The Bottom Line - America's Best Companies

Unemployment and Consumer Spend Highlight Stimulus Policy Failures

charles@gowithabc.com (Charles Cooper) — Thu, 13 Aug 2009 15:40:45 GMT

It seems that with rising unemployment and ever tighter budgets, American consumers missed the message that we are in an economic recovery. We hear talk of the recession “bottoming out” or that economists see this or that “good sign” or that the Treasury Secretary has “green shoots” in his sights. The fact is, all these people talking about how the recession is ending would have just as much success predicting what the economy will do if they slaughtered a goat and tried to read the entrails.

If you want to know what the economy is really up to, go to the people who are there, in the trenches, each and every day. Talk to the people who are on the unemployment lines, the salespeople in shops—people who live with the recession and must cope with it every day—not the bureaucrats and statisticians in Washington trying desperately to spin the numbers, including this group and excluding that in order to be able to report something that the Administration wants to hear. After all, since they have spent all that money to prop-up the economy, President Obama and his congressional allies are looking for some return on investment.

Sad to say, there really isn’t any such return, at least not yet, and there is nothing to support the claim that the stimulus and bailouts were responsible for the few bright spots we see now. In fact, given that one of the big selling points of the stimulus was that unemployment would not exceed 8%, and that figure was a sad underestimation, calls into question rest of the basis for the stimulus as well as its results. In other words, what else to Obama and his people get wrong? Let’s look at the recent unemployment and retail sales figures, as well as a global survey of corporate Chief Financial Officers (CFOs), to see what is happening.

Unemployment

Today, the headlines told us that the number of new claims for unemployment benefits moderated somewhat. That is good. The nation is still bleeding jobs, just now quite as much. One can call that a step in the right direction, but it’s hardly reason to break out the champagne. The next part of the message, that there was a drop in the number of continuing claims, has been heralded as a sign that unemployment is bottoming out, but is it? Consider how the unemployment figures exclude those who have fallen off the unemployment benefit rolls, discouraged workers who feel that there is no work available for them and others that are not in some way plugged into the system. Were these people to be counted, the percentage of unemployment would be much higher than the 9.4% currently being reported.

This is what makes that report that continuing claims have dropped so disturbing. Nowhere in the stories will you read that the drop is due to new employment, though it is inevitable that some of these people were hired and are thus no longer unemployed. That would be a real indicator that the economy is improving, but no one is saying it. That silence in the cause of the drop in continuing unemployment claims indicates that many of these people are no longer filing because they have simply run out of benefits, which not only runs counter to what the Administration wants to say, but also means that as consumers, these people are pretty much out of the game and that is bad news for small businesses.

Nobody is Buying

Consumers without money can hardly live up to the name, can they? May and June saw modest gains in retail activity, but then July, which economists expected to show a gain of 0.7%, came in with a drop of 0.1%. This may not seem like much, but consider what happened in June: Unemployment hit 9.5%. In July, it fell to 9.4%, but it is doubtful that figure included the growing ranks of discouraged workers. So, what do we have? We have record unemployment coinciding with a drop in consumer spending.

Explain to me why there is not a connection. True, Washington economists with their equations and theories will say that the connection is only superficial and then provide all sorts of reasons and excuses. They would call the connection between the two—unemployment and poor retail sales—anecdotal. The problem with anecdotal evidence, however, is that it tends to be based on things that happen, rather than numbers on a spreadsheet. The logic here is pretty hard to refute:

People with jobs = people with money = active consumers = retail sales

Simple and straightforward, and it doesn’t even include those who have jobs but are cutting their spending and saving more out of fear of becoming unemployed. Is it any wonder, any surprise, that retail spending is down? Of course not! Moreover, most folk who have to deal with this recession think it’s not going anywhere anytime soon.

Survey: Recession May Last another Year

People are worried, and with good reason. A Duke UniversityCFO Magazine survey of 1,268 CFOs representing a broad range of global public and private companies, asked them about their expectations for the economy. The expressly pessimistic results include:

35% say the US Economy will begin to recover in 2009, with the remaining 65% expecting the recession to last well into 2010.

The CFOs expect employment to fall in the US by 5.6% over the next year and that this will be in addition to wage freezes or cuts, and work hour reductions.

All told, the majority of CFOs around the world see this recession, the mounting unemployment and the weak consumer spending to continue well into next year, a sentiment shared by the general public, which is acting accordingly. People are saving their money at record rates because they have no faith in the economy or in the Obama Administration’s efforts to fix the problems. More and more, people are coming to understand that the only way they will get out of their financial problems is to rely on themselves and to be very conservative with their money.

This should not be a surprise, the same thing happened during the Bush stimulus. The Washington economists thought people would rush out and spend the money. Instead, they saved it and paid down debt. People are doing the same thing now, and while individually it is economically prudent, it does nothing to stimulate the economy.

But it is a surprise. The economics that the Obama Administration used to craft its policies, the economics Obama and his liberal cohorts all so faithfully believe in—the discredited Keynesian economics—only work when consumers act in the best interest of everyone except themselves. It assumes that people will spend and spend the same in good times and bad, and that they will spend in order to stimulate commerce. It doesn’t happen that way. When the future is so uncertain, spending dries up. When the government increases its size and power at the expense of those who create jobs, spending dries up. People who can hang onto their money because they do not know what will come next.

The Bottom Line

This is where we are today in America, after less than a year in office, Obama has forced policies on the nation that cost astronomical sums and harm business, one result of which is to further drive up unemployment; leading the people to minimize their spending and for what? He and his congressional counterparts do it simply to indulge the ideological desires of their liberal fellow-travelers. I say this because they are neither blind nor stupid and they would have to be both to miss the damage they are doing. Obama’s massive stimulus plan has proven to be a dismal failure and his healthcare plan, if enacted, will only cost more jobs, though possibly not as badly as his cap and trade energy plan; further damaging sales as disposable income dries up even more, lost to tax-driven raises in the cost of goods and services.

When the recession ends, if it does in the foreseeable future, it will not end because of the programs that Barack Obama has foisted upon the American people, it will be in spite of it.

The Law of Unintended Consequences: How Healthcare Reform Will Effect Small Business

charles@gowithabc.com (Charles Cooper) — Wed, 29 Jul 2009 15:50:12 GMT

Healthcare reform—that thousand-plus page monster that, according to House Judiciary Chairman John Conyers (D-MI), is pointless to read—is going to have a great and terrible impact on entrepreneurs and from that epicenter on their businesses, their employees and the economy as a whole. According to Columbia business professor Rita McGrath, the reason for this is that entrepreneurs will change the way they do things, not so much to thrive but to cope. She writes that “the plan currently being sped along by the House Democrats is going to fundamentally alter what [economist William J.] Baumol called the ‘structure of incentives’ that shape how entrepreneurs allocate their energies.”

The Structure of Incentives

What are these incentives? They are the things that make going into a particular business worthwhile. According to an article written by Baumol and entitled “Entrepreneurship: Productive, Unproductive and Destructive”, you get the kind of entrepreneurship that your culture encourages. Those places where risk-taking and productivity are rewarded encourage their entrepreneurs to pursue such courses. Where politics and status-seeking are encouraged, the drive and energy of entrepreneurs go in those directions. Finally, where corruption and criminality are rewarded, entrepreneurs will go in those directions as well. So, in the end, we have three different kinds of entrepreneurs: The productive, the non-productive and the destructive.

What worries McGrath is how American entrepreneurs will be forced to change by the policies coming out of the Obama White House. Up until now, America has been a bastion of the productive sort of entrepreneurial spirit. That is not to say that there is no crime and corruption, no politicking or status-seeking. There certainly is, but on the whole those elements are small when compared to the bulk of honest and productive enterprise. McGrath’s worry is that much of what is now productive will, in natural reaction to the confiscatory taxation schemes being pushed to fund Obama’s healthcare reform, be rendered unproductive as business owners seek to mitigate or dodge entirely the new tax burdens.

Small Business Reaction to Obama’s Healthcare Reform

If the structure of incentives is altered by Obama’s plan, then the outcome, in the form of entrepreneurial activity will, likewise, be altered; and according to McGrath, it will be altered for the worse. Citing a study of Sweden’s welfare state that shows key welfare state institutions reduce economic incentives both for opportunity-based and necessity entrepreneurship, she writes:

The first predictable consequence is that an awful lot of entrepreneurial energy is going to be spent, not productively, but unproductively, as small business people and those falling into the higher-tax categories spend their time not producing new innovations but figuring out how not to fall into the maws of increased tax and regulatory burdens. Following right on that as a predictable consequence is that those who are able to do so will do business in such a way that they don’t fall into the higher-taxed categories. Rather than pay individual rates, small businesses will incorporate and pay the lower 35% corporate rate. Further, get ready for the new conglomerates - thousands of businesses employing exactly 24.5 people, all interconnectedly doing business with one another rather than falling foul of the over 25 employee [healthcare tax trigger] stricture. And with small business growth having led us out of most recessions in the past, get ready for this sector to add jobs far more slowly and with far greater caution than it had previously - a big blow to an economy that desperately needs a vibrant and growing small business sector.

At a more macro level, a huge body of research points to the same conclusion (remarkably, for academic research). The effects of higher individual taxes on rates of entrepreneurship are without an exception, negative. It is well accepted, and has been for decades, that the desire to have a vibrant entrepreneurial economy is at odds with the desire to operate a welfare state, due in large part to the way in which welfare states allocate resources – when the upside to undertaking the risks of entrepreneurship decrease, while the downside of not doing much at all are limited, it becomes hard to justify making the effort. If it is possible to live quite a comfortable life without too much bother, why take on the long hours, the worry and the headaches of small business ownership?

The Bottom Line

This is just one expert’s take on the situation, but McGrath is not alone in sounding the alarm against this legislative cancer. A recent letter to the Wall Street Journal from a physician who owns a medical company said plainly that he would begin laying people off, beginning with everyone sporting an Obama bumper sticker on their car, since he cannot afford to pay more taxes and employ all the people he does.

It is because of research like McGrath’s, research into the costs and consequences of this kind of radical legislation, and the reaction of small business owners like this doctor—a reaction multiplied millions of times across the nation—that Obama and Pelosi want this over and done with before August, rushed through with no one reading, let alone comprehending, what they are voting for; rushed ahead so that by the time the members go back to their districts it would be too late for the people back home to complain and pressure them to not vote for the bill.

