The prophets of American economic decline revise their thinking.
THE HOT new idea in the post-bust years was American economic decline. Now, it seems to be ... American economic optimism? Fifty-one months after an impressive stock rally began and 48 months after economic growth started, optimism is finally—finally!—breaking out.
You can even hear crowing from Charles Morris, the author of the bestselling crisis book The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash; in June he released a sequel volume—albeit a slim one—called Comeback: America’s New Economic Boom. His cause for celebration? The fracking revolution. The nation’s supply of natural gas locked in shale “is so vast that it has the potential to transform the manufacturing economy, creating jobs across the country and requiring a new infrastructure that will benefit the nation as a whole.”
Another former economic sourpuss, banking analyst Meredith Whitney—who (accurately) predicted the financial crisis and then (inaccurately) predicted a boom in state and municipal bankruptcies—is out with Fate of the States: The New Geography of American Prosperity. Forget the coasts, she argues. The plains and interior, fueled in large part by agricultural and energy resources, are now driving economic growth.
And while in his 2011 jeremiad, The Great Stagnation, George Mason University economist Tyler Cowen said all the low-hanging fruit of productivity and technology had been picked, times have changed. Having tracked continuing technological advances and the slowdown of health-care costs, Cowen is recanting a bit in his new book, Average Is Over: Powering America Beyond the Age of the Great Stagnation, due out in September.
The data generally seem to agree with them. In recent years the U.S. economy has managed to shrug off internal and external shocks, and it is showing every sign of powering through both tax increases and sequestration. The private sector has created nearly 7 million jobs since early 2010. The U.S. economic engine may be revving in a low gear, but it’s not in neutral or reverse, as most developed economies are. And economists have been ratcheting up their growth forecasts for 2014. “When the facts change, I change my mind,” economist John Maynard Keynes is believed to have said. Some economic thinkers, following suit, have reacted to the changing facts by changing their minds too.
Save the planet, turn a profit. That’s the thinking of Mosaic, a company that lets you invest in solar panels, and promises a pretty decent return. Daniel Gross gives it a whirl.
It’s hard to get a 4.5 percent annual return on your money without taking too much risk. Banks pay less than 1 percent. Blue-chip stocks pay dividends at about2 percent. The U.S. government borrows for about 30 years at 3 percent.
But I found one way to get a decent interest rate while also boosting my personal green credentials: I bought a very small piece of a solar electric power plant in New Jersey.
Solar power is growing by leaps and bounds. But it requires a large personal investment—i.e. spend $15,000, take advantage of tax credits and rebates to put a small system on your roof. And it only pays to put panels homes that have south-facing roofs and aren’t surrounded by trees. Or it requires a large corporate investment, like the giant retailers putting arrays on their giant roofs, or the huge farms sprouting in the desert. There are very few options for people with limited resources.
That’s where Mosaic comes in. Essentially, it’s crowdsourcing investments for small-scale solar projects, like a Kickstarter for green energy. But it isn’t seeking donations, and it’s not offering silly rewards like tote bags or invitations to launch parties. Rather, it’s offering fixed financial returns, much like a corporate bond, or a bond backed by a mortgage. It’s an example of financial engineering meeting electrical engineering. “Our mission is to create shared prosperity through clean energy,” said Mosaic’s CEO Dan Rosen. “We see a huge opportunity for transitioning our world to clean energy ahead of us and we want to make it possible for communities to prosper from this massive transformation.”
When you construct a solar energy system, you’re basically constructing a stream of income that will flow over a period of many years. But you need a lot of money up front in order to build it. Mosaic is trying to bridge that gap. Among the many models being used to finance solar development is one in which a company builds and owns the solar array on the roof of another company’s store, or a government building, or a public agency, and then agrees to sell the power to the building owner at a fixed price for a long period of time. Mosaic is in the business of providing financing to the people who build the arrays. It raises funds not from venture capitalists or banks, but from individuals. And as the solar array owner receives revenue, it pays back the loan that Mosaic made. Mosaic then makes payments back to its investors. (Here’s a brief description of how it works.)
Started in 2011, and based in Oakland, Mosaic did a bunch of pilot projects in California—like putting 120 panels on the Asian Resource Center in Oakland, California. Then at the beginning of this year, it launched real projects, like one in which 293 investors kicked in $95,275 (that’s an average of $325) to build a 78 kilowatt installation on an affordable housing project in Salinas, California.
To learn about Mosaic in more detail, I opened an account. Most of the projects are available only to investors who live in California. But some are available for people out of state. So I was eligible to buy a piece of a $350,000 loan backing a 487-kilowatt, 1,694-panel system that was constructed on a convention center in Wildwood, New Jersey, and went into operation last year. The promised return: 4.5 percent interest, and the return of principal over a 114-month period.
