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“Econ 101 For The Party Of Sore Losers”: Tea Party Politics And Policy Limit Economic Freedom And Growth

Our businesses, markets and citizens are breathing sighs of relief. After wasting billions and toying with America’s creditworthiness, the so-called tea party has ceased, for the moment, holding our democracy and our economy hostage. Nevertheless, the fringe faction that calls itself by this name has made it abundantly clear that it lacks the character to own up to its folly. This Party of Sore Losers (POSERS, for short) has hacked at the proverbial cherry tree and, learning nothing from young George Washington, has failed to own up. In fact, it is holding the axe behind its back, ready to hack again.

This past month, attention was appropriately focused on the short-term consequences of the government shutdown and the POSERS’ game of chicken with sovereign default – default at the national level. This is serious. As Warren Buffett emphasized during the crisis in an interview with Fortune, we’ve spent hundreds of years building up our credibility; it takes but a moment to ruin it. Worldwide, markets have enormous confidence in our financial integrity and the functioning of our government. To date, the free market believes in America’s capacity and commitment to make good on its obligations. Let’s keep it that way.

During the Reagan years, it was liberals who thought the world was ending because of mounting federal debt. Eventually the country paid it down. We must do this again, but if we’re serious about it, first we need policies that support enterprise and growth. We have come through long wars and a stubborn recession. More of our veterans need employment in the private economy, and more of our businesses need to be able to hire and to invest in innovation again.

It is under such conditions that the Party of Sore Losers thought it would play with default at the national level. This shows a blatant disregard for growth and what growth means to our nation. In their zeal, they have put the economic cart before the horse. It’s as if they truly don’t understand that the horse – private enterprise and the growth and employment it generates – pulls the cart.

Much has been written in recent weeks about what the shutdown cost the nation and what a default would have cost. If the brinksmanship that brought us there were only a one-time tactic, it would have been bad enough. As it is, this tactic was merely the latest instance in a consistent pattern of fixation on cuts and obstruction, to the exclusion of growth. If you were out of a job, would it do you much good to stop showering, doing the laundry or paying rent and utilities, all in an effort to cut expenses? It would bring your costs down, to be sure. But it wouldn’t help you get a job.

As vivid as this analogy might be, it makes the point. POSER policies block investment in infrastructure, financial transparency, food safety, pollution controls and education. These are our Internet, our shower, our breakfast, laundry and rent; these fundamentals provide the stable conditions we need to get back to work. Investment in them is something business owners repay many times over. When a stable and functioning government does its job, we entrepreneurs can do ours: creating value and hiring people without unnecessary hindrance.

There are significant dangers when the government starts doing what private industry does best. Think of the last time you were in line at a government agency, and of the level of customer service you received, compared to what you got from a company that would lose you as a customer if it did a bad job. You can vote your representatives out, but the staff at your local government agency isn’t typically up for re-election.

There are, of course, many dedicated civil servants who give you their very best. Still, overall, beware the performer playing to a captive audience. Private companies that succeed in locking you in as a customer only underscore the point. Think of the last time you were on hold with, or tried to use the latest software from, a business with which you as a customer were more or less stuck. When a company becomes the only game in town, or seduces you into signing that contract, a certain disdain for your needs often follows.

The POSERS who call themselves the tea party appear to be seized by a great fear that we will all be waiting in line at government health clinics. The trouble is that they’re forcing their version of free choice down our throats. It can be hard to see the irony in this when you’re convinced that you’re channeling the will of the people. In an interview in Business Insider just days before the recent debt-ceiling deadline, POSER Rep. Ted Yoho claimed to know what “the people” wanted. He broke it down for the rest of us: “They have chosen not to fund the government.”

How did we get to this point? Did the POSERS get so good at dismissing their perceived political opponents on ideological grounds that they started to hear nothing but their own voices? Was it the hay this faction made by obstructing government, while screaming that the president was a socialist, that allowed its arguments to become divorced from what a functioning market economy is?

However they talked themselves into it, the POSERS have demonstrated their readiness to play havoc with the most basic needs of the business owner in America. They have shown their disregard for what it means to carry on our work with some confidence that government will do its job, while we do ours. What’s so tragic about this, among other things, is that it discredits legitimate efforts to keep government out of places it shouldn’t be.

In view of what the POSERS have put us through of late, Americans of all mainstream political persuasions should be on guard. The so-called tea party may pose the greatest threat to free enterprise in decades. The POSERS would block moves to reestablish the financial transparency on which savers and investors rely. They would make us pay the costs of other people’s pollution. They would restrict the economic opportunity for immigrants on which this country’s success is based. And they would rob us of our right to enjoy or to suffer from that which we have chosen for ourselves in free elections.