That tactic alone should give every small business owner who cares about his company, his family, his employees, a moment of pause. Mixed with what we know of their plan, it should also light a fire under them to pick up the phone and tell their representative not to bleed their businesses dry. You can find the numbers you need here, at House.gov and Senate.gov.

Space to Grow: Small Business and Commercial Space Flight

charles@gowithabc.com (Charles Cooper) — Thu, 23 Jul 2009 15:57:23 GMT

NASA has its ways of doing things, and when it comes to rocket construction, they go back to the lessons of rocket pioneer Werner Von Braun, who brought the rocket expertise he used to help Germany during World War II over to the United States and helped us reach the Moon. Von Braun felt that the best way to do things was to manufacture the rocket on-site, where the engineers lived and worked, thus controlling both costs and production for as long as possible. The problem is that in this time of record public debt and shocking deficits, where every dollar has both an economic and a political value attached to it, money for innovation and execution can be hard to come by, and NASA, well, they are the innovation people and the thinking in Washington is that maybe they ought to concentrate on what they do best. According to BusinessWeek:

The agency looks headed for a course correction. The White House has set up a blue-ribbon commission to help decide the future direction of manned flight. Headed by Norman Augustine, a former chief executive of defense contractor Lockheed Martin, the group plans to deliver several broad options to the Obama Administration by the end of August. Augustine, in a press briefing earlier this month, said the commission will "take a fresh independent look and go where the facts lead."

One option under serious consideration is whether NASA should tap the private sector more actively. Since its founding, the agency has done the heavy lifting in space exploration largely by itself—conceiving of missions, designing rockets, and executing flights. Companies such as Boeing, Alliant Techsystems, and Lockheed Martin simply built spacecraft to NASA's specs. Some experts argue that NASA should lean on private companies more heavily, perhaps to design rockets or execute such mundane missions as shuttling supplies up to the International Space Station. "The commercial sector could have a much bigger role," says Keith Cowling, editor of a Web site called NASA Watch, which monitors agency projects. "But NASA has to be willing to give up its monopoly on manned space flight. And that's the big question."

NASA declined to comment specifically. But Augustine has said his commission is looking at the prospect of greater private sector involvement. The idea is that NASA could accomplish more with its existing $17.3 billion budget if it could focus on the most important issues, such as setting ambitious goals and investing in long-term research and development and executing the goal of putting a man on Mars.

Ready to pick up the slack in engineering and production are a number of small and medium sized businesses, including SpaceX and Orbital Sciences and for those involved, like Elon Musk, SpaceX founder and CEO, it’s a natural fit. "If you look at any other mode of transporting goods and people, on planes or trains, most people would say that these things should be done by the commercial sector."

In a bid to see how well the private sector would serve the needs of NASA in putting men and cargo into space, SpaceX and Orbital Sciences, a medium-sized business, have been given $500 million to prove that they can develop the technology needed to deliver cargo to the International Space Station (ISS), demonstrating this capability by launching three successful demonstration flights by the end of 2010. If successful, NASA will pay each company approximately $1.6 billion for a dozen cargo missions to the ISS through 2015. “We are very appreciative of the trust NASA has placed with us to provide commercial cargo transportation services to and from the International Space Station, beginning with our demonstration flight scheduled in late 2010,” said Mr. David W. Thompson, Orbital’s Chairman and Chief Executive Officer. “The CRS program will serve as a showcase for the types of commercial services U.S. space companies can offer NASA, allowing the space agency to devote a greater proportion of its resources for the challenges of human spaceflight, deep space exploration and scientific investigations of our planet and the universe in which we live.”

The Bottom Line

That $1.6 billion per company breaks down to $133 million per flight, which is less than one-third of NASA's cost for such missions. "This is the only way NASA can afford to both service the station and go back to the moon," observes John Gedmark, president of the Commercial Space Flight Federation.

It’s also a tribute to the power of the private sector, especially America’s small and mid-sized businesses where, like NASA, innovation reigns supreme—only at one-third the price!

A New Surtax on the “Wealthy” Will Harm Small Business

charles@gowithabc.com (Charles Cooper) — Wed, 15 Jul 2009 15:01:14 GMT

I may have been wrong. I was all worried about President Obama’s cap-and-trade energy policies being the death of small businesses. After all, his scheme would raise energy prices across the board, spur inflation as the energy costs for all stages of production and distribution were all factored into the prices of both raw materials and finished products while vendors had their own energy costs to add as well. Never mind the increased energy costs that consumers would face. All in all, it’s a 5-star recipe for economic disaster and increased unemployment as jobs and capital flee to more tax-friendly places; but it has nothing on Obama’s healthcare reform measures.

Sure, we have a problem when it comes to the uninsured. Paying for their medical care drives up the costs for everyone else. OK, I get that. What I don’t get is the idea that instead of simply giving these 46 million people health insurance, you have to socialize the entire American medical establishment and tax the most productive members of society—people who create jobs and are already carrying a disproportionate tax load—to do it. How much would it cost to expand Medicare to cover them? My guess is that it would be a damn sight less than the $1 trillion Obama’s plan calls for, which would be a good thing given the horrific recession we are all riding out. But then, I am not thinking very progressively, am I? The answer to this question has nothing to do with healthcare, any more than cap-and-trade has anything to do with reducing greenhouse gas emissions, which everyone admits it won’t do. No, the answer to why they simply won’t choose the fastest and most expedient answer to the problem of the uninsured is all about politics.

And so is the Democratic solution for funding their reforms: Soak the rich.

The Problem with “Soak the Rich”

The funding solution that the House Democrats came up with is delightfully populist in nature and reeks of the class struggle that these people live and breathe: According to Reuters, they have settled on a 5.4% surtax on the most productive members of our society. That is, people making over a million dollars and that is over and above increases in income, capital gains and other taxes as well as cuts in Medicare reimbursements. That means that there will be a large number of people paying over 50% of their income to federal, state and local governments. Bloomberg described the plan is as follows:

House Democrats plan to fund the broadest U.S. health-care expansion in four decades by increasing taxes on the wealthiest Americans, imposing a surtax of 5.4 percent on couples with more than $1 million in income.

The legislation unveiled yesterday would place additional taxes on households with more than $350,000 a year in income and calls for further increases if the measure doesn’t hit a target for cost savings. The provisions are intended to raise $544 billion over 10 years.

House leaders said the plan, which includes mandates to purchase coverage and a public health-insurance option, would cover 97 percent of Americans by 2019. President Barack Obama praised their work, saying it will “begin the process of fixing what’s broken” in the system.

Now, many of these people are small business owners, sole proprietors, for example, whose business income is passed through to their federal tax returns. If they have a good year, they will be forced to give much of their profits to the government, so what is the use of having a good year? On a more practical level, how will our small business owner cover these additional taxes? He can only raise prices so much before he drives away his increasingly cost-conscious customers, then what? He will cut jobs, cut down on products and services, and make changes to the benefits for the people is able to keep on the payroll. He will do all these things and it still may not be enough to keep the business open. After all, our entrepreneur is not in business as a charity, he is in business to provide for himself and for his family. If he cannot do this, there is no point in staying in business, is there?

Reaction to the plan has been sharp. According to Bloomberg’s Ryan J. Donmoyer and Kristin Jensen, the plan drew fire from the US Chamber of Commerce, the nation’s biggest business lobby. “The intention of this plan is to tax high-income households, but the real victims would be America’s small business owners,” the Washington-based group’s president, Thomas Donohue, said in a statement. “Since when does our great free-market country punish success?”

Eric Cantor, the No. 2 House Republican, added to that by noting that the plan would be paid for by the “small business men and women we are counting on to start hiring workers again.”

The Bottom Line

So, small businesses—the engine of our economy—are to suffer because their owners are taxed beyond anything that is fair or reasonable to fund a so-called reform that is manifestly unnecessary and will likely go unread by anyone voting on it. According to Obama advisor David Axelrod who, along Chief of Staff Rahm Emmanuel, is pushing for a fast vote, “If we’re going to get this thing done, obviously time is a-wasting.”

That is the thinking that led to no one reading the stimulus bill or the cap-and-trade energy bill, both of which continue to yield gems that force lawmakers to say, “Gee, I didn’t know that was in there.” That is hardly a comforting thought, especially with this healthcare bill.

So, what’s the rush? Again, the answer is political: They know that with the 2010 elections around the corner, and the likely backlash against them from the voters, they have only so much time to push this through. If they gave this measure—any of the measures they have passed so far—the kind of debate and scrutiny they should have, Obama, Pelosi, Reid and the others know that they would have a tough sell on their hands at best, and that after the election, it would be impossible. So yes, time is running out.

Still, it is, as Emmanuel said, about results, and those don’t augur well, either. As with the recently passed energy bill, Obama Healthcare reform is going to be a business killer, but instead of attacking the business directly by running up costs, it attacks the owners of the businesses. Many will switch over to corporate structures and carry on that way, but many won’t. Others will pull up stakes for friendlier tax environments, if they can. Still other will just vanish. It’s a recipe for political control over healthcare, but how is it a recipe for prosperity?

Is Small Business in Decline?

charles@gowithabc.com (Charles Cooper) — Mon, 06 Jul 2009 15:53:31 GMT

The number of nonemployer firms has risen steadily in this decade, from 16.5 million in 2000 to an estimated 21.1 million in 2007. An estimated 637,100 new employer firms began operations in 2007 and 560,300 firms closed that year.

That is what the Small Business Administration had to say about the growth of small business over the last decade. According to the agency, there has been a steady growth in the number of small firms opening up shop in the United States. As of 2007, small businesses (those with 500 employees or less) made up 99.9% of the businesses active in the country. These small businesses also:

Represent 99.7% of all employer firms.
Employ about half of all private sector employees.
Pay nearly 45% of total US private payroll.
Have generated 60% to 80% of net new jobs annually over the last decade.
Create more than half of nonfarm private gross domestic product (GDP).
Hire 40% of high tech workers (such as scientists, engineers, and computer workers).
Are 52% home-based and 2% franchises.
Made up 97.3% of all identified exporters and produced 28.9% of the known export value in FY 2006.
Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the 1% most cited.

