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Another Opium For the People

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.

Corporate Lunch


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.

New Owners

Bringing Back the Twinkie

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.


Giving Back at Walmart

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.”


Pizza Hut’s Evil Genius

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.

Pizza Hut-Cheesy Crust

Pizza Hut/ AP

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.


State of the States Looking Up

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.


Matthew Borkoski/Getty

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.


The Economic Doomsayer

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

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.

Big Spenders

What Tax Hike?

This year’s tax increases were supposed to destroy the country and send Americans to the bread lines. That didn’t happen. In fact, the economy is pretty damn happy, writes Daniel Gross.

What if they threw a big tax hike, and nobody noticed?

Tax Increases

(Seth Wenig/AP)

On January 1, a new set of allegedly confidence-killing, consumption-destroying, investment-unfriendly taxes hit the economy. The payroll tax rose from 4.2 percent to 6.2 percent on the first $113,700 of income. The top marginal rate rose from 36 percent to 39.6 percent for families with adjusted gross income above $450,000. Taxes on capital gains and dividends for those same top earners rose from 15 percent to 20 percent. Meanwhile, the Affordable Care Act levied an additional 3.8 percent tax on investments, and an additional .9 percent Medicare payroll tax on families with adjusted gross income of more than $250,000.

The notion was that putting these taxes on the rich and middle-class, taxing income and investments, at a time when the economy was going at a painfully slow rate, would cause people to stop spending and investing, go Galt, and send the economy into a recession. To read the Wall Street Journal editorial page, you would have thought Hugo Chávez had been named to succeed Barack Obama.

But three months into this new experiment in extremely mild socialism, it seems like Americans are generally shrugging off the tax increases. A survey released this week by found that “more than half of working Americans either haven’t noticed (48 percent) or have been unaffected by (7 percent) the January 1 expiration of the payroll tax cut.” Some 30 percent said they’ve reduced spending, while 11 percent are saving less as a result. analyst Greg McBride noted that “the lowest-income households were the least likely to have cut back on spending and the most likely not to have noticed the change in the payroll tax.”

Of course, surveys measure feelings and intentions, not actual activity. But pretty much every consumer indicator has continued to tick up through the first few months of 2013—all in the face of higher taxes. Home sales and auto sales have risen smartly in the first two months of the year. Overall retail sales in January and February were up 4.3 percent from the first two months of 2012. The ICSC/Goldman Sachs index of chain-store sales has been chugging along.

Sure, Walmart has complained of poor sales. “Where are all the customers? And where is their money?” read a plaintive internal Walmart email that surfaced in February. But Walmart has been struggling for the last several years, before and after the tax cut, as its core consumers cope with low wages. And as Renee Dudley at Bloomberg reported Tuesday, another factor may be at work. Her article argues that the company has scrimped so much on labor and labor costs that its shelves aren’t sufficiently stocked. And that is pushing customers to take their money elsewhere.

If anything, the economy on the whole has been strengthening since January 1. The forecasting firm Macroeconomic Advisers now says the U.S. economy, which grew at an anemic pace in the fourth quarter, is expanding at a 3.2 percent rate in the first quarter—and that includes the initial effects of the sequester.


Cyprus Shuffle: Who’s the Lender?

The Cyprus banking crisis is reminding us of a fundamental, much-neglected truth about finance, writes Daniel Gross: when you leave money in the bank, you’re the lender.

So Europe resolved—at least for now—the crisis in the Cyprus banking system. Needing a massive bailout, Cyprus on Monday opted for what’s known as a “bail-in.” In exchange for cash from the European Union, the European Central Bank and International Monetary Fund, Cyprus will raise several billion euros by assessing a levy on uninsured deposits of its large banks. CNBC has the details: accounts above 100,000 euros in the Popular Bank of Cyprus and the Bank of Cyprus will be assessed a levy (or tax, or confiscation) of 30 percent or more.

