History > 2013 > USA > Economy (III)

A Day’s Strike

Seeks to Raise Fast-Food Pay

July 31, 2013
The New York Times
By STEVEN GREENHOUSE

From New York to several Midwestern cities, thousands of fast-food workers have been holding one-day strikes during peak mealtimes, quickly drawing national attention to their demands for much higher wages.

What began in Manhattan eight months ago first spread to Chicago and Washington and this week has hit St. Louis, Kansas City, Detroit and Flint, Mich. On Wednesday alone, workers picketed McDonald’s, Taco Bell, Popeye’s and Long John Silver’s restaurants in those cities with an ambitious agenda: pay of $15 an hour, twice what many now earn.

These strikes, which are planned for Milwaukee on Thursday, carry the flavor of Occupy Wall Street protests and are far different from traditional unionization efforts that generally focus on a single workplace. The national campaign, underwritten with millions of dollars from the Service Employees International Union, aims to mobilize workers — all at once — in numerous cities at hundreds of restaurants from two dozen chains.

None of the nation’s 200,000-plus fast-food restaurants are unionized.

The strategists know they want to achieve a $15 wage, but they seem to be ad-libbing on ways to get there. Perhaps they will seek to unionize workers at dozens of restaurants, although some labor leaders scoff at that idea because the turnover rate among fast-food employees is about 75 percent a year. Or the strategists and strikers might press city councils to enact a special “living wage” for fast-food restaurants. Or perhaps by continually disrupting the fast-food marketplace from counter to counter across the country, they can get McDonald’s, KFC and others to raise wages to end the ruckus. The protests’ organizers acknowledge that yet another goal is to push Congress to raise the federal minimum wage and pressure state legislatures to raise the state minimums.

“These companies aren’t magically going to make our lives better,” said Terrance Wise, who earns $9.30 an hour after working for eight years at a Burger King in Kansas City, plus $7.40 an hour at his second job at Pizza Hut. “We can sit back and stay silent and continue to live in poverty or, on the other hand, we can step out and say something and let it be known that we need help.”

In explaining why her union is pouring dozens of organizers and significant sums into the effort, Mary Kay Henry, the S.E.I.U. president, said, “Our union’s members think that economic inequality is the No. 1 problem our nation needs to solve. We think it’s important to back low-wage workers who are willing to stand up and have the courage to strike to make the case that the economy is creating jobs that people can’t support their families on.”

The protests in Detroit on Wednesday had a particularly poignant backdrop, given that the city has declared bankruptcy. Dozens of workers, joined by members of various unions and community groups, picketed in front of McDonald’s and Taco Bell, shouting chants like, “Hey, hey, ho, ho, $7.40 has got to go” — the amount per hour many of them are paid.

“Fifteen dollars an hour would be great – we’d be able to pay our living costs,” said Christopher Drumgold, 32, a father of two who earns $7.40 an hour after a year working at a McDonald’s on Seven Mile Road in Detroit. “On what I’m earning right now you have to choose between paying your rent and eating the next day.”

Restaurant industry officials say the strikers’ demand for $15 an hour is ludicrous because it amounts to more than twice the federal minimum wage. (The median pay for fast-food workers nationwide is $9.05 an hour.) Industry officials say a $15 wage might drive many restaurants out of business and cause restaurant owners to hire fewer workers and replace some with automation — perhaps by using more computerized gadgets where customers punch in the orders themselves.

Scott DeFife, executive vice president of the National Restaurant Association, said the one-day walkouts were not really strikes, but rather public-relations-minded protests that have caused very few restaurants to close.

“It is an effort to demonize the entire industry in order to make some organizing and political points,” he said, adding that only a small percentage of restaurant jobs pay the minimum wage. He said most of those positions were held by workers younger than 25.

Organizers of the protests — called Fast Food Forward in New York and Fight for 15 in Chicago — say that it seems to be catching fire. Some fast-food workers in St. Louis, inspired by the strikes in New York and Chicago, held their own one-day walkout.

“Things are going phenomenally. Workers all over the country are taking action in an industry where there had literally been no action or traction a year ago,” said Jonathan Westin, executive director of New York Communities for Change, which played a crucial role organizing the first fast-food strike in New York last November.

Explaining the focus on fast-food workers, Mr. Westin added, “In a lot of low-income neighborhoods, probably the largest employer is the fast-food industry, and we’re not going to reduce the level of poverty in those neighborhoods unless we try to get that industry to provide jobs that pay a living wage.”

Late Wednesday morning, 100 people protested in front of a Taco Bell on Eight Mile Road in Detroit, with organizers saying that 11 of the restaurant’s employees were on strike.

One Taco Bell worker, Sharise Stitt, 27, joined the strike, saying the $8.09 she earns after five years there was insufficient to support her family.

She was evicted from her Detroit apartment and moved her family to her sister’s house in Taylor, Mich. That means a 45-minute commute each way and a gas bill of $50 every four days. After taxes, she has about $900 a month to feed and clothe her three children. They receive food stamps.

“Sometimes my phone will go out because that isn’t a priority,” she said. “Giving my kids a roof over their heads is.”

She would love a $15 minimum wage. “I wouldn’t have to worry about school supplies or things like that,” she added.

Nelson Lichtenstein, a labor historian at the University of California, Santa Barbara, said he doubted the fast-food strikes would result in unionization. While unions might be excited by the current burst of enthusiasm, he said unions had learned to be cautious, adding, “You pour in a lot of resources, saying, ‘Yes it does work,’ and a year later it disintegrates.”

Nonetheless, he said the periodic chaos the one-day walkouts cause could influence the industry to pay more and could nudge lawmakers to raise the minimum wage (which Republicans in Washington strongly oppose).

Dorian T. Warren, who teaches a course on labor organizing at Columbia University, noted that most of the urban workers taking part in the single-day strikes were black and Hispanic, demographic groups that often lean in favor of unions.

“I think a vast majority would vote for unionization,” he said. “Many are earning so little they have nothing to lose.”

“Will they get $15 an hour?” he added. “I don’t know. If they get to $10 or $12, that’d be huge.”

Jaclyn Trop contributed reporting.

    A Day’s Strike Seeks to Raise Fast-Food Pay, NYT, 31.7.2013,
    http://www.nytimes.com/2013/08/01/business/
    strike-for-day-seeks-to-raise-fast-food-pay.html

Facebook Shares

Touch a Symbolic Threshold

July 31, 2013
The New York Times
By VINDU GOEL

SAN FRANCISCO — It took more than a year, but Facebook’s stock has fought its way back.

On Wednesday morning, the company’s stock crossed an important psychological barrier, trading above $38 a share, the price at which Facebook, the world’s leading social network, first sold shares to the public in May 2012.

The catalyst for the rise was the company’s surprisingly strong second-quarter earnings report last Wednesday, which quelled many investors’ doubts about Facebook’s ability to make money from its legions of mobile users and suggested that the company’s profit stream would continue growing.

Since last week’s report, shares have risen about 34 percent. Early Wednesday, they briefly touched $38.31 a share, although they pulled back to end at $36.80 a share at the time the market closed.

The company’s shares hit a low of $17.55 last fall. Since then, investors have warmed to the company as its management demonstrated that it can increase profits and not just users.

“There was a perception that they hadn’t monetized the users they have,” said Aaron Kessler, an analyst at the Raymond James brokerage firm, referring to last summer, when the Facebook’s stock was trading at half the current level.

These days, Wall Street sees revenue potential everywhere — from soon-to-come video ads in the Facebook news feed to the expansion of high-dollar ads targeted to specific swaths of Facebook users.

“Facebook was caught flat-footed by the shift to mobile,” said Mark S. Mahaney, an analyst with RBC Capital Markets. Now, he said, “they appear to be set up as a sustainable, high-growth business.”

Still, there are reasons to be concerned. Mobile messaging platforms like Snapchat and WhatsApp are grabbing the attention of many of Facebook’s younger users. Twitter is mounting a major effort to go after marketers, especially brands that typically advertise on television, as it prepares for its own likely public offering.

And Facebook risks turning off users with too many ads. About 1 in 20 items in the news feed, the main flow of items that a Facebook user sees, is an ad. During the company’s quarterly conference call with analysts, Facebook’s co-founder and chief executive, Mark Zuckerberg, said that users were beginning to notice the number of ads, suggesting that the company could not greatly increase their frequency without losing some users.

Nate Elliott, a principal analyst with Forrester Research, said Facebook users who visit the site on a computer’s browser still see too many cheap, poorly targeted ads on the right side of the page. “They’ve got to get much better at targeting,” he said.

Despite these worries, investors’ views of the company’s prospects have clearly changed.

Mr. Mahaney, whose firm has a $40 price target on the Facebook stock, said that analysts across Wall Street had increased their projections of the company’s financial performance. Analysts now expect Facebook to increase its profits 30 to 35 percent a year through 2015.

Because stocks tend to trade as a multiple of a company’s future profits, those upgrades last week sent Facebook’s stock soaring.

Facebook officials declined to comment on the stock rise on Wednesday. But for the company’s executives, who had urged investors to be patient as their strategy played out, the surge surely offers some vindication.

The company raised $16 billion from the initial public offering on May 18, 2012, vaulting it into the big leagues of American stocks, but problems struck immediately. The Nasdaq stock exchange botched the handling of buy and sell orders on the first day of trading — so badly, in fact, that regulators eventually fined Nasdaq $10 million for the fiasco.

In ensuing weeks, Facebook shares continued to fall. Instead of pouring into the stock, as they did a decade earlier with Google, many investors questioned whether Facebook’s stock was overpriced at $38 a share.

Particularly worrisome was Facebook’s seemingly nonexistent mobile strategy just as Internet users were abandoning PCs for their smartphones. The company’s smartphone and iPad applications were clunky, and it was generating no revenue from mobile ads.

Facebook’s management, including Mr. Zuckerberg, recognized the problem and began a crash course to revamp the company’s approach to mobile and better position the company for fast-growing emerging markets.

The company overhauled its apps, introduced ads into its users’ news feeds, and created a new category of revenue called app-install ads. With the app-install ads, a game maker, for example, can promote its new game in Facebook’s mobile software and give users an easy way to install the app with just a couple of clicks.

Facebook also introduced new advertising products meant to give marketers more ways to target specific groups of customers, which allowed the service to charge higher advertising rates.

While mobile advertising continues to grow, and was about 41 percent of Facebook’s ad revenue in the second quarter, investors are also looking to new areas of potential profit growth. Those include video advertising in the news feed, which is expected to begin later this year, and the possible sale of ads in Instagram, the fast-growing photo and video-sharing app that Facebook bought in 2012.

“All of those seem like relatively large low-hanging fruit, and they are starting to go after them,” Mr. Mahaney said.

    Facebook Shares Touch a Symbolic Threshold, NYT, 31.7.2013,
    http://www.nytimes.com/2013/08/01/technology/
    facebook-briefly-trades-above-ipo-price.html

Gangplank to a Warm Future

July 28, 2013
The New York Times
By ANTHONY R. INGRAFFEA

ITHACA, N.Y. — MANY concerned about climate change, including President Obama, have embraced hydraulic fracturing for natural gas. In his recent climate speech, the president went so far as to lump gas with renewables as “clean energy.”

As a longtime oil and gas engineer who helped develop shale fracking techniques for the Energy Department, I can assure you that this gas is not “clean.” Because of leaks of methane, the main component of natural gas, the gas extracted from shale deposits is not a “bridge” to a renewable energy future — it’s a gangplank to more warming and away from clean energy investments.

