Tuesday, February 23, 2010
Taxes and Tea Parties
My Columbia College classmate, Senator Judd Gregg has partnered with Oregon Democrat Senator Ron Wyden to propose a simplified tax system, with three marginal brackets, a unified deduction, and elimination of the alternative minimum tax. The current tax system, which creates work for accounting firms, CPA's, lawyers and estate planners is fundamentally undemocratic in that a fraction of one percent of the population can explain how what they pay is related to what they earn. The journey from one amount to the other goes through the miasma of exclusions, ceilings, deductions, and finally the absurd alternative minimum tax.A citizen should be able to fill out a return on one page without having a Ph.D. in taxation or a J.D. Bravo to a bipartisan proposal that is relatively simple, reasonable and a meaningful improvement on what we have. We don't need to reinvent the wheel by having another Commission. Unlike reform of financial regulation, here's hoping that this proposal gains momentum. Instead of the unfocused ire of the Tea Party group, this proposal could provide something meaningful to our democractic body politic.
Thursday, February 18, 2010
Credit Getting Easier?
A recent newspaper article trumpeted a great leasing deal on a 2010 Honda Accord for $199 a month for 36 months, with 12,000 miles per year allowance. In one sense, it could be an opportunistic grab for potential customers of a Toyota Camry, and so it's to be expected. One of the disappointing features is that it's for a 4 cylinder, stripped model that seems like it should be in a rental fleet, but even that's okay. The kicker was that the article said Honda's finance arm was looking at FICO scores of 710 or above for customers interested in the deal. This is a pretty strong credit score. It was not so long ago that this kind of deal would be aimed at a FICO score of 650 or better.
Someone with the credit score, and by extension that income would hardly seem interested in a stripped down model. They could probably do a better deal with a bank or their credit union at work, though that's an assumption on my part. I don't think that this kind of deal signals any kind of credit easing in consumer lending, in fact it suggests continuing fear and trepidation. Even as a marketing ploy, this deal seems to have little prospect of driving sales.
Someone with the credit score, and by extension that income would hardly seem interested in a stripped down model. They could probably do a better deal with a bank or their credit union at work, though that's an assumption on my part. I don't think that this kind of deal signals any kind of credit easing in consumer lending, in fact it suggests continuing fear and trepidation. Even as a marketing ploy, this deal seems to have little prospect of driving sales.
Sunday, February 14, 2010
Ethanol--It's About More Than Oil
I just received my Annual Report from The Leopold Center for Sustainable Agriculture, which was organized by the Iowa Legislature in 1987 as part of the Iowa Groundwater Protection Act. It's an organization that does valuable, high quality work, and they produce very informative publications.
We've had an ongoing water quality problem in the Gulf of Mexico, alarmingly called a "dead zone," which is a fairly wide hypoxic area that is being studied by the EPA and by a number of academic and quasi-governmental institutions, like the Leopold Center. The sad fact of the matter is that we know why the dead zone exists, and it's based on good science, not goofball, second hand citations.
One participating organization stated, "The most intensively cultivated watersheds of the Mississippi River Basin have been found to be sources of nutrients that create the dead zone and have numerous other detrimental environmental and social effects." Intensive corn monoculture has produced hockey stick growth rates of yield per acre since the 1950's, but the yields have been driven by intensive use of nitrogen-based fertilizers. Those yields has been relatively flat for the past decade, according to one of the working groups.
We also know that about 80% of the nitrogen applied to farmers' fields dedicated to animal production, that is planted with corn and soybeans, are lost to the environment. The nitrogen is released to the air as ammonia and oxides of nitrogen, and partly to the groundwater, rivers and estuaries as nitrates. So, we know a large part of why the dead zone exists.
Growing corn to fuel our vehicles is not a viable answer to our energy problems, neither to import dependency nor to the environmental problems. Going deeper, corn monoculture itself is a deeper part of the onion that needs to be peeled back.
Since 80% of the nitrogen applied is lost to the environment, that means that only 20% is captured by humans in their meat, as the bulk of corn grown is feeder corn for cattle and hogs. Our system of captive animal, meat production on huge feedlots is itself energy inefficient and harmful to the environment. Manure and animal waste being dumped into canals and rivers is another source of excess nutrients that accumulate downstream in areas like the Gulf. I'm certainly not a vegetarian myself, and I'm not proselytizing for compulsory diet change. However, our system of production--and it is a huge, industrial, low cost system--makes little sense when the externalities are made visible and the system boundaries are pushed out to include these costs that are now invisibly borne by the public.