Whether “Obamacare” turns out to hurt businesses and employees more than it helps them, we’re going to find out in practice. Far more threatening to private industry is the way the POSERS would cut off our economy’s nose to spite its face. One can only assume they earnestly believe themselves to be in a mortal struggle to keep government from interfering with our choices. In reality, of course, POSER economic policies limit those choices, in the ways I’ve described.

Moreover, these policies function to keep the private economy small and constrain recovery and growth, thereby perversely increasing our dependence on debt spending. We badly need to teach these ideologues the basics of cash flows, debt and investment, value generation and growth. Alas, the Party of Sore Losers has been busy teaching the rest of us a course of its own design. The textbook is titled, “Converting Resilient American Innovation into Entirely Unnecessary, Government-Induced Economic Paralysis (A Sore Loser’s Approach: 2013 Edition).”

 

By: Alejandro Crawford, U. S. News and World Report, October 29, 2013

October 30, 2013 Posted by | Businesses, Economy, Tea Party | , , , , , , | Leave a comment

“Those Dreaded Unions”: Republicans Who Meddle With Profit-Making Business

It’s no secret that many Republican lawmakers dislike labor unions, which are big supporters of Democrats. But it’s unusual to see a politician willing to castigate an employer in his state just for talking to union officials about setting up a union at its factory.

Consider the case of Bob Corker, the Republican senator from Tennessee, and Volkswagen, the German automaker that employs 2,000 workers at a plant in Chattanooga. As my colleague Steven Greenhouse reported last week, the company is working with the United Auto Workers on a plan to unionize its factory so it can establish what is known as a “works council” in Germany. These councils are essentially committees of workers that meet with management to discuss how to improve conditions and productivity. Some studies have found that plants with such committees have higher productivity and wages than factories without them, which is why both workers and management might want them.

But Mr. Corker appears to have never seen a union he liked. In an interview with the Associated Press, he called Volkswagen’s decision to engage in these talks “incomprehensible” and said the company would become a “laughingstock in the business world” if it went ahead with the plan. His criticism is particularly strange because he is reported to have played a big role in bringing Volkswagen to Chattanooga, where he was once mayor. To be fair, Mr. Corker is not alone; the governor of his state, the Republican Bill Haslam, is also opposed to the Volkswagen-U.A.W. plan.

The lawmakers say they are worried that a unionized Volkswagen plant would somehow ruin the investment climate in the state and compel other companies not to invest there. A more realistic explanation for why the lawmakers oppose the U.A.W.’s foray into their state is that they fear it will support the state’s Democratic party.

The strangest thing about Mr. Corker’s and Mr. Haslam’s criticism of Volkswagen is that Republicans are usually on the ones telling everybody else in government not to meddle in the affairs of profit-making businesses. After all, it’s their mantra that businesses, not lawmakers, create jobs. But I guess none of that matters in this case because even a company as successful and profitable as Volkswagen, which is competing with Toyota and General Motors to be the world’s largest automaker, must be deluded if it’s entertaining the possibility of working with a dreaded union.

 

By: Vikas Bajaj, Editors Blog, The New York Times, September 12, 2013

September 13, 2013 Posted by | Businesses, Unions | , , , , , , , | Leave a comment

“The Emergency Exits Are Always Open”: Wal-Mart’s Strategy Of Deniability For Workers’ Safety

Bangladesh is half a world away from Bentonville, the Arkansas city where Wal-Mart is headquartered. This week, Wal-Mart surely wishes it were farther away than that.

Over the weekend, a horrific fire swept through a Bangladesh clothing factory, killing more than 100 workers, many of whose bodies were burnt so badly that they could not be identified. In its gruesome particulars — locked doors, no emergency exits, workers leaping to their deaths — the blaze seems a ghastly centennial reenactment of the Triangle Shirtwaist fire of 1911, when 146 workers similarly jumped to their deaths or were incinerated after they found the exit doors were locked.

The signal difference between the two fires is location. The Triangle building was located directly off New York’s Washington Square. Thousands watched the appalling spectacle of young workers leaping to the sidewalks 10 stories down; reporters and photographers were quickly on the scene. It’s not likely, however, that the Bangladesh disaster was witnessed by anyone from either the United States or Europe — the two markets for which the clothes made inside that factory were destined. For that, at least, Wal-Mart should consider itself fortunate.

