Across the Great Divide

Big Business McCain and His Small Business Friends.

One of John McCain's gambits over the past several weeks has been to announce the formation of small business advisory groups in potential swing states, including Virginia, California and other states. Tiny New Hampshire has quite a robust list, while Minnesota, home to one of his campaign's co-chairs, Gov. Tim Pawlenty, has a pretty meager showing.

Given the relatively minor name recognition and political clout most of these "small business leaders" have, they are useful to McCain mostly so he can stand in front of them and proclaim himself in favor of business growth while spinning bald-faced lies about the effect his opponent's policies will have on these exemplars of the American Dream.

Backed by a handful of marketing consultants, cleaning service contractors, insurance agents and filling station owners, McCain makes as if he is supported by about 8 percent of the U.S. population — all those beleaguered small business owners.

FactCheck.org goes into the detail of how McCain first inflates the number of small businesses, ignores that most of them do not actually employ workers, and then conflates them with the relatively small proportion of business owners potentially affected by a tax increase on top earners.

Of the 26.8 million that SBA counts as "small businesses," fewer than 6 million are actually "employer firms" with any payroll.

From this, we must conclude that to arrive at his 23 million figure, McCain is counting mostly "business owners" with no workers, including those who simply report small amounts of income from sideline or freelance work. McCain is arguing that Obama's tax increase would "destroy jobs," but he's counting mostly firms that don't produce any.

[...]

Based on the number of taxpayers who now report any sort of business income on their returns, the Urban-Brookings Tax Policy Center projects that 663,608 taxpayers with business income, or business losses, will fall into the top two tax brackets in 2009, when any Obama tax changes would first take effect. Not all of those can properly be called "small-business owners," however. Some are farmers. Many are lawyers, accountants or other professionals who get some of their income in the form of partnership distributions. Others may be passive investors in real-estate partnerships or similar investment arrangements and not really persons who own and manage a business.

         

It is also not clear how many who report business income actually employ any workers.

 

         

Of the small businesses that do employ workers, Boston Review points out that many benefit as "state social supports—from education and training to health care—supplement workers’ wages and benefits, and help small businesses recruit and retain their workers."

Nor should we believe that small businesses are some monolithic political force with identical interests. Our service economy includes both businesses employing low-skilled, low wage workers and high-skilled, higher-paid knowledge workers that may value different ways the "welfare state" helps support their stability and success.

The Earned Income Tax Credit, for example, underwrites incomes for low-wage workers while increasing the labor supply in low-wage service industries. Food stamps, child care subsidies, and public health programs such as Medicaid and the State Children’s Health Insurance Program increase productivity and reduce turnover among low-wage workers, to say nothing of improving their quality of life, at virtually no cost to their employers.

[...]

High-skilled firms have needs different from low-skilled ones, but public policies are just as important for them. These firms tend to employ highly educated and potentially mobile workers who are attracted to communities with good schools and universities, well-maintained recreational facilities, and effective environmental policies. Moreover, when workers lose their jobs, unemployment insurance gives them the economic security to defer work in order to train for new skills. Here, too, there are bases for supporting a more active government as a way to ensure the supply of skills on which small businesses will build in the future.

    

By siding with mom & pop stores and plucky, job-creating entrepreneurs, McCain can still advance  the interests of big business — oil, pharmas, financial services, defense contractors, airlines, big box retailers... — without being associated with their down sides, which are plenty in this economy.

Notes on the New Economy, Part Two.

I'm not saying the economy is in full meltdown.

I know better than that. Look at the trouble The Economist stirred up for America by shooting its mouth off back in 2006.

Besides, just look at the activity all over this part of town. There's still a lot of money to be made — at least in certain sectors.

But you look at those Geek Squad vans driving around town, and you have to wonder if maybe Best Buy has gone just a little bit overboard with the brand extension...

Paper Profits.

Neal St. Anthony reports on a recent decision by the Star Tribune's parent Avista Capital Partners not to make a quarterly interest payment to its second-tier debt holders.

George Singer, a veteran bankruptcy attorney with Lindquist & Venum who is not connected to the Star Tribune, said Avista's decision to withhold payment to the junior debt holders likely was made with the approval or encouragement of the senior lenders who would get paid first in a bankruptcy. The senior debt has traded among banks for as little as 56 cents on the dollar while the second-tier debt has traded for as little as a dime on the dollar.

Also, junior creditors often exchange their debt for equity through a financial restructuring.