Methane is a far more powerful greenhouse gas than carbon dioxide, though it doesn’t last nearly as long in the atmosphere. Still, over a 20-year period, one pound of it traps as much heat as at least 72 pounds of carbon dioxide. Its potency declines, but even after a century, it is at least 25 times as powerful as carbon dioxide. When burned, natural gas emits half the carbon dioxide of coal, but methane leakage eviscerates this advantage because of its heat-trapping power.

And methane is leaking, though there is significant uncertainty over the rate. But recent measurements by the National Oceanic and Atmospheric Administration at gas and oil fields in California, Colorado and Utah found leakage rates of 2.3 percent to 17 percent of annual production, in the range my colleagues at Cornell and I predicted some years ago. This is the gas that is released into the atmosphere unburned as part of the hydraulic fracturing process, and also from pipelines, compressors and processing units. Those findings raise questions about what is happening elsewhere. The Environmental Protection Agency has issued new rules to reduce these emissions, but the rules don’t take effect until 2015, and apply only to new wells.

A 2011 study from the National Center for Atmospheric Research concluded that unless leaks can be kept below 2 percent, gas lacks any climate advantage over coal. And a study released this May by Climate Central, a group of scientists and journalists studying climate change, concluded that the 50 percent climate advantage of natural gas over coal is unlikely to be achieved over the next three to four decades. Unfortunately, we don’t have that long to address climate change — the next two decades are crucial.

To its credit, the president’s plan recognizes that “curbing emissions of methane is critical.” However, the release of unburned gas in the production process is not the only problem. Gas and oil wells that lose their structural integrity also leak methane and other contaminants outside their casings and into the atmosphere and water wells. Multiple industry studies show that about 5 percent of all oil and gas wells leak immediately because of integrity issues, with increasing rates of leakage over time. With hundreds of thousands of new wells expected, this problem is neither negligible nor preventable with current technology.

Why do so many wells leak this way? Pressures under the earth, temperature changes, ground movement from the drilling of nearby wells and shrinkage crack and damage the thin layer of brittle cement that is supposed to seal the wells. And getting the cement perfect as the drilling goes horizontally into shale is extremely challenging. Once the cement is damaged, repairing it thousands of feet underground is expensive and often unsuccessful. The gas and oil industries have been trying to solve this problem for decades.

The scientific community has been waiting for better data from the E.P.A. to assess the extent of the water contamination problem. That is why it is so discouraging that, in the face of industry complaints, the E.P.A. reportedly has closed or backed away from several investigations into the problem. Perhaps a full E.P.A. study of hydraulic fracturing and drinking water, due in 2014, will be more forthcoming. In addition, drafts of an Energy Department study suggest that there are huge problems finding enough water for fracturing future wells. The president should not include this technology in his energy policy until these studies are complete.

We have renewable wind, water, solar and energy-efficiency technology options now. We can scale these quickly and affordably, creating economic growth, jobs and a truly clean energy future to address climate change. Political will is the missing ingredient. Meaningful carbon reduction is impossible so long as the fossil fuel industry is allowed so much influence over our energy policies and regulatory agencies. Policy makers need to listen to the voices of independent scientists while there is still time.

Anthony R. Ingraffea is a professor

of civil and environmental engineering

at Cornell University and the president of Physicians,

Scientists and Engineers for Healthy Energy,

a nonprofit group.

    Gangplank to a Warm Future, NYT, 28.7.2013,
    http://www.nytimes.com/2013/07/29/opinion/gangplank-to-a-warm-future.html

Obama Says Income Gap

Is Fraying U.S. Social Fabric

July 27, 2013
The New York Times
By JACKIE CALMES and MICHAEL D. SHEAR

GALESBURG, Ill. — In a week when he tried to focus attention on the struggles of the middle class, President Obama said in an interview that he was worried that years of widening income inequality and the lingering effects of the financial crisis had frayed the country’s social fabric and undermined Americans’ belief in opportunity.

Upward mobility, Mr. Obama said in a 40-minute interview with The New York Times, “was part and parcel of who we were as Americans.”

“And that’s what’s been eroding over the last 20, 30 years, well before the financial crisis,” he added.

“If we don’t do anything, then growth will be slower than it should be. Unemployment will not go down as fast as it should. Income inequality will continue to rise,” he said. “That’s not a future that we should accept.”

A few days after the acquittal in the Trayvon Martin case prompted him to speak about being a black man in America, Mr. Obama said the country’s struggle over race would not be eased until the political process in Washington began addressing the fear of many people that financial stability is unattainable.

“Racial tensions won’t get better; they may get worse, because people will feel as if they’ve got to compete with some other group to get scraps from a shrinking pot,” Mr. Obama said. “If the economy is growing, everybody feels invested. Everybody feels as if we’re rolling in the same direction.”

Mr. Obama, who this fall will choose a new chairman of the Federal Reserve to share economic stewardship, expressed confidence that the trends could be reversed with the right policies.

The economy is “far stronger” than four years ago, he said, yet many people who write to him still do not feel secure about their future, even as their current situation recovers.

“That’s what people sense,” he said. “That’s why people are anxious. That’s why people are frustrated.”

During much of the interview, Mr. Obama was philosophical about historical and economic forces that he said were tearing at communities across the country. He noted at one point that he has in the Oval Office a framed copy of the original program from the March on Washington for Jobs and Freedom 50 years ago, when the Rev. Dr. Martin Luther King Jr. gave his “I Have a Dream” speech.

He uses it, he said, to remind people “that was a march for jobs and justice; that there was a massive economic component to that. When you think about the coalition that brought about civil rights, it wasn’t just folks who believed in racial equality. It was people who believed in working folks having a fair shot.”

For decades after, Mr. Obama said, in places like Galesburg people “who wanted to find a job — they could go get a job.”

“They could go get it at the Maytag plant,” he said. “They could go get it with the railroad. It might be hard work, it might be tough work, but they could buy a house with it.”

Without a shift in Washington to encourage growth over “damaging” austerity, he added, not only would the middle class shrink, but in turn, contentious issues like trade, climate change and immigration could become harder to address.

Striking a feisty note at times, he vowed not to be cowed by his Republican adversaries in Congress and said he was willing to stretch the limits of his powers to change the direction of the debate in Washington.

“I will seize any opportunity I can find to work with Congress to strengthen the middle class, improve their prospects, improve their security,” Mr. Obama said. But he added, “I’m not just going to sit back if the only message from some of these folks is no on everything, and sit around and twiddle my thumbs for the next 1,200 days.”

Addressing for the first time one of his most anticipated decisions, Mr. Obama said he had narrowed his choice to succeed Ben S. Bernanke as chairman of the Federal Reserve to “some extraordinary candidates.” With current fiscal policy measurably slowing the recovery, many in business and finance have looked to the Fed to continue its expansionary monetary policies to offset the drag.

Mr. Obama said he wanted someone who would not just work abstractly to keep inflation in check and ensure stability in the markets. “The idea is to promote those things in service of the lives of ordinary Americans getting better,” he said. “I want a Fed chairman that can step back and look at that objectively and say, Let’s make sure that we’re growing the economy.”

The leading Fed candidates are believed to be Lawrence H. Summers, Mr. Obama’s former White House economic adviser and President Bill Clinton’s Treasury secretary, and Janet Yellen, the current Fed vice chairwoman and another former Clinton official. The president said he would announce his choice “over the next several months.”

More clearly than he did in three speeches on the economy last week — the next is scheduled for Tuesday in Chattanooga, Tenn. — Mr. Obama in the interview called for an end to the emphasis on budget austerity that Republicans ushered in when they captured control of the House in November 2010.

The priority, he said, should be spending for infrastructure, education, clean energy, science, research and other domestic initiatives of the sort he twice campaigned on.

“I want to make sure that all of us in Washington are investing as much time, as much energy, as much debate on how we grow the economy and grow the middle class as we’ve spent over the last two to three years arguing about how we reduce the deficits,” Mr. Obama said. He called for a shift “away from what I think has been a damaging framework in Washington.”

The president did not say what his legislative strategy would be. Even as he spoke, House Republicans were pushing measures in the opposite direction: to continue into the fiscal year that starts Oct. 1 the indiscriminate across-the-board spending reductions — known as sequestration — that Mr. Obama opposes, and to cut his priorities deeper still.

Republicans are also threatening to block an increase in the government’s borrowing limit — an action that must be taken by perhaps November to avoid financial crisis — unless Congress withholds money for his health care law.

Mr. Obama all but dared Republicans to challenge his executive actions, including his decision three weeks ago to delay until 2015 the health care law’s mandate that large employers provide insurance or pay fines. Republicans and some legal scholars questioned whether he had the legal authority to unilaterally change the law.

The delay in the employer mandate, which mostly affects large businesses that already insure workers but are worried about federal reporting requirements, was “the kind of routine modifications or tweaks to a large program that’s starting off that in normal times in a normal political atmosphere would draw a yawn from everybody,” Mr. Obama said.

“If Congress thinks that what I’ve done is inappropriate or wrong in some fashion, they’re free to make that case,” he said. “But there’s not an action that I take that you don’t have some folks in Congress who say that I’m usurping my authority. Some of those folks think I usurp my authority by having the gall to win the presidency.”

The president’s latest campaign for his agenda began as national polls last week showed a dip in his public support. The declines were even greater for Congress and Republicans in particular, in their already record-low ratings.

Mr. Obama said he would push ahead with a series of speeches that lay out his agenda ahead of the fights this fall with Congress. “If once a week I’m not talking about jobs, the economy, and the middle class,” he said, “then all matter of distraction fills the void.”

    Obama Says Income Gap Is Fraying U.S. Social Fabric, NYT, 27.7.2013,
    http://www.nytimes.com/2013/07/28/us/politics/
    obama-says-income-gap-is-fraying-us-social-fabric.html

Detroit, the New Greece

July 21, 2013
The New York Times
By PAUL KRUGMAN

When Detroit declared bankruptcy, or at least tried to — the legal situation has gotten complicated — I know that I wasn’t the only economist to have a sinking feeling about the likely impact on our policy discourse. Was it going to be Greece all over again?

Clearly, some people would like to see that happen. So let’s get this conversation headed in the right direction, before it’s too late.

O.K., what am I talking about? As you may recall, a few years ago Greece plunged into fiscal crisis. This was a bad thing but should have had limited effects on the rest of the world; the Greek economy is, after all, quite small (actually, about one and a half times as big as the economy of metropolitan Detroit). Unfortunately, many politicians and policy makers used the Greek crisis to hijack the debate, changing the subject from job creation to fiscal rectitude.

Now, the truth was that Greece was a very special case, holding few if any lessons for wider economic policy — and even in Greece, budget deficits were only one piece of the problem. Nonetheless, for a while policy discourse across the Western world was completely “Hellenized” — everyone was Greece, or was about to turn into Greece. And this intellectual wrong turn did huge damage to prospects for economic recovery.

So now the deficit scolds have a new case to misinterpret. Never mind the repeated failure of the predicted U.S. fiscal crisis to materialize, the sharp fall in predicted U.S. debt levels and the way much of the research the scolds used to justify their scolding has been discredited; let’s obsess about municipal budgets and public pension obligations!

Or, actually, let’s not.

Are Detroit’s woes the leading edge of a national public pensions crisis? No. State and local pensions are indeed underfunded, with experts at Boston College putting the total shortfall at $1 trillion. But many governments are taking steps to address the shortfall. These steps aren’t yet sufficient; the Boston College estimates suggest that overall pension contributions this year will be about $25 billion less than they should be. But in a $16 trillion economy, that’s just not a big deal — and even if you make more pessimistic assumptions, as some but not all accountants say you should, it still isn’t a big deal.

So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to have had especially bad governance, but for the most part the city was just an innocent victim of market forces.