I hate to say I told you so, but I told you so. The golden age of deficit reduction has arrived. But will Republicans ever admit the truth? Unlikely.
It may not seem like it, but the Golden Age of Deficit Reduction we’ve been writing about is truly upon us.
Though the monthly treasury statement shows a $139 billion deficit for the month of May, a look inside the data shows why we are entering a brief age of deficit-reduction nirvana. (Jacquelyn Martin/AP)
The May monthly treasury statement came out on Wednesday. And while it shows a hefty $139 billion deficit for the month of May, a look inside the data shows why we are entering a brief age of deficit-reduction nirvana.
Many analysts believed the huge revenue gains seen in the first few months of 2013 would wilt away as winter turned into spring. Higher taxes and a gusher of dividends and other income in 2012 helped create huge tax liabilities that people had to pay in the early months of 2013. Yet in May, revenues again rose sharply from May 2012. They came in at $197.2 billion, compared with $180.7 billion in May 2012, or up 9.1 percent. Through the year thus far, revenues are up 15 percent from the year before.
The spending side was a little different. In general, the trend so far this year has been for spending to be down a bit, thanks to the sequester, and less spending on defense and unemployment benefits. But there was a wrinkle in May. As Treasury noted, “since June 1, 2013, the normal date for these expenditures fell on a non-business day, outlays for military active duty and retirement, Veterans’ benefits, Supplemental Security Income and Medicare payments to Health Maintenance Organizations moved to May 31, 2013.” As a result, spending for the month rose sharply from last year, to $335.9 billion, up 10 percent. Thus far this year, spending is up about 1 percent.
So what makes this a golden age? Well, according to Thomas Simons of Jefferies & Co., without the shift in spending, “the [May] deficit would have been approximately $103 billion.” That’s significantly lower than the $124.6 billion deficit reported in May 2012.
Next, consider that for the next four months, assuming no big shocks or great changes, the government will essentially break even. That hasn’t been done in well over a decade. In the first eight months of the fiscal year the deficit was $626 billion, down about 25 percent from the first eight months of fiscal 2012. But the Congressional Budget Office is predicting that’s all the red ink we’ll print this fiscal year. It is projecting the deficit for the entire fiscal year will be $642 billion.
Why? Well, as the economy continues to expand, revenues will continue to rise and spending will fall. The government often reports smaller monthly surpluses, and occasionally surpluses, in June and September, as people and companies make quarterly payments. But it will likely come in with a big surplus this June, in part because some spending that usually takes place in June was pushed into May and in part because Treasury is anticipating a humongous $59 billion dividend from the government-owned mortgage company Fannie Mae. Combined with an anticipated surplus in September, the gusher of revenues anticipated in June will more than wipe out the anticipated deficits for July and August.
Five years ago, Chobani didn’t exist. Now it’s a billion-dollar business. How the son of a small-town shepherd made good.
Turkish Kurd comes to the U.S. with $3,000 in his pocket, gets a feel for the country, ends up buying an ancient yogurt factory abandoned by a Fortune 500 company, and ships his first order of so-called Greek yogurt to a kosher grocery on Long Island. Five years later, the company notches $1 billion in revenue, Forbes deems the green-card-holding entrepreneur a billionaire, and the company—Chobani—stands as a case study of how a tiny consumer-products company can slug it out with giants.
Only in America!
Hamdi Ulukaya isn’t the type of immigrant that technology executives have in mind when they advocate less-restrictive policies. He didn’t arrive with an engineering degree or with cash to invest. He doesn’t know how to code. But he is likely to have an economic and consumer impact far greater and longer-lasting than that of the founders of Zynga or Instagram. Chobani Yogurt employs about 3,000 people around the world, hoovers up 40 million pounds of domestically produced milk per week, and has helped turn an economically depressed region of upstate New York into a capital of Greek yogurt production. Oh, and unlike so many large companies, he’s hiring. In May, Chobani had 290 job openings.
Experts say the darker the leaf, the healthier the food—making kale a great choice. But how can we make this health food more appealing in a way that doesn’t include bacon bits? Make it a chip. (Brendan Hoffman/Getty)
Chobani has also overturned some long-held prejudices about the American consumer. For decades, Pepsico, Coca-Cola, General Mills, and Kraft have pushed processed, sugary, unhealthy junk into grocery stores because they think that’s what American palates demand. And then they watch, at first in bemusement and later in alarm, as niche, higher-quality products go mainstream and gain mass. It happened with Sam Adams beer, Starbucks coffee, and Chipotle fast food. Now it’s happening with Chobani. Greek yogurt—essentially, thicker, strained yogurt—offers a lot of protein without much cholesterol or many carbs. And because the process removes the sour watery material, it has a milder taste than other yogurts. “Chobani figured out that if they made it thicker, that people would like it better. And they did it without adding sugar,” said Marion Nestle, a New York University professor of nutrition who is frequently a harsh critic of the packaged-food industry. “Even Stonyfield,” the organic-yogurt pioneer, “has added an awful lot of sugar to make it more palatable. So lots of applause for these guys.” With annual sales of more than $1 billion, Chobani is the leading Greek yogurt brand in the U.S. And it has a healthy chunk of the market for all types of yogurt; in the 12 months that ended in April 2013, Nielsen says all yogurt sales totaled nearly $6.1 billion.