"The banks say: 'Don't make any payments to subordinate debt holders.'" Singer said.

Notice it's the banks telling Avista to pay them, but hold back on paying others. That's today's wealth creation, where banks specialize in restructuring debt rather than growing businesses and funding innovation.

There's the economy in a nutshell. Today's financial industry — which is a major industrial sector, lobbyist and problem child — is all too often about leveraging debt and laying off risk on the suckers — whether they're workers, local governments or junior debt holders. It's not about investing in the fundamental business, but figuring out ways to divert profits to pay off increasingly untenable layers of debt until one owner finds the next more ruthless or gullible one.

I'm reminded of a recent interview with economist Michael Hudson, who said:

Our tax laws have shaped the marketplace to favor the debt-financed buying and selling of real estate, stocks and bonds rather than new direct investment. Advocates of this financialization of saving and investment depict it as a viable mode of wealth creation, but the effect is simply to de-industrialize the United States. And this is the tragedy of our economy today.

...

As the debt overhead grows exponentially, it siphons off more and more money from being spent on production and consumption. For the financial sector, this is applauded as being the miracle of compound interest. The volume of loans keeps on growing by purely mathematical principles, without much regard for the economy's ability (or inability) to generate a large enough surplus to pay.

More and more wages, corporate profits and tax revenues have to be earmarked to pay creditors. These creditors then turn around and lend out their flow of debt service to yet new borrowers. This involves finding more and more risky markets, while the debt becomes heavier and heavier.  

To pay the carrying charges on these debts, wage earners cut back consumption while debt-wracked companies cut back on new capital investment, research and development. State, local and federal governments also pay interest on their deficits by cutting back on spending to maintain infrastructure or improve services. These cutbacks shrink the domestic market, leading to lower investment and hiring.

All this is applauded as the magic of the marketplace in allocating resources. But it's the financial sector that is doing the applauding, not industry.

 

Renter Coleman: Unjustly Accused.

DFL Chair Brian Melendez sent me an email today about Sen. Norm Coleman's sweetheart rental deal — for "a huge English basement with a media center, office space, gorgeous custom marble and oak bar plus an airy guest bedroom and bath" — in a million-dollar Capitol Hill town house owned by a political consultant friend who does work for the Coleman campaign.

(An English basement has windows that are at least partially above street level and mechanicals on the same floor.)

I'd already read most of what was in the email, including the $600 rent and the fact that Coleman hadn't always paid his rent on time. But one detail caught my attention. Coleman offered furniture in lieu of rent, which his landlord accepted, and then he continued to use it.

Melendez says:

And don’t forget to insist on still using the used furniture after you’ve sold it. After all, if it worked for Norm Coleman, it should work for you, too, right?

Do we really think it will work for you? Probably not, because average Minnesotans don’t get sweetheart deals like Coleman did. But give it a shot, anyhow — then shoot us a message at usedfurniture@dfl.org, with a photo of the used furniture that you tried to pay with, and let us know how it went.

Well, sorry Brian, but I do know an average Minnesotan who got a very similar sweetheart deal:

The Minnesotan is a semi-employed 25-year-old who moved back here to take responsibility for a child he fathered out of wedlock.

He rents a basement in a $215,000 house in Crystal, a downscale, inner ring suburb. The bedroom is small, with an egress window; the living area/media center lacks daylight, oak and marble,  but the bath is pretty nice. His rent is $550 plus a share of the utilities, so pretty close to Sen. Coleman's.

He is now three months behind in his rent, but he has a nice leather sectional couch he obtained for well below market value by moving it out for someone who was remodeling. I accepted it in lieu of two months rent when he was out of work. It will stay in the basement when he moves out.

Like landlord  Jeff Larson, I have absolutely no expectation that my tenant will do any huge  favors for me some day.

So you can see such deals are probably quite common. If I were you, I would not vilify a U.S. Senator for accepting something clearly similar.

P.S. Sorry there are no pics of the basement and the couch, but I think I should respect my tenant's privacy.

Corporate Espionage Hurts Trust in Government.

In the 1990s, a Maryland-based private detective agency composed of former CIA agents and law enforcement officers spied on such activist groups as Greenpeace, the firm's records show.

— "Corporate Espionage Detailed in Documents," Washington Post

The Iraq war has put the focus on private contractors like Blackwater that employ former military and law enforcement agents to do the dirty work for corporate and government customers in dangerous places overseas. But this Washington Post story touches on another aspect of the business: Former government agents spying on activists who may threaten corporate enterprises.