Wall Street

Specialist Joseph Mastrolia, left, and trader Gregory Rowe work on the floor of the New York Stock Exchange Monday, March 25, 2013. U.S. stock markets opened higher after Cyprus clinched a last-minute bailout that saved it from bankruptcy. (Richard Drew/AP)

The relief was short-lived, as stocks around the world fell in response to the news. Why? Well, as we should have learned from five years of crisis management, the financial problems in Europe are never contained—especially when the relevant authorities say they are. More broadly, the “bail-in” is causing people to change the way they think about banks and the money they leave there. Indeed, Cyprus has forced us to relearn a fundamental truth that gets lost in the world of brands, 24-hour ATMS, catchphrases and goofy ads as banks compete feverishly for wallet-share. When you leave money in the bank, hoping to get a small return of interest, you’re not investing. You’re lending money. When push comes to shove, you’re not a customer of the bank. You’re a creditor. And these loans, like every other type of loan, can go bad.

When financial entities fail in the business world, the people who have made commitments to them suffer losses. Stockholders get less than they paid for their shares, and may wind up with nothing. Other stakeholders—the landlord who rents space to a store, the supplier who extended credit, workers with underfunded pensions, bondholders—settle for less than they were legally entitled to by contract. These “haircuts” take place all the time in and out of bankruptcy courts.

Now, in the U.S., and in most other places in the 21st century, the overwhelming majority of us “lend” to banks without consequence, and without fear of loss. In the U.S., the Federal Deposit Insurance Corporation’s will insure up to $250,000 of “loans’ made by a single customer to a single bank.

When your bank fails, as hundreds have in the last several years, the FDIC fund, which now contains $33 billion, steps up. And in 2008 and 2009, when it seemed as if the insurer would be overwhelmed by a tsunami of failure, the Federal Reserve and Treasury offered further guarantees. That’s how the U.S. prevented the Great Panic of 2008 from turning into the second coming of the Great Depression of the 1930s.

Regulatory orthodoxy in the U.S. and Europe has generally held that banks can’t be allowed simply to collapse because they are too interconnected and too leveraged. Lenders, it turns out, are prodigious borrowers themselves—banks borrow from one another, from the capital markets in the form of bonds, from central banks, and from depositors. When they fail to make good on their commitments, it triggers a host of failures and a chain reaction that effectively freezes economic activity. See: Lehman Brothers, September 2008. The investment bank owed more than $600 billion to other parties. Its plunge into bankruptcy caused the entire global financial system to go into a deep freeze.


A sign in a shop window in Nicosia, Cyprus. March 25, 2013 (Milos Bicanski/Getty)


Dylan Ratigan Unplugged

He walked away from his high-energy cable-news slot last summer and ventured into greener pastures: an ex-Marine’s organic farming enterprise aimed at employing his fellow veterans.

Dylan Ratigan resurfaced this week.

After nearly two decades of climbing the New York media ladder—Bloomberg wire-service reporter, anchor at Bloomberg TV and CNBC, a self-titled show on MSNBC—Ratigan walked away from his show last June. On Wednesday, he announced on his blog that he has moved to Southern California to help a former Marine build a network of hydroponic greenhouses aimed at employing fellow veterans.


(L-R) Carla Hall, journalist Dylan Ratigan, and Daphne Oz speak on “The Chew” on March 21, 2013. (Donna Svennevik/ABC via Getty)

Cue the snark from the Twitterverse and the blogosphere. Many of us occupy a world in which having your own hour on a cable channel is an all-consuming goal and the ne plus ultra. Ratigan, who lived the dream, now inhabits one in which people don’t know what a “hit” is, men typically don’t wear makeup, and few people know—or care—what TVNewser is. “I don’t miss it,” he told The Daily Beast on Thursday. “I teach a class at the school on the farm with the veterans, and somebody will occasionally raise their hand and say, ‘Aren’t you the guy who did the crazy rant on YouTube?’ “

The crazy rant came in August 2011, a Howard Beale moment from a journalist who understood the financial crisis from the inside out, and watched in disbelief and rage as banks and financiers got bailed out while veterans returned home to a poor jobs market. Ratigan fleshed out his frustrations  in Greedy Bastards, a book about the intertwined and corrupt financial and political systems. The show and bestseller were simultaneous jeremiads about the search for solutions. Aside from just talking heads and journalists (disclosure: including me) tossing around left-right talking points, his show featured people who were trying to make a difference, discussions of sustainable agriculture, renewable energy, and jobs programs.