The Bangladesh factory supplied clothing to a range of retailers, and officials who have toured the site said they found clothing with a Faded Glory label — a Wal-Mart brand. Wal-Mart says that the factory, which had received at least one bad report for its fire-safety provisions, was no longer authorized to make its clothing but one of the suppliers in the company’s very long supply chain had subcontracted the work there “in direct violation of our policies.”

If this were an isolated incident of Wal-Mart denying responsibility for the conditions under which the people who make and move its products labor, then the Bangladeshi disaster wouldn’t reflect quite so badly on the company. But the very essence of the Wal-Mart system is to employ thousands upon thousands of workers through contractors and subcontractors and sub-subcontractors, who are compelled by Wal-Mart’s market power and its demand for low prices to cut corners and skimp on safety. And because Wal-Mart isn’t the employer of record for these workers, the company can disavow responsibility for their conditions of work.

This system isn’t reserved just for workers in faraway lands: Tens of thousands of American workers labor under similar arrangements. Many are employed at little more than the minimum wage in the massive warehouses in the inland exurbs of Los Angeles, where Wal-Mart’s imports from Asia are trucked from the city’s harbor to be sorted and packaged and put on the trucks and trains that take them to Wal-Mart stores for a thousand miles around.

The warehouses are run by logistics companies with which Wal-Mart contracts, and most of the workers are employed by some of the 200-plus temporary employment companies that have sprung up in the area — even though many of the workers have worked in the same warehouses for close to a decade. Last year, the California Department of Industrial Relations, suspecting that many of these workers were being cheated, charged one logistics company that runs a warehouse for Wal-Mart with failing to provide its employees with pay stubs and other information on their pay rates. Wal-Mart itself was not cited. That’s the beauty of its chain of deniability.

A small band of these warehouse workers has been demonstrating for the past couple of months to bring attention to the bizarrely contingent nature of their employment and the abuses that flow from it. Their numbers were augmented Friday by actual Wal-Mart employees in stores around the nation, calling attention to the everyday low wages and absence of benefits that the vast majority of the company’s 1.4 million U.S. employees receive.

Other discount retailers — notably Costco and Trader Joe’s — pay their workers far more, train them more extensively, have much lower rates of turnover and much higher rates of sales per employee, according to a Harvard Business Review article by Zeynep Ton of the MIT Sloan School of Management. Costco is a very profitable business, but Wal-Mart maintains an even higher profit margin, which it achieves by underpaying its employees. The conservative economic blogger Megan McArdle estimates that if Wal-Mart held its profit margin down to Costco’s level, its average worker would make about $2,850 more each year — a considerable increase in a sector where workers’ earnings average less than $25,000 a year.

But Wal-Mart neither pays its own nor takes responsibility for those who make and move its wares. For America’s largest private-sector employer, the emergency exits are always open.

 

By: Harold Meyerson, Opinion Writer, The Washington Post, November 27, 2012

November 28, 2012 Posted by | Businesses, Corporations | , , , , , , , | Leave a comment

“Dressed Up As A Cheerful Holiday Add-On”: Why Black Friday Is A Behavioral Economist’s Nightmare

There are many, many reasons not to participate in Black Friday. Maybe you like sleeping in and spending time with family more than lining up in a mall parking lot at 2 a.m. Maybe you object on humanitarian grounds to the ever-earlier opening times, which force employees of big-box retailers to cut their holidays short by reporting to work in the middle of the night. (Or, increasingly, on Thanksgiving itself.)

But among the most potent reasons no sane person should participate in Black Friday is this: It is carefully designed to make you behave like an idiot.

The big problem with Black Friday, from a behavioral economist’s perspective, is that every incentive a consumer could possibly have to participate — the promise of “doorbuster” deals on big-ticket items like TVs and computers, the opportunity to get all your holiday shopping done at once — is either largely illusory or outweighed by a disincentive on the other side. It’s a nationwide experiment in consumer irrationality, dressed up as a cheerful holiday add-on.

As Dan Ariely explains in his book, Predictably Irrational, “We all make the same types of mistakes over and over, because of the basic wiring of our brains.”

This applies to shopping on the other 364 days of the year, too. But on Black Friday, our rational decision-making faculties are at their weakest, just as stores are trying their hardest to maximize your mistakes. Here are just a few of the behavioral traps you might fall into this Friday:

The doorbuster: The doorbuster is a big-ticket item (typically, a TV or other consumer electronics item) that retailers advertise at an extremely low cost. (At Best Buy this year, it’s this $179.99 Toshiba TV.) We call these things “loss-leaders,” but rarely are the items actually sold at a loss. More often, they’re sold at or slightly above cost in order to get you in the store, where you’ll buy more stuff that is priced at normal, high-margin levels.