Ulukaya talks about his company in organic terms. When entrepreneurs start businesses, they tap into their own natural resources. “What you brought wasn’t the money or the clothes, you brought what you learned from your culture. Mine was learning from my father how he dealt with the business, and the products which he loved. That’s my seed,” he says. “But this is an amazing soil in which that seed can grow.” We’re sitting in Hamdi’s office—everyone calls him by his first name—at Chobani’s plant in New Berlin, New York. His office is spare—there are no deal-commemorating Lucite plaques or glory photos of him with big shots, just some dairy-themed pictures, a few pieces of basic office furniture that could have come from Ikea, a white lab coat for when he goes into the production facilities. Ulukaya, 41, is trim. He arrives with two big German shepherds, who loudly lap up water as we speak. He wears jeans and a little red bracelet with the Turkish blue eye good-luck symbol. With his salt-and-pepper beard, angular nose, and expressive eyes, he’s an unlikely industrialist.
Ulukaya is a transplant from his native soil of Ilic, a town of fewer than 1,000 people in the Kurdish region of Anatolia, some 400 miles east of Ankara, where his family tended sheep and made cheese and yogurt. One of seven brothers, Ulukaya came to the U.S. in 1994 to learn English. He studied at Baruch College and Adelphi University, and after visiting a nephew in Albany, took to the rolling hills of upstate New York, which reminded him of home. At SUNY Albany, assigned to write an essay about making something, he wrote what he knew: making feta cheese. Impressed, the professor invited him to come work on her farm.
When Hamdi’s father came to visit, the dutiful son tried to find the best feta cheese to serve. When his father complained of the quality and said Hamdi could do better, he started Euphrates, which makes cow’s milk feta and sells it to wholesalers. With limited business experience, and no mentors, Ulukaya figured out things by trial and error—making the cheese, hiring people, loading the product into a beat-up car and driving around the East Coast to find customers. “I think that the two years from 2002 to 2004 was the most difficult time of my life,” he said. “After two years, it started to stabilize on a small scale, but at least I could breathe.”
The consulting firm that employed leaker Edward Snowden still has the support of investors. Daniel Gross on why this isn’t surprising.
How much does it cost you if one of your employees goes rogue and screws over your business client? If you’re Booz Allen Hamilton, the government contractor that employed leaker Edward Snowden, about $60 million.
On Monday, investors in Booz Allen, which is publicly traded, had their first opportunity to react to the bombshell news that broke over the weekend. And the reaction was something close to a shrug. The stock closed at $17.54, down about 2.55 percent from Friday’s closing price of $18. Given the company’s market capitalization of $2.41 billion, it lost about $64 million in value. Through midday Tuesday, the stock was down less than 1 percent.
Booz Allen cyberfacility, September 25, 2012; floor of the NYSE, June 11, 2013. (Jeffrey MacMillan/Washington Post, via Getty; Andrew Burton/Getty)
Snowden, who earned $122,000 a year from Booz Allen until the firm fired him yesterday, willfully leaked information. You would think such a breach in protocol and client-relationship management might be a disaster. After all, the U.S. government provides virtually all of the company’s revenues, and the national-security apparatus places a very high value on the ability to keep secrets. Booz Allen clearly failed to supervise Snowden adequately, or to make an accurate judgment about this particular employee’s willingness to abide by the terms of his employment. The result has been a huge black eye for the government, which will now incur significant financial and reputation costs. Imagine you were a law firm and a paralegal disclosed sensitive information from a major client. Or if an investment bank blew a high-profile public offering. Or if a seafood restaurant routinely served spoiled fish. The market would exact a swift punishment.
But government contracting is a different ballgame. When a company screws up, the government delivers a slap on the wrist—and then awards the company with new contracts. Based on recent history, investors could be forgiven for having a blasé attitude about Booz Allen’s prospects. Overcharging and being overbudget on high-profile fighter contracts hasn’t stopped Lockheed Martin from getting lucrative new high-profile contracts. A 2011 government report found that Boeing overcharged the Army for spare helicopter parts; This morning, Boeing announced it received a $4 billion contract to make helicopters for the Army.