What? Market forces have victims? Of course they do. After all, free-market enthusiasts love to quote Joseph Schumpeter about the inevitability of “creative destruction” — but they and their audiences invariably picture themselves as being the creative destroyers, not the creatively destroyed. Well, guess what: Someone always ends up being the modern equivalent of a buggy-whip producer, and it might be you.

Sometimes the losers from economic change are individuals whose skills have become redundant; sometimes they’re companies, serving a market niche that no longer exists; and sometimes they’re whole cities that lose their place in the economic ecosystem. Decline happens.

True, in Detroit’s case matters seem to have been made worse by political and social dysfunction. One consequence of this dysfunction has been a severe case of “job sprawl” within the metropolitan area, with jobs fleeing the urban core even when employment in greater Detroit was still rising, and even as other cities were seeing something of a city-center revival. Fewer than a quarter of the jobs on offer in the Detroit metropolitan area lie within 10 miles of the traditional central business district; in greater Pittsburgh, another former industrial giant whose glory days have passed, the corresponding figure is more than 50 percent. And the relative vitality of Pittsburgh’s core may explain why the former steel capital is showing signs of a renaissance, while Detroit just keeps sinking.

So by all means let’s have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away. And let’s also have a serious discussion about our obligations, as a nation, to those of our fellow citizens who have the bad luck of finding themselves living and working in the wrong place at the wrong time — because, as I said, decline happens, and some regional economies will end up shrinking, perhaps drastically, no matter what we do.

The important thing is not to let the discussion get hijacked, Greek-style. There are influential people out there who would like you to believe that Detroit’s demise is fundamentally a tale of fiscal irresponsibility and/or greedy public employees. It isn’t. For the most part, it’s just one of those things that happens now and then in an ever-changing economy.

    Detroit, the New Greece, NYT, 21.7.2013,
    http://www.nytimes.com/2013/07/22/opinion/krugman-detroit-the-new-greece.html

Billions in Debt,

Detroit Tumbles Into Insolvency

July 18, 2013
The New York Times
By MONICA DAVEY and MARY WILLIAMS WALSH

DETROIT — Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, filed for bankruptcy on Thursday, the largest American city ever to take such a course.

The decision, confirmed by officials after it trickled out in late afternoon news reports, also amounts to the largest municipal bankruptcy filing in American history in terms of debt.

“This is a difficult step, but the only viable option to address a problem that has been six decades in the making,” said Gov. Rick Snyder, who authorized the move after a recommendation from the emergency financial manager he had appointed to resolve Detroit’s dire financial situation.

Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.

For Detroit, the filing came as a painful reminder of a city’s rise and fall.

“It’s sad, but you could see the writing on the wall,” said Terence Tyson, a city worker who learned of the bankruptcy as he left his job at Detroit’s municipal building on Thursday evening. Like many there, he seemed to react with muted resignation and uncertainty about what lies ahead, but not surprise. “This has been coming for ages.”

Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

From here, there is no road map for Detroit’s recovery, not least of all because municipal bankruptcies are rare. State officials said ordinary city business would carry on as before, even as city leaders take their case to a judge, first to prove that the city is so financially troubled as to be eligible for bankruptcy, and later to argue that Detroit’s creditors and representatives of city workers and municipal retirees ought to settle for less than they once expected.

Some bankruptcy experts and city leaders bemoaned the likely fallout from the filing, including the stigma. They anticipate further benefit cuts for city workers and retirees, more reductions in services for residents, and a detrimental effect on borrowing.

“For a struggling family I can see bankruptcy, but for a big city like this, can it really work?” said Diane Robinson, an office assistant who has worked for the city for 20 years. “What will happen to city retirees on fixed incomes?”

But others, including some Detroit business leaders who have seen a rise in private investment downtown despite the city’s larger struggles, said bankruptcy seemed the only choice left — and one that might finally lead to a desperately needed overhaul of city services and to a plan to pay off some reduced version of the overwhelming debts. In short, a new start.

“The worst thing we can do is ignore a problem,” said Sandy K. Baruah, president of the Detroit Regional Chamber. “We’re finally executing a fix.”

The decision to go to court signaled a breakdown after weeks of tense negotiations, in which Mr. Orr had been trying to persuade creditors to accept pennies on the dollar and unions to accept cuts in benefits.

All along, the state’s involvement — including Mr. Snyder’s decision to send in an emergency manager — has carried racial implications, setting off a wave of concerns for some in Detroit that the mostly white Republican-led state government was trying to seize control of Detroit, a Democratic city where more than 80 percent of residents are black.

The nature of Detroit’s situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities around the country. Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s.

Leaders in Washington and in Lansing, the state capital, issued statements of concern late Thursday. A White House spokeswoman said President Obama and his senior team were closely monitoring the situation.

“While leaders on the ground in Michigan and the city’s creditors understand that they must find a solution to Detroit’s serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America’s great cities,” Amy Brundage, the spokeswoman, said in a statement.

The debt in Detroit dwarfs that of Jefferson County, Ala., which had been the nation’s largest municipal bankruptcy, having filed in 2011 with about $4 billion in debt. The population of Detroit, the largest city in Michigan, is more than twice that of Stockton, Calif., which filed for bankruptcy in 2012 and had been the nation’s most populous city to do so.

Other major cities, including New York and Cleveland in the 1970s and Philadelphia two decades later, have teetered near the edge of financial ruin, but ultimately found solutions other than federal court. Detroit’s struggle, experts say, is particularly dire because it is not limited to a single event or one failed financial deal, like the troubled sewer system largely responsible for Jefferson County’s downfall.

Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a huge, 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city’s operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction.

All of that makes bankruptcy — a process that could take months, if not years, and is itself expected to be costly — particularly complex.

“It’s not enough to say, let’s reduce debt,” said James E. Spiotto, an expert in municipal bankruptcy at the law firm of Chapman and Cutler in Chicago. “At the end of the day, you need a real recovery plan. Otherwise you’re just going to repeat the whole thing over again.”

The municipal bond market will be paying particular attention to Detroit because of what it may mean for investing in general obligation bonds. In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general obligation bonds as having no higher priority for payment than, for instance, city workers — a notion that conflicts with the conventions of the market, where general obligation bonds have been seen as among the safest investments and all but certain to be paid in full.

Leaders of public sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the State Constitution that union leaders say bars such cuts.

Officials in other financially troubled cities may feel encouraged to follow Detroit’s path, some experts say. A rush of municipal bankruptcies appears unlikely, though, and leaders of other cities will want to see how this case turns out, particularly when it comes to pension and retiree health care costs, said Karol K. Denniston, a bankruptcy lawyer with Schiff Hardin who is advising a taxpayer group that came together in Stockton after its bankruptcy.

“If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities,” Ms. Denniston said. “Detroit is going to be a huge test kitchen.”

Around this city, there was widespread uncertainty about what bankruptcy might really mean, now and in the long term. Officials said city workers were being sent letters, notifying them that city business would proceed as usual, from bills to permits. A hot line was planned for residents and others with questions and worries.

For some Detroiters, recent memories of bankruptcies by Chrysler and General Motors — and the re-emergence of those companies — appeared to have calmed nerves. But experts say corporate bankruptcy procedures are significantly different from municipal bankruptcies.

In municipal bankruptcies, for instance, the ability of judges to intervene in how a city is run is sharply limited. And municipal bankruptcies are a form of debt adjustment, as opposed to liquidation or reorganization.

Here, residents are likely to see little immediate change from the way the city has been run since March, when Mr. Orr arrived to oversee major decisions. A bankruptcy lawyer, he is widely expected to continue to run Detroit during a legal process. Mayor Dave Bing and Detroit’s elected City Council are still paid to hold office and are permitted to make decisions about day-to-day operations, though Mr. Orr could remove those powers.

Mr. Orr has said that as part of any restructuring he wants to spend about $1.25 billion on improving city infrastructure and services. But a major concern for Detroit residents remains the possibility that services, already severely lacking, might be further diminished in bankruptcy.

About 40 percent of the city’s streetlights do not work, a report from Mr. Orr’s office showed. More than half of Detroit’s parks have closed since 2008.

Monica Davey reported from Detroit,

and Mary Williams Walsh from New York.

    Billions in Debt, Detroit Tumbles Into Insolvency, NYT, 18.7.2013,
    http://www.nytimes.com/2013/07/19/us/detroit-files-for-bankruptcy.html

War On the Unemployed

June 30, 2013
The New York Times
By PAUL KRUGMAN

Is life too easy for the unemployed? You may not think so, and I certainly don’t think so. But that, remarkably, is what many and perhaps most Republicans believe. And they’re acting on that belief: there’s a nationwide movement under way to punish the unemployed, based on the proposition that we can cure unemployment by making the jobless even more miserable.

Consider, for example, the case of North Carolina. The state was hit hard by the Great Recession, and its unemployment rate, at 8.8 percent, is among the highest in the nation, higher than in long-suffering California or Michigan. As is the case everywhere, many of the jobless have been out of work for six months or more, thanks to a national environment in which there are three times as many people seeking work as there are job openings.

Nonetheless, the state’s government has just sharply cut aid to the unemployed. In fact, the Republicans controlling that government were so eager to cut off aid that they didn’t just reduce the duration of benefits; they also reduced the average weekly benefit, making the state ineligible for about $700 million in federal aid to the long-term unemployed.

It’s quite a spectacle, but North Carolina isn’t alone: a number of other states have cut unemployment benefits, although none at the price of losing federal aid. And at the national level, Congress has been allowing extended benefits introduced during the economic crisis to expire, even though long-term unemployment remains at historic highs.

So what’s going on here? Is it just cruelty? Well, the G.O.P., which believes that 47 percent of Americans are “takers” mooching off the job creators, which in many states is denying health care to the poor simply to spite President Obama, isn’t exactly overflowing with compassion. But the war on the unemployed isn’t motivated solely by cruelty; rather, it’s a case of meanspiritedness converging with bad economic analysis.

In general, modern conservatives believe that our national character is being sapped by social programs that, in the memorable words of Paul Ryan, the chairman of the House Budget Committee, “turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency.” More specifically, they believe that unemployment insurance encourages jobless workers to stay unemployed, rather than taking available jobs.

Is there anything to this belief? The average unemployment benefit in North Carolina is $299 a week, pretax; some hammock. So anyone who imagines that unemployed workers are deliberately choosing to live a life of leisure has no idea what the experience of unemployment, and especially long-term unemployment, is really like. Still, there is some evidence that unemployment benefits make workers a bit more choosy in their job search. When the economy is booming, this extra choosiness may raise the “non-accelerating-inflation” unemployment rate — the unemployment rate at which inflation starts to rise, inducing the Federal Reserve to raise interest rates and choke off economic expansion.

All of this is, however, irrelevant to our current situation, in which inflation is not a concern and the Fed’s problem is that it can’t get interest rates low enough. While cutting unemployment benefits will make the unemployed even more desperate, it will do nothing to create more jobs — which means that even if some of those currently unemployed do manage to find work, they will do so only by taking jobs away from those currently employed.

But wait — what about supply and demand? Won’t making the unemployed desperate put downward pressure on wages? And won’t lower labor costs encourage job growth? No — that’s a fallacy of composition. Cutting one worker’s wage may help save his or her job by making that worker cheaper than competing workers; but cutting everyone’s wages just reduces everyone’s income — and it worsens the burden of debt, which is one of the main forces holding the economy back.

Oh, and let’s not forget that cutting benefits to the unemployed, many of whom are living hand-to-mouth, will lead to lower overall spending — again, worsening the economic situation, and destroying more jobs.