As a working journalist, Ratigan had long believed that “telling good stories and revealing not readily apparent truths have benefit—to the investment structure, or the culture, or the political construct,” he said. But by mid-2012, “I had lost any sense that that was true.” And so after the book launched, a frustrated and burned-out Ratigan walked away, seeking meaning and purpose in his life. “After 780 hours of political cable news, 6,000 hours of live financial television, 45 cities, two national jobs tours, 277,963 signatures to amend the Constitution, 245 pages of book, and a promotion tour for Greedy Bastards, I was exhausted,” he noted on his blog this week.

Many observers believed Ratigan’s next step (after a long vacation) might include a run for office, or a return to another platform—another program, another network. But Ratigan was spending more time with a couple he had met on his show, Colin and Karen Archipley. Colin is a Marine veteran of three combat tours in Iraq who had redefined his mission as building hydroponic greenhouses that can be run by veterans.

Last fall, at a U.S. Marine Corps ball, Ratigan hung out with Archipley and members of Lima 3/1 Company—a group of guys who had been through hell in the Battle of Fallujah. “And they weren’t resentful, and they weren’t petty and self-absorbed,” Ratigan said. Impressed by their strength, their potential, and Archipley’s leadership, Ratigan had an epiphany. “I had all my hesitations about my own assets and my own life. I was just like, ‘Fuck it.’ Understanding what they had been through, all I had to do was move across the country.” Ratigan sold his Tribeca loft on North Moore Street, sold the Porsche Cayenne Turbo, and rented a 1933 furnished log cabin near Dana Point, California. “The only thing I own inside of it is my clothing,” he said.


Big Money, Big Cynicism

The $614 million Steven A. Cohen’s SAC Capital paid to settle SEC insider-trading charges is worth celebrating for reducing our deficit—but Daniel Gross says our culture of settlement is deeply corrosive.

Late Friday afternoon, this year’s budget deficit instantly shrank by more than $600 million through an extraordinary tax levied on a few very rich people.

Insider Trading Arrest

Mathew Martoma, former SAC Capital Advisors hedge-fund portfolio manager, exits Manhattan federal court with his attorney, Charles Skillman, left, on November 26, 2012, in New York. (Louis Lanzano/AP)

The payment will flow into Treasury’s coffers because SAC Capital, the huge hedge fund run by billionaire Steven A. Cohen, agreed to settle. Securities and Exchange Commission charges that SAC and its affiliates had profited by trading on insider information. The charges, outlined last November, were relatively simple. The government alleged that an SAC trader, Mathew Martoma, received inside information on trials of drugs made by two companies, Elan and Wyeth. A doctor who helped run the trials had admitted to passing on the information in exchange for cash. When the fund learned the trials wouldn’t be successful, the government alleged, the hedge fund sold its large position and then bet the stock would go down—saving it from huge losses and allowing it to reap big profits.

The $614 million settlement, the largest in the SEC’s long history, is worth celebrating for its contribution to deficit reduction. It also should bolster the confidence of millions of ordinary shareholders. The regulators showed an ability to detect misbehavior, to find and act legally against those who carried it out, and to recover large sums of money.

But we shouldn’t let the large figure cover up the deep cynicism at work here. Indeed, the culture of settlement that the SEC and Wall Street have constructed over the years is deeply corrosive. Here’s why.

Reviewing the complaint, it sure seemed as if the government had the goods on Mathew Martoma and, by extension, SAC. The doctor who provided the information had already agreed to cooperate. The timing of the trades appeared highly suspicious. But the SEC was happy to settle—at the right price. Why? An enforcement action is an enforcement action, and this is a volume business. A Wall Street Journal article on Monday noted that the number of SEC enforcement actions seems to be going down—at a time when the public is still thirsty for blood. Settlements don’t chew up the time and manpower that trials do. They allow regulators and prosecutors to escape the potential hazards of a trial, in which a mistake, a well-constructed defense, or simply a few stubborn jurors can mean a person suspected of wrongdoing gets off free. So the SEC settles. For the right price, the settling party enters a kind of existential limbo—it is allowed to deny guilt while also being prohibited from declaring its innocence. The SEC adds the case to the list, sends the money to the Treasury, and winks at the public. Sure, the party settling the case gets to say he didn’t do anything wrong. But really, if he hadn’t done anything wrong, why would he be paying this huge fine?