Halliburton and its subsidiaries had a series of problems providing services in Iraq. But the revelations didn’t sink its stock. And in 2010 its subsidiary KBR got a fat no-bid contract to provide services in Iraq.
The reality is that these contractors have become, in effect, arms of the government. The national-security and defense apparatus needs them to carry out essential operations as much as the private companies need their federal benefactor to deliver returns to the shareholder. Government agencies these days simply lack the resources, permissions, and wherewithal to hire all the people they need to conduct operations. Using contractors is a necessity.
On the one hand, it is a fiercely competitive industry in which big firms compete with one another. On the other hand, the fix is in. The government spreads its contracts around between large companies. Small businesses and start-ups have a tough time competing for the biggest of the contracts. And there is a limited number of domestic large players, especially in sensitive defense areas. Lobbying also plays an important role. Big contractors hire lobbyists, make campaign donations, and advertise in the publications that politicos read—all in an effort to work the system to their disadvantage.
It’s hard to see why else the state would propose a measure to lay a special tax on owners of hybrid and electric cars, writes Daniel Gross.
For a while there, North Carolina had progressives fooled. In 2008, its voters pulled the chain for President Obama (even if by a very narrow minority). The popular show Dawson’s Creek was filmed there. The ever-expanding Research Triangle drew thousands of out-of-staters who brought their Northeast modes of consumption and values.
Electric hybrid cars are plugged-in to charge during a demonstration of the vehicles. (Elaine Thompson/AP)
But in recent years, the state has taken a few steps backward. Last fall, North Carolina reverted to form and voted for Mitt Romney. Voters also swept Republicans into the governorship and control of the state legislature. And they’ve set about slashing unemployment benefits, and taking a host of other nonprogressive actions. As Mary Curtis notes in The Washington Post, the new regime’s agenda has included: “the decision to reject federal funds to expand Medicaid, the reduction of state unemployment benefits, proposals that would cut funding from public education and provide vouchers for private schools, a voter ID bill, and efforts to restart the death penalty and repeal North Carolina’s Racial Justice Act.”
Now North Carolina’s legislators are going after another progressive favorite: hybrid cars.
What? The state Senate has passed a measure that would single out hybrid and electric car drivers for special treatment. (The House will consider the measure but hasn’t acted yet.) Here’s the reasoning. The state relies on gas taxes to fund highway construction. But gas consumption has been falling, in part because the American auto fleet has been getting more efficient. In effect, people who drive cars that get 50 miles per gallon are contributing only half as much to the upkeep of roads as people who drive cars that get 25 miles per gallon. And so the North Carolina Senate is suggesting that people who drive hybrids pay an extra $50 for the annual registration fee, and that folks who drive all-electric cars pay an extra $100. This Prius tax would raise about $1.5 million each year.
Of course, the government is punishing people who are making more efficient use of a polluting, scarce, and expensive energy source. But even if it were a good to punish efficiency, North Carolina would be missing the target by taxing only hybrids and electric cars. There has been a quiet revolution in the American (and international) auto industry in recent years. Thanks to innovations in materials, engines, and transmission systems, consumers now have a dozens of high-mileage vehicles to choose from: electric cars, hybrids, and plain old sedans and coupes. The manual Dodge Dart, for example, gets 39 miles per gallon. The 2014 Chevrolet Cruze Eco that runs on diesel will get 47 miles per gallon. In fact, there are plenty of hybrids on the market that get worse mileage than regular vehicles. The Ford Escape hybrid gets about 30 miles per gallon on the highway. The Chevrolet Tahoe Hybrid gets only 23 miles per gallon on the highway. The drivers of those hybrids are already paying their fair share for the upkeep of the state’s roads.
If the principle is that those who use less gas to get around should pay a disproportionate amount of tax, then the legislature should single out anyone who drives a car that gets above a certain number of miles per gallon. Or they could go the route of taxing people based on usage—effectively, a toll for the number of miles you drive.
North Carolina’s beef, it turns out, isn’t really with hybrids. It’s with more fuel-efficient cars, or, as others might describe it, with progress.
The NSA leaker might have been a rogue Booz Allen Hamilton employee. But he made the company’s biggest client, the U.S. government, look terrible—and that can’t be good for business, says Daniel Gross.
Booz Allen's cyber facility on September 25, 2012 in Annapolis Junction, Maryland. (Jeffrey MacMillan/The Washington Post via Getty)
On Sunday, The Guardian reported that Edward Snowden, a Booz Allen Hamilton employee who previously worked for the CIA and NSA, was the individual who leaked information about the government’s extensive surveillance of digital communications. Now holed up in Hong Kong, Snowden claimed he had the ability to access the email and communications of pretty much anyone, even the president.