The move to slash unemployment benefits, then, is counterproductive as well as cruel; it will swell the ranks of the unemployed even as it makes their lives ever more miserable.

Can anything be done to reverse this policy wrong turn? The people out to punish the unemployed won’t be dissuaded by rational argument; they know what they know, and no amount of evidence will change their views. My sense, however, is that the war on the unemployed has been making so much progress in part because it has been flying under the radar, with too many people unaware of what’s going on.

Well, now you know. And you should be angry.

    War On the Unemployed, NYT, 30.6.2013,
    http://www.nytimes.com/2013/07/01/
    opinion/krugman-the-war-on-the-unemployed.html

The Future of Fair Labor

June 24, 2013
The New York Times
By JEFFERSON COWIE

ITHACA, N.Y. — SEVENTY-FIVE years ago today, President Franklin D. Roosevelt signed the Fair Labor Standards Act to give a policy backbone to his belief that goods that were not produced under “rudimentary standards of decency” should not be “allowed to pollute the channels of interstate trade."

The act is the bedrock of modern employment law. It outlawed child labor, guaranteed a minimum wage, established the official length of the workweek at 40 hours, and required overtime pay for anything more. Capping the working week encouraged employers to hire more people rather than work the ones they had to exhaustion. All this came not from the magic of market equilibrium but from federal policy.

For decades afterward, Congress brought more people under the law’s purview and engaged in perennial struggles to maintain or increase the minimum wage. Fifty years ago this month, John F. Kennedy signed its most important amendment, the Equal Pay Act, which guaranteed women and others equal pay for equal work.

Despite this noble history, today the act faces an uncertain future, thanks to a series of disconcerting shifts in the way we think about work in America.

The problem is indicative of the moral and political slipperiness of our time. A large and growing number of employers willfully classify their employees as “exempt” from the law by shifting their jobs, but not their pay, to administrative, executive and professional categories. Being exempt allows employers to ignore pesky things like overtime or minimum wages, since these are salaried, not hourly workers. Lawsuits over back overtime pay resulting from misclassifications have gone through the roof.

If the line between exempt and nonexempt workers has become unfairly blurred, the line distinguishing employee and independent contractor has faded to near invisibility. We are moving toward the “1099 economy,” named after the tax form provided to independent contractors, a classification that often walks the line of legality.

For some workers, being a 1099’er means more flexibility, creativity and control over their work. However, there are many more reluctant 1099 workers who want regular jobs but find themselves locked out of the system by employers looking for an easy way to buck their responsibility to their employees.

And then there is the most infamous classification hustle: the internship. For bright, young (and typically affluent) interns at America’s top corporations there is no actual job, so there are no fair labor standards to apply. That means no minimum wage and no maximum hours. There is often no pay at all.

A recent decision by the Federal District Court in Manhattan declaring that the hard-working “interns” involved in making the 2010 film “Black Swan” for Fox Searchlight were really employees is encouraging, and may well have long-range implications. It’s a hopeful sign that we may yet be able to re-establish an idea that is as old-fashioned as it is good: work and you get paid.

And yet, countercurrents persist. When Obamacare goes into effect next year, businesses that have more than 50 full-time employees will have to start offering health insurance. This could produce a scramble among small companies to reclassify enough employees so as not to have to pay for health insurance.

In response, we need a new commitment from the federal government to buttress the Fair Labor Standards Act.

More money for enforcement is a must. Compliance actions from the Department of Labor’s Division of Wages and Hours fell by over a third between 1997 and 2007. This is partly a matter of resources: for this coming budget year, the Obama administration is seeking a modest increase of $15 million for enforcement of both the Fair Labor Standards Act and the Family Medical Leave Act. That’s not enough.

There are several other ways to improve the act. Because its enforcement scheme relies on employees to come forward, rather than on government-initiated supervision through audits and worksite visits, protection against retaliation needs to be more robust. We can also improve the law’s deterrence function, in the form of punitive damages for severe or pervasive violations.

It’s true that we are in the middle of a seismic shift in the way we structure our work lives. Both workers and employers want more flexibility. But that similarity of interests shouldn’t mask the fact that employers will always have more power than their employees, and that it’s in their interests to make those employees work as long and as cheaply as possible.

In Roosevelt’s day, the courts found most wages and hours legislation unconstitutional based on the doctrine of “liberty of contract.” The idea was as simple as it was pernicious: wages and hours legislation violated an individual’s freedom to make an independent (read: worse) deal with his employer.

We can’t afford to drift further back to the bad old days of liberty of contract. Americans are drastically overworked and underpaid compared to workers in other advanced countries, and our workers are trapped in a rigid pattern of inequality that has ended a historic claim to being the nation of upward mobility.

Roosevelt did not bother with economic arguments when it came to hours and wages. He offered a simple framework, both moral and patriotic. “A self-supporting and self-respecting democracy,” he proclaimed, “can plead no justification for the existence of child labor, no economic reason for chiseling workers’ wages or stretching workers’ hours.” That is as true today as it was then.

Jefferson Cowie is a professor of labor history at Cornell

and the author of “Stayin’ Alive: The 1970s

and the Last Days of the Working Class.”

    The Future of Fair Labor, NYT, 24.6.2013,
    http://www.nytimes.com/2013/06/25/opinion/the-future-of-fair-labor.html

The Forgotten 50,000

June 16, 2013
The New York Times
By THE EDITORIAL BOARD

More than 50,000 New Yorkers slept in city homeless shelters and on the streets last night. About 21,000 were children. These numbers are huge and appalling, higher than they were in 2002, when Mayor Michael Bloomberg took office, higher than in the dismal days of the fiscal crisis, the Reagan ’80s and the surly administration of Rudolph Giuliani.

New Yorkers who have no permanent place to live form a small city unto themselves — an abandoned one. The shelter population has risen 61 percent while Mr. Bloomberg has been mayor, propelled by a 73 percent increase in homeless families, according to the Coalition for the Homeless, whose relentless advocacy has been provoking mayoral fury since the 1980s. These surging numbers — of families with children, especially — undercut claims that New York is steadily becoming a better place to live, and that its government has gotten better at helping its most vulnerable citizens meet their most basic needs.

The next mayor will have to do better by them than Mr. Bloomberg. He once proposed energetic and aggressive initiatives on behalf of the homeless. Now he speaks of them with resentment: “You can arrive in your private jet at Kennedy Airport,” the mayor said recently, “take a private limousine and go straight to the shelter system and walk in the door and we’ve got to give you shelter.”

He is right that city law grants a right to shelter, the result of a hard-fought legal battle that Mr. Bloomberg has repeatedly tried to undermine. But he is wrong to imply that the greatest strains on the shelter system come from out-of-towners who have no city roots, or that this crisis is somehow the fault of lawyers and judges.

That isn’t true, and it is a diversion from the real problem. His administration is meeting its legal obligation by filling the city’s shelters to bursting. But it has failed to keep its promises to significantly shrink the shelter population by giving people the means to live independently and enough paths to permanent housing.

Previous mayors tackled the problem with the assistance of federal programs, helping families in shelters obtain Section 8 rent vouchers and federal public-housing apartments managed by the New York City Housing Authority. So did the Bloomberg administration, for a while. But it broke with those policies in 2005, substituting short-term rent subsidies, which it then abruptly terminated in 2011. That was when homeless families started returning to shelters at an accelerating rate and at great expense. It costs taxpayers an average of $36,799 a year to shelter a family, according to city data, far more than it would to simply subsidize its rent.

With six months left in Mr. Bloomberg’s 12-year tenure, the crisis will be the next mayor’s to solve. The problems of housing and homelessness are intertwined, fed by many unrelated things: joblessness and the lagging economy, deficiencies in mental-health and addiction care that force vulnerable men and women onto the streets, the simple lack of affordable units and a widening gap between incomes and market rents. The mayoral candidates need to offer solutions that are multifaceted, too, in an era of ever-dwindling federal and state aid.

A coalition of more than a hundred community organizations and advocacy groups, created in April to call attention to the growing crisis, has called for restoring rent subsidies and legal services to protect families from eviction and foreclosure, giving the homeless priority access to low-income housing, and expanding supportive housing for the disabled and mentally ill — all good ideas. Mr. Bloomberg’s Homebase program, begun in 2004 to help residents of some high-poverty neighborhoods avoid eviction, now serves about 11,000 families a year — a worthwhile effort but only a piece of the broader solution.

The Democratic candidates generally agree on some approaches, like getting developers to include affordable housing in their projects. Comptroller John Liu has proposed a rental-voucher program that he says could save the city $237 million annually in shelter costs. The city’s public advocate, Bill de Blasio, has laid out perhaps the most comprehensive housing plan; he wants to create 100,000 and preserve 90,000 affordable housing units in eight years, in various ways, including converting thousands of illegal units into rent-stabilized apartments. City Council Speaker Christine Quinn also wants a new rental subsidy program for homeless families and promises to build 40,000 “middle income” units. William Thompson Jr. has an antipoverty plan that includes more Section 8 vouchers for homeless families. Anthony Weiner talks of cutting red tape to get more affordable units built.

Joseph Lhota and John Catsimatidis, Republican candidates, speak of market solutions. So does the Republican George McDonald, who has spent years aiding homeless New Yorkers through his charity, the Doe Fund, which offers job training as a path to a paycheck and an apartment. He says the Doe Fund’s approach should be vastly scaled up, which is one reason he is running for mayor.

The city looks cleaner, safer and richer in gentrifying neighborhoods, many lined with luxury high-rises and new amenities, like rental bicycles. But it looks vastly different from the intake center for homeless families in the South Bronx, or the shelter for men on East 30th Street, or the other sites where tens of thousands of New Yorkers are languishing, out of sight and out of mind of the larger city.

    The Forgotten 50,000, NYT, 16.6.2013,
    http://www.nytimes.com/2013/06/17/opinion/the-forgotten-50000.html

Fracking Tests Ties

Between California ‘Oil and Ag’ Interests

June 1, 2013
The New York Times
By NORIMITSU ONISHI

SHAFTER, Calif. — Scattered on either side of Shafter Avenue just north of the town center here, new oil pump jacks, some bobbing and others thrusting, tower above this corner of California’s prime farmland.

A dirt side road, flanked by an orchard of two-year-old almond trees and a field of alfalfa plants, leads to a two-acre patch where workers were drilling a third well. At a larger rig not too far away, next to a field of potatoes, a 50-foot-tall tower flared off the gas from the crude being extracted from land that used to be a rose field. At yet another site next to almond trees, a fence now surrounds an area where liquids from hydraulic fracturing, the drilling technique commonly known as fracking, leaked into an open pit.

Driven by advances in drilling technology and high oil prices, oil companies are increasingly moving into traditionally agricultural areas like Shafter that make up one of the world’s most fertile regions but also lie above a huge untapped oil reserve called the Monterey Shale. Even as California’s total oil production has declined slightly since 2010, the output of the North Shafter oil field and the number of wells have risen by more than 50 percent.

By all accounts, oilmen and farmers — often shortened to “oil and ag” here — have coexisted peacefully for decades in this conservative, business friendly part of California about 110 miles northwest of Los Angeles. But oil’s push into new areas and its increasing reliance on fracking, which uses vast amounts of water and chemicals that critics say could contaminate groundwater, are testing that relationship and complicating the continuing debate over how to regulate fracking in California.

“As farmers, we’re very aware of the first 1,000 feet beneath us and the groundwater that is our lifeblood,” said Tom Frantz, a fourth-generation farmer here and a retired high school math teacher who now cultivates almonds. “We look to the future, and we really do want to keep our land and soil and water in good condition.”

