CSRWire: Does greater equality benefit the rich?

Corporate Social Responsibility Wire asks if greater economic equality benefits the rich, as well as the poor:

By Jeffrey Hollender

“We want bigger houses and more cars, not because we need them, but because we use them to express our status. Material goods are how we show the world we’re keeping up, and in a more hierarchical society that’s more important. Status competition becomes more intense, and that increases our need to consume… We came across a website in England called ‘Ferraris for All,’ making the point that if everybody had a Ferrari, there would be no status in owning one.” -Kate Pickett

For years, I have worked to create a more just and equitable society, knowing that it would lead to a more sustainable world but also deeply believing that it was a moral imperative. If you are one of the globe’s vast majority of citizens who live daily with the adverse impacts created by the concentration of wealth in the hands of a very few, chances are you agree with this point of view. However if you are part of the wealthy and powerful 1% of the population that controls 90% of the world’s wealth, you’re likely to think this point of view reeks of a liberal disorder.

But what if increased justice and equity was also the key to greater happiness and fulfillment for the wealthy as well, and would mean less pollution, higher levels of educational achievement, lower health care costs, less crime, more vibrant local communities, and declining rates of cancer and depression? What if the bad stuff we all want less of and all the good stuff we want more of was exponentially achievable if we lived in societies where the spread between the rich and the poor was reduced?

A brilliant and critically important new book, The Spirit Level: Why Greater Equality Makes Societies Stronger, by Richard Wilkinson & Kate Pickett, provides compelling evidence that, in fact, each of eleven different health and social issues-physical health, mental health, drug abuse, education, imprisonment, obesity, social mobility, trust and community life, violence, teenage births, and child well-being-fare substantially better in more equal societies.

Until I read the research assembled in The Spirit Level it was difficult to argue that the problem of income inequality in modern societies is about anything other than fairness. But Wilkinson and Pickett methodically compare the scale of income differences in both different countries and different states within the U.S. to reveal just how much the fabric of society is affected by high levels of inequality. Research carried out since the early 1990s shows that many of our most pressing problems are worse in more unequal societies, and that societies with bigger income differences suffer more from a very wide range of health and social ills.

Statistics comparing countries with very high-income inequality like the U.S., the U.K., and Singapore to countries with very low-income inequality like Sweden, Norway, Finland, Netherlands, Belgium and Denmark tell a stark story:

When being asked to agree or disagree with the statement, “most people can be trusted,” people in Sweden, Norway, Finland and Denmark agree 50% more often than citizens of the U.S. and Singapore.

Comparing levels of foreign aid, Sweden, Norway, Finland, and the Netherlands spend on average 400% to 500% more of their national income than does the U.S.

60% more individuals suffer from mental illness in the U.S. and U.K. than in the Netherlands and Belgium.

If you live in Sweden or Norway you’ll live on average 2 to 3 years longer than if you live in the U.S. or Singapore.

Infant deaths per thousand are 100% higher in the U.S. than in Sweden, Norway, and Finland.

Obesity is 200% higher in the U.S. than in Sweden and Norway.

What can we do to erase these and many other remarkable disparities? Here are 10 ideas that would go a long way toward that critical goal:

Develop a national economic plan that places a priority on investing in health, education and welfare over military spending.
Raise income taxes on the wealthiest individuals and families and close loopholes.

Eliminate estate tax deductions.

Change capital gains tax rates to provide aggressive incentives for long-term investments. Short term rates (investments for under 1 year) may need to increase to as much as 90%, with long term rates declining to zero over a twenty-five year time horizon.

Mortgage deductions must be eliminated on second homes and limited to $200,000 for primary residences.

Charitable giving needs to receive even greater financial incentives.

Limit deductions for executive compensation to $500,000.

Minimum wage requirements must be transitioned to “Livable wages.”

We must ensure that “green jobs” are only funded and incentivized in sustainable businesses and industries.

Small Business Administration loan guarantees and tax credits for job creation must be aligned with the interests of local sustainable economies.


For more information on the issue and impacts of inequality, please visit the Equality Trust, Wealth for the Common Good, and Fair Economy.org.

An Inequality Index from the Institute for Policy Studies

Percentage of U.S. total income in 1976 that went to the top 1% of American households: 8.9. Percentage in 2007: 23.5.
Only other year since 1913 that the top 1 percent’s share was that high: 1928.
Combined net worth of the Forbes 400 wealthiest Americans in 2007: $1.5 trillion.
Combined net worth of the poorest 50% of American households: $1.6 trillion.
U.S. minimum wage per hour: $7.25.?· Average hourly wage in 1972, adjusted for inflation: $20.06.?· In 2008: $18.52.
From 2006 through 2008, the top five executives at the 20 banks that have accepted the most federal bailout dollars since the meltdown averaged $32 million each in personal compensation. One hundred average U.S. workers would have to work over 1,000 years to make as much as these 100 executives made in three years. (Institute for Policy Studies, Executive Excess 2009)
About Jeffrey Hollender

Jeffrey Hollender is co-author of the recently published book, The Responsibility Revolution and Co-Founder and Executive Chair of Seventh Generation, the leader in green household products. He is also the author of Inspired Protagonist , the leading blog on corporate responsibility and a co-founder of the American Sustainable Business Council and the Sustainability Institute.

NPR: Microlending comes to the US

When I was an undergraduate, I wrote a paper on microlending. Everyone, including me, admires the concept. As practiced in the Global South, it relies on social networks to guarantee credit - microloans are made to groups of women, under the assumption that if one defaults, the others will pressure her to make good on her promise, since they too will be considered in default. I thought microlending would not take off in the US because social norms would not allow for that business model, and the legal system might not support it.

Well, microloans are starting to come to the US, but they aren't guaranteed by the group lending model. National Public Radio has a good story on how non-profits are doing a lot of micro loans in the US, and how they have become a significant source of credit for small businesses in this recession.

Basically, large traditional lenders in the US mainly work with your credit score, which is a summary measure of how well you've repaid your debts (both secured, like mortgages and car loans, and unsecured, like credit cards) in the past. For the big banks, their business model is based on doing a lot of mortgages quickly, which is why they use the credit scores. However, the credit scores miss a lot of new immigrants and a lot of poorer people who haven't been banked in the past. They may also miss small businesses who don't have a track record of credit, but have a good business model and need funds to expand. This describes Ryan Folcher of Arlington, Virginia. A traditional bank was about to extend him a loan before the recession hit - then they pulled their offer. Folcher was nearly forced to liquidate until a local nonprofit microloan corporation (that was incorporated to help Hispanics but extended him credit anyway) worked with him.

The radio segment described that the loan process was quite labor intensive. The loan officer worked with Folcher in detail to understand his financial situation and how much cash flow he was generating. Businesses development assistance is one prominent feature of microlending which is harder to translate to commercial banking because of its labor intensity; Self Help Credit Union is a community development credit union which offers such services (disclosure: I have some money on deposit with them).

When I was an executive VP at a student housing cooperative, we worked with a local for-profit bank. We were refinancing a loan, and our loan officer took the time to understand our unique and quirky business model, and the fact that we could, in a worst case, liquidation scenario, pay the loan off. He said that he'd heard a case of a local businessman working with a larger commercial bank. He, too, had a slightly unusual financial situation. He had always been good on his debts, but some newly-minted MBA loan officer came in, took a look at the documents, and called in his loan. He had to shut his business down, but a loan officer who had taken the time to go through the business would likely not have made that call.

In the US, business opportunities are readily available. I suspect that non-profits will continue to dominate the micro-loan space in normal times; we had a credit glut not so recently, but the big banks are being very careful now. The smaller amounts involved in working with small businesses and the time it takes to offer business development assistance and to work intensively with clients probably rules the big banks out from being major suppliers of small loans. The microloan person interviewed on NPR said that his goal was to eventually be put out of business by the bigger banks, but I still think we will need to rely on nonprofits and smaller community banks to fill this gap in.

Health Reform Watch: AT&T takes $1 billion charge from health reform, files Chapter 11

The folks on the Wall Street Journal are starting to get hysterical over the $1 billion charge that AT&T took due to changes in health reform. What happened, exactly?

First, some accounting. AT&T took a $1 billion charge against earnings. This is not the same as the company writing the government a check for $1 billion. And the headline about AT&T going bankrupt is a joke.