For the settling party, a different cynical calculus is at work. Wall Street is a world in which everything has a price—even the ability to walk around saying you didn’t do anything wrong. For SAC Capital in this instance, that price turned out to be $614 million. Far from being embarrassed, the company is officially glad. “We are happy to put the Elan and Dell matters with the SEC behind us,” spokesman Jonathan Gasthalter said in a statement to the press on Friday. “This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence. We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”

Happy? People who run hedge funds are never happy about doing something that causes their net worth to decline by more than $600 million—or even by $6 million. These are people who live and die, and measure their status, self-worth, and manhood by the size of their bank accounts. Even for a billionaire like Cohen, who owns much of SAC and hence will foot much of the settlement bill, $614 million is a lot of money.


Keep Calm, Shop On

The latest retail numbers are up—a lot. Which means Washington insanity doesn’t crimp consumer spending, which means Americans still love to shop. Viva Costco, writes Daniel Gross.

If you visit public schools or public libraries, you’ll probably come across the Works Progress Administration–era social-realist murals that depict Americans—farmers, doctors, shopkeepers, laborers—going about their work with a sense of dignity. Aside from providing employment to idle painters, these Depression-era works were meant to show people calmly going about their useful social purposes in an unsettled era.

Consumer Spending

David Goldman/AP

Today if I were to commission a mural highlighting the quiet heroes of our current economic era, it would look something like this: a teenager checking out at Abercrombie & Fitch; a 35-year-old mother with two kids filling the cart at Costco; a middle-aged man running into Cabela’s, stocking up on guns and ammo; a multigenerational family feasting at Olive Garden; and an office worker clicking the “buy” button on Rue La La when she should be working.

Why? Because at this stage of our expansion, which is heading toward its fourth birthday in June, shoppers are doing the heavy lifting.

The Census Bureau on Wednesday reported retail sales numbers for February. And they were impressive: up 1.1 percent from January to February and up 4.6 percent from February 2012. January’s gain was revised higher, too. To be sure, higher gas prices account for a decent chunk of the increase. But the report showed that consumers continued to spend despite of higher gas prices and all the other headwinds.

A second big number came out Wednesday. The Commerce Department reported that business inventories business inventories rose a solid 1 percent from December to January. In plain English, it meant that companies, anticipating that their sales might be higher in February and March, ordered more stuff to hold in inventory.

These numbers were surprising and caused analysts to ratchet up their projections for growth. Macroeconomic Advisers fed the data into its model and upped its fourth-quarter figure to 0.8 percent, and to 2.7 percent for the first quarter of 2013. Deutsche Bank’s economic-research team, led by economist Joseph LaVorgna, was even more optimistic. It jacked up its first-quarter GDP growth forecast from 1.5 percent to 3 percent, in part because “February retail sales surprised significantly to the upside, and there were upward revisions.”

The increase in sales is particularly important, because some of the other forces that propelled growth in the early stages of this expansion are petering out. Exports, which soared in 2010 and 2011, are showing signs of plateauing as the global economy slows. The government, which did a lot to stimulate the economy in 2009, has become a rolling force for austerity.


Move Over, Goldman

Raymond Dalio

Raymond Dalio, the president and founder of Bridgewater Associates. (Scott Eells/Bloomberg, via Getty )

Bridgewater Associates is the $145 billion hedge fund elite college grads are clamoring to work for. Daniel Gross on the oddball firm’s special sauce.

In the Northeast, spring is in the air, and at Ivy League schools, kids are planning their postgraduate futures. But this year, many of the smart young finance things who used to flood to positions at name-brand banks in lower Manhattan are casting their sights elsewhere. It’s not a bank. It’s not in New York. And it’s not a century-old global institution with a patrician name.