Focus now will undoubtedly shift as well to Booz Allen, which has been a huge beneficiary of the boom in defense and national security contracting. The company is one of the many firms that hangs around the Beltway and hoovers up jobs large and small from government agencies. A for-profit company, it gets virtually all its revenue from the federal government. (It should not be confused with Booz & Co., the management consulting firm that was spun off as a separate entity in 2008.) Booz Allen Hamilton’s major clients include, according to the company, “the Department of Defense, all branches of the U.S. military, the U.S. Intelligence Community, and civil agencies such as the Department of Homeland Security, the Department of Energy, the Department of Health and Human Services, the Department of the Treasury, and the Environmental Protection Agency.” Among the things it helps these agencies do is “addressing complex and pressing challenges such as combating global terrorism, improving cyber capabilities, transforming the healthcare system, improving efficiency and managing change within the government, and protecting the environment.”
The value proposition of Booz and others is that it is supposed to carry out many functions that governments used to—for less money and hassle while ensuring superior performance and impeccable security. In its most recently concluded fiscal year, it collected $5.76 billion in revenue and reported a healthy operating profit of $446 million. After paying $149 million in income taxes, it was left with net income of $219 million.
Essentially, Booz Allen is a conduit for taxpayer money to contractors, shareholders, and employees, many of whom, like Snowden, are highly paid. The Guardian pegged his salary at $200,000. According to the company’s proxy filing, CEO Ralph Shrader earned a $1,162,500 salary last year, plus nearly $2 million in stock awards and other compensation.
To a large degree, Booz Allen Hamilton is a low-risk, high-reward type of business. It doesn’t assume all that much financial risk. And it doesn’t have to worry too much about collecting its bills. Its main client, the government, isn’t in danger of going bankrupt.
Edward Snowden explains why he leaked top secret information.
Fueled by solid economic growth, Turkey’s stock market has been on a fantastic run. The government’s ham-handed efforts to crush protests have caused investors to flee.
The hardline tactics that the Turkish government has taken to crush protests in Taksim Square in Istanbul have taken a toll on the image of Prime Minister Recep Tayyip Erdogan. But they’ve also taken a toll on the image of Turkey’s booming corporate sector. In recent years, Turkey has been a bright spot in the global economy. A rising middle class, a stable financial sector, and growing economic integration with Europe (to the west) and the Middle East (to the, um, east) have spurred rapid growth in recent years. And that has made the Turkish stock market a solid performer.
An elderly scrap collector pulls her trolley in front of a Turkish bank in Istanbul on June 4. (Thanassis Stavrakis/AP)
But bull runs can come to end quickly, especially when violence erupts on the streets. Below are three-month and one-year charts of the iShares MSCI Turkey Investable Market Index Fund, which tracks the performance of major Turkey-based companies. Both show impressive bull runs that came to an abrupt end when the protests in Taksim Square got out of control. The index has fallen about 20 percent in the past month.
Ignore the nail-biters saying we buy too much oil from ugly places; the latest numbers show we’re buying less and making more.
For years, geopolitical analysts have warned of the twin deficits that threaten America. There’s the federal budget deficit, which gobbles up resources and forces the U.S. to borrow ever-greater amounts of money from China. And there’s the trade deficit, which means Americans are sending their hard-earned dollars to buy stuff (plastic products, clothes, oil) from unfriendly regimes. These twin deficits enrich our frenemies and impoverish present and future Americans. The good news! Both of these mortal threats are declining.
For the last several months, we’ve been banging on about the Golden Age of Deficit Reduction. As the expansion chugs toward its four-year anniversary, tax revenues are rising and federal spending is falling. The deficit for the current fiscal year is now projected to come in at about $642 billion, down 41 percent from the $1.089 trillion in fiscal 2012. By now, it’s not exactly news.
But data released yesterday shows the U.S. is also making some progress on the trade front—especially when it comes to shipping dollars to the Middle East, Venezuela, and other hostile climates in exchange for oil. Here are the numbers. In April, the U.S. exported $187.4 billion of goods and services and imported $227.7 billion of goods and services, leaving a trade deficit of $40.3 billion. That’s a lot. But the trade deficit has been falling in the past couple of years. It fell 4 percent in 2012 from 2011. And through the first four months of 2013, the trade deficit, at $164 billion, is 13.5 percent smaller than it was in the first four months of 2012. In real terms, and as a percentage of gross domestic product, the trade deficit is falling.