The company, being heavily unionized, has many retirees for which it provides health benefits. In this case, it pays them some benefits for Medicare Part D, which is the prescription drug benefit. Previously, those payments were deductible, meaning that the company could deduct the value of those retiree benefits from its earnings when figuring its tax liability - just like a company can deduct the cost of its employee salaries from its earnings. Earnings, in the accounting sense, are what a company earns after its cost of doing business (like infrastructure, administration, etc), but before depreciation, amortization and taxes.

During the enactment of Part D, many companies threatened to drop drug coverage for their retirees, since they could then get the drug benefits through the public program. Congress then decided to give them a 28% subsidy to continue delivering the benefits - a significant subsidy. Corporations deduct salaries, retiree benefits and other costs like infrastructure from their revenue to figure their taxable earnings, and under the previous regimen, they were allowed to deduct the entire value of their contributions to drug benefits including the cost of the subsidy. Under health reform, companies are now not allowed to deduct the government subsidy from their earnings, which is what should have happened all along.

Ironically, this information comes from a WSJ article by David Reilly, Ellen Schultz and Ron Winslow.

At the time Congress granted the subsidy and allowed companies to deduct the subsidy from their taxes (and again, they should not have allowed companies to double-dip by also deducting the subsidy from their taxes), AT&T reduced its future tax liability by $1.6 billion. The charge they have taken for $1 billion affects their current earnings, but it is a non-cash charge. They will have to pay about $1 billion in extra taxes over a period of many years - basically, over the lives of their retirees. Due to accounting rules, they had to charge off the entire amount now.

A different WSJ article says that the impact to Caterpillar's bottom line, will be more like $7 million per year - in comparison, they took a $100 million charge, their retirees will receive $240 million in government subsidies from 2010-2019, and their profits last year were $895 million.

The companies probably correct in their accounting, but people should not be misled - AT&T is NOT out $1 billion in cash right this second because of health reform. Nobody is going to go bankrupt over this accounting change. In contrast, if we fail to control costs, the entire country is going to go bankrupt.

Businessweek: How Hospitals Can Slash Costs

Businessweek offers a slideshow on steps, some quite simple, that hospitals can take to slash costs. For example, just rigorously enforcing hand washing has lead to significant savings. Being more cautious in the use of diagnostic imaging (e.g. MRIs) could save the average hospital as much as $7.2 million. Better coordination of care and coaching for people with chronic diseases and for recently discharged Medicare patients could lead to much better outcomes.

The related article by Catherine Arnst is here.

Peter Coy, Michelle Conlin and Moira Hervst write on Businessweek about how the use of temporary workers in the U.S. has increased and about how worker tenure is eroding, and on the effects it has on the workforce. The first page:


On a recent Tuesday morning, single mom Tammy DePew Smith woke up in her tidy Florida townhouse in time to shuttle her oldest daughter, a high school freshman, to the 6:11 a.m. bus. At 6:40 she was at the desk in her bedroom, starting her first shift of the day with LiveOps, a Santa Clara (Calif.) provider of call-center workers for everyone from Eastman Kodak (EK) and Pizza Hut (YUM) to infomercial behemoth Tristar Products. She's paid by the minute—25 cents—but only for the time she's actually on the phone with customers.

By 7:40, Smith had grossed $15. But there wasn't much time to reflect on her early morning productivity; the next child had to be roused from bed, fed, and put onto the school bus. Somehow she managed to squeeze three more shifts into her day, pausing only to homeschool her 7-year-old son, make dinner, and do the bedtime routine. "I tell my kids, unless somebody is bleeding or dying, don't mess with me."

As an independent agent, Smith has no health insurance, no retirement benefits, no sick days, no vacation, no severance, and no access to unemployment insurance. But in recession-ravaged Ormond Beach, she's considered lucky. She has had more or less steady work since she signed on with LiveOps in October 2006. "LiveOps was a lifesaver for me," she says.

You know American workers are in bad shape when a low-paying, no-benefits job is considered a sweet deal. Their situation isn't likely to improve soon; some economists predict it will be years, not months, before employees regain any semblance of bargaining power. That's because this recession's unusual ferocity has accelerated trends—including offshoring, automation, the decline of labor unions' influence, new management techniques, and regulatory changes—that already had been eroding workers' economic standing.

The forecast for the next five to 10 years: more of the same, with paltry pay gains, worsening working conditions, and little job security. Right on up to the C-suite, more jobs will be freelance and temporary, and even seemingly permanent positions will be at greater risk. "When I hear people talk about temp vs. permanent jobs, I laugh," says Barry Asin, chief analyst at the Los Altos (Calif.) labor-analysis firm Staffing Industry Analysts. "The idea that any job is permanent has been well proven not to be true." As Kelly Services (KELYA) CEO Carl Camden puts it: "We're all temps now."

Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania's Wharton School, says the brutal recession has prompted more companies to create just-in-time labor forces that can be turned on and off like a spigot. "Employers are trying to get rid of all fixed costs," Cappelli says. "First they did it with employment benefits. Now they're doing it with the jobs themselves. Everything is variable." That means companies hold all the power, and "all the risks are pushed on to employees."

The era of the disposable worker has big implications both for employees and employers. For workers, research shows that chronic unemployment and underemployment cause lasting damage: Older people who lose jobs are often forced into premature retirement, while the careers of younger people are stunted by their early detachment from the working world. Even 15 years out of school, people who graduated from college in a recession earn 2.5% less than if they had graduated in more prosperous times, research has shown.

Diminishing job security is also widening the gap between the highest- and lowest-paid workers. At the top, people with sought-after skills can earn more by jumping from assignment to assignment than they can by sticking with one company. But for the least educated, who have no special skills to sell, the new deal for labor offers nothing but downside.

Employers prize flexibility, of course. But if they aren't careful they can wind up with an alienated, dispirited workforce. A Conference Board survey released on Jan. 5 found that only 45% of workers surveyed were satisfied with their jobs, the lowest in 22 years of polling. Poor morale can devastate performance. After making deep staff cuts following the subprime implosion, UBS (UBS), Credit Suisse (CS), and American Express (AXP) hired Harvard psychology lecturer Shawn Achor to train their remaining employees in positive thinking. Says Achor: "All the employees had just stopped working."

Kris Maher writes for the Wall Street Journal about black lung disease. Society and the coal mining industry need to do better by the miners.


WASHINGTON, Pa. -- Rates of black-lung disease are growing, most notably among younger miners, reversing decades of progress and prompting more federal scrutiny and calls to lower exposure to coal dust.

The increase, which federal mine safety officials attributed in part to longer work shifts and companies' uneven dust-mitigation practices, could put a further strain on the industry-financed trust fund set up to compensate disabled miners and their families.

Black lung, the common name for coal worker's pneumoconiosis, is caused by inhaling coal dust over a prolonged period. This can lead to fibrosis, destruction of lung tissue and greater risk of emphysema, chronic bronchitis and tuberculosis.

The Black Lung Disability Trust, funded by a tax on coal companies, has paid out about $44 billion in benefits over the past 40 years to miners totally disabled by black lung or to their widows. The fund had a deficit of $10 billion in 2007, before a law was passed to eliminate the debt by issuing bonds. A Labor Department spokesman said the plan to work down the debt is on track and $343 million in bond obligations was retired in September.

The National Institute for Occupational Safety and Health has found that roughly 9% of workers with 25 years or more in mines tested positive for black lung in 2005-2006, the latest published data, up from about 4% in the late 1990s. The rates also doubled for people with 20 to 24 years in mining, including many in their 30s and 40s, according to NIOSH, part of the Centers for Disease Control and Prevention.

Black lung accounts for more deaths than do mine accidents, including explosions and cave-ins. More than 10,000 miners have died from the disease during the past decade, compared with fewer than 400 from mine accidents.

"It is time to end black lung," said Joe Main, assistant secretary of labor in charge of the Mine Safety and Health Administration, as he addressed more than 200 miners gathered last week at a Ramada Inn here. MSHA, which is part of the Labor Department and enforces federal mining law, will consider proposing regulations to cut in half the permissible levels of coal dust in mines and to require miners to wear dust monitors throughout their shifts.

Today dust levels are measured periodically at mines and then only for eight hours at a time to comply with federal law. MSHA is working on introducing a new type of monitor that could be worn by every miner and provide continuous feedback on dust levels so miners could leave an area if they have reached their daily exposure limit.