“This mixing of farming and oil, all in one place, is a new thing for us,” added Mr. Frantz, who is also an environmentalist and is pressing for a moratorium on fracking.

Fracking is indispensable to extricating crude from the complex geological formation of the Monterey Shale, which makes up two-thirds of the United States’s shale oil reserves, oil industry officials and other experts say. If exploited, they say, the Monterey Shale could create the kind of oil boom seen in North Dakota and Texas, and could even transform California into the nation’s top oil-producing state.

Gov. Jerry Brown, a Democrat, said recently that increasing oil production could hand California a “fabulous economic opportunity,” though he said he wanted to learn more about fracking’s effects on the environment. The State Department of Conservation, which oversees the oil industry, is leading a yearlong process to establish regulations for fracking, which injects water, sand and chemicals deep into shale rock to unlock the oil and gas underground.

Meanwhile, state lawmakers have introduced nearly a dozen bills that would curtail various aspects of fracking. Environmental groups, including the Center for Biological Diversity and the Sierra Club, have sued state regulators, arguing that they have given oil companies drilling permits without subjecting them to environmental reviews. In April, after another lawsuit was filed by the groups against the United States Bureau of Land Management, a federal judge temporarily blocked exploratory drilling on 2,700 acres of public lands after ruling that the bureau had failed to review the environmental impact of fracking.

Here in Shafter, at least two farmers have sued the state and oil companies over environmental damage. A new group representing dozens of farmers, the Committee to Protect Farmland and Clean Water, is holding discussions with oil companies on drilling, fracking and compensation. The group’s lawyer, George Martin, said he could not comment because of the continuing discussions.

Rex Parris, another lawyer working with farmers, said that unlike environmental groups, most farmers do not seek to ban fracking but to regulate it strictly.

“It’s ludicrous to think that we’re going to prevent anybody from getting at that oil,” said Mr. Parris, who is also the mayor of Lancaster, a city north of Los Angeles. “The only thing we should be focusing on, because it’s the only thing we’re going to be successful at, is regulating how they get to that oil.”

“We’re just seeing the tip of the iceberg of what’s coming,” he said of the drilling for Monterey Shale oil here. “It could enrich the state beyond belief, but it could also destroy it.”

Lorelei Oviatt, the planning director for Kern County, which includes Shafter and accounts for 80 percent of California’s oil production, said that oil companies and farmers would work out their differences, some of which center on compensation. Under California’s split estate, many farmers do not own the underground rights to their property but would be compensated for access to the surface.

“We have these new questions because the oil companies have been moving into prime ag land in the past three years,” Ms. Oviatt said. “But oil and ag have coexisted here for a hundred years.”

Rock Zierman, the chief executive of the California Independent Petroleum Association, a trade group, says the oil industry is open to groundwater testing before and after fracking to ensure quality.

“When it comes to hydraulic fracturing, we fully expect water-quality monitoring to be part of a comprehensive set of regulations,” he said.

Industry officials point out that fracking has occurred in California for more than half a century — without incident. But experts say that new fracking techniques involve more potent cocktails of chemicals that drillers are allowed to leave undisclosed to protect trade secrets; what is more, California regulators barely monitor fracking activities.

“It’s somewhat alarming how little the state knows about the fracking that has occurred in the past and the fracking that continues today,” said Jayni Foley Hein, the executive director of the Center for Law, Energy and the Environment at the University of California, Berkeley, and a co-author of a recent report on fracking in California.

Last October, Mr. Frantz, the almond farmer, videotaped liquid being discharged into an open pit at a site belonging to Vintage Production California, next to almond orchards. That led to an investigation by the Central Valley Regional Water Quality Control Board.

Vintage, a subsidiary of Occidental Petroleum, recently released a report acknowledging that although fracking actually took place the day after the video was shot, “small quantities of fluids” were discharged during fracking. Susie Geiger, a company spokeswoman, said in an e-mail that Vintage was continuing to review the information.

Doug Patteson, a supervising engineer at the water board, said that 6 to 10 barrels of fracking liquids, or 252 to 420 gallons, leaked over two days into an open, unlined pit. In addition, Mr. Patteson said, the company also violated regulations by disposing of hundreds of thousands of gallons of liquids, produced directly after the drilling and containing high levels of salts, into the pit. He added that the investigation was still under way.

“If groundwater were impacted from anything, I think it would be from that, and maybe these 6 to 10 barrels of fracking fluids certainly didn’t help,” he said.

    Fracking Tests Ties Between California ‘Oil and Ag’ Interests, NYT, 1.6.2013,
    http://www.nytimes.com/2013/06/02/us/california-oil-and-ag-face-rift-on-fracking.html

Throwing Money at Nukes

May 26, 2013
The New York Times
By THE EDITORIAL BOARD

The United States has about 180 B61 gravity nuclear bombs based in Europe. They are the detritus of the cold war, tactical weapons deployed in Belgium, Germany, Italy, the Netherlands and Turkey to protect NATO allies from the once-feared Soviet advantage in conventional arms. But the cold war is long over, and no American military commander can conceive of their ever being used. Even so, President Obama has put $537 million in his 2014 budget proposal to upgrade these bombs. When all is said and done, experts say, the cost of the rebuilding program is expected to total around $10 billion — $4 billion more than an earlier projection — and yield an estimated 400 weapons, fitted with new guided tail kits so that they are more reliable and accurate than the current ones.

This is a nonsensical decision, not least because it is at odds with Mr. Obama’s own vision. In a seminal speech in Prague in 2009 and a strategy review in 2010, Mr. Obama advocated the long-term goal of a world without nuclear arms and promised to reduce America’s reliance on them. He also promised not to field a new and improved warhead.

But the B61 upgrade would significantly increase America’s tactical nuclear capability and send the wrong signal while Mr. Obama is trying to draw Russia into a new round of nuclear reduction talks that are supposedly aimed at cutting tactical, as well as strategic, arsenals.

Even if there is a case to be made for keeping the bombs in Europe as a sign of America’s political commitment to NATO (allied opinion is divided on whether the weapons should stay), many experts doubt that the B61 warheads need to be rebuilt now, if at all. Government-financed nuclear labs have a rigorous program for testing them to make sure they still work.

Moreover, as Congress slashes spending on far more defensible programs like food stamps and Head Start, Mr. Obama’s $537 million request for the B61 bomb in 2014 is 45.5 percent higher than the 2013 figure; the $7.86 billion request for all weapons-related activity in the National Nuclear Security Administration, a semi-independent agency within the Department of Energy that oversees the nuclear warhead programs, is 9 percent above the amount Congress appropriated in 2012.

Mr. Obama’s profligacy apparently has its roots in 2010. That is when the president made a Faustian bargain with Senate Republicans who demanded that he invest more than $80 billion in the nuclear labs as a condition of their allowing the New Start arms reduction treaty with Russia to be approved. It is a mystery why he would feel bound by this commitment at a time when limited dollars should be directed toward real needs, and when Republicans have obstructed him at every turn on those needs.

In addition to overspending on warheads, Mr. Obama has cut the Global Threat Reduction Initiative program, which reduces and protects from terrorism vulnerable nuclear material at sites worldwide, by 15 percent from 2013 levels. His budget is being rewritten by Congress, but in the nuclear area it is a disappointing, and befuddling, measure of his priorities.

    Throwing Money at Nukes, NYT, 26.5.2013,
    http://www.nytimes.com/2013/05/27/opinion/throwing-money-at-nukes.html

‘A’ Is for Avoidance

May 25, 2013
The New York Times
By THE EDITORIAL BOARD

Even before last week’s Senate hearing on Apple, it was clear that the aggressive use of tax havens and other tax avoidance tactics had become standard operating procedure for global American companies.

Microsoft and Hewlett-Packard were the focus of a similar Senate hearing last September, while Google, Amazon and Starbucks have drawn recent scrutiny in Europe. And, of course, there is General Electric, which achieved a perfect zero on its United States tax bill in 2010. In fact, G.E. was reputed to have the world’s best tax avoidance department until Apple came along with tactics to stash some $100 billion in Ireland without paying taxes on much of it anywhere in the world and, apparently, without breaking any law.

And that is the problem. Rampant corporate tax avoidance may not be illegal, but that doesn’t make it right or fair.

As corporate tax revenue has withered as a share of the economy and as a share of total revenue, Washington has leaned more heavily on individuals to pay for government. In 2012, personal income taxes and payroll taxes raised $1.9 trillion, compared with $242 billion raised from corporate taxes, a disparity that contributes to widening inequality and, in turn, to a slow economy and less social mobility. Congress’s Joint Committee on Taxation estimates that fully taxing the profits sheltered abroad by American corporations would raise an additional $42 billion in revenue this year, enough to end more than half the spending cuts in the sequester.

Yet it is not clear that lawmakers are committed to stopping widespread tax avoidance. Instead, they may further entrench the system, or even make it worse. The most immediate issue involves a tax repatriation holiday. Under the law, American corporations can defer paying tax on their profits as long as the money is held abroad. Apple is one of nearly two dozen major corporations pushing for a tax holiday, which would permit corporations to bring their foreign-held profits to the United States over the course of a year at a discounted tax rate.

A tax holiday in 2005 dropped the rate from 35 percent to 5.25 percent, enticing corporations to repatriate some $300 billion. It was billed as a way to create jobs and boost investment, but it was a total policy failure. The repatriated money was mostly used for dividend payments, share buybacks (which tend to raise executive pay) and severance pay for employees laid off in corporate restructuring. The holiday rewarded aggressive tax avoidance, with 77 percent of the repatriated profits coming from tax haven countries, according to the Government Accountability Office.

Worse, that tax holiday encouraged American companies to come up with even more ways to shift profits abroad in anticipation of a second tax holiday. Since the last holiday ended, profits held in foreign countries have skyrocketed, according to expert testimony at the tax avoidance hearings in the Senate last year. American corporations now have an estimated $2 trillion stashed abroad.

Some American corporations are also lobbying for a new “territorial” tax system, which would, in effect, be a permanent holiday: profits made or shifted abroad would be forever untaxed in America, even if the country where the profits were held was a haven with no or low taxes. That would further encourage the shift of jobs, investment and profit abroad — exactly the wrong policy direction.

Equally pernicious is the notion, shared by members of both political parties, that corporate tax reform should be “revenue neutral” — meaning that it should simplify the code but not raise any taxes. That is absurd. It would leave the nation chronically short of revenue and increasingly reliant on working people to shoulder the tax burden.

•

Global corporations present difficult issues for which there are no easy answers, but it is clear what we should not do. And there are steps that can be taken in the short run to curb abusive tax avoidance. Corporations should be barred from deducting expenses against foreign-held profits on which taxes are deferred, as is currently allowed. Congress also needs to end a practice known as “check the box,” which allows companies to easily create the requisite corporate structures to shift profits offshore. Tax rules and enforcement must be tightened to ensure that profits attributable to patents, design, marketing and other intangibles developed in the United States are indeed taxed in the United States. A more permanent fix would end tax deferral of foreign-held profits, imposing American taxes on profits when they are made.

The revelations in the hearings on Apple and other companies have given Congress all the evidence it needs to justify new corporate taxes. But there are no signs yet that it has the courage to impose them.

    ‘A’ Is for Avoidance, NYT, 25.5.2013,
    http://www.nytimes.com/2013/05/26/opinion/sunday/a-is-for-avoidance.html

Here Comes the Sun

May 22, 2013
The New York Times
By JOE NOCERA

Among the many things Tim Cook apparently learned at the knee of Steve Jobs, during his long tenure as Apple’s No. 2, was how to create a “reality distortion field.” Or so it would appear after watching Cook, now Apple’s chief executive, testify on Tuesday at a Senate hearing on the company’s tax avoidance schemes.

