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North Carolina Hates Progress

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.

130610-gross-hybrid-tease

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.

NSA Blowup

The Whistleblower’s Company

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 Hamilton is a publicly traded company with a market capitalization of $2.5 billion, about 24,500 employees, headquarters in McLean, Va., and, as of Sunday, a huge public-relations problem.

cb-boozallen1

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.

Sell

CHART OF THE DAY

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.

APTOPIX Turkey Protest

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.

Slippery

Crude Awakening

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.

Oil Prices

Mark Lennihan/AP

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.

Green and Green

The Electric Car’s Tipping Point?

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.”

Tesla Motors

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?

Well, maybe.

Look at what Tesla is up to. The electric sportscar manufacturer has been on something of a tear—notching its first profit, ramping up production, and paying back the big government loan it took.

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.

Yahoo

Bike Sharing Works!

New Yorkers can gripe about it all they want, but the city’s new bike system is cheap, easy, and even a little fun.

It works!

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.

Bicycle Share

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.

Bicycle Share

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.

Vroom

Tesla Goes to War

Don’t get me wrong: the electric-car startup is a success and has every right to boast. But for all its bravado, Tesla’s still getting plenty of help from Uncle Sam.

Tesla Motors CEO Elon Musk is felling it. And with good reason. His startup electric-car company reported its first quarterly profit. The stock has gone nuts—in a good way. Tesla just raised $1 billion in new cash, which enabled it to repay, nine years ahead of schedule, the $465 million loan it took from the Department of Energy. Overall, it’s a great success story that has defied the many haters and critics.

Elon Musk

Tesla CEO Elon Musk speaks during a June 2012 press conference at his company's factory in Fremont, California. (Paul Sakuma/AP)

On Wednesday Musk, a prototypical 21st-century CEO, took to Twitter to talk a little trash: “Tesla wired the funds to repay the DOE loan today. Only US car company to have fully repaid govt.”

This raised some hackles at Chrysler, whose official Twitter feed responded, “Not so fast, Tesla,” and linked to a blog post noting that Chrysler had repaid its government loan, too, in 2011, six years ahead of schedule. The post concluded, “Question: short memory or short-circuit?”

Musk responded, on Twitter, with a mixture of sincerity and snark: “As many have already noted, @Chrysler is a division of Fiat, an Italian company. We specifically said first *US* company.”

And then: “More importantly, @Chrysler failed to pay back $1.3B. Apart those 2 points, you were totally 1st.”

Oh, snap.

Tesla’s taunting of other car companies wasn’t confined to Twitter. Check out the company’s press release announcing the payment: “Following this payment, Tesla will be the only American car company to have fully repaid the government,” the company said. Tesla noted that the program under which it received the credit, the Advanced Technology Vehicle Manufacturing Loan Program, was created by President Bush in 2008. “This program is often confused with the financial bailouts provided to the then bankrupt GM and Chrysler, who were ineligible for the ATVM program, because a requirement of that program was good financial health.”

C’mon, Guys

You’re Doing It Wrong!

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.

Federal Reserve Board Chairman Ben Bernanke

Alex Wong/Getty

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.”

Good Government

Big Fat Green Government

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

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.

In the Money

Our Swiftly Melting Deficit

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.

Obama's Promises,Consumer Spending

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.

Dov Charney

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.

Survivor

The Invincible Fat Cat

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.

Dimon in the Rough

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.

Jobs

Hiring Is Up!

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.

Job Fair in California

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.

Next Rhodes?

Schwarzman Wants Scholars

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.

CHINA-BLACKSTONE/DONATION

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.”

Apocalypse Now

The Anarchy Economy

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.)

158377821SO00012_U_S_Market,Wall Street

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.”

About the Author

Author headshot

Daniel Gross

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

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