Some miners worry that more-productive mining machinery may be churning up more dust. "Back in the old days those guys suffered through a lot, but we're generating a lot of coal and there's a lot of dust in the air," said 29-year-old Chuck Knisell, who works at a mine in Waynesburg, Pa.

The National Mining Association, an industry trade group, said that while it wasn't challenging the general trend of disease rates, it hasn't seen detailed data that would indicate what jobs were done by miners screened by NIOSH, or what mines were represented in the data.

Luke Popovich, a spokesman for the association, said the industry is working closely with MSHA and NIOSH to develop better dust-monitoring technology and practices. He declined to comment on whether longer shifts or uneven dust mitigation practices could be leading to an increase in the incidence of black lung among miners. The association declined to comment on new regulations to reduce coal-dust limits until details were announced.

A federal effort to eliminate black lung was launched in 1969 with the passage of the federal Coal Mine Health and Safety Act, which set coal-dust standards for mines and provided compensation for those affected. The battle was thought to be largely won through practices such as spraying water at the mine face, as well as the dwindling number of miners working in underground mines.

Safety officials believe the increase could also reflect longer workshifts in recent years when production was high and miners were in short supply, increasing dust exposure. They also note that much of the easily accessible underground coal has been mined, and companies are increasingly dependent on thinner coal seams. This requires cutting through rock, which creates more dust.

Preston Butt, 79, developed black lung after working 34 years in an underground mine. Speaking in a croaky voice at the miner's meeting, he said it was only after about 30 years that his co-workers noticed he was breathing harder. He now sleeps hooked up to a tank of oxygen and can't garden or hunt. "Coal mining did provide me a pretty good life financially, but now I can't do anything."

Wall Street Journal: Haven for Disabled Workers Feels Job Market's Sting

Clare Ansberry of the Wall Street Journal has an excellent article on the difficulties of a company that provides jobs for workers with developmental and other disabilities. The company had been quite successful at placing workers with disabilities. However, 60-70% of their revenue came from the auto industry, and almost all of that has dried up for obvious reasons. It is not easy to place such individuals, but work gives them critical economic security and an equally critical sense of self-worth.


TOLEDO, Ohio -- Robert Ertle, 30, has cerebral palsy and can't walk. But he can assemble car parts at a special table designed for him. After one of his frequent brain operations, he's apt to argue with his mother, Dawn Cleveland, that he should go back to work immediately.

"I like to be busy," he says.

Mr. Ertle works for Lott Industries, a nonprofit organization that trains adults with developmental disabilities to do light assembly work and other tasks. In 1993, Lott became the only program of its kind to earn the auto industry's prestigious Quality One supplier award.

Now, Lott and its 1,200 workers are in danger of becoming another casualty of recession. Seven major contracts vanished in late 2007, representing 80% of its business, when Ford Motor Co. closed a nearby stamping plant. Next, in 2008, went the General Motors contract for truck transmission parts. Earlier this year, business with a Honda parts supplier dropped off. Cleaning and other nonautomotive work also dried up as companies brought those functions back in-house to keep their own employees busy.

Lott's struggles show how an economic pall can be particularly tough on the disabled, a group that suffers from chronically low employment. As early as the 1940s, the government launched "Hire the Handicapped" campaigns, urging companies to recruit disabled veterans -- many of them missing limbs -- in a show of patriotism and goodwill. While industry supported the idea in theory, preconceptions about worker limitations often damped opportunities.

Progress has been particularly difficult for developmentally challenged adults -- those who have lifelong impairments such as autism, brain injury or Down syndrome. The Americans with Disabilities Act of 1990 barred employers from discriminating against workers with disabilities and forced them to make reasonable accommodations -- such as wheelchair ramps -- so that qualified disabled people wouldn't be shut out from jobs. But the act didn't do anything to compel companies to hire employees with more severe mental and physical limitations. Unemployment within the nation's developmentally challenged population hovers around 80%.

Lott has been a barrier-breaker. It was founded in the 1940s by Josina Lott, a teacher who believed that children with developmental disabilities should have the chance to make a living. Over the years, it earned a name in the auto industry, where companies like Ford were flush with business and willing to give Lott's eager work force a chance.

"[Lott] was ahead of the curve," says Charles Lakin, who heads a University of Minnesota program that tracks services to the developmentally disabled. Too often, he says, programs provided training for jobs that never came up, like "screwing nuts on bolts, even though no one screws nuts on bolts." Lott also offered benefits, like paid sick leave and 15 holidays.

Despite the Detroit inroads, Lott's ranks are stalled as workers cope with pay cuts and a murky future. Because Lott is classified as a training organization, they do not qualify for unemployment. New gigs aren't likely to materialize soon, due to intense competition in the Toledo area. The city's jobless rate stands above 12%.

Joan Uhl Browne, Lott's president, wakes up in the middle of the night thinking "Oh my God, what am I going to do? It's not like other places where you risk your job and reputation if you mess up," she says. "Here if I screw up, I mess up a lot of people's lives."

All of Lott's workers have developmental impairments. Some are in wheelchairs. Others have autism. Over the years, they've tried with little success to work in restaurants or supermarkets, wiping tables and stocking shelves. One deaf man was dismissed from a local grocery for poor communication skills.

For many, the realities of the downturn are tough to process. Lott's employees don't understand why their work went away or that broader remote forces -- like oil prices and imports -- have been partly to blame. They thought they had done something wrong. Many refused to do other work, less out of stubbornness than bewilderment. "I do Ford. I make those cars," they would tell Gail Little, the Lott supervisor who was the customer liaison with Ford. "I would say, 'Honey, Ford isn't here."

Some had been with Lott since high school. Now middle aged, they had come to rely on Lott for a livelihood and self esteem that is often elusive for those with disabilities.

Eduard Kemp, 46, has had seizures since he was 6 and lives with his mother, Pearline, 79, in Toledo. A few years ago, after her husband died, Pearline suggested moving south to Memphis to be with her family. "He didn't want to move because he loves Lott," she says. His co-workers elected him president of the employee council. Eventually, he earned enough at Lott to buy his own drum set and computer. Because of employees like him, "we have to find work," says Ms. Uhl Browne.

At this point, Lott's revenues are less than half of what they were two years ago. With business evaporating, Lott began burning reserves to maintain its average $101,000 biweekly payroll. Wages and sick pay were reduced, although no workers have been released.

Ms. Uhl Browne's small staff has been scrambling to replace the auto contracts. They've cast a wide net, cold-calling businesses offering to label bottles and bundle linoleum. While dining at the bar of a local restaurant, Ms. Uhl Browne overheard a conversation between a father and son regarding their bookselling business. They needed to unload unwanted volumes. "I butted in," she says. A deal to sell Lott's document destruction services was later struck.

Lott had scored its first contract with Ford in 1980, stapling felt pads to pieces that later went into the racy and powerful Thunderbird. Workers assembled parts in an old industrial three-story building. When elevators broke, employees formed lines handing goods to one another and then down the steps to get them out the door in time. That early relationship helped Lott become essentially self-sustaining, enabling it to buy its own equipment and operate largely without subsidies from the state or federal government.

In 1993 Ford told Lott that if it wanted to continue doing business with the auto giant, it had to earn the highest quality certification, called Q1 -- just like the rest of its suppliers.

"There was going to be no more hand holding," recalls Ms. Little. Lott embarked on an intensive overhaul. It invested in new computers and training. It engineered special tables and hand-held tools for those in wheelchairs and with limited fine motor skills to help them attach clips and clamps to plastic fender and wheel parts.

Ford officials spent five days at its factory inspecting operations. Before leaving, they said Lott would be recommended for the prestigious Q1 award. "It was the greatest day of my life," says Ms. Little. Workers celebrated with an outing to the Toledo Zoo. All received blue Ford jackets.

Soon, Lott was shipping directly to Ford plants in Kentucky, Illinois and Michigan, with quality and on time ratings exceeding 99%, according to data compiled by Lott for Ford. It expanded to three production sites, with close to 300,000 square feet, and began assembling head rests and hoses for Jeep, GM, and Chrysler. By 2006, revenue reached $7 million, with Ford generating about 75%. The rest came from other car makers and non-auto assembling, packaging, recycling, and maintenance jobs.