Jobs was so persuasive that he could claim the sun was setting when it was actually rising, and everyone would nod in agreement. On Tuesday, despite the overwhelming evidence presented by the Senate Permanent Subcommittee on Investigations that Apple engaged in dubious tax avoidance gimmicks, Cook claimed that Apple never resorted to tax gimmickry. Even though the company appears to pay about 10 percent of its pretax income in taxes — when the federal corporate tax rate is 35 percent — Cook said, “We pay all the taxes we owe — every single dollar.” He added that Apple had never shifted any of its American profits to an offshore tax haven when, in fact, that is basically what it has done, routing tens of billions in pretax profits to a shell corporation in Ireland that exists solely to avoid taxes in the United States. He even said that the low taxes Apple pays overseas is on the profits of its overseas sales. Not to put too fine a point on it, but this was a flat-out lie.

In other words, Cook spent Tuesday claiming that the sun was setting when it was actually rising, and, predictably, by the time the hearing had ended, most of the senators were agreeing with him. Senator John McCain, the committee’s ranking Republican, who had earlier labeled Apple “a tax avoider,” was soon swooning over Apple’s “incredible legacy.”

Indeed, Apple’s fabulous success over the past decade or so — its creation of the iPads and iPhones that the world lusts over — is a large part of the reason it always gets the benefit of the doubt, whether deserved or not. Two years ago, when David Kocieniewski of The Times reported on General Electric’s tax-avoidance prowess, a storm of protest resulted. Last year, however, when Kocieniewski and Charles Duhigg wrote about Apple’s tax avoidance schemes as part of a series about the company that won a Pulitzer Prize, it was greeted mainly with yawns. Nobody really wants to hear anything bad about Apple.

Yet as documented both by The Times and the Senate subcommittee, Apple is as much an innovator in tax avoidance as it is in technology. Take, for instance, a scheme known as The Double Irish, which it largely invented and which many American companies have since replicated. This strategy, which was the primary focus of Tuesday’s hearing, involves setting up a shell subsidiary in an offshore tax haven — a k a Ireland — and transferring most of Apple’s intellectual property rights to the dummy subsidiary. The subsidiary, in turn, charges “royalties” that allows it to capture billions of dollars in what otherwise would be taxable profits in the United States. In Ireland, according to Apple, it pays an astonishing 2 percent in taxes, thanks to a deal it has with the government. (The Irish government denies giving Apple a special deal.)

Here is another whopper from Mr. Cook on Tuesday. He said that his company not only doesn’t violate the letter of the law, that it doesn’t even violate the spirit. He may be right on the first part, but he is wrong on the second. As the subcommittee’s chairman, Carl Levin, the Michigan Democrat, pointed out to me on Wednesday, one of the main goals of American corporate tax policy is to tax profits in the jurisdiction where they are produced.

“That intellectual property and patents are the crown jewels of the company,” Levin said. “The Irish subsidiary had nothing to do with creating those crown jewels. It has no employees. It has no offices. Yet most of Apple’s profits are now offshore because they were able to utilize a shift of their intellectual property to a tax haven.”

(Question for the government of Ireland: Do you really want your country to be known as an offshore tax haven? Indeed, at a time when your citizens are dealing with the pain of an austerity program, how can you justify allowing Apple to pay virtually no taxes on a subsidiary established solely to avoid taxes in the United States? Just wondering.)

Levin has proposed a bill that would curb the most blatant abuses of the tax code like the Double Irish. Part of the purpose of the hearing was to bring these abuses to light and generate bipartisan support for closing them. When I asked Levin whether he felt that the subcommittee had made a mistake in singling out Apple, given its Teflon reputation, he said no. “You can’t ignore the most blatant examples just because it is a popular company,” he said.

He’s right about that, of course. But that’s only obvious if you are willing to say the sun is rising when Apple says it is not.

Nicholas D. Kristof is on book leave.

    Here Comes the Sun, NYT, 22.5.2013,
    http://www.nytimes.com/2013/05/23/opinion/nocera-here-comes-the-sun.html

The 1 Percent Are Only Half the Problem

The New York Times
Opinionator
A Gathering of Opinion From Around the Web
May 18, 2013
12:04 pm
By TIMOTHY NOAH

Most recent discussion about economic inequality in the United States has focused on the top 1 percent of the nation’s income distribution, a group whose incomes average $1 million (with a bottom threshold of about $367,000). “We are the 99 percent,” declared the Occupy protesters, unexpectedly popularizing research findings by two economists, Thomas Piketty and Emmanuel Saez, that had previously drawn attention mainly from academics. But the gap between the 1 percent and the 99 percent is only half the story.

Granted, it’s an important half. Since 1979, the one-percenters have doubled their share of the nation’s collective income from about 10 percent to about 20 percent. And between 2009, when the Great Recession ended, and 2011, the one-percenters saw their average income rise by 11 percent even as the 99-percenters saw theirs fall slightly. Some recovery!

This dismal litany invites the conclusion that if we would just put a tight enough choke chain on the 1 percent, then we’d solve the problem of income inequality. But alas, that isn’t true, because it wouldn’t address the other half of the story: the rise of the educated class.

Since 1979 the income gap between people with college or graduate degrees and people whose education ended in high school has grown. Broadly speaking, this is a gap between working-class families in the middle 20 percent (with incomes roughly between $39,000 and $62,000) and affluent-to-rich families (say, the top 10 percent, with incomes exceeding $111,000). This skills-based gap is the inequality most Americans see in their everyday lives.

Conservatives don’t typically like to talk about income inequality. It stirs up uncomfortable questions about economic fairness. (That’s why as a candidate Mitt Romney told a TV interviewer that inequality was best discussed in “quiet rooms.”) On those rare occasions when conservatives do bring it up, it’s the skills-based gap that usually draws their attention, because it offers an opportunity to criticize our government-run system of public education and especially teachers’ unions.

Liberals resist talking about the skills-based gap because they don’t want to tell the working classes that they’re losing ground because they didn’t study hard enough. Liberals prefer to focus on the 1 percent-based gap. Conceiving of inequality as something caused by the very richest people has obvious political appeal, especially since (by definition) nearly all of us belong to the 99 percent. There’s also a pleasing simplicity to the causes of the growing gap between the 1 and the 99. There are only two, and both are familiar liberal targets: the rise of a deregulated financial sector and the erosion of accountability in compensating top executives outside finance. (The cohort most reflective of these trends is actually the top 0.1 percent, who make $1.6 million or more, but let’s not quibble.)

Both halves of the inequality story should command our attention, because both represent a dramatic reversal of economic trends that prevailed in the United States for most of the 20th century. From the 1930s through the 1970s the 1 percent saw its share of national income decline, while the “college premium” either fell or followed no clear up-or-down pattern over time.

At least some of the tools to restore these more egalitarian trends shouldn’t be divisive ideologically. Liberals and conservatives both recognize the benefits of preschool education, which President Obama has proposed making universally available. I’ve never met an affluent 4-year-old who wasn’t enrolled in preschool, but nationwide about one-third of kids that age aren’t.

Another reform both conservatives and liberals have supported — though at different times — is withholding federal aid from colleges and universities that can’t control tuition increases. Mr. Obama proposed it in his last two State of the Union addresses; House Speaker John A. Boehner was a sponsor of a bill to do the same in 2003.

THERE is also more bipartisan support than you might suppose for restricting some of the Wall Street excesses that enrich the 1 percent. The impetus to do so isn’t inequality so much as fear that an out-of-control banking sector will once again create economic crisis and compel Congress to bail out the big banks. Congressional Republicans have been blocking proper implementation of the Dodd-Frank financial reforms, but a growing chorus of conservative voices, including the columnist George F. Will, the former Utah governor Jon M. Huntsman Jr. and Richard W. Fisher, president of the Federal Reserve Bank of Dallas, favor breaking up the big banks. Senators David Vitter, Republican of Louisiana, and Sherrod Brown, Democrat of Ohio, have sponsored a bill to require the largest banks to hold more capital reserves, or become smaller.

One reason the left plays down the growing skills-based gap is that it accepts at face value the conservative claim that educational failure is its root cause. But the decline of labor unions is just as important. At one time union membership was highly effective at reducing or eliminating the wage gap between college and high school graduates. That’s much less true today. Only about 7 percent of the private-sector labor force is covered by union contracts, about the same proportion as before the New Deal. Six decades ago it was nearly 40 percent.

The decline of labor unions is what connects the skills-based gap to the 1 percent-based gap. Although conservatives often insist that the 1 percent’s richesse doesn’t come out of the pockets of the 99 percent, that assertion ignores the fact that labor’s share of gross domestic product is shrinking while capital’s share is growing. Since 1979, except for a brief period during the tech boom of the late 1990s, labor’s share of corporate income has fallen. Pension funds have blurred somewhat the venerable distinction between capital and labor. But that’s easy to exaggerate, since only about one-sixth of all households own stocks whose value exceeds $7,000. According to the left-leaning Economic Policy Institute, the G.D.P. shift from labor to capital explains fully one-third of the 1 percent’s run-up in its share of national income. It couldn’t have happened if private-sector unionism had remained strong.

Reviving labor unions is, sadly, anathema to the right; even many mainstream liberals resist the idea. But if economic growth depends on rewarding effort, we should all worry that the middle classes aren’t getting pay increases commensurate with the wealth they create for their bosses. Bosses aren’t going to fix this problem. That’s the job of unions, and finding ways to rebuild them is liberalism’s most challenging task. A bipartisan effort to revive the labor movement is hardly likely, but halting inequality’s growth will depend, at the very least, on liberals and conservatives better understanding each other’s definition of where the problem lies.

Timothy Noah is the author

of “The Great Divergence:

America’s Growing Inequality Crisis

And What We Can Do About It.”

    The 1 Percent Are Only Half the Problem, NYT, 18.5.2013,
    http://opinionator.blogs.nytimes.com/2013/05/18/
    the-1-percent-are-only-half-the-problem/

Yahoo Is Planning

to Buy Tumblr for $1.1 Billion

May 19, 2013
The New York Times
By MICHAEL J. de la MERCED, NICK BILTON
and NICOLE PERLROTH

The board of Yahoo, the faded Web pioneer, agreed on Sunday to buy the popular blogging service Tumblr for about $1.1 billion in cash, people with direct knowledge of the matter said, a signal of how the company plans to reposition itself as the technology industry makes a headlong rush into social media.

The deal, which is expected to be announced as soon as Monday, would be the largest acquisition of a social networking company in years, surpassing Facebook’s $1 billion purchase of Instagram last year.

For Yahoo and its chief executive, Marissa Mayer, buying Tumblr would be a bold move as she tries to breathe new life into the company. The deal, the seventh since Ms. Mayer defected from Google last summer to take over the company, would be her biggest yet. It is meant to give her company more appeal to young people, and to make up for years of missing out on the revolutions in social networking and mobile devices. Tumblr has over 108 million blogs, with many highly active users.

Yet even with all those users, a basic question about Tumblr and other social media sites remains open: Can they make money?

Founded six years ago, Tumblr has attracted a loyal following and raised millions from big-name investors. Still, it has not proved that it can be profitable, nor that it can succeed on mobile devices, which are becoming the gateway to the Internet. Even Facebook faces continued pressure from investors to show it can increase its profits and adapt to the mobile world.

“The challenge has always been, how do you monetize eyeballs?” said Charlene Li, the founder of the Altimeter Group, a consulting firm. “Services like Instagram and Facebook always focus on the user experience first. Once that loyalty is there, they figure out how to carefully, ideally, make money on it.”