That’s the retailer’s Black Friday secret: You never just buy the TV. You buy the gold-plated HDMI cables, the fancy wall-mount kit (with the installation fee), the expensive power strip, and the Xbox game that catches your eye across the aisle. And by the time you’re checking out, any gains you might have made on the TV itself have vanished.

Implied scarcity: This is when a store attempts to drum up interest in an item by claiming “limited quantity” or “maximum two per customer,” which makes us think we’re getting something valuable when we may not be. It’s a staple of deceptive marketing, and at no time in the calendar year is it in wider use than on Black Friday. (There is also actual scarcity on Black Friday — when stores carry only a 50 or 100 of an advertised doorbuster item — which also introduces a risk that you’ll be 51st or 101th in line and waste your time entirety. Both are bad.)

Confirmation bias: As Derek Thompson points out, many shoppers neglect to factor in the non-cash costs of their Black Friday trip — gas, parking, warranties, and rebates. (To say nothing of the vacation time lost to waiting in lines.) Shoppers want to believe they save money by going out on Black Friday, so they use only their per-item savings in calculating the benefits of their trip. But on a net basis, it’s often not a very good deal.

Irrational escalation: This behavioral quirk is also known as the “sunk cost fallacy,” and it means that people are bad at knowing when to give up on unprofitable endeavors. This happens a lot on Black Friday. If you’ve already made the initial, bad investment of getting up at 2 a.m., driving to the mall, finding parking, and waiting in line for a store to open, you’ll be inclined to buy more than you initially came for. (Since, after all, you’re already there, and what’s another few hundred dollars?)

Pain anesthetization: One of my favorite pieces of shopping-related research is a 2007 paper called “Neural Predictors of Purchases” [PDF] which used fMRI scans of shoppers’ brains to show how deeply irrational the purchasing process is. Researchers found that if a shopper saw a price that was lower than expected, his medial prefrontal cortex (the part of the brain responsible for decision-making) lit up, while higher-than-expected prices caused the insula (the pain-registering part) to go wild. That brain activity had a strong correlation to whether or not the shoppers ended up buying the products or not.

Economists typically think of consumer choice as dispassionate cost-benefit analysis by rational market actors — a bunch of people saying to themselves, “Will having this $179.99 TV now create more pleasure than having the $179.99 in my bank account to do other things in the future?” — but the 2007 study shows that shoppers don’t actually behave that way at all. In fact, they’re choosing between immediate pleasure and immediate pain.

That explains why, on Black Friday, retailers pull out every trick in their playbook to minimize the immediate pain of buying: instant rebates, in-house credit cards with one-time sign-up discounts, multi-year layaway plans, and the like. The problem, of course, is that those methods of short-term anesthetization often carry long-term consequences — like astronomically high interest rates and hidden fees.

Post-purchase rationalization: When we’ve bought something expensive, we tend to overlook its flaws or defects in order to justify our decision. On Black Friday, the investment is more than just financial — we’ve emotionally invested in the post-holiday ritual of standing in line with friends or family and enduring cold, dark misery for the shot at cheap electronics. That excess investment leads to excess rationalization, and coupled with a return/refund process that is a nightmare at many big-box retailers, it leads to people owning a lot of things they’re not very happy with.

In short, if shopping on the other 364 days of the year is the behavioral economist’s version of bringing a knife to a gunfight, going out on Black Friday is going to that same gunfight with a knife made out of Play-Doh. Between retail tricks and your own cognitive flaws, you have almost no chance of actually saving money or making rational decisions. (Plus, you might get trampled.)

Of course, just by telling you to stay home on Black Friday, I may be triggering your reactance bias (the tendency to do the opposite of what someone tells you) and making you want to go bargain-hunting even more. In which case, good luck. You’ll need it.

 

By: Kevin Roose, Daily Intel, November 22, 2012

November 23, 2012 Posted by | Businesses | , , , , , | 1 Comment

Bank Of America Cuts Off Credit To Some Small Businesses

Bank of America Corp., under pressure to raise capital and cut risks, is severing lines of credit to some small-business owners who have used them to stay afloat.

The Charlotte, N.C., bank is demanding that these customers pay off their credit line balances all at once instead of making monthly payments. If they can’t pay in full, they are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had.

Business owners complain that BofA’s credit squeeze is abrupt and could strain their small companies and even put them out of business. The credit cutoff is coming at a time when the California economy can’t seem to catch a break, and bucks what the financial industry says is a new trend of easing standards on business loans.