That is pretty robust activity for a sector of the economy that some, like Scott Shane—Case Western professor of entrepreneurial studies and New York Times small business blogger—say has been in decline for a long time. According to Shane, we are creating fewer employer firms per capita than we did a decade ago, we are creating fewer establishments than we were a decade ago and fewer people are becoming self-employed than they were a decade ago. Shane takes statistics from the SBA, the Census Bureau and the OECD Factbook 2009 and uses them to paint a bleak picture of entrepreneurship in the United States, blaming the rise of big box retailers like Wal-Mart for this decline, citing how these “super efficient” stores (evidently, he has never actually had to shop in one) have out-competed their small business counterparts, driving them out of business.

It’s an ugly picture to be sure, but he doesn’t stop there. No, Professor Shane goes on to say this:

Most Americans would like to believe that this country is getting more entrepreneurial over time. While I wish this were true, the data don’t agree. Policy makers need to take a look at these data and acknowledge the pattern. More important, they need to understand why the rate of entrepreneurship is declining over time.

So, now he is calling for Washington bureaucrats to embrace this view, which, like global warming and other hysterical claims, is not supported by real numbers. Nor is it supported by experience. This should be no surprise, read enough of Professor Shane’s work and you see a man who is a true tenant of the ivory tower, far happier with nice, clean, abstract policy than he is with the messy realities of small business and entrepreneurship that Case Western expects him to teach and that the New York Times expects him to write about. Consider this from a recent CNNMoney.com article:

From a societal point of view, if you have a group of people who do something that makes them happier but less productive (which the data support), and you aggregate that, then entrepreneurship is an economic drain. If the goal of the policymaker is to make everybody in your country happy, then let everybody start businesses.

But most policymakers seek to create jobs and promote growth. If that's your goal, you want to stop all these people from starting marginal businesses that don't go anywhere and devote the resources to encouraging high-growth companies. In terms of tax policy, for example, you could argue that the government should eliminate the home-office tax deduction - which doesn't differentiate between high- and low-performing businesses - and beef up R&D tax credits.

Shane sees small business as a productivity drain that policymakers should do something about. He says this in spite of the overwhelming evidence that small business—American entrepreneurship—is the engine that drives all economic growth. He also sees it along racial lines:

White Americans are three times more likely to start businesses than black Americans are. And that's been pretty much the same since 1910. So what's going on here? If you measure psychological characteristics of representative samples of whites and blacks, you see very little difference.

The main difference between white and black households is net worth. White household net worth is 10 times that of black households on average. Now, most U.S. startups are self-financed. Entrepreneurs with 10 times more money take on less risk because they invest a much smaller percentage of their net worth when starting a business. So until you get rid of household wealth discrepancy, you'll see that gap there.

His obvious point: Whites with money start more businesses than blacks without money. His underlying assumption: Small business is primarily a white activity, minorities don’t have a shot. Guess what: Poor folks of all colors are at a disadvantage when it comes to a lot of things—including starting a business—as compared to their more well-heeled counterparts and just because you are white does not mean you have ten times the resources of your black neighbor. Yet, that does not stop many of these disadvantaged people from starting their own firms. In fact, according to the SBA, between 1997 and 2002, black-owned small business grew by an astounding 45.4%. Asian-owned firms saw a 12.6% expansion and Native American and Alaska Native firms grew by 2.1%. Hispanics, however, owned the largest share of minority-owned businesses at 6.6% of the total number of business in the country. Do minorities start as many small businesses as whites? Probably not, there is a financial disparity, but the small businesses that minorities start are every bit as robust and their white counterparts and their owners are, like all entrepreneurs, energetic and focused.

The Bottom Line

When you are discussing small business, bringing up the entire racial issue is silly and deflects one from the real issue, which is the strength of small business in America. It has taken some hits of late, like every other sector of the economy, but it is certainly not in decline. In fact, it is stronger than most, regardless of what the good professor says, and it still provides the only real traction the US economy has right now. So, instead of using his space on the New York Times website to talk down the small business sector, why not talk it up?

In his CNN interview, Shane spoke of race and financing and competition, but he missed the point of it. As Ken Blanchard, author of The One Minute Entrepreneur put it, “Entrepreneurship is all about fire in the belly.” That is something that Shane, for all his calculations, has no reckoning of. You cannot chart a fire in the belly, that drive to excel, and it does not fit into Shane’s preconceived narrative. His references to policymakers and race, his stance that small business is less efficient and than tax policy should be used to move the economy away from it, his very connection with The New York Times all testify to someone with a policy-first mindset, as opposed to an entrepreneurial or even an open and inquiring academic mind.

Another point that Shane and the policy-first crowd always miss, is that small business can and will succeed very nicely without them, without their studies and without their interference. If Shane ever really wants to see what American entrepreneurs can accomplish, he should be demanding that those policymakers of his do everything they can to give small business all the tools and freedom—mostly freedom—it needs to succeed.

The FedEx Scam: Yet Another Crooked Game

charles@gowithabc.com (Charles Cooper) — Wed, 01 Jul 2009 13:35:34 GMT

I love scams, and sometimes, when I get a really good one, something with a little originality to it, something that shows a little effort, I want to share it. Here is an email message that America’s Best magazine editor Lynn Celmer forwarded to me that supposedly comes from FedEx (emphasis mine):

Dear Customer !!!

We have been waiting for you to contact us for your Confirmed Package that is registered with us for shipping to your residential location. We thought that the sender gave you our contact details and that you would have contacted us by now. we would also let you know that a letter is also attached to your package. However, we cannot quote its content to you via E-mail for privacy reasons. We understand that the content of your package itself is a Bank Draft worth $800,000.00 USD, in FedEx we do not ship money in CASH or in CHEQUES but in Bank Drafts only. The package is registered with us for mailing by your colleague, and your colleague explained that he is from the United States but he is in Nigeria for a three (3) month Surveying Project. for he is working with a consulting firm in Nigeria West Africa .

We are sending you this E-mail because your package is been registered on a Special Order. What you have to do now, is to contact our Delivery

Note that the payment that is made on the Insurance, Premium & Clearance Certificates, are to certify that the Bank Draft is not a Drug Affiliated Fund (DAF) neither is it funds to sponsor Terrorism in your country. This will help you avoid any form of query from the Monetary Authority of your country. However, you will have to pay a sum of $125 US Dollars to the FedEx Delivery Department for the Security Keeping Fee of the FedEx company as stated in our privacy terms & condition page. Also be informed that your colleague wished to pay for the Security Keeping charges, but we do not accept such payments considering the facts that all items & packages registered with us has a time limitation and we cannot accept payment not knowing when you will be picking up the package or even respond to us. So we cannot take the risk to have accepted such payment incase of any possible demurrage.

Kindly note that your colleague did not leave us with any further information. We hope that you send your response to us as soon as possible because if you fail to respond until the expiry date of the foremost package, we may refer the package to the British Commission for Welfare as the package those not have a return address.

Kindly contact the delivery department (FedEx Delivery Post) with the details given below:

FedEx Delivery Post
Contact Person: Mr. Smith Isu
mr.smithisu@btinternet.com

Kindly complete the below form and send it to the email address given above. This is mandatory to reconfirm your Postal address and telephone numbers.

FULL NAMES:
TELEPHONE:
POSTAL ADDRESS:
CITY:
STATE:
COUNTRY:

Kindly complete the above form and submit it to the delivery manager on: mr.smithisu1@btinternet.com

As soon as your details are received, our delivery team will give you the neccessary payment procedure so that you can effect the payment for the Security Keeping Fees. As soon as they confirm your payment receipt of $125 US Dollars. They will not hesitate to dispatch your package as well as the attached letter to your residence. which usually takes 24 hours being an over night delivery service.

Note: that we were not instructed to email you, but due to the high priority of your package we had to inform you as your sender did not leave us with his phone number because he stated that he just arrived Nigeria and he has not gotten a phone yet. We personally sealed your Bank Draft and we found your email contact in the attached letter as the recipient of the foremost package. Ensure to contact the delivery department with the email address given above and ensure to fill the above form as well to enable a successful reconfirmation. Attach to this email is a scan copy of the package to be delivered to your address containing the draft of $800,000.00 USD, immediately you we have confirmed your payment of $125 US Dollars for the Security Keeping of your package.

Yours Faithfully,
Mr James Wellington.
FedEx Online Team Management.
All rights reserved. © 1995-2009.

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This E-mail is only for the above addressees. It may contain confidential or Privileged information. If you are not an addressee you must not copy, distribute, disclose or use any of the information in it or any attachments.
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FEDEX INTL>>>LICENCE OF FEDERAL EXPRESS CO-OPERATION.

Wow! It seems that I am violating the terms of their confidentiality warning by putting a copy of this up on The Bottom Line. It really makes you wonder what these people are thinking when they put this out there, other than that I would get a hold of it and pick it apart.

Now, let us assume that you, indeed, have a colleague on a surveying project in West Africa who just happens to have nearly a million dollars burning a hole in his pocket (he must be wearing those jungle explorer pants with the really big cargo pockets on the legs). Let us also assume for the moment that for some reason that pesky wire transfer thing is simply so unappealing to this latter-day Captain Spaulding that he searched high and low to find the nearest FedEx office in order to get this small fortune to you, told them all about it, showed them the letter written to you and then sent it to you collect. If that doesn’t sound like a Marx Brothers movie, I don’t know what does!

The Signs of a Scam

Now, the absolute absurdity of the story behind this attempt to lighten your wallet by $125 really does make this scam email suitable for framing. However, even if all of that rubbish was true—including the bit about the cargo pants—there are ample clues within the letter itself to demonstrate that it is nothing more than a phishing lure!

Phishing is a kind of scam that is really designed to collect personal data. Sure, if they can get you to pony-up some money as well, all the better. However, the real pay-off comes with the inevitable identity theft that follows the disclosure of the information they request. It is easy to spot one of these scams. You notice the clues—you may even laugh at them—but you need to connect them with the scam.

Sloppy writing . This is supposedly from a professional, worldwide, multibillion-dollar company and the writer cannot spell. Nor has he any idea how to use capital letters and punctuation, word spacing and so on. Moreover, a quick look at the sentence structure and vocabulary shows unnecessarily complex and flowery language. Sentences like: So we cannot take the risk to have accepted such payment incase of any possible demurrage do tend to stand out, and that salutation, Dear Customer !!! is both vague, as if they don’t know who you are—which they don’t—but the prospect of contacting you is still incredibly exciting. Editorially speaking, this email is a mess!