It’s Bridgewater Associates. Based in Westport, Connecticut, and founded and led by a person who is equal parts investing savant and shaman, Bridgewater might best be described as an alternative alternative asset-management company. It’s the creation of Ray Dalio, who was memorably described in a great New Yorker profile by John Cassidy thusly: “He looked a bit like an aging member of a British progressive-rock group.” Big shots like Stephen Schwarzman of Blackstone and Steven Cohen of SAC Capital may garner the headlines. But in recent years Dalio and Bridgewater have ridden new investment flows and superior performance to become America’s largest hedge fund, with about $145 billion in assets.

Bridgewater, which has 1,300 employees, isn’t for ex-jocks or day traders. Rather, it tends to attract—and look for—self-styled intellectuals and deep thinkers who like constructing arguments as much as they enjoy constructing portfolios. It’s “the thinking Yalie’s destination,” as one recent Yale graduate put it. Undergrads at Harvard report that the scandal-free firm is more desirable than Goldman Sachs, previously the ne plus ultra for young grads on the make. “Bridgewater is very popular because it is one of the few hedge funds that will accept people right out of college,” says a Harvard undergraduate who interviewed with the firm. “Also, the hours tend to be better. In investment banking you’re working 100 hours a week, and at hedge funds it is more like 70.” (This student may be overestimating the amount of time employees of both investment banks and hedge funds spend working).

Economist Joseph Schumpeter, who invented the phrase “creative destruction,” analogized the upper strata of society as a hotel in which the guests are always checking in and out. That has been the case on Wall Street for the last many years. The list of blue-chip recruiters in 2006 would have included Lehman Brothers (bankrupt), Bear Stearns (essentially failed and merged into JPMorgan Chase), and Merrill Lynch (now a unit of Bank of America). The survivors—Goldman Sachs, JPMorgan Chase—are all shedding workers and bringing in smaller classes. Meanwhile, other companies have come up in the world. BlackRock, the bond giant, boasts more than $1 trillion in assets. Private-equity firms like the Blackstone Group and KKR, which weathered the storm, are continuing to transform from small partnerships into large institutions. They’re hiring.

Then there’s Bridgewater, whose workplace more closely resembles The Master than Wall Street; the trading day is like a long encounter session in which people learn about themselves, and then trade their way to prosperity.

The edge at most hedge funds is getting an informational edge, or using holdings to push for changes in management. Bridgewater, which manages money on behalf of public-employee pension funds like the Pennsylvania Public School Employees’ Retirement System, foreign sovereign wealth funds, and other institutions, has a different approach. Bridgewater is a macroinvestor, meaning it analyzes big-picture economic trends, data, and market behavior to come up with ideas about how to profit off the movement of stocks, bonds, and currencies all over the world. The strategy appears to be working: Bridgewater’s main fund has returned 14 percent annually since 1991, with only one losing year—an astonishing record. As The Economist noted, over the last several years, the hedge-fund industry at large has underperformed the S&P 500 index.

To keep its machine finely tuned, Bridgewater searches out young intellectuals in addition to hiring experienced workers. No surprise they recruit from the Ivy League. The company “recruited incredibly aggressively at Yale,” noted one recent Yale graduate. “They offered students who did not apply for their summer internship program $100 gift cards to sit in a focus group and explain why.” Students say they received several emails from the company—personally addressed to them from friends or associates who were at Bridgewater.

The interviews themselves have become legendary. “Really weird” and “very confrontational” were two phrases used by students to describe the on-campus interview. A candidate is likely to be put in a room with about seven people. Instead of being grilled about stock trades or economic issues, students will be asked to debate controversial topics like Roe v. Wade or gun control for an hour. “They wanted you to compete with each other,” said a Harvard undergraduate. “Unsurprisingly, quite a few members of the Yale debate team end up working there,” says the recent Yale graduate.

Spun Off

Why Time Inc. Had to Go

Time Warner’s founding division, which was spun off Wednesday, still makes money. But while most media companies would be happy with the magazine unit’s performance, Time Warner isn’t a sentimental place, says Daniel Gross.