One such customer, Babak Zahabizadeh, was told in a letter that the $96,000 debt carried by his Burbank messenger service must be repaid Jan. 25. A loan officer offered multiple alternatives over the phone that Zahabizadeh called unaffordable, including paying off the debt at 12% interest over two years. That’s about $4,500 a month, nearly 10 times his current interest-only payment.

Zahabizadeh, known as Bobby Zahabi to his customers, said he has cut the staff of his Messengers & Distribution Inc. to 80 from 200 to nurse his business through tough times.

“I was like, ‘Dude, you’re calling a guy who’s barely surviving!’ ” he said. “My final word was that I can double my payment — but not triple or quadruple it. I told them if they apply too much pressure they’re going to push me into bankruptcy.”

The capped credit lines stem from a corporate overhaul launched by Brian Moynihan, who became Bank of America’s chief executive in 2010. He promised to address losses caused by loose lending and rapid expansion by reining in risks and shedding investments deemed non-core.

BofA spokesman Jefferson George said a “very small percentage” of small-business customers have been affected by the changes. He would not provide exact numbers except to say it wasn’t in the hundreds of thousands. Some of the affected businesses had been customers of other banks that Bank of America acquired, but most were BofA customers from the start, George said.

“These changes were explained in letters to customers, and they were necessary for Bank of America to continue prudent lending to viable businesses across the U.S.,” he said.

The bank still has 3.5 million non-mortgage loans to small businesses on its books. The affected business owners were notified a year in advance that their credit lines were being called, George said, although Zahabi and several others said they had not received the early warnings.

The changes also include added annual reviews of borrowers and annual fees, and often reductions in the maximum amount of credit. George said the aim was to reduce Bank of America’s risks and to bring the loan terms in line with more stringent standards imposed after the 2007 mortgage meltdown and 2008 credit crisis.

Scott Hauge, president of the advocacy group Small Business California, called the credit cuts “a tragedy” for longtime BofA clients left vulnerable by years of struggle in a sour economy.

“If small businesses are going to lead the way out of the economic doldrums we now face in this country, they must have access to capital, not only to hire more people but to protect the jobs they are currently providing,” Hauge said.

Bank of America was a leader in the banking industry’s abortive attempt to impose debit card fees. But it appears to be a laggard in tightening business lending standards. Most other banks, having tightened lending standards in the aftermath of the financial crisis, had eased credit last year as competition for small-business customers heats up, bank analysts say.

“Everyone … is targeting commercial and particularly small-business lending as the real focus area for growth,” said Joe Morford, an analyst in San Francisco for RBC Capital Markets.

While Bank of America is advertising its own commitment to small businesses, it needs to send another message to its government supervisors because it has less of a capital cushion against losses than major rivals, said FBR Capital Markets bank analyst Paul Miller.

Restricting credit lines “is a way to show the regulators they are serious about addressing risks,” Miller said. “Bank of America is under great pressure, especially with another round of [Federal Reserve] bank stress tests coming up, as the regulators say: ‘We want you to tighten up.’ ”

The analysts said all banks monitor business customers and restrict credit on a case-by-case basis. But they said they were unaware of any other large bank systematically capping credit at this time.

Customers interviewed by The Times said they could understand how the turbulent economy might result in some restrictions. But they complained that the credit cutoffs threatened to undo businesses they shepherded through the downturn by slashing costs, hoping to expand when brighter days return.

Several small-business owners indicated that they had nearly used up all the available credit on their Bank of America lines. However, George said maxing out the lines wasn’t a major factor in the bank’s reevaluation of the credit terms.

Kathleen Caid’s Antique Artistry Studio in Glendale sells elaborately beaded, Victorian-style shades that she makes for lamps, chandeliers and sconces. She said she had understood that her $85,000 credit line would remain in place “as long as I wasn’t in default,” and she hadn’t missed any payments.

Caid and her husband, Tim Melchior, a video producer with a Burbank media company, insist they are not in serious financial trouble despite having laid off her eight full-time employees and downsized her business space by two-thirds during the recession.

Yet Bank of America says that her credit-line debt, totaling $80,000, is due in May.

“I wouldn’t have run it up if I knew what was in store,” she said, adding that she would be speaking to an attorney and other banks about her options.

 

By: E. Scott Reckard, Los Angeles Times, Jamuary 3, 2012

January 3, 2012 Posted by | Bank Of America, Businesses, Class Warfare | , , , , , | Leave a comment

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