Misuse of the company name . The actual name is FedEx Corporation. It is not, as this scam letter suggests, “FEDEX INTL,” nor is it “Federal Express Co-operation.” This is more than just the company name; it is the heart of their brand, just as your company name is the heart of your brand. Everything that FedEx puts out is consistent both within the document and with everything else that the company distributes. If that were not the case, then their brand would be diluted, and that is the last thing they want.

Strange email addresses and URLs . Take a look at the FedEx website and you will notice that their email addresses end in @fedex.com. So, if you want to reach, say, investor relations, it would be ir@fedex.com. They also have contact forms. Now, knowing that, what does it tell you about the email address of one Mr. Smith Isu, which is mr.smithisu1@btinternet.com? After all, if the man was with FedEx, why does his email direct you to well-known spam email company? If nothing else in this email sets off alarms for you, this discrepancy between this email address and FedEx’s usual email practices really should. The same thing goes with links. Roll over all the links in a message and at the bottom of your browser you will see the URL the link points to. If the links don’t point to where they should, based on who supposedly sent the email, it’s a scam.

Ask yourself, if one of your employees sent out a similar email to a potential customer—impersonal, poorly written, riddled with mistakes—how would you react? Not well, certainly. There is, however, more.

Internal inconsistencies . When they say they cannot tell you what’s in the letter for “privacy” reasons, but go ahead to tell you there is a bank draft for $800,000 riding with the letter, then something is distinctly wrong. The writer of the email states at the top that they have been waiting for you to contact them, yet further down they say that this is a “high priority” package. Which is it, a high priority or something you can just throw on the shelf until you get tired of looking at it?

False sense of urgency . This is the hard sell. They say you have to reply quickly to avoid having the check sent to the British Commission for Welfare in order to get you to act rashly. Since when does a delivery company give unclaimed packages to a government welfare agency? Does that mean they would send that sweater Aunt Kate mistakenly tried to mail to your former address to Goodwill because you didn’t pick it up? No! They would return it to Aunt Kate. If this was real, the worst thing that would happen would be the package being returned to Captain Spaulding.

The terrorism/drug angle . Everyone wants to do their part and we all know that Obama’s Department of Homeland Security and Drug Enforcement Agency have lists of people and transactions they want to keep and eye on, but to imagine that you have to pay $125 to avoid being branded a terrorist or a drug smuggler is patently absurd on the face of it. The implication here is that if you don’t play ball, then you will be suspected of wrongdoing.

Keep it quiet . This goes back to the comment about breaking their confidentiality rules by posting their email and discussing it. Scammers don’t want you talking about their activities. At the same time, they want to look as legitimate as possible. By adding the language: This E-mail is only for the above addressees. It may contain confidential or Privileged information. If you are not an addressee you must not copy, distribute, disclose or use any of the information in it or any attachments, the scammer is trying to accomplish both.

The Bottom Line

I cannot say it any more plainly than this: No one in Nigeria wants to send you money. On the other hand, there are quite a few folks who would like to take some—all—of yours, so you have to be careful and you have to have your eyes open.

In this specimen, the company being used in the scam was FedEx, but it could have just as easily been UPS or some other courier/delivery service and there are examples of this. These scammers are using these companies to give themselves some legitimacy, to cover their real purpose. This is very damaging to the company’s brand, but there is little they can realistically do. It is the latest version of the old Nigerian 419 scam and it is spreading through the Internet thanks to spam merchants like BTI Internet. If FedEx and the other companies went after companies like BTI and tried to either shut them down or bleed them through high legal fees, then there might be a chance to stop these scams, or at least a portion of them.

Until then, however, we have to be careful. Since email like this can be filled with malware, make sure that your spam filters are properly set and that you don’t open any attachments that might come with the email. This one, for example, refers to a scan copy of the package (whatever that means) as being attached. The most important rule, however is this one: If you do not initiate the business, never send any money to anyone you do not know and trust. If you do, odds are you will never see it again.

Cap and Trade: Win or Lose, It Will Be Close

charles@gowithabc.com (Charles Cooper) — Fri, 26 Jun 2009 15:34:19 GMT

There is a last minute push going on around the country to get to as many fence-sitters on the climate change issue as possible to vote NO on the final ballot. Why is this? After all, the legislation is just to put a cap on the amount of carbon dioxide and other greenhouse gasses that we pump into the atmosphere each day; we need it to fight global warming. The UN says so, and there is that consensus in the scientific community, and that guy from NASA has been going on about this for years! Al Gore made that movie! If anyone knows about climate and planetary atmospheres, it’s the folks a NASA and Al Gore. Right?

Not so fast. There are a number of reasons why this bill is getting the opposition it is, but it all comes down to two things: Bad science, worse economics.

He Blinded Us with (Bad) Science

A recent article in the Wall Street Journal introduced us to a legislator named Steve Fielding. According to the article:

Steve Fielding recently asked the Obama administration to reassure him on the science of man-made global warming. When the administration proved unhelpful, Mr. Fielding decided to vote against climate-change legislation.

If you haven't heard of this politician, it's because he's a member of the Australian Senate. As the U.S. House of Representatives prepares to pass a climate-change bill, the Australian Parliament is preparing to kill its own country's carbon-emissions scheme. Why? A growing number of Australian politicians, scientists and citizens once again doubt the science of human-caused global warming.

The fact is that more and more scientists and politicians from around the globe are turning away from the idea of man-caused global warming, questioning the computer models, the conclusions and even the science of those who espouse the global warming dogma, the people who have spent more time smearing those who disagreed with global warming than in actually proving their theory. There is now a vigorous debate happening in Asia, Europe and Australia and even here in the US.

Oklahoma Sen. Jim Inhofe now counts more than 700 scientists who disagree with the U.N. -- 13 times the number who authored the U.N.'s 2007 climate summary for policymakers. Joanne Simpson, the world's first woman to receive a Ph.D. in meteorology, expressed relief upon her retirement last year that she was finally free to speak "frankly" of her nonbelief. Dr. Kiminori Itoh, a Japanese environmental physical chemist who contributed to a U.N. climate report, dubs man-made warming "the worst scientific scandal in history." Norway's Ivar Giaever, Nobel Prize winner for physics, decries it as the "new religion." A group of 54 noted physicists, led by Princeton 's Will Happer, is demanding the American Physical Society revise its position that the science is settled. (Both Nature and Science magazines have refused to run the physicists' open letter.)

This is not good news for the green/global warming crowd, a fact that is not lost on American Democrats who are working feverishly to ram this legislation through before the tide here turns completely against them. These people are ideologically-driven, not rationally-driven as shown by the way they blissfully ignore the following:

The earth's temperatures have remained steady since 2001 despite major growth in the amount of C02 in the atmosphere.
Peer-reviewed research has debunked the various doomsday scenarios about the polar ice caps melting, rising oceans, monster hurricanes, mass extinctions, etc.
A massive recession is precisely the worst time to kneecap the economy in the name of reining in carbon.

Voodoo Economics

We know how cap and trade is supposed to work: The government puts a cap on the amount of carbon dioxide a business is allowed to generate, and then sells carbon credits that allow the business to generate more. These can then be traded, bought and sold like any other commodity. It’s been tried before, in Europe and Australia, with disastrous results. That’s not political spin, it’s history, and it tells us that cap and trade laws:

Amount to a massive energy tax
Have no substantive impact on the environment
Kill jobs by burdening businesses—especially small businesses
Cause electricity bills and gas prices to sharply increase
Force the outsourcing of manufacturing jobs
Hurt free trade
Make people choose between energy, groceries, and other necessities
Are highly susceptible to fraud and corruption
Hurt senior citizens, the poor, and the unemployed the worst

American families will pay an additional $3,000 a Year for energy, which falls into line with what President Obama said when he was a candidate, admitting that "Electricity rates would necessarily skyrocket" under his cap-and-trade Program (January 2008). In fact, the price for all goods and services will skyrocket as the added cost of energy is figured into the final consumer prices. Just consider energy prices. According to recent Heritage economic analyses, the costs of the proposed global warming bill will kick in when it takes effect in 2012. By 2035, a family of four will see the following changes to their energy bill:

90 percent increase in electricity costs
58 percent increase in gasoline costs
55 percent increase in natural gas costs

How affordable is that, especially considering the pseudo-science that all this taxation is based on? Will your small business be able to stay in business with energy costs like this? Remember, these will hit you, your suppliers and your customers. Every use of energy will be so taxed and cost will be sent along to those who pay for the final products.

The Bottom Line

The rest of the world understands this all too well. They experimented with these schemes during the good times and know the damage that these policies can do. President Obama, Nancy Pelosi, Harry Reid and many others in the Democratic majority are bound and determined to repeat those mistakes, perhaps feeling as though they can avoid the pitfalls, or perhaps to pay back their political masters in the radical environmental movement. Who knows? What we do know is that not every Congressional Representative has made their decision, so there is still time to stop this where it is.

The following 25 Representatives in Congress are on the fence about this issue. Time is running out, so you might want to call them and let them know how you feel about Cap and Trade and the damage it will do to your business and to your family’s standard of living.