A Yahoo spokeswoman declined to comment. A representative for Tumblr did not respond to requests for comment.

If the deal is approved, Ms. Mayer will face the challenge of successfully managing the takeover, given Yahoo’s notorious reputation for paying big money for start-ups and then letting the prizes wither. Previous acquisitions by Yahoo, like the purchase of Flickr for $35 million and a $3.6 billion deal for GeoCities, an early pioneer in social networking, have been either shut down or neglected within the company.

Because of this, Ms. Mayer will face pressure to keep Tumblr’s staff, led by its founder, the 26-year-old David Karp, who dropped out of high school as a 15-year-old programmer. It is unclear whether all of Tumblr’s 175 employees, based in New York City, will move over to Yahoo.

At the same time, analysts and investors are likely to question whether buying a site that has struggled to generate revenue makes sense.

“This is not an inexpensive acquisition, but they’re willing to pay to get back some of what they’ve lost,” said Colin Gillis, an analyst at BGC Partners. “They want to be hip.”

In her short tenure as chief executive, Ms. Mayer has bought a string of tiny start-ups. Most of those were aimed at buying engineering talent that could help freshen Yahoo’s core products, like mail, finance and sports, as well as build out new mobile services.

Ms. Mayer has had ambitions to hunt bigger game, armed with $4.3 billion in cash from selling half of Yahoo’s stake in the Chinese Internet titan Alibaba.

She has had conversations with a number of other big-ticket targets, like Foursquare, a mobile app that lets users find nearby restaurants, stores and bars, and Hulu, the video streaming service, according to people with knowledge of those discussions who were not authorized to speak publicly.

Tumblr brings something that Ms. Mayer has sought for some time: a full-fledged social network with a loyal following. The start-up claims more than 100 million blogs on its site, reaching 44 million people in the United States and 134 million around the world, according to Quantcast.

But in some ways, Yahoo isn’t pursuing users — it already claims 700 million, one of the biggest user bases on the Web — but products and services that would again make it a central destination. Once the biggest seller of display ads in the United States, Yahoo has lost market share to the likes of Google and Facebook. Its share of all digital ad revenue tumbled to 8.4 percent last year, from 15.5 percent in 2009, even as total advertising spending grew, according to eMarketer. Google now claims about 41 percent.

The company also missed the shift from the Web to smartphones and tablets. It waited a significantly long time to roll out apps for its most popular services, missing out on chances to harvest users to competitors like Google and Apple.

And while Yahoo has managed to grow internationally, it has struggled to make its familiar brand relevant again. Until a recent home page renovation, the company’s main page felt claustrophobic, with ads and content jumbled together.

Tumblr’s trove of users and pages could provide fertile new ground for Yahoo’s ad operations, with what industry experts say is a bounty of unsold ad inventory. Mr. Karp of Tumblr had eschewed advertising, favoring a minimalist policy, starting to serve users ads only last May.

Mr. Karp, the C.E.O., is expected to get nearly $250 million from the deal. Spark Capital, a venture firm in Boston, has been involved in five investment rounds of Tumblr’s financing and is expected to make tens of millions of dollars from the deal.

Yet it is not clear how much Tumblr can help Yahoo reach its goals. The blogging site burned through an estimated $25 million in cash last year, and struggled to raise additional money at an acceptable valuation, according to people briefed on the matter who were not authorized to speak publicly about it. That prompted Mr. Karp to begin deal discussions with a number of companies, including Facebook, Microsoft and Google, though nothing came of those talks.

Yahoo and Tumblr have been in serious talks since last week, culminating in the Yahoo board’s vote to approve the deal on Sunday morning.

The blogging site has been trying to create new ad efforts like interactive campaigns, rather than using standard clickable ads, with mixed success. It has set a revenue goal of $100 million for this year; the company reported only $13 million for the first quarter and reported $13 million for 2012.

Despite its ranking as the 24th most viewed Web site on the Internet, according to Quantcast, Tumblr has yet to translate that into success on mobile devices, something Yahoo needs.

Tumblr also bears a fair amount of unsavory content that may unsettle advertisers. Pornography represents a fraction of content on the site, but not a trivial amount for a site with 100 million blogs.

The search for profits isn’t unique to Tumblr, as free apps and services struggle to wring money from their users. Instagram famously generated no money when Facebook bought it.

Mr. Gillis of BGC said, “Either this management team is going to turn Yahoo around or be the ones who squandered its asset base.”

Andrew Ross Sorkin

and Jenna Wortham contributed reporting.

    Yahoo Is Planning to Buy Tumblr for $1.1 Billion, NYT, 19.5.2013,
    http://www.nytimes.com/2013/05/20/technology/
    yahoo-to-buy-tumblr-for-1-1-billion.html

U.S. Budget Deficit Shrinks

Far Faster Than Expected

May 14, 2013
The New York Times
By ANNIE LOWREY

WASHINGTON — Since the recession ended four years ago, the federal budget deficit has topped $1 trillion every year. But now the government’s annual deficit is shrinking far faster than anyone in Washington expected, and perhaps even faster than many economists think is advisable for the health of the economy.

That is the thrust of a new report released Tuesday by the nonpartisan Congressional Budget Office, estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.

The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015 — a level that most analysts say would be easily sustainable over the long run — before beginning to climb gradually through the rest of the decade.

"Revenues have been strong as the economy has outperformed a bit," said Joel Prakken, a founder of Macroeconomic Advisers, a forecasting firm based in St. Louis.

Over all, the figures demonstrate how the economic recovery has begun to refill the government’s coffers. At the same time, Washington, despite its political paralysis, has proved remarkably successful at slashing the deficit through a variety of tax increases and cuts in domestic and military programs.

Perhaps too successful. Given that the economy continues to perform well below its potential and that unemployment has so far failed to fall below 7.5 percent, many economists are cautioning that the deficit is coming down too fast, too soon.

“It’s good news for the budget deficit and bad news for the jobs deficit,” said Jared Bernstein of the Center on Budget and Policy Priorities, a left-of-center research group in Washington. “I’m more worried about the latter.”

Others, however, are warning that the deficit — even if it looks manageable over the next decade — still remains a major long-term challenge, given that rising health care spending on the elderly and debt service payments are projected to eat up a bigger and bigger portion of the budget as the baby boom generation enters retirement.

“It takes a little heat off, and undercuts the sense of fiscal panic that prevailed one or two years ago when the debt-to-G.D.P. ratio was climbing,” said Mr. Prakken, of referring to the growth of the country’s debt relative to the size of the economy. “These revisions probably release some pressure to reach a longer-term deal, which is too bad, because the longer-term problem hasn’t gone away.”

With the government running a hefty $113 billion surplus in the tax payment month of April, according to the Treasury, analysts now do not expect the country to run out of room under its debt ceiling — a statutory borrowing limit Congress needs to raise to avoid default — until sometime in the fall. That has left both Democrats and Republicans hesitant to enter another round of negotiations over painful cuts to entitlement programs like Social Security and Medicare, and tax increases on a broader swath of Americans, despite the still-heated rhetoric on both sides.

For the moment, the deficit is largely repairing itself. Just three months ago, the Congressional Budget Office projected that the current-year deficit would be $845 billion, or about 5.3 percent of economic output.

The $200 billion reduction to the estimated deficit comes not from the $85 billion in mandatory cuts known as sequestration, nor from the package of tax increases that Congress passed this winter to avoid the so-called fiscal cliff. The office had already incorporated those policy changes into its February forecasts.

Rather, it comes from higher-than-expected tax payments from businesses and individuals, as well as an increase in payments from Fannie Mae and Freddie Mac, the mortgage finance companies the government took over as part of the wave of bailouts thrust upon Washington in the darkest days of the financial crisis.

The C.B.O. said it had bumped up its estimates of current-year tax receipts from individuals by about $69 billion and from corporations by about $40 billion. The office said the factors lifting tax payments seemed to be “largely temporary,” due in part, probably, to higher-income households realizing gains from investments before tax rates went up in the 2013 calendar year.

It also reduced its estimated outlays on Fannie and Freddie by about $95 billion. The mortgage giants, which have required more than $180 billion in taxpayer financing since the government rescued them in 2008, have returned to profitability in recent quarters on the back of a stronger housing market and have begun to repay the Treasury for the loans.

But there is a darker side to the brighter outlook for the deficit. The immediate spending cuts and tax increases Congress agreed to for this year are serving as a partial brake on the recovery, cutting government jobs and preventing growth from accelerating to a more robust pace, many economists have warned. The International Monetary Fund has called the country’s pace of deficit reduction “overly strong,” arguing that Washington should delay some of its budget cuts while adopting a longer-term strategy to hold down future deficits.

In revising its estimates for the current year, the budget office also cut its projections of the 10-year cumulative deficit by $618 billion. Those longer-term adjustments are mostly a result of smaller projected outlays for the entitlement programs of Social Security, Medicaid and Medicare, as well as smaller interest payments on the debt.

The report noted that the growth in health care costs seemed to have slowed — a trend that, if it lasted, would eliminate much of the budget pressure and probably help restore a stronger economy as well. The C.B.O. has quietly erased hundreds of billions of dollars in projected government health spending over the last few years.

It did so again on Tuesday. In February, the budget office projected that the United States would spend about $8.1 trillion on Medicare and $4.4 trillion on Medicaid over the next 10 fiscal years. It now projects it will spend $7.9 trillion on Medicare and $4.3 trillion on Medicaid.

This article has been revised to reflect the following correction:

Correction: May 14, 2013

Because of an editing error,

an earlier version of this article misspelled

the author’s surname.

She is Annie Lowrey, not Lowery.

    U.S. Budget Deficit Shrinks Far Faster Than Expected, NYT, 14.5.2013,
    http://www.nytimes.com/2013/05/15/business/
    cbo-cuts-2013-deficit-estimate-by-24-percent.html

Where Have All the Jobs Gone?

May 3, 2013
The New York Times
By JARED BERNSTEIN

WASHINGTON

THOUGH yesterday’s employment report revealed a slowly improving job market, the jobless rate is still elevated, at 7.5 percent, with 11.7 million people looking for work, including 4.4 million who have been doing so for at least half a year. About eight million more were stuck in underemployment (“involuntary” part-timers) last month, unable to find the hours of work they sought.

These measures persist amid an economic expansion continuing since mid-2009, a roaring stock market and a housing market that’s now reliably in recovery.

While the high jobless numbers are partly a legacy of the Great Recession, the fact is that our economy has generated too few jobs for most of the last 30 years and is likely to continue to do so. The only viable response is a return to an idea that once animated domestic policy making: full employment, the notion that everyone who wants to work should be able to find a job, and if the market isn’t up to the task, then the government must fill the gap.

For decades in postwar America, the maintenance of full employment, defined as an unemployment rate below 5 percent, was enshrined in law, beginning with the Employment Act of 1946 and revisited in 1978 in the Humphrey-Hawkins Act. It was a central goal of the Democratic Party, labor unions and advocates of social and racial justice.

And it usually worked. While conservatives and businesses pushed back — tight labor markets meant more worker bargaining power, higher wages and less profitability — between 1949 and 1979 the market was at full employment over two-thirds of the time. Since then, it has been at that level just a third of the time.

How did this happen? Both the politics and economics are implicated.

Politically, as union power declined, the concerns of Democratic policy makers shifted from working-class issues like jobs and toward the concerns of upper-income constituents, like inflation, taxes and budget balancing.

Economically, a number of trends have created persistent, upward pressure on the jobless rate. Since 2000 — the last time the market was at full employment — productivity is up about 30 percent, while employment has been flat. And that’s not just because of the recession; the same pattern prevailed during the 2000s expansion.