Now, the Leopold Center does lots of fine work on land use conservation measures like conservation tillage, crop rotation, reduced inputs, stream widening, and plantings of grasses and hays to increase infiltration. The problem is that most of the programs are voluntary, and the farmers that have the greatest impact on the environmental measures are generally not participating.
Under a "business as usual" scenario, the number of farms continues to decrease, and the average farm size increases to about 360 acres. Just as in other industries, we get a concentration among producers, and the larger producers are the ones tied into the large, industrial model for agricultural production.
Corn-based ethanol makes as much sense as moonshine (which it is) does for a dinner table beverage. However, the larger question is how we start to politically look at our food system. We need to connect people to the land and food, and to understand how things are grown and who grows the food. We need to produce a wider variety of crops on a sustainable basis, and we need to internalize costs associated with the rehabilitation and conservation of our air, land and water resources.
We've had an ongoing water quality problem in the Gulf of Mexico, alarmingly called a "dead zone," which is a fairly wide hypoxic area that is being studied by the EPA and by a number of academic and quasi-governmental institutions, like the Leopold Center. The sad fact of the matter is that we know why the dead zone exists, and it's based on good science, not goofball, second hand citations.
One participating organization stated, "The most intensively cultivated watersheds of the Mississippi River Basin have been found to be sources of nutrients that create the dead zone and have numerous other detrimental environmental and social effects." Intensive corn monoculture has produced hockey stick growth rates of yield per acre since the 1950's, but the yields have been driven by intensive use of nitrogen-based fertilizers. Those yields has been relatively flat for the past decade, according to one of the working groups.
We also know that about 80% of the nitrogen applied to farmers' fields dedicated to animal production, that is planted with corn and soybeans, are lost to the environment. The nitrogen is released to the air as ammonia and oxides of nitrogen, and partly to the groundwater, rivers and estuaries as nitrates. So, we know a large part of why the dead zone exists.
Growing corn to fuel our vehicles is not a viable answer to our energy problems, neither to import dependency nor to the environmental problems. Going deeper, corn monoculture itself is a deeper part of the onion that needs to be peeled back.
Since 80% of the nitrogen applied is lost to the environment, that means that only 20% is captured by humans in their meat, as the bulk of corn grown is feeder corn for cattle and hogs. Our system of captive animal, meat production on huge feedlots is itself energy inefficient and harmful to the environment. Manure and animal waste being dumped into canals and rivers is another source of excess nutrients that accumulate downstream in areas like the Gulf. I'm certainly not a vegetarian myself, and I'm not proselytizing for compulsory diet change. However, our system of production--and it is a huge, industrial, low cost system--makes little sense when the externalities are made visible and the system boundaries are pushed out to include these costs that are now invisibly borne by the public.
Now, the Leopold Center does lots of fine work on land use conservation measures like conservation tillage, crop rotation, reduced inputs, stream widening, and plantings of grasses and hays to increase infiltration. The problem is that most of the programs are voluntary, and the farmers that have the greatest impact on the environmental measures are generally not participating.
Under a "business as usual" scenario, the number of farms continues to decrease, and the average farm size increases to about 360 acres. Just as in other industries, we get a concentration among producers, and the larger producers are the ones tied into the large, industrial model for agricultural production.
Corn-based ethanol makes as much sense as moonshine (which it is) does for a dinner table beverage. However, the larger question is how we start to politically look at our food system. We need to connect people to the land and food, and to understand how things are grown and who grows the food. We need to produce a wider variety of crops on a sustainable basis, and we need to internalize costs associated with the rehabilitation and conservation of our air, land and water resources.
Monday, February 8, 2010
Black and White
Framing discussions in "black and white" is part of our DNA in politics, journalism and financial reporting. As Paul Simon writes, "...everything looks worse in black and white." ("Kodachrome")
American companies navigating through the global financial crisis have generally reported solid quarterly comparisons, against depressed prior year periods. The comparisons have been helped generally by one-time items and by cost-cutting, including large layoffs. Investors applaud, the market goes up and everyone feels good, until we suddenly realize that the next set of comparisons will be extremely challenging. This short-term mentality is what has been decried by coalitions of institutional investors, academics, accounting firms, and executives, as for example in The Aspen Principles.