Republicans:
Bartlett (MD) – (202) 225-2721
Bono Mack (CA) - (202) 225-5330
Castle (DE) – (202) 225-4165
Dent (PA) – (202) 225-6411
Ehlers (MI) - (202) 225-3831
Frelinghuysen (NJ) - (202) 225-5034
Gerlach (PA) – (202) 225.4315
Inglis (SC) - (202) 225-6030
Tim Johnson (IL) – (202) 225-2371
Kirk (IL) – (202) 225-4835
Lance (NJ) - (202) 225-5361
LoBiondo (NJ) - (202) 225-6572
Petri (WI) – (202) 225-2476
Platts (PA) - (202) 225-5836
Ros-Lehtinen (FL) – (202) 225-3931

Democrats:
Altmire (PA) – (202) 225-2565
Bright (AL) - (202) 225-2901
Dahlkemper (PA) - (202) 225-5406
Drieshaus (OH) - (202) 225-2216
Ellsworth (IN) - (202) 225-4636
Kissell (NC) - (202) 225-3715
Kratovil (MD) - (202) 225-5311
Kanjorski (PA) - (202) 225-6511
Minnick (ID) - (202) 225-6611
Teague (NM) - (202) 225-2365

Taxing Your Way to the Poorhouse

charles@gowithabc.com (Charles Cooper) — Thu, 18 Jun 2009 10:11:34 GMT

Some of the states in the union are getting pretty desperate—or pretty greedy. Like California, which is now finally facing the consequences of its self-imposed high-tax-welfare-state way of doing business, a number of states are seeking to maintain their profligate ways by looking for new taxes to shore-up their sagging revenues in the face of the recession. A quick look at US history will show what a bad policy this is, but the lessons of the past seem lost on this generation of politician. They seem far less concerned with the impact their new taxes will have on the people of their state than on getting their hands on the money. Case in point: North Carolina. According to the Greensboro News & Record:

As part of the effort to bridge that gap, House members broadened the number of items to which state sales tax would apply and have to be collected by retailers. The tax on the category “digital click-throughs” under which the Amazon agreements fall would raise $13.2 million next year, according to estimates by the General Assembly’s fiscal research arm.

So, the North Carolina General Assembly passed a tax on digital click-throughs that would affect Amazon’s affiliates in that state. This is similar to a tax passed in New York. One has to wonder what the legislators were thinking, perhaps that this is easier to slide past the people than a big, obvious income tax hike that would make reelection more difficult, especially during these hard economic times. It did not, however, slide past Amazon. Here is their response, in the form of an email to their North Carolina affiliates:

We regret to inform you that the North Carolina state legislature (the General Assembly) appears ready to enact an unconstitutional tax collection scheme that would leave Amazon.com little choice but to end its relationships with North Carolina-based Associates. You are receiving this e-mail because our records indicate that you are an Amazon Associate and resident of North Carolina .

Please note that this is not an immediate termination notice and you are still a valued participant in the Associates Program. All referral fees earned on qualified traffic will continue to be paid as planned.

But because the new law is drafted to go into effect once enacted – which could happen in the next two weeks – we will have to terminate the participation of all North Carolina residents in the Amazon Associates program on or before that same day. After the termination day, we will no longer pay any referral fees for customers referred to Amazon.com or Endless.com nor will we accept new applications for the Associates program from North Carolina residents.

The unfortunate consequences of this legislation on North Carolina residents like you were explained in detail to key senators and representatives in Raleigh , including the leadership of the Senate, House, and both chambers’ finance committees. Other states, including Maryland , Minnesota , and Tennessee , considered nearly identical schemes, but rejected these proposals largely because of the adverse impact on their states’ residents.

The North Carolina General Assembly’s website is http://www.ncleg.net/, and additional information may be obtained from the Performance Marketing Alliance at http://www.performancemarketingalliance.com/.

We thank you for being part of the Amazon Associates program, and we will apprise you of the General Assembly’s action on this matter.

Sincerely,

Amazon.com

North Carolina imposes taxes, Amazon pulls out of the state to avoid the new taxes. The victims in all this, you guessed it, the affiliates who can no longer do business with Amazon. Now, I am not sure of the constitutionality of the taxes, though taxing the click-through and then the income derived from the click-through does smack of double taxation, there is a larger issue here.

We have learned in the past—and that lesson is being reinforced today—that the more government taxes, the more damage it does to the economy as a whole. Productivity tends to drop, fewer people have jobs and prosperity suffers. Moreover, those who can pull-up stakes and move to more tax-friendly places do so. That goes for individuals and companies like Amazon; it has always happened that way and it is happening today. When votes at the ballot box don’t seem to make a difference, people will vote with their feet.

Governments, like people, have two choices: They can either live within their means or they can go into debt. Unfortunately, in an effort to pander to the various pressure groups, constituencies, contributors and anyone else they can milk for money or votes, they are far more likely to go into debt than remain fiscally responsible. In other words, they game the system for their own benefit.

Illinois Governor Pat Quinn, who is championing a 60% income tax increase, is a prime example. During a recent radio interview on WLS, he was pressed to name a single state program that can be cut. He could not—or would not—do it. According to the Governor, there was nothing left to cut, but if something had to go, it would be police and medical services. In other words, give me the money or I will make cuts in two of the most important things to Illinois voters.

Pat Quinn, New York Governor Patterson, Nancy Pelosi, Barney Frank, President Obama—yes, even George W. Bush; what they don’t understand is that our governments—all of them—are simply too big, they are doing things now that they were never meant to do—and for the most part they are doing them badly—and that the cost associated with them has become prohibitive. It is long-past time for the people to take stock of their government and demand that it stop trying to be everything to everyone.

The Bottom Line

When we read in the Constitution that the role of government is to “promote the general welfare” that does not mean the creation of a ponderous, tax-heavy welfare state. It means that the government should foster individual prosperity through policies that promote business and commerce. It means that government acts as a referee, not a participant—except in those specific areas where the Constitution gives it authority—and that it stands back from the lives of the people.

We don’t have that now, we lost it years ago, but it is time to find it again. We cannot afford government growth spurred by political pandering at taxpayer expense. Amazon’s departure from North Carolina is a great example of that. Instead of looking for more ways to dip into the pockets of the taxpayers, the General Assembly should have come up with ways to spur business growth and prosperity. As Reagan’s tax cuts back in the 1980s demonstrated, the more money people get to keep, the more business and the economy are stimulated, the more taxes are paid. It may not be “progressive” but it is the perfect formula for increasing tax revenues.

Sometimes You Just Need to Apologize and Make it Right

charles@gowithabc.com (Charles Cooper) — Wed, 17 Jun 2009 13:07:54 GMT

General George S. Patton said it best: I don't measure a man's success by how high he climbs but how high he bounces when he hits bottom. In other words, everyone fails. It happens. The real measure of who you are is what you do to recover when you fail. Patton applied that rationale to his soldiers, but in the world of business, especially service businesses, it also applies.

I know of a destination management company (DMC) that just lost a very lucrative client and they did it by forgetting that the real measure of a business is what they do after the mistake is made, after the damage is done.

In the field of destination management, when things go bad, they tend to go bad in an obvious and embarrassing way for the client. After all, they have put their image—personally and professionally—in the hands of the DMC and when there is a failure, it is the client that takes the hit and not the DMC they hired. Here is what happened:

The DMC was contracted to manage a corporate event for the client’s outside sales team. As part of that contract, they were to have a bus waiting at 4:00pm at a suburban Chicago hotel. The bus was then to take the assembled outside salespeople downtown to Chicago’s Navy Pier, a journey of about an hour. These arrangements were confirmed by the client in writing the day before and again by phone that morning. There was no miscommunication, yet at 4:00pm the tour bus was waiting at Navy Pier, instead of picking up the salespeople for the trip to Navy Pier.

The destination management company had just experienced an epic failure and the client, who was left looking rather foolish, was furious. This was the time for the DMC to; as Patton put it, bounce. There were a number of different ways they could go to deal with the issue. They could have A) worked to resolve the issue as quickly as possible and with as little trouble to the already troubled client as possible, or B) insult said troubled client with a flurry of profanity, angrily lecture them on how they are human and make mistakes as well, offer to buy a couple of drinks while the people wait and then hanging-up on them.

Which choice do you think our DMC made? Here’s a hint: They showed very little bounce.

No, rather than bounce, our DMC went with Option B, preferring to slither in an altogether terrible and viscous fashion along the gutter of pathetic business practice as they left their client shaking with outrage, finally oozing into a fetid sewer where mediocrity is something sorely to be yearned for.

To recap: they swore at the client, told her off, threw a token offer at her and hung up on her. That is a recipe for losing business, which is precisely what happened. They did pay for the drink tab at the hotel while the passengers waited their 90 minutes for the pick-up. I’ll give them that, but the apology they sent via email had their client a bit puzzled. (The names have been removed to protect all those involved.)

Thank you, and again I am so sorry about last night, this [the bar tab] will be credited to you today.

And for your other service, I have made it crystal that your service is to be onsite no less that 15 min prior to the scheduled pick up time. And I will follow up with the drivers to see that this happens.

That second part would be comforting, indeed, were it not for the unfortunate fact that there was no other service contracted. This was a one-day event. Didn’t the company know that, and what does it say about them that after failing with the bus, they thought that there was more to the contract? Nothing good, I imagine. In fact, somehow the word “chaos” comes to mind.

The Bottom Line

Gross disorganization in the office of the destination management company is probably at the bottom of all of this mess. Orders get lost, emails go unread, people forget things, the busier the office, the more likely things are to slip through the cracks. It’s normal, it’s human, and it is also utterly irrelevant. To the client, all of that adds up to excuses. With any customer, you are responsible for their experience with your firm, but when you take the image and reputation of your client in your hands as part of your services, then you are not only responsible for the experience you provide your client, but also the experience your client provides to whoever they are working with. With the DMC in this story, the client was entertaining salespeople, so the damage was not as bad as it might have been. They could have just as easily been entertaining major customers. However, the DMC raised the damage level by taking a high-handed approach to the initial failure and then demonstrated their incompetence when trying to make amends.

Remember, everyone makes mistakes and no one is perfect, including you. The issue is never one of flawless service. That would be nice, but it doesn’t exist. The issue is what you do when things go bad. Do you turn inward, circling the wagons and defending your mistake, or do you reach out to your customer and work hard to resolve the issue quickly and effectively? Do you bounce or do you slither? The choice is yours.

Get Ready for the Pay Czar

charles@gowithabc.com (Charles Cooper) — Thu, 11 Jun 2009 16:49:03 GMT

The Associated Press story put it in stark, clear terms: Democrats on the House Financial Services Committee said Thursday the administration's efforts to hector the private sector into reining in executive pay might not go far enough.

Now, this is after naming a Special Master for Compensation to make sure that the pay and bonuses of executives for companies that needed to be bailed out is not over the top. As I mentioned in a previous article, this is a fine, populist move, but hardly an economically practical one unless the entire playing field is leveled by across-the-board wage controls. Now, as if fulfilling a prophecy, we have this: [Congressional] Democrats and administration officials agreed that companies across the private sector need to adjust compensation practices to avoid damaging the economy.