Why? First, exports are rising. Even though America tends to get down on itself, the U.S. is in fact a global export powerhouse. The megatrend of continuing global growth has translated into rising demand for American-made planes and grains, and for American hotel and dormitory rooms. U.S. exports rose 4.6 percent in 2012 to a record $2.2 trillion. Through the first four months of 2013, even with the global economy slowing, exports are still up 2 percent.
That’s one side. The other side, of course, is imports. The U.S. doesn’t so much have a trade problem as it has a China-and-oil trade problem. We have a big trade deficit because we import a lot of stuff from China and a lot of oil to feed our transportation and industrial complexes. In 2011 the U.S. imported $250 billion of petroleum products and exported $68 billion of petroleum products, leaving a deficit of $184 billion in that sector.
But something has happened in the past few years. There has been a quiet, unappreciated revolution in energy production and consumption. Domestic energy production, especially oil production, is booming. Thanks to developments like the Bakken Shale in North Dakota and the use of fracking to get at oil all over the country, the U.S. in 2012 produced 28 percent more oil than it did in 2007, and more than it has in any year since 1995.
If demand was simply staying constant, we’d have a lot less use for imported oil. But domestic demand for petroleum, and for gasoline in particular, is falling. We’ve written before about the revolution in efficiency for automobiles. Beyond marketing hybrids and electric cars, automakers have been making a concerted and successful effort to boost the efficiency of new vehicles. And so as the American auto fleet slowly turns over, it gets more efficient. According to researchers at the University of Michigan, the average mileage of the fleet sold in May was 24.8 miles per gallon, a modern-day record, and up more than 20 percent from late 2008. Meanwhile, school buses, trucking fleets, and delivery vehicles are being converted to run on compressed natural gas. And with every day, smart, stylish people are seeking nonpetroleum alternatives, from trains to bike sharing.
Tesla’s making money, sales have doubled, and prices for plug-ins and hybrids are coming down in a big way. Is this the green market’s Model T moment?
“I would build a motorcar for the great multitude.”
A Tesla Roadster Sport sits in a Chicago dealership showroom in 2011. (Scott Olson/Getty)
That’s what Henry Ford proclaimed early in his career. Ford, of course, is associated with the democratization of the automobile; the Model T was the first mass-owned car. But Ford started off as a luxury-car maker—making high-tech, impractical, very expensive vehicles for the very rich.
That’s how it often goes when new technologies hit the market: they’re produced in small batches at a high cost. But as the companies increase production, as unit volumes rise, and as competitors enter the field and innovate further, the cost of the products falls, and falls, and falls again—to the point where the middle class can afford them. That’s what happened with the telephone, the car, the television, the personal computer, the mobile phone. A century after the Model T took the nation by storm, could the same process be happening with electric cars?
The high price of the Tesla Model S—about $60,000—is inhibiting more widespread adoption. But the more practice it gets making cars, and the more volume ramps up, the greater the ability to cut prices. This week, Tesla CEO Elon Musk said the company is aiming to produce a version of the Tesla that would retail for about $30,000 in “probably three to five years.”
Meanwhile, other electric and plug-in hybrid makers aren’t sitting still. With the advent of the Nissan Leaf, the Chevrolet Volt, the Tesla, and plug-in hybrids from Toyota and Ford, there are now more than a handful of cars on the market that rely in part, or entirely, on electricity. (Cadillac appears to be joining the fray as well.) And as they ramp up production and fight with each other for customers, they are effectively lowering the price of the vehicles.
New Yorkers can gripe about it all they want, but the city’s new bike system is cheap, easy, and even a little fun.
New York City’s new bicycle-sharing system, Citi Bike—a.k.a. the Mike Bikes, after Mayor Michael Bloomberg—has been the source of great anticipation, fear, and derision. The rollout was delayed by Hurricane Sandy and software glitches. New Yorkers moaned about the loss of parking spaces as room was made for bike docks. Tabloid reporters eagerly awaited the first thefts, which they duly reported.
Dan Gross; Susan Watts/NYDN-Getty
But the haters and critics were generally missing the point. This is a major addition of transportation infrastructure to New York. And compared with some other projects (the Second Avenue subway line has been under construction for decades), it’s cheap and relatively unobtrusive. The cost to taxpayers is negligible. Sponsors, namely Citi (hence Citi Bike) and MasterCard, helped pay for the rollout, and, as New York City notes, “sponsorship and revenues will cover the entire equipment and operations cost of the system.”
I’ve been excited about the prospect of bike sharing for a while. My office is on the far west side of Manhattan, not particularly close to any subway station, and adjacent to the unobstructed bike path that goes along the West Side Highway. A bike-sharing system would offer a way to shorten the trek to and from Grand Central Station, whence my train departs, all while getting some exercise, avoiding expensive cabs, and being carbon-free.
I signed up in early May—$95 for an annual membership—and received my key last week. On CNBC yesterday I showed it to the skeptical New Jersey–based hosts.