Assembly-type work, tedious to others, was ideal for Lott employees, who thrived repeating and mastering a single activity. Taking ownership in their work, they asked to visit the Ford stamping plant to see where their parts fit onto vans and trucks and wore Ford baseball hats.

Stars like Patty Zawierucha emerged. Her specialty was belly pans and splash shields. "I loved them," says Ms. Zawierucha, 60, who has a learning disability. She preferred using her hands, now proudly calloused, instead of specially engineered tools because she could work faster that way. At times, her output was so far above average that supervisors suspected a data-entry error. Joe Murnen, chief operations officer, stood next to her and tried to match her numbers. "I tried but I just couldn't do it," he says.

Depending on the type of job, Lott workers are either paid minimum wage of $7.30 an hour or a piece rate, which is based on the competitive prevailing wage. With volumes currently down, that's translated into smaller paychecks for many Lott employees.

Michael Peters, 44, was dubbed Speedy Gonzales, "because I was so fast" adding clips, pins and foam strips to parts, he says. While working for Ford, he earned $800 and $900 every two weeks, which was enough to support his mother, Martha, in their home. "I was paying for all the household bills for me and my mom," says Mr. Peters, who wears a photo of his now-deceased mother, on a metal tag around his neck.

Mr. Peters's diligence, mirrored by many others, earned the respect of those around them. "A lot of regular guys in life think how to cheat and steal from the system," says Mike Walker, who supervises Mr. Peters and others. "These guys work hard."

Robert Ertle, the 30-year old who can't walk, is industrious by nature. In the evenings, antsy to get out of his wheelchair, he will crawl out to the garage to clean his mother's car.

"Lott is the best thing that ever happened to him," says his mother, Ms. Cleveland.

That sense of stability was shaken when Ford launched its Way Forward program in 2006. It was a much-needed restructuring aimed at saving billions by closing more than a dozen factories, including the Maumee stamping plant, which was Lott's major customer.

Ms. Little was devastated. "We worked so hard to get that business," says Ms. Little, noting that Lott workers would sometimes find problems with the auto parts and help resolve them.

"It was nothing that Lott did or didn't do. We were appreciative of the work they did and the dedication the employees showed," says Ford spokesman Todd Nissen.

Lott President Ms. Uhl Browne, a former consultant in higher education, was hired a few months before the Ford contract ended. "I knew it was going to happen, but knowing it and living are it are two different things," she says.

After losing the Ford work, Lott secured a GM contract and invested $100,000 in equipment. Lott anticipated the arrangement to last for three or four years -- enough time to warrant the capital investment. Instead, that work dried up by the end of 2008. A GM spokesman says it was never meant to be a long-term contract. Lott says the business went away faster than expected.

It obtained another auto-related contract for more than 20 small parts for a Honda supplier. Almost immediately, the expected volume began shrinking and was cut by more than 40%.

Meanwhile, Lott's other business took a hit from the financial crisis and recession. Paper mills wouldn't accept recycled paper because prices had tanked. Local companies that employed crews of Lott workers to clean or load boxes cancelled those contracts, or greatly reduced volume.

Revenues fell to $2.6 million, with a scant $100,000 trickling in from the auto-supply business. "And we really hustled to get that," says Jeff Holland, Lott's chief financial officer.

Even though contracts were dwindling, Lott employees continued coming to work, doing odd jobs like shredding paper and repairing wooden pallets. At first Lott tried to maintain their average biweekly pay of about $200 by tapping its investment reserves. But the fund was losing money. "We had to stop," says Ms. Uhl Browne. Workers receive only what they actually earned -- even if it was just $24 every two weeks.

The speedy Mr. Peters could no longer afford the $500 a month payments to stay in his house so he moved into an apartment. Lott contacted a social-service organization to help him and others pay their bills and manage their money.

Pockets of optimism remain. The "Cash for Clunkers" stimulus effort helped revive flagging volume at the Honda supplier. A few other contracts have come through in recent weeks. One involves sorting, labeling and stacking decorative panels on pallets for delivery to retailers like Lowe's. Another short-term stint labeling containers will occupy some workers for three to four months.

"We're keeping everyone busy but we're still losing money," says Ms. Uhl Browne. "We're not out of the woods."

Steven Rattner (the "Car Czar") on the auto bailout

Steven Rattner, one of the people in charge of reforming the Big Three automakers in the US, writes about his experience on CNN Money and in Fortune Magazine. I've excerpted two sections. One shows how groupthink permeated GM. As defined by Wikipedia, groupthink is "a type of thought exhibited by group members who try to minimize conflict and reach consensus without critically testing, analyzing, and evaluating ideas. Individual creativity, uniqueness, and independent thinking are lost in the pursuit of group cohesiveness, as are the advantages of reasonable balance in choice and thought that might normally be obtained by making decisions as a group." A key feature of groupthink is that the group and its members automatically suppress any form of dissent. Groupthink inevitably leads to a bad decision being made at some point.

A second section reveals that Rattner and co might have let Chrysler liquidate if not for the massive unemployment it would cause.

Management has got to go
Everyone knew Detroit's reputation for insular, slow-moving cultures. Even by that low standard, I was shocked by the stunningly poor management that we found, particularly at GM, where we encountered, among other things, perhaps the weakest finance operation any of us had ever seen in a major company.

For example, under the previous administration's loan agreements, Treasury was to approve every GM transaction of more than $100 million that was outside of the normal course. From my first day at Treasury, PowerPoint decks would arrive from GM (we quickly concluded that no decision seemed to be made at GM without one) requesting approvals. We were appalled by the absence of sound analysis provided to justify these expenditures.

The cultural deficiencies were equally stunning. At GM's Renaissance Center headquarters, the top brass were sequestered on the uppermost floor, behind locked and guarded glass doors. Executives housed on that floor had elevator cards that allowed them to descend to their private garage without stopping at any of the intervening floors (no mixing with the drones).

In my relatively few interactions with chairman and CEO Rick Wagoner, I found him to be likable, dedicated, and generally knowledgeable. But Rick set a tone of "friendly arrogance" that seemed to permeate the organization.

Certainly Rick and his team seemed to believe that virtually all of their problems could be laid at the feet of some combination of the financial crisis, oil prices, the yen-dollar exchange rate, and the UAW.

It seemed completely obvious to us that any management team that had burned through $21 billion of cash in a year and another $13 billion in the first quarter of 2009 could not be allowed to continue. Equally important, GM's February viability plan was more "business as usual" and not the aggressive new approach that we felt was essential.

In a mid-March meeting with Rick, I explored his feelings about his team and then tried to work the conversation around to himself. "I'm not planning to stay until I'm 65 but I think I've got at least a few years left in me," said Wagoner, 56. "But I told the last administration that if my leaving would be helpful to saving General Motors, I'm prepared to do it." He added that neither he nor his board thought that was a good idea.

I left my conversation with Rick at that. The next day, I met with Rick's deputy, Fritz Henderson. Another GM lifer (and son of a GM lifer), Fritz conveyed more energy and openness to change. The question for us was whether GM would be better off with Fritz or with an outsider, as Ford (F, Fortune 500) had done in bringing in Boeing executive Alan Mulally. While nervous about whether Fritz could bring the change GM desperately needed, I was considerably more nervous about the likelihood of recruiting a thoroughbred CEO in the midst of the turmoil.

Meanwhile, if ever a board of directors needed shuffling, it was GM's, which had been utterly docile in the face of mounting evidence of looming disaster. We decided to recommend to Tim, Larry, and ultimately the President a package that would include replacing Rick with Fritz as interim CEO, changing at least half of the board, and making an outside director chairman (which should be universal).

A close call on Chrysler
While we had separate teams working on Chrysler and GM from the start, the first and toughest decision that we faced was what to do with Chrysler.

Badly run after Daimler bought it in 1998, Chrysler had been sold nine years later at the peak of private equity mania to Cerberus Capital Management. Larded up with debt, hollowed out by years of mismanagement, Chrysler under Cerberus never had a chance. We marveled, for example, that Chrysler did not have a single car that was recommended by Consumer Reports.

The question for us -- and ultimately, the President -- was whether any restructuring could save Chrysler.

Back and forth the debate went in Larry's small office in the West Wing. Our working team was joined by Diana and other administration economists. Gene Sperling, a Michigan native, argued eloquently and passionately for standing by America's heartland.

