also now in the black. The current projection is for a surplus of $437 million.
Those new stock-market records? Just another bubble—but this one might well finish us. ‘Great Deformation’ author David Stockman tells Daniel Gross where we went wrong, and who’s to blame.
Most 742-page jeremiads aren’t much fun to read. But The Great Deformation, David Stockman’s revisionist history of the past 100 years of capitalism American-style, is a spirited, occasionally gleeful skewering of many of our most widely held assumptions and most lionized figures. A former divinity student, Stockman chronicles what he views as the moral rot in the American financial system—one fueled by easy money, profligate debt, and needless government intervention. To a degree, this book is autobiographical. As a congressman, Reagan-era budget official, and private-equity executive, Stockman has lived through the booms and busts of the past half-century. He knows the world of which he writes from the inside out. And in The Great Deformation, few escape his opprobrium—current and past policymakers, Roosevelt and Reagan, Democrats and Republicans, leveraged buyout titans, and corporate CEOs. “Sundown now comes to America because sound money, free markets, and fiscal rectitude have no champion in the political arena,” Stockman writes.
David Stockman. (Louis Lanzano/AP)
He spoke with Daniel Gross about The Great Deformation.
Reading this book, it seems like your approach was less that of a historian than that of an archeologist.
Right. Economic archeology. I started reacting highly negatively to the bailouts in September 2008. The Federal Reserve was creating $600 million an hour in new money. That was a disconnect, a major leap into the unknown. And I thought the bailouts were a repudiation of everything that the Republican Party and conservatives stood for. I didn’t believe the rationalizations at the time. I started on Capitol Hill in 1970, as a young guy on the sidelines and then a congressman, then in the thick of it in the Reagan era, then on Wall Street. So this is an effort to make sense of all the experiences and encounters, of the evolution I personally witnessed. And the deeper I dug into it, the more I became convinced that the whole thing was an unnecessary panic. So I had to dig into the root causes. So I backed into the tenure of Alan Greenspan and Reagan, and all the way back to the founding of the Fed—basically a reconsideration of 20th-century economic, fiscal, and monetary policy.
You were a divinity school student. The title—The Great Deformation—and tale of the decline you describe has an Old Testament-prophet quality to it. Is this a morality tale? And is the U.S. like the Catholic Church circa 1518?
I wouldn’t carry the analogy too far. It’s not so much a comparison or wordplay on the Reformation. I do believe free markets are the only route to prosperity. But they have been so deformed and distorted and misused. This book is a polemic. It is an attempt to identify where we got off track and how one thing compounded another. It’s not meant to be any kind of a moral tract but a chronicle of where things went wrong in a practical sense. For decades now, mainstream opinion has held that the markets and capitalism are good, but they have inherent flaws and tend to wild swings in the business cycle. My argument is that we’ve so overloaded the state, including the central bank, with tasks that it is paralyzed and is caught in policies that are clearly not sustainable. In trying to solve the alleged problems of capitalism through an act of the state, we’ve ended up wrecking the state. I call it statewreck.
There’s something in here to disappoint everybody. Liberals excited at the way you take after Alan Greenspan will be chagrined at your critiques of the New Deal. And libertarians who like your critiques of the Obama stimulus probably won’t like your harsh take on Reagan.
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.
The economy added 203,000 jobs in November, according to today’s data—and the unemployment rate dipped for the right reasons. There’s just one downside: stubbornly stagnant wages.