Laura Glenn-Hershey gets a Citi Bike bicycle from a station near Union Square as the bike-sharing system is launched in New York on May 27, 2013. (Stan Honda/AFP-Getty)
On Monday the bike-sharing system was opened to annual members like me. So this morning I gave it a trial run. As my train rolled into Grand Central at about 7:15, I opened up the free app on my (natch!) iPhone and found there was a station at 43rd Street and Vanderbilt, just outside Grand Central, with several bikes available, and that the docking station across from my building on 18th Street and 11th Avenue had several open slots.
Maybe corporate America finally got too greedy for its own good.
Apple always seemed like the perfect company. Not so fast. When CEO Tim Cook testified before Congress on May 25, he didn’t come to talk about Apple’s latest amazing gadget or the need to grant more visas to computer programmers. Rather, in his maiden voyage to Capitol Hill as Steve Jobs’s successor, Cook had to defend the company’s tax-avoidance efforts. What should have been a triumph for Cook was instead an awkward encounter.
The Senate Permanent Subcommittee on Investigations documented the ways in which Apple avoided billions of dollars in American taxes by funneling activities through subsidiaries in Ireland, where it had negotiated a special 2 percent tax rate and with some Apple subsidiaries appearing to be the business equivalent of duty-free zones—residents of no country and, hence, immune to taxation. So Cook was left defending the company by waving around its progressive bona fides. “We believe in President Kennedy’s phrase ‘To whom much is given, much is required.’ ” By turns humble and combative, he noted that Apple paid about $6 billion in U.S. taxes in 2012. “We expect to pay even more this year,” the 52-year-old Alabama native said. “We pay all the taxes we owe.”
But the Apple fanboys and fangirls in the world’s greatest deliberative body weren’t buying his protestations that the company doesn’t use too-shrewd tax tricks. In fact, senators on both sides of the aisle pointed out that Apple has a superior tax-planning department that is a source of profits no less important than the beautiful, simple interface of the iPad. Sen. John McCain, in particular, sounded indignant. “For years, Apple has opted to forego fully contributing to the U.S. Treasury and to American society by shifting profits and circumventing U.S. taxes,” he said.
SAC Capital Advisors employee Michael Steinberg, center, after he was charged with insider trading earlier this year. (Spencer Platt/Getty)
Corporate America has never been more profitable or had more cash. It dominates labor, bosses around the political system, and manipulates the tax code the way Yo-Yo Ma plays the cello. Corporate profits have soared from $1.1 trillion in 2008 to $1.95 trillion in 2012—up 77 percent. The amount of cash on companies’ books has risen from $1.39 trillion in 2008 to $1.79 trillion in the fourth quarter of 2012—also a record. The stock market has more than doubled since March 2009.
And yet this spring, a set of seemingly unconnected events—the unmasking of America’s most admired company as a serial tax avoider, the collapse of a factory in Bangladesh, empty aisles and falling profits at America’s largest retailer, the relentless prosecutorial pursuit of hedge-fund titan Steven Cohen—shows that businesspeople can, and often do, take things too far. In other words, it seems that corporate America may be in danger of becoming too brutally efficient for its own good.
The story of Cook’s testimony on the Hill crystallizes the ways in which that single-minded pursuit might endanger even a strong brand such as Apple, which otherwise epitomizes the socially progressive Silicon Valley ethos. (Cook has let it be known that he has a picture of Martin Luther King Jr. on his wall.) But then Apple also epitomizes the profit-at-all-costs mentality that drives technology leaders today.
Walmart workers demonstrating at a rally in Maryland, demanding better pay, regular hours, and affordable health care. (Jim West/Report Digital/REA/Redux)
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.
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.”
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.”
CEOS pursue lower taxes and then—surprise!—the public gets mad.
When Google chairman Eric Schmidt showed up at 10 Downing Street last week to discuss tax reform with David Cameron, he had to leave through the back door. The press and the opposition were in a lather over reports that Google—whose chairman sits on the U.K. prime minister’s Business Advisory Council—had paid only a few million pounds of corporation tax on billions in profits it had racked up in the U.K. Said Lord Oakeshott, a Liberal Democrat peer: “How can David Cameron possibly not see how outrageous it is to keep Mr. Schmidt on his business advisory group when Google is making a mint and paying pennies in tax in Britain?”
As the CEOs of many of America’s largest and most admired companies have waded into public debates, the same kind of rough treatment has been meted out, and for largely the same reason. In recent years, the pursuit of lower taxes—using tools like offshore accounts, loopholes, and shell companies—has become a pathology for large companies. Corporate profits have never been higher in the U.S., but corporate tax receipts as a percentage of gross domestic product have been falling steadily. The $242 billion in corporate income taxes collected in fiscal 2012 was less than 10 percent of total federal revenue.