Austan Goolsbee, a fearless former University of Chicago economist who had been with Obama since the beginning of his campaign, led the charge against Chrysler, marshaling strong factual arguments. One was that letting Chrysler go would give a needed boost to GM (and also to Ford), since most buyers of Chrysler's strongest products -- trucks, minivans, and Jeeps -- probably would turn instead to the other Detroit automakers.

Harry maintained that a Chrysler liquidation could potentially add billions of dollars a year to GM's operating income in a normal sales environment, vastly increasing the value of the company.

The group was torn (at one point the vote was four to four) and so were Tim, Larry, and I. We intuited that from a theoretical point of view, the correct decision could well be to let Chrysler go. But this was not an academic exercise.

Repeatedly, Larry asked us for probabilities -- what did we think the chances would be of Chrysler making it for two years? For five years? Indefinitely? Pressed by Larry, I came down 51-49 in favor of helping. Comfortable that Chrysler could survive, Larry asked us to recast Austan's analysis into an assessment of the employment effects of a Chrysler liquidation.

We were all shocked to realize that when the collateral damage of a Chrysler shutdown was factored in (like lost jobs at dealers and suppliers), the short-term effect of a Chrysler shutdown could be 300,000 more unemployed, similar to what was lost across the entire economy in the month of July. And with the memory of Lehman's collapse still fresh, we imagined the potential for other systemic risk. That cemented matters for Larry and me.

Yet Chrysler's cupboard was bare. We did not believe we could underwrite its viability without a strong corporate partner, so we turned our attention to that single possibility, an overture from Fiat.

The Italian carmaker had been brought back from near disaster a few years earlier by its own new management team, led by Sergio Marchionne. Raised in Canada, rarely seen in anything but a black sweater, and with an insatiable appetite for the media, Sergio was relatively new to the auto industry but possessed a drive to win that was alien to the traditional Detroit culture. Fiat also brought its advanced products to the table -- small, stylish cars and fuel-sipping engines.

As our March 31 deadline approached, we got ready to brief the President. For the prior six weeks, Tim and Larry had been using their daily briefings of the President to keep him posted on our progress. And we had sent in a couple of lengthy memos for his evening reading stack, which indicated that the only decision over which his advisers were divided was whether to save Chrysler.

In our meeting in the Oval Office on March 26, Larry began to lay out the issues, only to be interrupted after a few minutes by the President, who said "Larry, I've read the memo," signaling that he wanted to dive into the decision items. Quickly, the question of whether to save Chrysler dominated the discussion.

As we went back and forth over Chrysler, the President himself seemed as torn as Larry and I had been. Suddenly, he realized that Austan Goolsbee, unofficial spokesman for the opposition, was not in the room. "Where's Goolsbee?" the President asked. A few minutes later, Austan joined the conversation. But the President had only about 20 minutes available before his assistant, Katie Johnson, came in with a note urging him to move on to his next appointment. "This is too important to try to decide in a rush," the President told us. "We need to get together again later."

For that early-evening session, we convened in the windowless Roosevelt Room, the only real conference room in the West Wing. Larry asked me to begin by summarizing the consequences of refusing aid to Chrysler, and from there the conversation took off. The group was sobered by my assessment that given the early stage of the Fiat discussions, there was only a fifty-fifty chance of reaching an acceptable agreement.

The President's political advisers were as torn as his task force: Polls universally showed the public strongly opposed to the auto bailouts. At the same time, the advisers recognized the severe economic and political consequences of a Chrysler shutdown across broad swaths of the industrial Midwest. We were dazzled that chief of staff Rahm Emanuel -- a former congressional leader -- could identify from memory the representatives in whose districts the large Chrysler facilities lay.

After about an hour, the President asked for any final comments and then said, "I've decided. I'm prepared to support Chrysler if we can get the Fiat alliance done on terms that make sense to us." And we were thrilled when the President said, "I want you to be tough, and I want you to be commercial."

With that, the meeting dispersed. The recommendation to ask GM's Rick Wagoner to step aside had received barely a mention. New to business meetings with Presidents, I found Obama's style consistent with his "No drama Obama" image and on a par with the best CEOs I had spent time with. He was cordial without being effusive and decisive when his advisers were divided.

Washington Post: Bank of America at a Crossroads (and possibly the end of free checking)

A Washington Post article details some of the travails of Bank of America. I'm less concerned with their travails and more concerned with the implications of regulation on bank fees:

Even as the government considers limits on the scope of the company's business, it is also squeezing its profit margins.

Bank of America, like other large banks, lured customers in recent years by offering checking accounts with no monthly fees, credit cards with no annual fees, mortgage loans with no closing costs, brokerage transactions with no commissions. It made money by charging penalty and service fees, drawing much of its revenue from a minority of its customers.

In 1990, for example, the credit card industry derived two-thirds of fee revenue from annual fees, and one-third from penalty fees. By 2004, the ratios had more than reversed, according to the Government Accountability Office.

A recent report from the consulting firm Oliver Wyman said that banks had become too reliant on such penalty fees, allowing most customers to pay little or nothing for services such as checking accounts while a small minority of customers carried the load. Banks will collect an estimated $39 billion in overdraft fees this year, for example, which the Wyman report noted is more than the $32 billion Americans will spend on vegetables.

"The situation is not sustainable, and cracks have begun to appear," the report said.

Legislators imposed new limits on credit card fees and interest rates earlier this year. Pending bills in both the House and the Senate would sharply restrict the ability of banks to charge overdraft fees without asking or telling customers. And the White House has proposed the creation of a new agency solely devoted to protecting consumers from abuses in financial transactions, a key part of its proposal to overhaul financial regulation.

Bank of America has started to wean itself from penalty fees. The company announced last month that it would offer a credit card stripped of features that have angered borrowers. The terms, streamlined to allow for complete disclosure on a single page, include a promise not to increase the interest rate based on missed payments or credit problems. But such a card can only be offered profitably to the bank's more reliable customers, who are less likely to incur fees.

In late September, Bank of America announced small changes to its overdraft policy, including eliminating fees on overdrafts below $10.

The next step, according to financial analysts, is that banks may start charging these reliable customers monthly or annual fees. It was once a standard banking industry practice to collect such fees on checking accounts and credit cards.

Banking analysts and industry executives warn that the changes will limit the availability of loans and other financial services.

"The unintended consequence is that the cost of banking is going to soar for consumers," said Richard Bove, a banking analyst at Rochdale Research. "If you can't keep increasing overdraft fees, 30 percent of the customers are unprofitable. What the banks will do is kick them out of the bank."

In summary, banks have effectively been using less reliable customers who incur various penalty fees (the majority) to subsidize the more reliable customers. Checking accounts with no maintenance fees and no minimum balance requirement are easy enough to find in the US, but not so easy elsewhere. If limits are placed on penalty fees, that effectively means we all will have to pay some fees to have accounts, and that folks who are less careful aren't penalized or just are living on the edge will not be penalized so much. I'm sure there are some who will complain bitterly. I think this is more fair because it's more transparent. The bank isn't depending on gotchas to make money - ergo they have less of an incentive to try dirty tricks so that you make mistakes.

What does concern me is the unbanked. As readers know, a number of US customers have no bank account and live off cash. I last blogged about this here. This impedes their access to credit and imposes a transaction cost every time they receive a check. This could theoretically be avoided by using a no-fee, no-minimum checking account. However, account maintenance fees are one of the reasons the poor cite for not using banks. I'm not certain if the fee restrictions will have any effect on banks or credit unions that serve mainly poor communities. Certainly, mainstream banks in poor communities will probably become less attractive because they'll have to charge higher explicit fees - and then the check cashing/payday loan system and its high implicit fees will take over. We need a solution either way.

Brief thoughts on biologic drugs

Biologics are molecules produced in living organisms, as opposed to chemically like regular drugs. They often target rare diseases, and they're often the only treatment available for that disease. From a cost perspective, it's obviously better to have multiple competing drugs, and preferably one or more of them are generics - it brings costs down.

Right now, there is no legal pathway to allow generic biologics in the US, whereas pharma drugs go off patent in a number of years. There are two bills in the House of Representatives that would reverse that. One would grant 7 years' exclusivity, the other would grant twelve. The latter bill seems to be in favor. However, Morningstar, a stock analyst firm, argues that even 8-10 years' exclusivity is far too long. One factor at play is that the companies can make minor adjustments to the formula, a process known as evergreening, and legally have a brand new drug every time they do this. This is not acceptable.