For the most part, I don't see much change in the actions, as opposed to the rhetoric of global American multinationals, which remain focused on the short-term. Talking heads are fearful of American firms adopting "the European model," whatever that means. We do know that it is the polar opposite of the American model, which is driven by profits, even if these profits are ephemeral and not sustainable. Giles Moec, a Deutsche Bank economist, quoted in the New York Times, wrote that "American companies have been faster to adjust their work forces and protect their profit margins than European companies." There's the black-and-white comparison, but reflecting on this, it's really not that simple.
First of all, the reported profits, as we noted, reflect one-time events and are against easy comparisons. Second, these large labor force downsizings are not without their costs, yet investors treat them as if they generate profits at the stroke of a pen. The black and white view says that European companies tolerate higher employment and lower productivity than their American counterparts. American executives from every industry echo this sentiment. The European practice is sometimes referred to as "labor hoarding."
Siemens increased employment at an old factory in the midst of the crisis by adding 500 jobs to a turbine business. However, the factory retrofit and new hires were put into place as part of their "green initiatives," in this case to produce the company's most powerful gas turbines that would also have lower carbon-dioxide emissions than the current products. With oil prices flagging and a weak economy, there probably won't be returns to this investment for some time, but they are still worth making.
Barbara Kux, the Chief Sustainability Officer for Siemens, had this to say: "It's part of sustainability, and it shows you (Siemens) think long-term and are here to stay...It gives you a chance to keep experienced people, to keep their knowledge in-house and to develop a high level of loyalty and trust so they (the workers) feel like part of a family rather than just doing a job." This is not European socialism, it's good business and it's actually emblematic of some of the thinking that is recommended in the Aspen Principles, which is what institutional investors claim they want to see.
In 2006, 6,000 S&P companies in the CompuStat database (1) invested $1.3 trillion into their businesses, (2) returned $1.3 trillion to their shareholders through dividends and share repurchases, and (3) spent $486 billion on mergers and acquisitions. Source: Graham, J.R, Campbell, R.H. and Puri, M. (2009), "Capital Allocation and Delegation of Decision-Making Authority," Fuqua School of Business, Duke University.
We know that pretty much all of the $486 billion will have gone down the rabbit hole and will not yield the promised returns. I suspect that much of the share repurchase activity was of marginal benefit except to the short-term shareholders, especially the hedge funds.
I can think of one very large American company that seems to have used the crisis to think long-term and to change the company for the better, and that is Exxon Mobil. I attended a presentation by Bill George, a director of Exxon Mobil, who said that he felt it was the "best run company in the world." George is a long-time Honeywell executive, and the former CEO of Medtronic. Looking at their ROIC over the cycles, I would tend to agree. Lesson 5 in Bill George's book, "7 Lessons for Leading in a Crisis," is "Never Waste a Good Crisis." He suggests taking aggressive action to improve your company in the long-term. This is exactly what Exxon Mobil did with the acquisition of XTO Energy.
Talking about American or European corporate models is more about politics than about business models, governance and returns to shareholders. We need to see the picture with all the nuances of Kodachrome.
American companies navigating through the global financial crisis have generally reported solid quarterly comparisons, against depressed prior year periods. The comparisons have been helped generally by one-time items and by cost-cutting, including large layoffs. Investors applaud, the market goes up and everyone feels good, until we suddenly realize that the next set of comparisons will be extremely challenging. This short-term mentality is what has been decried by coalitions of institutional investors, academics, accounting firms, and executives, as for example in The Aspen Principles.
For the most part, I don't see much change in the actions, as opposed to the rhetoric of global American multinationals, which remain focused on the short-term. Talking heads are fearful of American firms adopting "the European model," whatever that means. We do know that it is the polar opposite of the American model, which is driven by profits, even if these profits are ephemeral and not sustainable. Giles Moec, a Deutsche Bank economist, quoted in the New York Times, wrote that "American companies have been faster to adjust their work forces and protect their profit margins than European companies." There's the black-and-white comparison, but reflecting on this, it's really not that simple.