Time Warner announced Wednesday that it is spinning off Time Inc., its magazine unit, to existing shareholders as a separate company. Effectively, the parent company is cutting ties with the original founding division of the company. Time Inc.’s stock will trade separately, with its own management.


Oprah Winfrey and Time Inc. CEO Laura Lang attend Time’s screening of “Lincoln” in October in New York. Lang has stated that she will step down from Time Inc. (Neilson Barnard/Getty)

Until Wednesday, the presumption had been that Time Warner would effectively sell most of its magazines, including big moneymakers People and InStyle, to Iowa-based Meredith Corp. But Meredith, which specializes in women’s and consumer magazines, wasn’t interested in taking on harder-news Time, Fortune, Money, and Sports Illustrated. Rather than hold on to those prestigious titles as a small rump unit, Time Warner CEO Jeff Bewkes decided to spin off all the magazines to the public as a group.

The move highlights the dizzying pace of change in the media business. Time Inc. CEO Laura Lang arrived at the company in January 2012. She replaced the prior CEO, Jack Griffin, who had lasted just six months. Lang didn’t come up in the publishing world. A Wharton M.B.A., she was the former CEO of the digital advertising agency Digitas, and she quickly set about revamping the unit. Lang reshuffled executives and promised more innovation in digital ads, brought in Bain & Co. to consult, ordered up a round of cost cutting, and in late 2012 was energetically pushing new plans to higher-ups on how Time Inc. could prosper in a digital world.

But Lang returned from the New Year’s break deflated, according to company executives. Time Warner reviewed her plans and essentially said thanks but no thanks. It pocketed the staff reductions—layoffs of about 500 were announced in late January—and almost immediately set about figuring out a way to divorce the slimmed-down company. Time Warner started discussions with Meredith in mid-February.

It’s no secret that magazine publishing is a very tough business. But Time Inc. still makes money. In 2012 it reported revenue of $3.436 billion and operating income of $420 million. The overwhelming majority of media companies would be pleased with such a performance. But Time Warner, which is justifiably proud of its magazine properties and their fantastic history, is not a sentimental place. Ultimately businesses rise and fall within the company based on their ability to generate higher profits and growth. If a troubled unit is seen as a drag on the corporate bottom line, as AOL was, it can get spun off. If a successful unit is viewed as having greater potential as an independent entity, as Time Warner Cable was, it can get spun off too.

Time Inc. more likely falls in the former bucket. While still profitable, it has lost its ability to contribute to growth. The move, Bewkes said in his memo, enables Time Warner “to focus entirely on our television networks and film and TV production businesses, and improves our growth profile.” (My italics.) In 2002 Time Inc. had $5.4 billion in revenue and $881 million in operating income. In 2007 the unit had revenues of $4.955 billion, but still managed to make $907 million. But in the ensuing five years, as noted, revenues fell 30 percent while profits fell by an even greater margin—54 percent.

Earns Time Warner

People walk by the Time Warner building in New York in 2007. (Diane Bondareff/AP)

The Asylum

The Greatest Sequester Lie of All

We’ve already saved the billions of dollars the sequester is meant to save. So why are we about to jump off the cliff, asks an astonished Daniel Gross.

The sequester is rapidly approaching. If no one stops it, we’ll experience automatic and devastating spending cuts of $84 billion between now and this fall.

Recently Hired

Pipefitters, Glenn Browne (left) and Mike Turner who were recently hired by Cool-Breeze Air Conditioning work on installing an air conditioner in a hotel on January 6, 2012 in Miami Beach, Florida. (Joe Raedle/Getty)

There are many insane things about this, but one in particular strikes me as ludicrous beyond comprehension: the deficit has already shrunk by $84 billion so far this fiscal year.

Get it? The whole point of the sequester was to cut the deficit—meaning the difference between what the government makes in taxes and what it spends. Yet through natural forces, the deficit has already been cut by essentially the same amount the sequester would cut.

Why everyone—the president, Congress, the commentariat—is ignoring this blinding truth is beyond me. What I do know, is how we got to this place. And it’s important to understanding the lie behind the sequester, and the actual economic forces at work.