You don’t have to be a Harvard MBA to connect the dots between epic corporate tax avoidance and their leaders’ poor public reception. Called before Congress last Tuesday, Apple CEO Tim Cook was grilled about his firm’s practice of funneling a huge chunk of profits through a lightly taxed entity in Ireland. “Apple has become the largest corporate income-tax payer in the U.S.,” Cook protested. But his denials that the company used tax gimmicks were largely met with disbelief.
This has been going on for a while. When General Electric CEO Jeff Immelt was named head of the President’s Council on Jobs and Competitiveness in 2011, critics on the left and right made hay over the company’s feeble tax contribution. Immelt’s tenure on the Jobs Council ended with a whimper, and it’s unlikely that Eric Schmidt and Tim Cook will be more effective as voices for tax reform. These esteemed CEOs have lost sight of a simple truth. In the corporate world, paying taxes may make you a chump, but in the public world, it makes you a citizen. And it is citizenship—not title or money—that gives you the right to be heard.
The Federal Reserve chairman has been working like a dog to keep the economy moving, he told Congress today, but they’re not pulling their weight. He's absolutely right.
You’re doing it wrong!
That was the gist of Federal Reserve Chairman Ben Bernanke’s opening statement in front of the Congressional Joint Economic Committee on Wednesday morning. The Fed is doing its job, but Congress and the White House are being counterproductive.
The economy is moving in the right direction, but not fast enough for anyone’s liking. Asset prices are getting a nice lift—in part from the underlying performance of the economy and in part from the Federal Reserve’s easy money policies. The stock market is at all-time high, auto companies are ramping up production, and home sales are recovering nicely. The National Association of Realtors reported on Wednesday that existing home sales rose 9.7 percent in April from last year. The median price for a home sold in April 2013 was up 11 percent from April 2012. The combination of rising values and consistent mortgage payments means that, with each passing week, more Americans are above water in their mortgages—i.e., they owe less than their homes are worth. And when people have equity in their homes, all sorts of good things happen. They’re able to sell homes and move. They’re more likely to stay current on their mortgage. And as Home Depot noted in a conference call, in which executives discussed the firm’s bang-up quarterly-earnings report, above-water homeowners are much more likely to spend money on home improvements.
While noting the positive developments, Bernanke said the economy is still sort of meh. So what’s the problem? In a word: government. I’ve noted that we are living in a Golden Age of Deficit Reduction™—the combination of higher taxes, the end of the payroll-tax holiday, the sequester, and growth are helping to bring down the deficit rapidly. The Congressional Budget Office now projects the fiscal 2013 deficit will be $642 billion, down $441 billion, or 41 percent from $1.089 trillion in fiscal 2012. That’s huge. But it may be too much, too soon.
Indeed, Bernanke complained that fiscal policy was dampening growth. First, for the last few years, state and local governments, which have to balance budgets every year, have been hacking spending and employment. “Notably, over the past four years, state and local governments have cut civilian government employment by roughly 700,000 jobs, and total government employment has fallen by more than 800,000 jobs over the same period,” Bernanke noted. I’ve dubbed this the “conservative recovery,” since all the jobs growth has come from the private sector. That’s not how it usually goes, even when Republicans are in the White House. Bernanke: “For comparison, over the four years following the trough of the 2001 recession, total government employment rose by more than 500,000 jobs.”
Now that states are doing much better, with many sporting surpluses, the job carnage is ending. But if it’s not one thing, it’s another. While states may be loosening up, Bernanke noted, “at the same time, though, fiscal policy at the federal level has become significantly more restrictive. In particular, the expiration of the payroll-tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.” How much? Bernanke noted that “the deficit-reduction policies in current law will slow the pace of real GDP growth by about 1 1/2 percentage points during 2013, relative to what it would have been otherwise.” That doesn’t sound like much. But 1.5 percent of GDP represents more than $200 billion in economic activity.
Congress, of course, is the main culprit here. But the White House is complicit as well. So too are the professional deficit hawks, who, having failed to encourage a grand bargain, continue to advocate for more cuts in the face of massive deficit reduction. Bernanke suggested that Congress ease up on the whole budget-cutting thing. The U.S. still has long-term issues, Bernanke noted, but that’s no reason to let the sequester continue. To boost short-term growth and ward off giant long-term deficits, “the Congress and the administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”
With news of potential Fed tapering, Julie Hyman joins In the Loop with Betty Liu on Bloomberg News to give analysis of market reaction.
More U.S. workers means more people paying taxes— and a $197 billion cut in the deficit. By Daniel Gross.