Right now, they are talking about ways to have the shareholders of these companies make the decisions about executive pay, and if it goes no further than that, they might be on to something. After all, the executives—right up to and including the CEO—are just employees. Sure, they make lots more money than anyone else in the company and they have all sorts of perks, but they are employees all the same. The shareholders are the owners. They ought to have a very strong voice when it comes to determining the pay of their company’s executives.

There was another idea worth considering, new administration guidelines that call on all publicly held companies to link compensation to long-term performance rather than short-term gains. "We believe that compensation practices must be better aligned with long-term value and prudent risk management at all firms, and not just for the financial services industry," said Gene Sperling, a counselor to Treasury Secretary Timothy Geithner.

Two great ideas, but that is really not the point. Executive pay did not damage the economy regardless of what Obama and his Congressional minions claim. The damage to the economy came from short-sighted but socially laudable programs that put people into mortgages they could not afford on the mistaken idea that the real estate boom would last indefinitely. It was further exacerbated by poor government oversight and an abandonment of the regulations that ensured fiscal safety and stability from the Great Depression onwards. These were political decisions made by politicians pressed by lobbyists from the financial sector and made for political purposes and personal gain. Sure, executives made a lot of money, and they made decisions that would guarantee even more, but it was not their pay that was at the center of the problem, it was the environment created by Washington politicians of both parties that opened the door to the abuses we now have to clean up.

Capping the compensation for executives in firms that received bailout money makes sense. The tax payers are part owners of these companies and so they ought to have a say in the pay and bonuses of the executives. That, by itself, should be enough to keep any company from taking any government money at all. However, this notion that the executive pay for all firms across the private sector should be subject to controls for the good of the economy is ludicrous.

Executive pay regulation is just another in a string of political decisions that have little to do with helping the ailing economy but everything to do with furthering the political ends of the American Left. It is really little more than a ham-handed populist tactic designed to garner support among an increasingly unhappy citizenry for Obama’s big government policies, a way for him and legislators like Barney Frank to be able to identify with the proverbial “little guy.” Of course, Obama and company will argue that they are doing the Lord’s work and that everyone has to sacrifice. All he wants to do is narrow the gap between the workers and the executives and since he can’t raise the workers up, he will push the executives down.

So, to recap, corporate greed as typified by high executive pay—not a long string of harebrain political decisions—damaged the economy. Lowering that pay across the private sector is good because it will A) Save the economy; and B) Narrow the gap between the executives and the janitors. Well, if all that is true and righteous, then there should be no problem whatsoever in following the advice of the Workforce Fairness Institute: Apply the same caps to the executives of the labor unions. In a story by Amanda Carpenter for The Washington Times, we learn that a 2008 Hudson Institute study that suggests unions have short-changed benefits for their rank and file in favor or generous executive compensation packages and to pad the coffers of their political allies, who are mostly Democrats.

According to the study cited in the article, the 21 largest unions’ pension plans had less than 70% of the funding needed to meet their obligations, and none were fully funded. Seven were less than 65% funded. Yet, in spite of this, 23 officer and staff funds from the same unions were 88.2% funded. Seven were fully funded plans and another 13 were at least 80% funded. Isn’t this the same sort of financial malfeasance and gross underperformance that has corporate executives under attack? Where is the outrage in Washington over how the “little guy” is being cheated by the “fat cats”?

The Bottom Line

It is not there, union bosses are above reproach these days since no one in the current government is going to go after their benefactors in the labor movement. This is more than mere politics; however, it is damning proof that the executive pay cap issue is nothing more than an unconstitutional ploy to win some votes and initiate some of the Left’s long sought after social change by vilifying a certain group of people in the finest Saul Alinsky tradition. Seeing that this is a recipe for disaster, Representative Tom Price of Georgia, chairman of the Republican Study Committee, summed it up perfectly: "The president cannot continue his heavy-handed meddling in the private sector and expect it to function, much less flourish."

Stimulus Scams Continue

charles@gowithabc.com (Charles Cooper) — Tue, 09 Jun 2009 15:06:39 GMT

I just got a call, on my cell phone no less, telling me that I am required to visit a certain website to apply for my share of economic stimulus funds that will soon be available in my area. Needless to say I didn’t bother, it was an obvious scam, but with all those autodialers at the disposal of these criminals and hucksters, it occurred to me that calls like that are going out to hundreds of thousands, if not millions of people and enough of them are gullible enough to take the bait. Then I read this on BusinessWeek.com:

My sons own and operate an architectural/engineering firm and a steel fabrication firm. These are Main Street firms, needing operating capital. What department of the stimulus package do they apply to for a loan?

The answer went through how this person’s sons can apply for SBA loans backed by stimulus funds and then went on to talk about the fraud arising from the stimulus program, saying in part that:

Hundreds of complaints have poured in to the BBB in the weeks since the stimulus package was passed, she says, most of them from people who responded to Internet ads leading to websites featuring "testimonials" from individuals claiming they got government money to start businesses or pay off bills. For a fee, many of the website pitches say, they'll send you a CD or a mail-order kit explaining how to have access to government stimulus money.

That sounds awfully similar to my phone call. What these places are selling is, essentially, free information. You don’t have to pay to learn about government grants or SBA loans, unless you sign-up with one of these outfits. What they are gathering is your identification and details about your finances and we know all too well what unscrupulous frauds like to do with that information.

What gets me, other than having to pay airtime to listen to some conman’s spiel, is how desperate we are today that the idea of Washington cutting us all stimulus checks is even something anyone would consider. Step back for a moment and think about this: When was the last time the federal government actually handed out money? The Bush Stimulus, right. Now, how much wailing and gnashing of teeth accompanied that thoughtful but largely impotent gesture? Right again, lots. It was all over the media and in the corridors of power—it’ll work, it will fail, too much, not enough—and the debate was loud and generally danced around the real issues: that people could decide what to spend their own money on and that it was really the people’s money that was being returned. As it turned out, the people like keeping more of their money and with it they will do what is in their own best interests. This was not good news for the Washington elite, so let’s not expect that experiment to be repeated anytime soon.

Of course, we have heard a lot of loud debate since Election Day, it is true, and the issues—the people keeping their money and doing what is in their own best interests—are the same as well. The difference is that this time the focus is on government and government action, not on the actions of individuals. Today, the economic stimulus is being allowed to trickle down to the people in the form of a generous $8 tax cut that may or may not last the year, payments for work on the so-called “shovel ready” projects, government programs of all sorts and funds to back business lending.

The Bottom Line

The lesson in all this is that if someone offers you something for nothing, offers to deliver free government money to you to ease your problems and make you and yours prosperous again, they are lying to you.

To get your hands on some stimulus money, you have to actually be part of something the government wants to fund. If you are not, then your only hope is an SBA loan. You can work for it, or you can borrow it. What you cannot expect to do is hold your hand out and receive it.

Do We Really Need a Compensation Czar? Or Maybe a Different Kind of Czar?

charles@gowithabc.com (Charles Cooper) — Fri, 05 Jun 2009 16:26:06 GMT

Deborah Solomon at The Wall Street Journal reports that:

The Obama administration plans to appoint a "Special Master for Compensation" to ensure that companies receiving federal bailout funds are abiding by executive-pay guidelines, according to people familiar with the matter.

Talk about a wonderful example of having to play the King's tune when you take the King's shilling. This is the executive pay czar that the administration has been talking about ever since they seized upon the outrage over executive compensation and turned it into a populist cause. The czar will make sure that executive compensation for companies who have taken—or will take—falls within the guidelines developed by President Obama. These guidelines include limiting salary for top executives and requiring that additional pay be in the form of restricted stock, vesting only after the company repays its debt, with interest, to the government. Congress added even tougher rules on bonuses for top earners at companies receiving TARP money, barring them from paying those executives bonuses that exceed a third of their total compensation. Throw in the administration's efforts to change the way the financial sector pays its employees—to keep them from paying people in a way that would threaten the safety and soundness of the bank—and you can see that Mr. Kenneth Feinberg, the man likely to get the job, will have his hands full.

From a political point of view, this is a slam dunk. The people are outraged at the huge sums of money these people made while their firms, overloaded with bad debt and crippled by questionable mark-to-market accounting regulations, went under. Obama comes in, judiciously saves some, lets others go to the wall, and demands accountability, transparancy and even a dose of humility from these former masters of the universe. He will end this terrible injustice and the people will see his efforts and love him for it.

The problem is that politics is not business and rarely reflects anything even remotely like the real world. It certainly does little, if anything, to help business or the economy. In this case, companies that cannot pay the big bucks are not likely to get the big talent, which will impede their ability to compete. That may be why Obama wants to revamp the entire pay system for the financial industry. By leveling the playing field, the temptation to find greener pastures will drop dramatically.

The real question, though, is whether we need a “Special Master for Compensation” (will people be walking around calling him “Master” all day?) or some other kind of czar. After all, czars get appointed to sort out things that have gone horribly awry, right? There is a problem with the auto industry, for example, and we get a car czar. We also get a controlling interest in General Motors and Chrysler to go along with that. Well, there is a harrowing problem in this country and it is getting worse by the day. I speak, of course, about the economy. Former Clinton advisor Dick Morris summed-up the current economic situation and Obama's response to it as follows:

In April, personal household, inflation-adjusted income rose by $122 billion. Of that increase, one-third or $44 billion came from the government’s stimulus program. But while personal income was rising, household savings (which includes paying down credit card balances, mortgages, student loans, car loans, etc) rose by $132 billion — $10 billion more than the rise in income. So personal consumption dropped 0.1%.

The stimulus package was a total and complete failure. As predicted, as happened with Bush’s 2008 tax cut, as happened with the Japanese stimulus packages of the 90s, fearful consumers sat on their money and wouldn’t spend it. Keynesian economics didn’t work. Again.

But the debt sure piled up. The deficit quadrupled and is sending interest rates soaring as the government elbows aside businesses and consumers at the loan window, all in a desperate effort to borrow enough money to spend enough money to stimulate the economy which isn’t happening.

Keynesian economics doesn’t work. The theory for rational expectations has taken its place. Consumers are not idiots. They know that when their paycheck is fatter - either because of tax cuts or government spending - that it is not the beginning of nirvana but just a short term, one shot respite from hard times. They know the difference between standing in front on an electric fan and a windy day.

Barack Obama has fatally undermined our currency, our solvency, our financial stability, and - ultimately - our economy all to spend money that has had no economic effect!