I think it's legitimate for companies to defend themselves against corporate espionage — attempts by competitors to gain access to business information. It's also reasonable to take steps to protect their people and assets from attack. It makes sense to employ people experienced in those fields, and retired cops, FBI and Secret Service agents make good candidates for those jobs.

But when the work turns to spying — or in more benign terms, intelligence gathering and preventive security — I worry about former government employees getting involved.

Here's an outline of how privatization of security  works.

An oil company hires a former FBI agent to oversee security of drilling sites and pipelines. A wealthy landowner buys up local ranches and employs a former game warden to protect his home and keep poachers off his property while he's in Malibu or Switzerland. The developer of a ski area worries about eco-sabotage of the lodge and condominiums he's building, so he hires a few moonlighting county sheriff's deputies.

It's the law enforcement version of the revolving door that puts former regulatory agency heads to work for the companies they once regulated. The retired agents have the knowledge, techniques and contacts of their former jobs with few of the restraints. And in many cases, like the Blackwater boys, they're making a lot more money for a heck of lot less aggravation than in their previous jobs. Their loyalty easily swings from protecting the pubic interest to protecting the boss.

As someone with numerous law enforcement people in the family, I don't begrudge them the opportunity to work in the private sector once they've retired. But how does this affect the public trust of law enforcement, when they see ex-agents freed from the restraints of their old jobs engaged in questionable behavior? How does it influence current law enforcement people who aspire to similar jobs when they retire?

Identity Crises.

Our social identity as a member of a community has given way to an individual identity as a homeowner with sovereignty over our property.
— Janna Caywood, Minnesota Journal [pdf]

*****

Artist Geoffrey Raymond has been painting portraits of Wall Street figures and placing them in public so passersby can annotate them. His latest is former Bear Stearns CEO Jimmy Cayne. The failed Bear Stearns was folded into J.P. Morgan on Friday, and as Cayne's speech to employees was met with silence, Raymond was outside.

Raymond intended to sell the portrait on eBay, but he's already received an offer he couldn't resist. No word on whether it was from an art lover or Cayne hater or both. [h/t She muses]

*****
The Strib has a story about two Best Buy employees who've written a book about the Results-Only Work Environment (ROWE) "which allows employees to put in their hours whenever, wherever and however they want, as long as the work gets done."

I agree with the premise of hiring the right people and trusting them to get the job done, with a minimum of oversight and mandatory meetings.  But I'm skeptical that ROWE's results are as rosy as portrayed.

First, it doesn't work for all jobs, which may cause problems that have yet to bubble up in the culture. And what message does it send to customers? We're available for you 24/7? Or it's all about us?

Second, it contributes to the general noise pollution as ROWEving workers carry on conversations from non-work settings like beaches, restaurants, airplanes and parks. I had to endure a long sales call in a store last month as the caller worked his way around the shelves. Maybe he was entirely focused on winning the business on the other end of the call, but it sure didn't look like it where I stood.

Third, when you need to get people together it becomes more of a production. I have a friend who works for Best Buy. He left his old position three weeks ago and took some time off. Now, he'll be in Minneapolis, but in three weeks he flies back to his former office so he can attend his going away party.

*****
The online Star Tribune's search engine apparently doesn't recognize phrases in quotes very well. Or maybe it searches for subtext as well.

Looking to do a quick count of the space dedicated to Sex and the City in the last week — at least nine stories with photos covering several pages by my recollection — I found this story on the first page of hits: "Coleman calls on GOP to be party of hope and toughness."

*****

I thought of the SATC PR splurge when I read Gail Dines claiming the distinction between soft core vs. hard core pornography has changed. Pop culture is the new soft core porn.

According to Dines, who is working on a book titled Slut Culture, Playboy magazine invented the modern porn industry, she says, by putting "high-class" women in a context with "high-class" products. Hefner's genius was understanding the line of explicitness that attracted male readers without driving away the high dollar advertisers.

Shingle Karma.

On Friday a neighbor came by canvassing for the American Cancer Society. It came up that we were replacing our roof on Monday. She asked me if we had hail damage. I said no, and she said are you sure? Then she began recounting the neighbors, including her, who'd recently gotten new roofs paid for by home owner's insurance.

A home repair company has been working the area, finding hail-damaged shingles and agreeing to replace the roof for whatever the insurance company would reimburse.