Generic Biologics Face Uphill Battle
Generic Biologics Face Uphill Battle -- Part 2

A Marketwatch article notes that Europe has biogenerics legislation. However, due to manufacturing difficulties, biogenerics are only about 20% cheaper on average than the originals, although they will get cheaper as manufacturing technology improves.

Pharma spending accounts for about 10% of US spending. However, biologics are a growing market. People who need them face high costs (insurers often make you pay a certain percentage of the price of a drug, as opposed to a dollar amount; this is coinsurance, as opposed to a copayment). Those who go broke end up on Medicaid, and then the government picks up the tab. Again, the current proposed solution was heavily influenced by the pharmaceutical lobby and is absolutely unacceptable.

For-profit insurers: how big a problem are they?

Health insurance in the US is dominated by for-profit insurers (in contrast, the hospital sector is dominated by non-profits). Several people on the political left in the US have condemned the insurers for making billions of dollars in profits while denying care, retroactively cancelling policies (aka recission), and not doing anything to control costs.

However, a Wall Street Journal article notes that average profits at publicly traded US insurance companies average in the 4% range. That's very low. If you introduced a public option, the article says it would only be able to undercut premiums for the for profit insurers by 4% or so - assuming it can achieve the same scale as the largest ones.

You will hear that insurers spend only about 83% of every dollar they receive in premiums on medical care - that's known as the medical loss ratio. The medical loss ratio is a very, very rough gauge of an insurer's efficiency - in fact, it's such a rough gauge that we should consider ignoring it entirely. The medical loss ratio includes profits, but it also includes the expenses that insurers spend managing care, combating fraud, and other administrative expenses. Medicare and Medicaid perform very well on a loss ratio standard, but they need to do much more in managing care, and they need to do more in fraud prevention.

Of course, the nature of for-profit business has led the insurers to seek aggressive tactics to preserve their bottom lines. As said earlier, they've conducted recissions and denied necessary care. They've also sought to enroll healthier people at the expense of other plans. They've been too quick to offer skimpier benefit packages, excluding such services as cancer care, mental health treatments, inpatient care and others, instead of becoming more efficient.

While insurers have invested in wellness, disease management and other care management initiatives that produce a return, but these innovations are dwarfed by their antisocial behavior.

Regardless of whether a publicly sponsored insurance plan is enacted in the US, Congress must take care that the rules of the game are stringent. Delivering efficient care must be the only way that insurers can compete. The rules of the marketplace must prohibit them from discriminating against the sick and selectively marketing to healthier people. There must be an adequate minimum benefit standard. I think that the for-profit insurers have skills and infrastructure that could be used to the nation's benefit, but the market place must be set up so that the ONLY thing they can do is to be more efficient at delivering care.

Morningstar: Will Cash for Clunkers keep the auto industry rolling?

The US enacted a program informally known as Cash for Clunkers, where the government sponsors rebates of $3,500 to $4,500 for consumers to trade in old vehicles to new, more fuel efficient ones. The old vehicle must have had an EPA-rated fuel economy of less than 18 mpg, and the new one must have over 22 mpg. The standard, in other words is quite lax. Nonetheless, it seems that most people who are taking advantage of the program are trading in heavy vehicles for smaller ones. This is good.

I'm not sure that the bill is good from an environmental standpoint. The government requires that the traded in vehicles be disabled by destroying their engines. The remains would presumably be scrapped. This too incurs environmental costs.

Here, Morningstar argues that the auto industry has long-term issues that they will have to resolve independent of this program, although it is definitely a short-term boost and does provide some stimulus to the economy. To revive the industry, all players (even the Japanese manufacturers) have overcapacity that they need to reduce.

My view is that there are probably better places to put the US government's money. The House passed an extension, and the Senate is likely to vote yes - my inclination would be to vote no if I were a Senator, but there are (sadly) political factors here. In any case, the program would probably get only $1-2 billion more - there are bigger battles to fight.

WSJ: In France, Immigrant Offspring Return to Ancestral Homelands

The Wall Street Journal has an interesting report on job discrimination, racism and emigration in France.

PARIS -- Nawal El Kahlaoui grew up near Paris as the daughter of a mechanic who left Morocco to seek a better life in France. But after finishing her university studies here, Ms. Kahlaoui moved back to Morocco to find work.

"I love Morocco, as the country gave me a chance," says the 35-year-old retail consultant in Casablanca. "It's a land of opportunity."

A growing number of well-educated French people of immigrant backgrounds are returning to their parents' homelands. There are no official figures on the number of "returnees," and government officials, scholars and employment agencies say the number is small. Still, this gradual U-turn reflects a relative decline in the desirability of life in parts of Europe, compared with some developing countries.

Mass immigration to France started in the 1960s, as the economy grew strongly, creating jobs. In addition to migrants from southern Europe, workers came from France's former colonies, in particular Algeria, Morocco and Tunisia.

As France's economy slowed in subsequent decades, however, unemployment rose, and hasn't dipped below 7% for the past quarter of a century. In recent years, the jobless rate for immigrants has been around twice that of non-immigrants. Now that France is in recession, the first jobs to go are often those filled by minorities.

Most of the French "returnees" are of Moroccan background, according to people who have studied the phenomenon, though there is also a trickle to other former French colonies, such as Algeria and Vietnam. In 2002, Rabat set up a "Ministry for the Overseas Moroccan Community," to encourage émigrés to return and invest their skills in their native land.

Morocco is also becoming more open and prosperous. Overhauls under King Mohammad VI, who ascended to the throne in 1999, have improved freedom of expression and women's rights. In addition, the country has formed free-trade agreements with the U.S. and the European Union. The economy expanded at an average of more than 4% from 2000 to 2008, and even this year is expected to post growth higher than that. While a large number of rural poor keep Morocco relatively low in international measures of economic prosperity, city life can be good for better-off residents.

Life can be better than in France. Surveys show that in France, applicants for a job have around a third the chance of getting a reply if their name sounds Arab or African as they do with a more traditional French name.

But no one knows the exact extent of inequality: The French Republic's doctrine that everyone is equal has so far ruled out the collection of statistics on race and religion. As a result, unlike in the U.S., there are no detailed data on how many French people are black, Arab or Asian -- and how they fare in education and work.

Opponents say that such an ethnic census would divide society by validating the existence of groups based on race and religion.

President Nicolas Sarkozy, acknowledging the problem, said before his 2007 election that he wanted better ways to measure discrimination, and in December he appointed a commissioner for diversity. Algerian-born Yazid Sabeg recently published a report in which he recommended that people be allowed to identify -- but not in a mandatory way -- which ethnic group they belong to on official documents.

"We need to measure the negative situation that is the result of different appearances," Mr. Sabeg said in a recent interview in his office on Paris's Left Bank. "It's very important for France to get out of its fantasy that there is no discrimination."

A French education is highly valued in former colonies, and salaries are good relative to the cost of living.

In Morocco, former émigrés are very welcome. Big European companies have been actively recruiting French-educated staff for their units there over the past three or four years, says Jamal Belahrach, president of the North African operations of job agency Manpower. The recruits find they can rise faster in their careers than they would have in France -- and are surprised to find a country different from the one their parents left. "There's a generation who didn't see Morocco in the past, and now sees the modern Morocco," he says.

Barka Biye's parents had moved to France from Morocco when she was just two months old. Ms. Biye graduated in law from the University of Paris, and then worked for several years in insurance. In 2007, she decided to look for a job in Morocco. She found one with a French insurance company in Casablanca in just two weeks.

"I thought I could play my part in the evolution of a country going through big changes," she says. "Morocco is expanding fast, and the companies who set up there want managers educated in Europe and at the same time capable of understanding the country's culture."

When Ms. El Kahlaoui was job-hunting in the late 1990s, she had trouble finding an interesting job, even though she held an undergraduate degree in chemistry from the University of Paris and another in marketing from ESSEC, an elite business school.

When she asked a university careers adviser why she was having so much trouble, the woman gave her some advice: "She told me I had to change my name and address," says Ms. El Kahlaoui. The problem: Her name and address told potential employers she was from a typical North African immigrant background.

In Casablanca, Ms. El Kahlaoui started off working for French pharmaceuticals company Pierre Fabre and then German cosmetics group Beiersdorf before joining a small retail consultancy.