When the sequester was set in motion in the summer of 2011, the government was about to complete its second straight fiscal year with a $1.3 trillion deficit.

But our budget situation isn’t static. It’s cyclical. When the economy slumps, tax revenues from payroll, income, and corporate taxes fall. At the same time, spending on unemployment benefits rises and the political system provides stimulus through tax cuts or higher spending. That’s what happened in the 2009-2011 period. So the deficit quickly grows by big leaps and chunks.

This also works in the other direction. When the economy improves, and more people go back to work, receipts from corporate, payroll, and income taxes rise at the same time that money spent on unemployment benefits decline. And so the deficit can decline quickly. What’s more, in January 2013, taxes rose significantly. The Social Security payroll tax rose from 4.2 percent of income up to $113,700 to 6.2 percent (that’s an increase of almost 48 percent), while taxes on very high earners rose a few basis points.


Sequester's Red-State Payback

Republicans cheering for the sequester to kick in this week may find that their big-government states will suffer the most. Daniel Gross on the budget's poetic justice.

The sequester, which is poised to hit at the end of this week, is dumb, dangerous, and bad policy to boot. And yet I can’t help but welcome its arrival. Why? It will lay bare an obvious fact that too many on the political right (and many in the political center) have been ignoring for the last few years. The federal government plays a very important role in the economy, in employment, in supporting consumption and investment, and in building and running the infrastructure that enables commerce.


U.S. Speaker of the House Rep. John Boehner (R-OH) (6th L) speaks as House Majority Whip Rep. Kevin McCarthy (R-CA) (L), Republican Conference Chair Cathy McMorris Rodgers (R-WA), House Majority Leader Rep. Eric Cantor (R-VA) (3rd R) and other Republican House members listen during a media availability February 25, 2013 on Capitol Hill in Washington, DC. (Alex Wong/Getty)

Washington Republicans remain rather blasé about the impact of the upcoming sequester. But state Republican officials are already starting to freak out. Virginia Governor Robert McDonnell, a onetime Tea Party favorite, is worried the sequester will affect the large military and government operations in his state. That’s to be expected. Economically speaking, the Commonwealth of Virginia is rapidly becoming an exurb of the District of Columbia. But Washington pols may soon be hearing about the negative impact of the sequester from some distant Republican redoubts – like Utah.

Utah, where I spent the past week, might seem like an unlikely source of pleadings to maintain government spending at current levels. The state’s mythology and history speak to a sense of self-reliance, anti-government sentiment, and entrepreneurship. Mitt Romney, a quasi-native son by virtue of his Mormon faith, advocated balancing the federal budget through spending cuts alone. He carried the state last November by a stunning 73-25 margin. "I’m for sequestration," Sen. Orrin Hatch, the veteran Utah senator said last week, according to the Salt Lake Tribune. “We’ve got to face the music now, or it will be much tougher later."

And yet, the sequester is going to make the music really discordant in Hatch’s home state, which is disproportionately dependent on the federal government.

The federal government is the biggest employer in the state, employing 34,000 people in Utah. The list of the largest state employers is topped by Hill Air Force Base, a mammoth, 6,650-acre installation that specializes in aircraft maintenance. A city unto itself, Hill features residences, “a modern shopping complex,” plus “a bowling center, fitness center, clinics, chapel, museum, recreation center, officer and enlisted clubs, dining facilities and a child development center.” It has 1,475 buildings and 228 miles of roads. According to Natalie Gochnour, chief economist of the Salt Lake Chamber of Commerce, Hill directly employs 9,300 military personnel and 16,300 civilians, with a combined annual payroll of $1.2 billion. In addition, the base purchases $832 million in goods and services locally each year.

But wait, there’s more. A large regional IRS processing facility in Ogden (here’s a street view) employs between 4,000 and 5,000 state residents.

Oh, and because two-thirds of the state is federal land, the Bureau of Land Management and other federal agencies are major economic forces. Many small towns are home to BLM offices with several employees – biologists, firefighters, sanitation workers. “Typically in rural Utah, the biggest employer is the school district and right after that is the federal government,” Gochnour said.

About the Author

Author headshot

Daniel Gross

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

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