When folks from your own party are looking at your policies and seeing nothing but scortched earth, it is time to rethink things. The problem is, that rethinking will not happen. Obama has turned to policies that have been tried—and have failed miserably—time and again because free-market capitalism does not fit well with his left-wing ideology. More than that, these policies have taken a recession, which would have naturally eased by now, and are making it worse and more long-lasting. Last time this happened, it was set into motion by Franklin Delano Roosevelt and it took World War II to stop it.

The Bottom Line

By the President's own logic, the executives are out of control and the business—in this case the Federal Government—is on a sure road to ruin. More than that, it will destroy the US economy in the bargain! If we apply the remedy that Obama is pushing on the private sector, then it is time to appoint a Government Czar, to sort things out and make changes so the government is run correctly and the economy is saved. A noted business leader, an entrepreneur with a track record of sound, real world, financial success—someone who knows how to make a profit—who can bring that experience to bear on the economic problems we face.

I know that such a Czar would not be ideologically palatable to Obama, Pelosi and the rest, but I really have to wonder: Would the Government Czar decide to fire Obama and the other leaders who brought us to this ruinous point? That may be why they would never appoint one.

GM Bankruptcy: The Small Business Crisis Begins

charles@gowithabc.com (Charles Cooper) — Mon, 01 Jun 2009 11:08:45 GMT

Today, June 1^st, 2009, is an historic date. It is the day that General Motors entered bankruptcy. There are a lot of wide-eyes and crestfallen faces in Detroit and Washington today, as if this is some kind of surprise, a financial Pearl Harbor if you will. It isn’t, this assault has been going on for a long time, and if you want to know who sank GM’s battleships, you need look no further than the GM corporate boardroom and the UAW. Because of weak leadership and short-sightedness, GM executives have been systematically running the company into the ground for years now and the unions have been right there adding ballast and force to the effort, demanding more and more, sucking the competitive life out of the company. Now, here we are. One of the parties to the company’s demise—the unions—will now split ownership with the only entity actually less competent to make sound financial and industrial decisions for the good of the company, the federal government.

GM Bankruptcy and Small Business

That is the bleak landscape upon which a very large number of small businesses will have to make a living, and many of these will have to follow GM up the bankruptcy court steps, which will be a major blow, not only to the auto industry but to the economy as a whole. According to Keith Gerard at AllBusiness.com, Independent suppliers manufacture 70% of the 15,000 parts that go into making a single automobile. Taken together, these companies comprise a $388 billion industry within the overall automobile industry, accounting for over 600,000 (of the 2 million) American jobs tied to the auto industry. The overwhelming majority of these suppliers are small businesses with an average of 80 to 100 employees.

Will These Small Businesses Get Paid?

It is not just future work that is imperiled as the number of nameplates—and the associated production—is trimmed down. With the government holding such a large interest in the company, they will not let it die completely. There will always be a level of productions, though how much and of what is still in question.

The more immediate issue deals with payments on product that has already been delivered. Many of these companies have been waiting for weeks or even months to be paid and the bankruptcy protection is likely to stretch that out even further. Those companies participating in the administration’s Supplier Support Program—funded by the Troubled Asset Relief Program (TARP)—are seeing payments withheld up to 180 days, which is resulting in severe cash-flow problems for small suppliers. This has the effect of raising their risk categories for lenders and receivables insurance brokers, which, in turn, leads to even tighter credit terms, if credit is extended at all. Lenders and brokers no longer see the auto industry, or those connected with it, as a good risk.

Of course, there is always the government’s 7(a) small business emergency loan plan, right? The problem is that it doesn’t offer enough to keep these firms afloat, and it requires personal collateral to the tune of 20% of the loan and in this economy that is simply not realistic.

More than that, if the experience with Chrysler’s investors is any guide to the way the government is likely to handle things, these small businesses have little hope to recoup all of the money—or even most of the money—that they are owed. Forced to take pennies on the dollar, and later forced to renegotiate their prices to continue supplying the new GM and Chrysler companies, you will see these firms struggling to survive and those that cannot widen their customer base, or who cannot get ever-more-elusive credit, will probably fail.

The Bottom Line

While an emergency loan may help bridge the gap for a time, a look at the way the automaker crisis was handled by the government shows rather graphically that it is no solution. After all, Obama threw billions of dollars at the automakers to keep them out of bankruptcy, and it failed to save them. It did, however, give him a chance to payback the unions, but that is a different issue. The bailouts failed because they failed to address the labor, product and management problems that had been plaguing Detroit for ages. In other words, they failed because the problem was not money.

For these companies to have the best chance for survival, they have to realize that their cash problems are not their real problem, either. Rather, they are symptoms of a more fundamental problem—the market they are in. Many of them will have to turn away from the auto industry and find other markets to serve, other products to build, which will further exacerbate the problems with the auto industry, but we are in an environment where “every man for himself” is pretty good advice. These small businesses need to look to themselves for salvation and with their skills and knowledge, they can do it. These are good companies—too good to be trampled under the jackboots of a government-run auto industry—and they should go forth to greener pastures. Waiting for Washington to do right by them could mean the end of them all.

When Fluffy Flies First Class

charles@gowithabc.com (Charles Cooper) — Fri, 29 May 2009 16:28:50 GMT

Pets are great, aren’t they? They offer the companionship some crave, the unconditional love so rare in our human companions, and for a few the really tiny ones make for a great fashion accessory. We walk them, we feed them, we play with them and now, Southwest Airlines is allowing us to fly with them, right in the cabin. That is great, if it is your dog or cat, but I think that Southwest is forgetting one thing—the other passengers!

In a story on ChicagoBreakingNews.com, Julie Johnsson writes:

As of June 1, Southwest passengers will be able to purchase the right to bring small pets onboard flights for $75, each way, for travel that begins June 17.

Texas-based Southwest said it will allow a maximum of five pets on to any given flight. The cats and dogs must be small enough to travel comfortably in a leak-proof carry-on case that will fit under an airline seat.

Southwest also plans to outfit its airport terminals with areas where animals can relieve themselves. But it warned passengers on its Web site that these areas will likely be outside the security areas and that it won't hold flights for passengers who opt to take their pets on a potty break.

OK, never mind that the airline needs to increase its revenues; and never mind that you, the non-pet-owning traveler will be trapped in an aluminum tube with poor air circulation, thousands of feet in the air, traveling at hundreds of miles an hour for who knows how many hours, with a quintet of terrified lapdogs and adorable feline dander-spewing machines. For those with animal allergies, not to mention those who prefer a quiet flight that does not smell like a dog bed or a litter box, this is not a good combination. I am also sure that passing—and smelling—those promised airport relief areas will be a real pleasure before you board your kennel, er, flight.

Take the issue of allergies. Many people are allergic to animals. These allergies manifest in everything from hives to sneezing to profound respiratory distress. Are these people, who have dutifully paid their fare and expect a safe flight, going to be forced to endure allergy attacks, asthma and other health problems simply so the airline can collect an additional $375 on their flight? That seems to be the plan.

Also, will the airline guarantee that there will be no turbulence on the flight? Anyone who has seen a dog in the car knows they don’t enjoy potholes, sharp turns or anything else that shakes them up. Some bark their heads off; others get scared and have accidents or get sick. Any one of these, on top of the good jouncing everyone would get from the turbulence itself, will be such an added pleasure on the flight for staff and passengers alike! After all, it’s not as if you can roll down the window for fresh air.

I think you begin to see the potential problems here and the reason for pressurized cargo areas for pets.

The Bottom Line

I am not saying these things because I don’t like pets. I love animals! Cats, dogs, ferrets, turtles, birds, fish, rabbits, hamsters, chinchillas, gerbils—I’m all for them! I would love my house to be filled with animals. Notice, I said my house, not the cabin of the aircraft I am traveling aboard. They don’t belong there, and by putting them there—especially for such a trivial return—Southwest is really shooting itself in the foot.

A business cannot cater to one group of customers—in this case the pet-owners willing to pony-up the aforementioned $75—to the detriment of another group of customers—everyone else. When a business does follow this course, it leads to only one place—the courthouse steps. It will take one bad asthma attack and Southwest will be explaining its policy before a judge. “Well ya see, yerhonner, it’s this way: Without that extra $375, our airline’d be broke!” Then the gavel drops and the asthmatic plaintiff and his lawyer have a nice payday at Southwest’s expense. On top of that, said plaintiff would take their money and fly other carriers, recounting the tale of his asthma attack and how it resulted from Southwest’s silly pet policy.

That is the lesson here for Southwest and for every business owner. Your customers must all have a positive experience with your company. If you encourage a situation in which any portion of your clientele will be inconvenienced or actually damaged in some way for the benefit of another portion, you not only risk losing that segment of your customer base, you risk the kind of litigation and terrible publicity that could well put an end to your business.

It will be interesting to see how this plays out for Southwest. Stay tuned!

A Scrushy Lesson for All Business Leaders

charles@gowithabc.com (Charles Cooper) — Thu, 28 May 2009 13:23:00 GMT

Meet Mr. Richard Scrushy, the former CEO of HealthSouth, currently serving a seven-year federal stretch in Texas on a bribery conviction—he bribed former Alabama Gov. Don Siegelman—but that isn’t what were here to talk about. No, Mr. Scrushy has been brought to the Jefferson County Circuit Court in Alabama—HealthSouth is headquartered in Alabama—to face a civil suit brought by the company’s investors and stemming from the rather self-serving management style he adopted during his time as CEO. According to a story on BhamWeekly.com:

A derivatives action on behalf of HealthSouth investors is seeking damages from the former CEO. The lawsuit is a civil case in state court. Scrushy risks paying damages if he loses, but he will not face further time in prison.

Why are the stockholders suing Mr. Scrushy? They are suing because when he was the CEO of this publicly-traded company he used the firm as an extension of his own wallet. Moreover, as a man of grand ambition and expensive taste, he did it big.

Plaintiff’s lawyer John Haley described how a fairly small $7 million account fraud ballooned over a period of seven years (1996-2003) to approximately $2.7 billion. Haley also discussed how Scrushy would use the company for personal reasons, directing business to companies that he had set-up and spending $40,000 on breast implants for the members of his girl band, 3rd Faze. The band itself was paid by HealthSouth and traveled to events on HealthSouth aircraft and on HealthSouth’s dime.