She says she's happy in Morocco, but being there makes her feel very French. "I will come back ," she says, "but only when the system can generally accept people like me.

3 Ugly Truths About the Auto Industry

Now that I've pissed off the coal miners, I'm going to take on the auto workers. Jack Hough, writing for Smartmoney, thinks the picture for the auto industry is only going to get worse.

Readers should note that Smartmoney is home to two free market fundamentalists whose opinions I find repugnant. I don't believe Hough is one of them, and I do agree with him.


For most of this decade, Americans could be counted on to buy more than 16 million cars a year. Last year sales barely topped 13 million. This year industry forecasts call for 10 million.

America’s car makers are thus struggling to survive. Chrysler couldn’t convince a cluster of debt holders to accept less than they're owed, and filed for bankruptcy on Thursday. On Monday, General Motors (GM: 1.81, -0.11, -5.72%) said it will cut 2,600 dealers and eliminate its Pontiac brand, and will either sell or close Hummer, Saturn and Saab. It faces a June 1 deadline to restructure, or file for bankruptcy.

I wish both companies success, but for America’s car business to have a shot, policy makers and Detroit executives must come to terms with three ugly truths.

1. The new sales pace is closer to normal than sickly.

America’s car count has grown well faster than its population over the past half century (see graphic below). Credit two trends: Incentives for house buyers have pushed citizens away from cities in search of affordability, giving them long commutes, while the cost of living has outstripped wage growth, leading to a surge in two-worker, and two-driver, families. But our stock of cars couldn’t grow that fast forever. We’re already well past the point where our cars (close to 250 million of them) outnumber our drivers (just over 200 million).

I’m guessing the bubbly pace of sales we took for normal a few years ago was driven far more by fashion than utility. The suburbs, after all, put neighbors’ cars on naked display. In 2002, the average new car buyer kept his car for just over 49 months. Whether because consumers can’t borrow more or because flashy displays of wealth have fallen out of style, that number has since crept up to 56 months. It can surely climb higher.

Sales of 10 million cars a year are enough today to keep every driver in his or her own car (already an astounding thing), with many of them driving new cars and none driving ones built much earlier than 1990. That’s enough. It’s not like new technology demands a stampede to showrooms. Tree lovers who buck up for a Toyota Prius today will go five fewer miles on a gallon of fuel than I went at age 16 in a Volkswagen Rabbit with a diesel engine. It was made in 1980.

2. Recent boom years weren’t so great for car makers, and Congress is partly to blame.

General Motors didn’t turn a profit in 2005, 2006 or 2007, years of relative opulence. Even before that, profits came largely from lending, including for houses, and not from making and selling cars. Operating margins for the car business have been more or less in decline since the 1960s. Health-care costs have steadily risen. General Motors famously spends more than $1,600 per car for employee health care.

In the U.S., government payments to the middle class for health care are decried as socialist, but the money is nonetheless needed, so we route payments through employers using a giant tax subsidy, and somehow convince ourselves that we’re more capitalist for it. The money ultimately comes out of workers in the form of lower wages and take-home pay instead of taxes — a subtle enough difference, except the scheme also leaves employers on the hook in the event of a sudden rise in plan costs, which we’ve had over the past decade. Nonunion companies and ones without steep obligations to retirees can adjust. Car makers can’t. On some level, rather than boo them we should applaud them. By losing money to health-care costs, they’ve taken on a responsibility that politicians have shirked.

3. Jobs worth saving generally don’t need saving.

Over the past year policy makers have lent car companies billions of dollars on the theory that if we keep them alive long enough the economy will pick up and good jobs will be saved. But financial failure for a company doesn’t mean that it ceases operations. Often, it means it drastically shrinks, takes on new management and forces otherwise impossible concessions on its unions and creditors. That might be just what’s called for.

Last week I wrote that what some politicians call extraordinary times, financially speaking, are really a return to normalcy. Personal savings (what consumers don’t spend) has recently risen from less than 1% of after-tax income to more than 4%, but its long-term average is 7%. After-tax corporate profits have fallen from 7% of the nation’s income to 5.1%. Their long-term average is 5%. If sales of 10 million cars a year is the new normal, too, we still need plenty of car workers — just not as many as we have today.

One recent proposal by lawmakers would give $4,000 to $5,000 to a consumer who buys a new car by year’s end. It seems like an easy fix. I can picture cashing my $5,000 check and driving off in a new Ford with the thought that I’ve helped my fellow American earn a decent wage. But giant car incentives will only lure Americans into buying more of something when they don’t truly need it, in the same way that giant house incentives have doubled America’s average house size since 1950, even as families have shrunk.

Better to let the car business shrink to a healthy size, whether through bankruptcy or selling brands and closing production lines. Send more taxpayer cash to Detroit if need be, but use it to help our former car workers find and qualify for good new jobs that need them.

More cars than drivers

Dress for Success for Less

My dad said to me once, "Life is too short to wear cheap suits." I agree in general, but that was said when times were good. Prospective job seekers should check out this article from Kiplinger's, a personal finance magazine, on how to assemble that wardrobe on the cheap. Remember, you're not expected to dress like a CEO when you're just out of college, but you still need to look sharp.

Obama Administration feels GM and Chrysler failing to turnaround

As reported by CNN Money, the Obama administration turned down GM's and Chrysler's restructuring plans. GM gets 60 more days to prove it can run a viable business. Chrysler gets 30; the administration is saying it must merge with Italian automaker Fiat to do so.

The administration said that debtholders had not done enough. The companies had been trying to get bond holders to accept new equity in return for large portions of the outstanding debt. The bond owners had stonewalled, saying that they bought bonds, not equities of questionable value.

However, without reducing outstanding debt, neither company is going to make it. The Obama administration seems to be leaning towards putting them into a structured bankruptcy. Bankruptcy courts have authority to impose settlements on debt owners, as well as employee contracts and provisions affecting other stakeholders. This would be unfortunate but could prove necessary.

I'd previously noted that one company had produced a report for the auto industry, indicating that consumers were less likely to buy cars from an automaker in bankruptcy. It looks like the automakers will have to find out how accurate that report it (frankly, that report might not be accurate - things have changed and everyone's used to the idea that the Big 3 are in bankruptcy).

AIG: Bigger problem than bonuses

While I agree that the AIG bonuses shouldn't have been paid, the issue deserves less shouting and screaming than the fact that AIG still has $1.6 trillionof derivative contracts outstanding, as reported in a CNN Money article.

AIG is not going to be able to back up all of these contracts if they need to be paid out. The firm is attempting to extinguish the contracts through negotiation with counterparties. Should AIG have to liquidate, the losses incurred by many of the counterparties could lead to a large number of them being insolvent.

The American public should be more worried about AIG's outstanding liability - every U.S. taxpayer is on the hook for the consequences.

Andrew Ross Sorkin at NYT: The case for paying AIG bonuses

Andrew Ross Sorkin of NYT writes about the bonus controversy at AIG, where the folks who basically blew the company up are due to be paid retention bonuses, which were contracted in early 2008.


Do we really have to foot the bill for those bonuses at the American International Group?

It sure does sting. A staggering $165 million — for employees of a company that nearly took down the financial system. And heck, we, the taxpayers, own nearly 80 percent of A.I.G.

It doesn’t seem fair.

So here is a sobering thought: Maybe we have to swallow hard and pay up, partly for our own good. I can hear the howls already, so let me explain.

Everyone from President Obama down seems outraged by this. The president suggested on Monday that we just tear up those bonus contracts. He told the Treasury secretary, Timothy F. Geithner, to use every legal means to recoup taxpayers’ money. Hard to argue there.

“This isn’t just a matter of dollars and cents,” he said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

If government officials were to break the contracts, they would be “breaking a bond,” Ms. Meyer says. “They are raising a whole new question about the trust and commitment organizations have to their employees.” (The auto industry unions are facing a similar issue — but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

Not that any of this takes the bite out of paying these bonuses. For better or worse — in this case, worse — someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear.

Now we can debate why A.I.G. felt it necessary to guarantee seven executives at least $3 million apiece when the economy was clearly on shaky ground. Perhaps we will find out these contracts were a bit of sleight of hand to enrich executives who knew this financial Titanic had hit the iceberg. But another possible explanation is that A.I.G. knew it needed to keep its people.