I don't know that they are doing anything wrong. Maybe we do have hail damage that hasn't yet caused any apparent problems. But I'm generally suspicious of solicitations by construction outfits who "just happen to be working in your neighborhood."

One of their sales guys came by here the other day. He may have been the same guy I saw door knocking earlier in the week as I was biking home. Since he looked like a missionary, I took an extra spin around the neighborhood. Not in the mood.

I checked them out on the web and didn't find too much about them being shady or shoddy, although several prospects noted a two-hour sales presentation. No, thanks, I'll take the missionary.

When the salesman is wearing a suit, the antennae really start vibrating. It means the price is going up because the guy on the front step isn't the one doing the work. (A roofing contractor along one of my routes has a sign up looking for sales help and promising "40%" of something.) And if it takes a two-hour presentation to convince me to fix a problem I didn't know I had, maybe the real problem is keeping the roofing crew working.

The key to this sale, of course, is the promise to take advantage of the insurance company. That's why you buy insurance, right? Maybe, but I had something more in mind like replacing a tornado-flattened house, not fixing dimples in my 20-year-old shingles. My neighbors may have free new roofs, but I get to feel morally superior.

Originally, the roofers were supposed to come last Monday, but we put them off a week.

Yesterday it hailed like hell.

How Are You Doing?

“I got a great severance package.”

“We decided one of us should stay home with the kids.”

"Oh, they outsourced my function."

“I’ve decided to take my career in a different direction.”

“I got tired of the commute so I’m working from home.”

"I've always dreamed of starting my own business."

"I’ve been unhappy at my job for so long. It was time to make a change."

"It wasn't personal, it was a business decision.”

"Personality conflict. What can you do?"

"You know, it's good to be out of the rat race."

"I learned so much there. I have nothing but great feelings for the company."

"They lost a big contract."

"I'm really looking forward to retirement."

"I didn't want to relocate, so..."

"Change is good!"

"I just didn't see where I could go next if I stayed with the company."

"I'm looking at this as an opportunity."

"Definitely, keep me in mind, but I'm not going to jump on the first thing that comes along..."

"Yeah, consulting's going really well, but I think I'd feel more fulfilled contributing to something bigger than myself."

"Hey, I'm taking my cans down to the recycling center. Do you have any you want me to bring?

Lower Childhood Obesity in the Future? Fat Chance.

The New York Times has an article today saying:

Childhood obesity, rising for more than two decades, appears to have hit a plateau, a potentially significant milestone in the battle against excessive weight gain among children.

Its story has a graphic, but it's one of those boring bar charts.

It is not clear if the lull in childhood weight gain is permanent or even if it is the result of public anti-obesity efforts to limit junk food and increase physical activity in schools. Doctors noted that even if the trend held up, 32 percent of American schoolchildren remained overweight or obese, representing an entire generation that will be saddled with weight-related health problems as it ages.

Here's a more understandable infographic I came across somewhere awhile back.

   

Selling Air.

Via SCSU Scholars, why popcorn costs so much at the movies.

The clip is to promote a book on microeconomics and doesn't really answer the question, though it does provide some interesting information about popcorn pricing. You knew already that popcorn has a huge mark-up, but maybe not what accounts for the price differences and margins among the various sizes.

Marginal Revolution linked to the same video and attracted revealing comments from a former theater worker:

Popcorn kernels are cheap to buy and easy to store. Unlike other food items such as soda, candy, or ice creame, where we traded in part on the name of the brand, which the firms used to increase costs and lower margins [? i.e., the candy companies raised the cost to the theaters and lowered the theaters' margins?], popcorn has no such associated costs. Towards the latter part of my work there, they added a "bulk" candy apparatus, for lack of a better term, and positioned it prominently in the lobby area, again because this candy was not sold as a brand was a far higher grossing product.

And from a popcorn marketer:

One of my first jobs out of school was running the popcorn division of a Fortune 500 food company. I attended meetings of the Popcorn Institute, followed planting patterns, inspected acreage, had meetings with our food chemists, and attended seminars on new popcorn hybrids. We had grocery, concession, and institutional buyers. What I remember most about about the concessions, primarily theaters, was they were all focused on the expansion ratio of the kernel. At that time we could deliver up to 40:1, but they wanted more. It was inventory, storage, and pricing issues. If they could have filled a 1 quart cup with 15 kernels that had an expansion ratio of 300:1, they would have bought it (selling more air). That was why we only sold them butterfly kernels instead of the superior mushroom kernels.