One explanation may be that capital investment has become, to put it politely, more “labor saving.” Yes, this process has been going on forever, but robotics and other ways of automating tasks may be accelerating it.

Second, our large and persistent trade deficits have exported too much demand. There’s nothing wrong, and a lot right, with increased global trade. The problem comes when it stays out of balance for so long, as it has in America, with trade deficits averaging 5 percent of G.D.P. in the 2000s, compared with 1 percent in the 1990s. That’s millions of net jobs lost.

Third, a growing number of economists believe that our very high levels of inequality are not just whacking the incomes of the “have-nots” but are slowing job growth as well. Part of this works through the demand channel: with so much spending power in the hands of so few, consumer demand is becoming bifurcated. Walmart will do well on one end, Neiman Marcus on the other, with too little in between. Another part works through misallocation: too much economic activity devoted to “innovative” finance and too little to sectors more germane to middle-class jobs and incomes.

What would it take to reverse these trends? For one thing, in the near term, do no harm. Austerity, including sequestration, is the economic version of medieval leeching. The Federal Reserve continues to apply high doses of monetary stimulus, and that’s supporting low interest rates, which in turn are linked to the improving housing market. But it can’t do it alone, and Congress is counteracting such tailwinds with fiscal headwinds.

We also need a significant, permanent program to absorb excess labor (an explicit part of the Humphrey-Hawkins law). We should consider restarting and rescaling a subsidized jobs program from the 2009 Recovery Act that, though relatively small, made jobs possible for hundreds of thousands of workers.

And we have to reassess our manufacturing policy, including reducing the trade deficit. That means both reshaping our dollar policy — going after competitors who suppress their currencies’ value to get an edge on net exports — and public investments in areas where clean energy intersects with production.

Finally, financial deregulation has become the enemy of full employment: it funnels capital to unproductive parts of the economy, and plays a key role in the “shampoo cycle” of bubble, bust, repeat. Less volatile capital markets mean fewer shocks to the job market.

If that is too interventionist, there’s another approach. Like many European countries, we could ask less of our people in terms of work, and hold them harmless by broadly redistributing our productivity gains. But I don’t see that in our future. What I do see is a growing disconnection between growth and jobs. Setting a path to full employment is the best way to alter that dark vision.

Jared Bernstein, a senior fellow at the Center on Budget

and Policy Priorities, was economic adviser

to Vice President Joseph R. Biden Jr. from 2009 to 2011.

    Where Have All the Jobs Gone?, NYT, 3.5.2013,
    http://www.nytimes.com/2013/05/04/opinion/where-have-all-the-jobs-gone.html

Jobs, Wages and the Sequester

May 3, 2013
The New York Times
By THE EDITORIAL BOARD

The employment report released on Friday showed some economic resilience. Job growth for March was revised upward to 138,000 new jobs, while the tally for April, at 165,000 jobs, was stronger still.

But both tallies represent a big drop from February, which showed a healthy gain of 332,000 jobs. One interpretation is that the sequester-induced economic headwinds that began in March are hurting job growth, which might otherwise have taken off this year. Seen in that light, the April report portends elevated joblessness and low wages for at least as long as the sequester lasts, and possibly longer, depending on the extent of the economic damage from the self-inflicted austerity.

At the average pace of job growth this year, it would take more than five years to return to the prerecession unemployment rate of 5 percent. It is doubtful that even the current pace can be sustained. The length of the average workweek dropped in April, to 34.4 hours, a sign that there is less work in the economy. That measure very likely overstates the demand for workers, because it includes only private-sector workers and does not capture the reduction in work hours for government workers furloughed because of the sequester. Another sign of weak labor demand is the increase in April, by 278,000, of the number of part-time workers who want full-time work.

New jobs are being added in low-wage fields typically filled by women — in restaurants and bars, retailers, temporary help services and home health care. In manufacturing and construction, typically higher-paying jobs filled by men, there was either no job growth or job losses. The biggest losses were in generally stable and decent-paying government jobs, with 11,000 positions shed in April, a chunk of them related to the sequester. Over all, the numbers suggest continued deep strains on families, even those whose breadwinners are employed.

For the 11.7 million who are unemployed — and especially the 4.4 million who have been out of work for more than six months — the picture is even bleaker. So far, 18 states have made cuts under the sequester to federal unemployment benefits, taking $39 a week on average from the typical benefit of about $300. That hurts those directly affected, but it also reduces demand in the economy. The likely result from these and other sequester cuts is job and wage stagnation.

    Jobs, Wages and the Sequester, NYT, 3.5.2013,
    http://www.nytimes.com/2013/05/04/opinion/jobs-wages-and-the-sequester.html

Apple’s Move

Keeps Profit Out of Reach of Taxes

May 2, 2013
The New York Times
By FLOYD NORRIS

Why would a company with billions of dollars in the bank — and no plans for a large investment — decide to borrow billions more?

A decade ago, that was a question some short-sellers were asking about Parmalat, the Italian food company that had seemed to be coining money.

It turned out that the answer was not a happy one: The cash was not real. The auditors had been fooled. A huge fraud was being perpetrated.

Now it is a question that could be asked about Apple. Its March 30 balance sheet shows $145 billion in cash and marketable securities. But this week it borrowed $17 billion in the largest corporate bond offering ever.

The answer for Apple is a more comforting one for investors, if not for those of us who pay taxes. The cash is real. But Apple has been a pioneer in tactics to avoid paying taxes to Uncle Sam. To distribute the cash to its owners would force it to pay taxes. So it borrows instead to buy back shares and increase its stock dividend.

The borrowings were at incredibly low interest rates, as low as 0.51 percent for three-year notes and topping out at 3.88 percent for 30-year bonds. And those interest payments will be tax-deductible.

Isn’t that nice of the government? Borrow money to avoid paying taxes, and reduce your tax bill even further.

Could this become the incident that brings on public outrage over our inequitable corporate tax system? Some companies actually pay something close to the nominal 35 percent United States corporate income tax rate. Those unfortunate companies tend to be in businesses like retailing. But companies with a lot of intellectual property — notably technology and pharmaceutical companies — get away with paying a fraction of that amount, if they pay any taxes at all.

Anger at such tax avoidance — we’re talking about presumably legal tax strategies, by the way — has been boiling in Europe, particularly in Britain.

It got so bad that late last year Starbucks promised to pay an extra £10 million — about $16 million — in 2013 and 2014 above what it would normally have had to pay in British income taxes. What it would normally have paid is zero, because Starbucks claims its British subsidiary loses money. Of course, that subsidiary pays a lot for coffee sold to it by a profitable Starbucks subsidiary in Switzerland, and pays a large royalty for the right to use the company’s intellectual property to another subsidiary in the Netherlands. Starbucks said it understood that its customers were angry that it paid no taxes in Britain.

Starbucks could get away with paying no taxes in Britain, and Apple can get away with paying little in the United States relative to the profits it makes, thanks to what Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff at the Congressional Joint Committee on Taxation, calls “stateless income,” in which multinational companies arrange to direct the bulk of their profits to low-tax or no-tax jurisdictions in which they may actually have only minimal operations.

Transfer pricing is an issue in all multinational companies and can be used to move profits from one country to another, but it is especially hard for countries to monitor prices on intellectual property, like patents and copyrights. There is unlikely to be a real market for that information, so challenging a company’s pricing is difficult.

“It is easy to transfer the intellectual property to tax havens at a low price,” said Martin A. Sullivan, the chief economist of Tax Analysts, the publisher of Tax Notes. “When a foreign subsidiary pays a low price for this property, and collects royalties, it will have big profits.”

The United States, at least theoretically, taxes companies on their global profits. But taxes on overseas income are deferred until the profits are sent back to the United States.

The company makes no secret of the fact it has not paid taxes on a large part of its profits. “We are continuing to generate significant cash offshore and repatriating this cash will result in significant tax consequences under current U.S. tax law,” the company’s chief financial officer, Peter Oppenheimer, said last week.

A company spokesman says the company paid $6 billion in federal income taxes last year, and “several billion dollars in income taxes within the U.S. in 2011.” It is a testament to how profitable the company is that it would still face “significant tax consequences” if it used the cash it has to buy back stock.

There is something ridiculous about a tax system that encourages an American company to invest abroad rather than in the United States. But that is what we have.

“The fundamental problem we have in trying to tax corporations is that corporations are global,” says Eric Toder, co-director of the Tax Policy Center in Washington. “It is very, very hard for national entities to tax entities that are global, particularly when it is hard to know where their income originates.”

In principle, there are two ways the United States could get out of the current mess. The first, proposed by President John F. Kennedy more than 50 years ago, is to end the deferral. Companies would owe taxes on profits when they made them. There would be, of course, credits for taxes paid overseas, but if a company made money and did not otherwise pay taxes on it, it would owe them to the United States. After it paid the taxes, it could move the money wherever it wished without tax consequences.

President Obama has not gone that far, but he has suggested immediate taxation of foreign profits earned in tax havens, defined as countries with very low tax rates.

Some international companies hate that idea, of course. They warn that we would risk making American multinational corporations uncompetitive with other multinationals, and perhaps encourage some of them to change nationality.

The other way is to move to what is called a territorial system, one in which countries tax only profits earned in those countries. Apple would then be free to bring the money home whenever it wanted, tax-free. But without doing something about the ease with which companies manage to claim profits are made wherever it is most convenient, that would simply be a recipe for giving up on collecting tax revenue. Companies around the world have done a good job of persuading countries to lower tax rates. Back in the 1980s, the American corporate tax rate of 34 percent was among the lowest in the world. Now the 35 percent United States tax rate on corporate income is among the highest. In this country, notwithstanding the high rate, the corporate income tax now brings in about 18 percent of all income tax revenue, with individuals paying the rest. That is half the share corporations paid when Dwight Eisenhower was president.

There seems to be something of a consensus developing around the idea that the United States rate should be lowered. Both President Obama and Representative Dave Camp, the chairman of the House Ways and Means Committee, say they want to do that without reducing government revenue, but they disagree on most details. Mr. Camp likes the territorial idea, but he concedes that we would have to do something about the ease with which companies move income from country to country.

In fact, the need for such a rate reduction is not as clear as it might be. Reuven Avi-Yonah, a tax law professor at the University of Michigan, studied the taxes paid by the 100 largest American and European multinationals and found that, on average, the Americans paid lower rates.

Professor Avi-Yonah says he thinks that the developed countries should cooperate and enact similar rules. He compares that to the American Foreign Corrupt Practices Act, which makes it illegal for American companies to bribe foreign governments. American companies used to say that was unfair, but now most developed countries have similar laws.

Something like that may be growing a little more likely. At the request of the Group of 20 governments, the Organization for Economic Cooperation and Development is doing a study called BEPS, for Base Erosion and Profit Shifting.

In Europe, where budget problems have grown drastically, there seems to be a growing understanding that governments must raise a certain amount of revenue and a belief that if one sector manages to avoid paying taxes, that means other sectors must pay more. That led to the anti-Starbucks demonstrations in Britain. In this country, there is little sign of similar attitudes, let alone a belief that those who find ways to twist the laws to avoid paying taxes are being unpatriotic.

If that belief were to become widespread, Apple and similar companies might find that their success in avoiding taxes was making them unpopular with other taxpayers — people whom Apple wants to be its customers.

Floyd Norris comments on finance and the economy

at nytimes.com/economix.

Apple’s Move Keeps Profit Out of Reach of Taxes,
NYT, 2.5.2013,
http://www.nytimes.com/2013/05/03/
business/how-apple-and-other-corporations-move-profit-to-avoid-taxes.html