That is the explanation offered by Edward M. Liddy, who was installed as A.I.G.’s chief executive when the government effectively nationalized the company last fall. (He is being paid $1 a year.)

“We cannot attract and retain the best and brightest talent to lead and staff” the company “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he said.

There’s some truth to what Mr. Liddy is saying. Would you want to work at A.I.G.? Sure, maybe for $3 million. But not if you could go somewhere else for even more — or even much less.

“The jobs are terrible,” said Robert M. Sedgwick, an executive compensation lawyer at Morrison Cohen who represents a number of employees of banks that have taken government money. “You have to read about yourself in the paper every day. These people are leaving as soon as they can.”

Let them leave, you say. Where would they go, given the troubles in the financial industry? But the fact is, the real moneymakers in finance always have a place to go. You can bet that someone would scoop up the talent from A.I.G. and, quite possibly, put it to work — against taxpayers’ interests.

“The word on the street is that A.I.G. employees are being heavily recruited,” Ms. Meyer says.

Of course, if taxpayers had not bailed out A.I.G., these contracts would not be worth anything. Andrew M. Cuomo, the attorney general of New York, made the point on Monday, when he subpoenaed A.I.G. for the names of the people who received the bonuses. If A.I.G. had spiraled into bankruptcy, its employees would have had to get in line with other unsecured creditors.

Mr. Cuomo wants to know who A.I.G.’s lucky employees are, and how they have been doing at their jobs. So here is a suggestion for him. Get the list, and give those big earners at A.I.G. a not-so-subtle nudge: Perhaps they will “volunteer” to give some of their bonuses back or watch their names hit the newspapers. But in the meantime, despite how offensive and painful it might be, let’s honor the contracts.

Financial Times: Now is the time for a less selfish capitalism

Lord Richard Layard writes an interesting article for the Financial Times.


What is progress? The Organisation for Economic Co-operation and Development has been asking this question for some time and the current crisis makes it imperative to find an answer. According to the Anglo-Saxon Enlightenment, progress means the reduction of misery and the increase of happiness. It does not mean wealth creation or innovation, which are sometimes useful instruments but never the final goal. So we should stop the worship of money and create a more humane society where the quality of human experience is the criterion. Provided we pay ourselves in line with our productivity, we can choose whatever lifestyle is best for our quality of life.

And what would that involve? The starting point is that, despite massive wealth creation, happiness has not risen since the 1950s in the US or Britain or (over a shorter period) in western Germany. No researcher questions these facts. So accelerated economic growth is not a goal for which we should make large sacrifices. In particular, we should not sacrifice the most important source of happiness, which is the quality of human relationships – at home, at work and in the community. We have sacrificed too many of these in the name of efficiency and productivity growth.

Most of all we have sacrificed our values. In the 1960s, 60 per cent of adults said they believed “most people can be trusted”. Today the figure is 30 per cent, in both Britain and the US. The fall in trustworthy behaviour is clear in the banking sector but can also be seen in family life (more break-ups), in the playground (fewer friends you can trust) and in the workplace (growing competition between colleagues).

Increasingly, we treat private interest as the only motivation on which we can rely and competition between individuals as the way to get the most out of them. This is often counterproductive and does not generally produce a happy workplace since competition for status is a zero-sum game. Instead, we need a society based on positive-sum activities. Humans are a mix of selfishness and altruism but generally feel better working to help each other rather than to do each other down.

Our society has become too individualistic, with too much rivalry and not enough common purpose. We idolise success and status and thus undermine our mutual respect. But countries vary in this regard, and the Scandinavians have managed to combine effective economies with much greater equality and mutual respect. They have the greatest levels of trust (and happiness) of any countries in the world.

To build a society based on trust we have to start in school, if not earlier. Children should learn that the noblest life is the one that produces the least misery and the most happiness in the world. This rule should apply also in business and professional life. People should do work that is useful to society and does not just make paper profits. And all professions – including journalism, advertising and business – should have a clear, professional, ethical code that its members are required to observe. It is not for nothing that doctors form the group most respected in our society – they have a code that is enforced and everyone knows it.

So we need a trend away from excessive individualism and towards greater social responsibility. Is it possible to reverse a cultural trend in this way? It has happened before, in the early 19th century. For the next 150 years there was a growth of social responsibility, followed by a decline in the next 50. So a trend can change and it is often in bad times (such as the 1930s in Scandinavia) that people decide to seek a more co-operative lifestyle.

I have written a book about how to do this and there is room here for three points only. First we should use our schools to promote a better value system – the recent Good Childhood report sponsored by the UK Children’s Society was full of ideas about how to do this. Second, adults should reappraise their priorities about what is important. Recent events are likely to encourage this and modern happiness research can help find answers. Third, economists should adopt a more realistic model of what makes humans happy and what makes markets function.

Three ideas taught in business schools have much to answer for. One is the theory of “efficient capital markets”, now clearly discredited. The second is “principal agent” theory, which says the agents will perform best under high-powered financial incentives to align their interests with those of the principal. This has led to excessive performance-related pay, which has often undermined the motive to work well for the sake of doing a good job and introduced unnecessary tension among colleagues. Finally, there is the macho philosophy of “continuous change”, promoted by self-interested consulting companies, which disregards the fundamental human need for stability – in the name of efficiency gains that are often not realised.

We do not want communism – as research shows, the communist countries were the least happy in the world and also inefficient. But we do need a more humane brand of capitalism, based not only on better regulation but on better values.

Values matter and they are affected by our theories. We do not need a society based on Darwinian competition between individuals. Beyond subsistence, the best experience any society can provide is the feeling that other people are on your side. That is the kind of capitalism we want.

Lord Layard is at the London School of Economics Centre for Economic Performance. He has written ‘Happiness’ (2005) and co-authored ‘A Good Childhood’ (2009)

US hospitals facing financial stress

Many US hospitals, both for-profit and non-profit, are facing financial stress in this economic recession.

Jeffrey Stafford, writing for the stock and fund analysis firm Morningstar, contends that "Like their patients, hospitals are ill". His report specifically references for-profit hospitals. Under law, all hospitals maintaining an ER must stabilize all patients who present regardless of insurance. Therefore, hospitals undergoing financial stress are a public policy issue, even if they are for-profit hospitals.

Patients are delaying care, at risk to their own health, in this economic environment. This includes insured patients who are underinsured - their insurance excludes their pre-existing conditions, has lifetime benefit caps on a condition considered to be expensive, or has cost-sharing provisions (e.g. premiums, co-pays or co-insurance*) that cause high out of pocket costs.

In addition to the insurance issue, US hospitals must keep track of their payer mix. Medicaid, the program for the poor, and Medicare, the program for the elderly, generally reimburse hospitals below the latter's cost of providing the care. Medicaid pays more poorly than Medicare. Of course, Medicaid is preferable to having an uninsured patient, since a hospital will get reimbursed little, if at all. Medicaid is generally a prime target for state governments to cut; in their defense, Medicaid expenses have grown considerably and are often a strain on state budgets.

For better and for worse, hospitals rely on privately insured patients to generate their operating margins. Essentially, they shift costs to the private insurers. All told, the payer mix at all US hospitals is deteriorating - more uninsured and Medicaid patients are showing up.

All hospitals have a high degree of what is known as operational leverage. Their fixed costs (as opposed to variable costs) are relatively high, since they have to stay open no matter what. Declines in patient volume affect their bottom lines severely.

US hospitals rely heavily on debt to finance their operations. These days, it is very difficult to raise debt at a reasonable price unless (and sometimes even if) a company has an excellent credit rating. Any hospitals that need to raise debt will have problems doing so at reasonable rates. Normally, non-profits can raise debt at better rates, since their bonds are usually tax-free and can offer lower interest rates. However, the tax-free debt market is facing similar stresses.

US nonprofits face many of the same stresses. The Michigan Health and Hospital Association documents similar problems to for-profits. US non-profit hospitals can take donations and usually have endowments, so they face the additional challenge of significantly declining donations and endowments that have half vanished with the stock market. This can be a big problem, since nonprofits often draw regularly on their endowments and charitable donations.


* Co-pay: flat fee that you pay when you access a service or get a prescription drug. May vary, e.g. a copay of $5 for generic drugs or $10 for branded.
Co-insurance: same as the above, but a percentage fee, e.g. 10% co-insurance for hospital visits.