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Thursday, March 14, 2013

Monetary Policy Over-Reach

With fiscal policy hamstrung by public debt in both the E.U. and U.S., monetary policy was a major beneficiary in the wake of the financial crisis of 2008 and the ensuing debt crisis that stammered on at least until 2013 in Europe. Lest it be concluded that central bank policy had reached an unassailable hegemony, the expanded role actually made its delimitations transparent, at least in financial circles.
Speaking to Charlie Rose on March 11, 2013, Jeremy Grantham of a Wall Street firm argued that the Fed’s extremely low interest-rate policy would be unlikely to spark an increase in employment. In fact, the low interest rate is a transfer of wealth from the poor to the rich. Fiscal policy, such as the CCC of the New Deal in the 1930s, is a much better tool to achieve full employment.
Meanwhile, Jens Weidmann, the president of the Bundesbank, argued that monetary policy in the E.U. “can only buy time at best..” He went on to say he was “a bit concerned about some of the expectations around the power and potential of monetary policy.” The ECB should get back to monetary policy in a stricter sense, rather than trying to spark economic growth and employment through low interest rates and buying state government bonds.
Behind the hypertrophy of interest-rate policy as salvific economically was the paralysis of fiscal policy determination in both unions.  Divided government at the federal level stymied fiscal policy in the U.S. after President Obama’s “stimulus” package in 2010. In the E.U., the vetoes retained by the state governments at the federal level put pressure on state governments strapped fiscally to take on themselves additional fiscal expenditure by issuing even more debt. In short, much of the allure of monetary policy was actually structural flaws in the political systems.


Katy Barnato, “Central Banks Alone Can’t Fix Europe: Weidmann,” CNBC, March 12, 2013.  

Tuesday, March 12, 2013

General Electric Brings IRS Employees In-House

In the debate on whether to end the Bush Tax Cuts, the nominal (or statue) tax rates were salient. Much less was said of the effective rates, which are calculated by dividing the actual tax paid by total income (individuals) or net income (corporations). According to the New York Times in 2011, although “the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less.” The name of the game in all too many corporate tax departments is to minimize the tax due as much as possible. No countervailing notion of “corporate citizenship” or even “fair share” exists in that world of single-minded minimization. Put another way, responsibility does not compute in the operative business calculus. Lest it be concluded that that calculus itself is the reason for the tax avoidance (which is legal, unlike tax evasion), the financial power of business to essentially bring government “in house” ought to be recognized as part of the larger problem of plutocracy.
In 2010, General Electric (G.E.) reported global profits of $14.2 billion, $5.1 billion of which came from operations in the United States. Rather than owing any federal income tax, however, the company claimed a tax benefit of $3.2 billion. Behind the “fierce lobbying for tax breaks and innovative accounting that enables [the company] to concentrate its profits offshore,” the company’s tax department was led at the time by a former U.S. Treasury official, John Samuels. Moreover, the Times reports that the department included “formal officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.” G.E. had essentially brought the tax-writing and enforcement skill of the U.S. Government “in house.” As paid employees of G.E., the formerly government expertise was then put under the aims of the private company, which are not necessarily in line with the public weal.
Put another way, U.S. companies of such financial wherewithal as to have annual profits of billions and billions of dollars can appropriate and harness governmental machinery at the expense of the republics and the General Government. The issue is not simply too much tax avoidance, which shirks any sense of responsibility or fairness; rather, the problem is whether such large and powerful private enterprises are compatible with a democratic form of government. Lest this question be interjected into public discourse, vested powerful interests keep us preoccupied with secondary issues, such as nominal individual tax rates, off-shore factories, and NAFTA. That the mainstream media in the U.S. consists of large companies that are owned by even larger conglomerates (e.g., NBC was owned by G.E. before being bought by Comcast) only makes it easier for corporate America to control the public discourse through interlocking directorates. Meanwhile, companies like G.E. and Exxon continue to gain wealth and power.
The question may be whether the American people writ large would object to the threat—or even come to view the mammoth companies as threats to the American republics—were the extent of corporate power over the governments transparent. The mantra of many Americans in the 1950s, for example, could be said to be, “What is good for GM is good for America.” Put another way, economic growth is in everyone’s interest. But is prosperity so wide-open? That corporations increase their stock prices by shedding jobs suggests that what is good for the Dow is not necessarily in the public interest. Abstractly speaking, the good of a part is not necessarily the good of the whole. In political economy, the salience of the parts can be rather subtle, or even subterranean, while the public good can suffer for want of committed defenders. The result is that the parts come to dominate the whole and even define it in their own terms or image.


David Kocieniewski, “G.E.’s Strategies Let It Avoid Taxes Altogether,” The New York Times, March 24, 2011.

Bonnie Kavoussi, “General Electric Avoids Taxes By Keeping $108 Billion Overseas,” The Huffington Post, March 11, 2013.