First of all, the reported profits, as we noted, reflect one-time events and are against easy comparisons. Second, these large labor force downsizings are not without their costs, yet investors treat them as if they generate profits at the stroke of a pen. The black and white view says that European companies tolerate higher employment and lower productivity than their American counterparts. American executives from every industry echo this sentiment. The European practice is sometimes referred to as "labor hoarding."
Siemens increased employment at an old factory in the midst of the crisis by adding 500 jobs to a turbine business. However, the factory retrofit and new hires were put into place as part of their "green initiatives," in this case to produce the company's most powerful gas turbines that would also have lower carbon-dioxide emissions than the current products. With oil prices flagging and a weak economy, there probably won't be returns to this investment for some time, but they are still worth making.
Barbara Kux, the Chief Sustainability Officer for Siemens, had this to say: "It's part of sustainability, and it shows you (Siemens) think long-term and are here to stay...It gives you a chance to keep experienced people, to keep their knowledge in-house and to develop a high level of loyalty and trust so they (the workers) feel like part of a family rather than just doing a job." This is not European socialism, it's good business and it's actually emblematic of some of the thinking that is recommended in the Aspen Principles, which is what institutional investors claim they want to see.
In 2006, 6,000 S&P companies in the CompuStat database (1) invested $1.3 trillion into their businesses, (2) returned $1.3 trillion to their shareholders through dividends and share repurchases, and (3) spent $486 billion on mergers and acquisitions. Source: Graham, J.R, Campbell, R.H. and Puri, M. (2009), "Capital Allocation and Delegation of Decision-Making Authority," Fuqua School of Business, Duke University.
We know that pretty much all of the $486 billion will have gone down the rabbit hole and will not yield the promised returns. I suspect that much of the share repurchase activity was of marginal benefit except to the short-term shareholders, especially the hedge funds.
I can think of one very large American company that seems to have used the crisis to think long-term and to change the company for the better, and that is Exxon Mobil. I attended a presentation by Bill George, a director of Exxon Mobil, who said that he felt it was the "best run company in the world." George is a long-time Honeywell executive, and the former CEO of Medtronic. Looking at their ROIC over the cycles, I would tend to agree. Lesson 5 in Bill George's book, "7 Lessons for Leading in a Crisis," is "Never Waste a Good Crisis." He suggests taking aggressive action to improve your company in the long-term. This is exactly what Exxon Mobil did with the acquisition of XTO Energy.
Talking about American or European corporate models is more about politics than about business models, governance and returns to shareholders. We need to see the picture with all the nuances of Kodachrome.
Tuesday, February 2, 2010
Giving Up Something of Value
In looking at the summary of Paul Volcker's testimony in front of the Senate Banking Committee, I noted this item reported in the Wall Street Journal:
"Mr. Volcker said in response to a question from Sen. Mark Warner (D,. Va.) that Morgan Stanley and Goldman Sachs Group Inc. would have to make a decision if the proprietary trading ban was put in place. He said they would either have to shed their proprietary trading operations or shed their banking licenses."
That decision is the ultimate "no brainer." Investment banks would me quite mad to give up their proprietary trading operations! They are unconscionably profitable. I suspect that the decision to become bank holding companies was taken in the heat of the crisis because it was with minor incremental cost in relation to the value of Government guarantees when systemic collapse was an improbable, but non-zero alternative.
With the crisis morphing into a traditional post-binge malaise, the protection afforded by being a bank holding company is something that can be economically cast aside. Proprietary trading in an environment of volatile asset prices is exactly where adept traders make LOTS of money.
"Mr. Volcker said in response to a question from Sen. Mark Warner (D,. Va.) that Morgan Stanley and Goldman Sachs Group Inc. would have to make a decision if the proprietary trading ban was put in place. He said they would either have to shed their proprietary trading operations or shed their banking licenses."
That decision is the ultimate "no brainer." Investment banks would me quite mad to give up their proprietary trading operations! They are unconscionably profitable. I suspect that the decision to become bank holding companies was taken in the heat of the crisis because it was with minor incremental cost in relation to the value of Government guarantees when systemic collapse was an improbable, but non-zero alternative.
With the crisis morphing into a traditional post-binge malaise, the protection afforded by being a bank holding company is something that can be economically cast aside. Proprietary trading in an environment of volatile asset prices is exactly where adept traders make LOTS of money.
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