Monday, March 11, 2013

McDonald’s Over-Reach: Trying to Be a Coffee Shop

In spite of essentially flat sales in the U.S. in February 2013 from the same month in 2012, McDonald’s CEO, Don Thompson, said he was confident that the people at the company had sufficient experience to “grow the business for the long term.” Even assuming that a business can be grown as if it were a geranium plant, the claim can be critiqued both in regard to the underlying assumption regarding “growth” and that of long-term viability.
Tackling first the question of a company’s long-term viability, changes in the business environment are important, if not vital to survival. The fast-food industry from 1970 to 2010 is a case in point. As restaurant chains like McDonalds gained substantial economies of scale with the proliferation of restaurants, the increasing popularity of healthy meals subtly undercut the prospects for continued growth.
                        From "Americana" to "Enjoy Getting Fat": A change in the business environment in the last quarter of the twentieth century in the U.S. that impacted McDonalds at its core.    source: McDonalds.com
The management at McDonalds did relatively well in introducing healthy alternatives to its menu by 2010. The strategy also included blending the restaurant with a coffee shop experience. New drinks, such as smoothies, mochas and lattes, and wireless internet service were added. As a result of having adjusted to the changes in the business environment, McDonald’s U.S. sales rose 11.1% in February 2012 from February 2011, and 2.7% in that month from the year before. By 2013, Burger King was renovating its restaurant and adding "coffee shop" drinks. I suspect that being first or second in introducing those products makes less difference than is typically assumed in the business world. Even so, the flat McDonald's sales figure in February 2013 was a bit of a surprise. Although the problem could have been the newly introduced fish product, I suspect that the market may have been questioning McDonald’s expansion into the coffee shop business.
McDonalds was admittedly poised to give Starbucks a "run for its money" concerning its inflated drink prices. That coffee chain was essentially charging a premium price for non-premium products, given the manner of production. Even though McDonalds could undercut Starbucks on price and thus potentially gain market share, it was not clear that being in a McDonalds could feel like being in a coffee shop.  Adding to the discordance was the management’s decision to continue to stress the “dollar menu” for the “budget conscious” customer. Put somewhat delicately, the business strategy assumed that two very different market segments would co-exist in the same room. Even just within the “budget conscious” area, incompatibilities exist, such as between university students and the long-term unemployed who are on government aid. The market segment that goes to Starbucks and skips the mocha in order to get a cheaper drink is not necessarily the segment that hangs out in McDonalds until the government check arrives. McDonald's management was essentially blurring the company's identity by seeking continued sales growth by trying to combine a restaurant with a coffee shop.
In general terms, a company’s senior management (or board) should not get so caught up in important changes in the business environment that the resulting strategic change involves trying to be something the company is not. In the case of McDonalds, a fast-food restaurant is not a coffee shop. Blending the social distance between the two would at the very least be a formidable task. Had McDonald's management concentrated simply on adding new healthy fast-food (i.e., restaurant) products, sales would be shored up without risking a corporate identity crisis. But merely shoring up sales is insufficient where a lack of growth means death. Internal pressure to venture into another line of business simply because it is “in” fits, unfortunately, with the mantra of business that to stop growing is to die.
Is it necessarily such a bad thing that sales in February 2013 were flat from the month a year before? Can it be assumed that a large global business such as McDonalds can continue to have increased sales from year to year ad infinitum? Furthermore, might the equilibrium of steady sales provide a large company with more stability? In nature, an ecosystem that is not in equilibrium may be in trouble, particularly if a species is maximizing itself. Reformulating the menu to have healthy items may result in only a few years of double-digit increases, which in turn would be within a longer-term equilibrium rather than in ever-increasing sales. Put another way, the senior management of McDonalds may have used a “shot gun” approach to reacting too broadly to important changes in the business environment. To keep up with societal shifts while not losing touch with the business’s identity is the sort of balance that a corporate management should attempt to reach and sustain in formulating strategy over the long-term.


Candice Choi, “McDonald’s Sales Drop Despite New Fish McBites,” The Huffington Post, March 8, 2013.

Sunday, March 10, 2013

The Fed Whitewashes Citibank: Systemic Risk Understated

As reported by Reuters in March 2013, “The newest stress tests for U.S. banks produced scores that are at odds with other measures of lenders' safety, in another sign that some institutions may be too big for regulators to understand and executives to manage. For example, Citigroup Inc, which has been bailed out multiple times by the U.S. government, showed up on the score sheets posted by the Federal Reserve . . . as being clearly safer than JPMorgan Chase & Co. That conclusion is at odds with the views of investors, bond analysts and credit-rating agencies, as well as when measured by a yardstick regulators themselves want to use in the future.” Kathleen Shanley, a bond analyst at GimmeCredit, a research service for institutional investors, said "I wouldn't say that Citi is safer than JPMorgan, for a variety of reasons, including its track record.” Citigroup has lower credit ratings than JPMorgan, and prices for credit default swaps suggest that the market views JPMorgan as safer.
The full essay is at Fed Whitewashes Citibank.