The end result of all this was that HealthSouth, the company that Mr. Scrushy was supposed to be leading, was being bled to the tune of $2.64 billion in accounting fraud and another $1.23 billion in fees and legal settlements once that fraud was brought to light. Now, the investors want to get some of that back.

It doesn’t help that the main witnesses for the prosecution are the five HealthSouth CFOs who already confessed to being in on the fraud, but Haley described it like this: it’s like a car accident, and Scrushy was at the wheel. The CFOs are the ones riding with Scrushy at the time of the accident. “He was the driver of the vehicle that caused the damage,” Haley said.

To give the trial judge, Circuit Judge Allwin Horn, a complete picture of the damage done, Scrushy’s successor, Jay Grinney, took the stand to testify about the conditions he found when he took over in 2004 and what he had to do to keep the company out of bankruptcy. He discussed to utter lack of any internal controls, describing how there was virtually nothing in place to catch or prevent fraud and malfeasance, saying that the situation was “unlike anything he had seen at other companies.” To deal with the mess, Grinney said that HealthSouth was forced to amend nearly 90% of its accounts to reflect real numbers, spending more than one million man-hours to clean up the fraud. According to Grinney, it is the responsibility of the CEO to make accurate statements to shareholders and the public and that any CEO who saw the same documents that Scrushy saw “should be able to see fraud of the magnitude of HealthSouth’s fraud.”

In other words, assuming that Scrushy was not somehow brain dead during his time at HealthSouth, he would have had to know about the fraud going on in his company, and if he knew about it, there had to be a reason he did nothing to stop it; a reason such as he was in on it! That is kind of circumstantial, but the breast jobs for his girl band and all that business going to his side companies do go a long way toward bolstering the plaintiff’s case. We’ll have to see how it all plays out.

The Bottom Line

The case against Richard Scrushy is a pretty strong one, in spite of the felonious nature of the plaintiffs’ star witnesses, but it’s not done yet. Regardless of the trial outcome—remember the OJ trial—there are some important lessons for every business owner, president or CEO.

Lesson One : You are not a rock star. It is sad but true. A better analogy would be the captain of a ship. You cannot afford the stereotypical attitude, vanity and self-centeredness of a rock star while you are at the ship’s helm and dodging icebergs.

Lesson Two : There is always someone you need to please. It may be your partner; it may be your investors. It is always your customers. If you don’t, you have a problem. During this time when corporate heads are rolling and CEOs are regarded as highly as the US Congress, the odds of being punished for even perceived wrong-doing is rising by the day.

Lesson Three : Your primary responsibility is to your investors, partners and employees, not to yourself. This is a corollary to Lesson Two: To please these people, you have to put the business first. In other words, do your job. Scrushy did not do his job as CEO and now he will be made to pay for that.

Leadership is about service. It is about making sure that the people following you have what they need to get their jobs done effectively. It is about creating an open and honest atmosphere in which everyone can pull together for a common goal. The Scrushys of the world pervert this and everyone suffers as a result. That is not leadership, its not creativity and its not cleaver. It is theft, no more, no less, and it cheats everyone connected to it.

Voting With Your Feet: Entrepreneur Quits New York

charles@gowithabc.com (Charles Cooper) — Wed, 20 May 2009 15:20:02 GMT

Permit me to introduce you to Tom Golisano, founder and board chairman of Paychex, Inc. His hard work through the years and a bit of luck has made him a wealthy and successful man and one of the pillars of New York society. He loves New York, but he is pulling up stakes, leaving New York and heading to Florida. Why? Because the out-of-control spending, and the spate of new taxes and tax increases imposed by Governor Patterson and the State legislature to pay for it, have simply made it far too expensive for him to remain there. Golisano, one of the wealthy job-creators whose taxes support the State of New York, is withdrawing that support and voting with his feet. In an open letter to the New York Post, he makes his feelings very clear:

I LOVE New York . But how much should it cost to call New York home? Decades of out-of-control budgets, spending hikes and relentless borrowing have made New York simply too expensive.

Politicians like to talk about incentives -- for businesses to relocate, for example, or to get folks to buy local. After reviewing the new budget, I have identified the most compelling incentive of all: a major tax break immediately available to all New Yorkers. To be eligible, you need do only one thing: move out of New York State .

Last week I spent 90 minutes doing a couple of simple things -- registering to vote, changing my driver's license, filling out a domicile certificate and signing a homestead certificate -- in Florida. Combined with spending 184 days a year outside New York , these simple procedures will save me over $5 million in New York taxes annually.

By moving to Florida , I can spend that $5 million on worthy causes, like better hospitals, improving education or the Clinton Global Initiative. Or maybe I'll continue to invest it in fighting the status quo in Albany . One thing's certain: That money won't continue to fund Albany 's bloated bureaucracy, corrupt politicians and regular special-interest handouts.

How did the state get to this point? By spending, spending and spending some more.

New York 's budget was $72.7 billion in 1999. Ten years later it ballooned to $131.8 billion. Each year, on average, the budget has risen at an astounding 6 percent compounded annual rate -- more than double inflation (2.8 percent).
Medicaid spending alone works out to $2,283 for every man, woman and child in the state. That's the highest in the nation and twice the national average. In the last decade, the Medicaid budget grew 50 percent (from $30 billion in 1999 to $45 billion in 2009). In almost every sector (hospitals, nursing homes, medicine, clinics and home and community care), spending per recipient regularly exceeds the national average.
Faced with escalating costs and diminishing returns, Albany and its allies -- that is, the health-care unions (SEIU Local 1199 has more than 300,000 members, many of whom are politically active) -- have only one answer: increase taxes.
New York spends the most, per pupil, in the nation on education. Our education spending is 63 percent above the national average. Costs went up about 70 percent in the last decade (from $12.7 billion in 1999 to $21.8 billion in 2009).
Like health care, education is something worth spending on and worth investing in, but we're spending more and getting less. New York City schools graduated only 54 percent of high-school students in 2007; Buffalo , just 47 percent, and Rochester 39 percent. Why do we keep spending more? Perhaps it's because New York teachers unions spend millions convincing Albany to spend more. And when faced with potential cuts, the union and its allies had one response: increase taxes.

Nor is it just Albany . After all, local governments tax, too. In New York , the average total state and local tax burden is $5,260 for every man, woman and child. That's by far the highest in the country. And like Albany , when faced with problems, municipalities have one answer: increase taxes.

Upstate New York has been particularly hard hit. Add unreasonable real-estate taxes to uncontrolled state spending, and you wind up with whole communities decimated. An unworkable assessment process compounds the problem further. The result: Fifteen of the 20 highest-taxed counties in America are right here in Upstate New York . While homeowners in other areas build equity, we just pay more taxes.

This problem didn't begin with the current recession. New York faced a $6 billion shortfall before the economic downturn. However, in the face of economic turmoil, Gov. Paterson, Assembly Speaker Sheldon Silver and Senate Majority Leader Malcolm Smith looked to the unions and special interests, who answered with one voice: raise taxes.

That was irresponsible -- and may just prove to be counterproductive, since the top 1 percent of earners account for about 50 percent of state revenue and are the ones who can and will leave. Among other hikes in taxes and fees, they raised the marginal tax rate on the most successful (and most mobile) New Yorkers to 8.97 percent, the second-highest rate in the nation.

Bottom line? By domiciling in Florida , which has no personal-income tax, I will save $13,800 every day. That's a pretty strong incentive.

Like I said, I love New York . But I'm not going to pay any more for the waste, corruption and inefficiency that is New York state government.

It seems pretty straightforward: A person who creates jobs and adds value is leaving the community because it is no longer economically sensible for him to remain and the State is the poorer for it. This is something that taxing politicians never seem to understand: the people with the money will protect that money, even to the point of moving from high-tax jurisdictions to low tax jurisdictions.

Also, unless a business is strictly local, so can business owners. Given the electronic nature of our financial industry, it would not be difficult at all for many businesses to pull up stakes and headquarter where the grass is greener. Sometimes others will take the place of the departed, sometimes not, but it has always been true that money votes with its feet. People who are successful prefer to keep their earnings rather than subsidize bloated government, whether that is on the local, state or federal level. On the local level, it is no news that high-tax cities like Chicago and New York City have seen people and jobs drain away as the burden of government is increased. If Governor Quinn’s 50% tax increase is passed in Illinois, you will see people leave the state, especially entrepreneurs, the job creators, who have the means to set-up elsewhere.

It is no surprise that out of control spending leads to out of control taxation and the resulting exodus, but now we are facing that on a national level. Will that mean that companies with the means will go offshore? We are already seeing that in the energy sector. It takes little imagination to see it coming in other sectors of the economy as well. After all, if all the various governmental entities are taking as much as 50% or more from your revenue, then why are you working so hard? Where is your incentive? That is where Mr. Golisano was, questioning why he should remain in a place where so much of his income was being taken by government.

His solution was to move, like so many others before him, and so many others yet to go. That leaves those who remain to shoulder the additional burden as more tax revenues will be needed to make-up the shortfall of the lost taxes. It means more businesses close, which leads to more unemployment, further shrinking the tax rolls but padding the rolls of people on government aid and that leads up to a vicious spiral to ruin. We see it in Michigan, and are seeing it begin in New York and are likely to see it in Illinois before the year is out. But it doesn’t need to be this way.

The Bottom Line

The government is too big—every level of government—and it is sucking the life out of American business and American life. It was too big under Clinton, far too big under Bush and is growing at a rate usually associated with the monster in a Japanese sci-fi flick. It is also doing things our founders never intended government to do—things it has no business doing—and the cost of that bloated corpulance, borne of a split between our government and the US Constitution, is disastrous. It is not an issue of preferring Hamilton’s Federalism to Jefferson’s Democratic Republicanism, but rather John Madison’s middle path between the two, the path that keeps the federal and state governments within their proper spheres and emphasizes the prosperity of the American people over the power of government.

To do that, the people have to rein in their governments on every level. America can no longer afford ignorant voters; it can no longer afford a government that acts beyond its rightful place. Politicians need to hear from you, from me, from everyone that their number one job is to help you prosper, and that begins with you keeping more of your hard-earned money. The wealthy already pay their fair share, and my fair share and your fair share, too. How about everyone pays their fair share? Instead of a tall, narrow tax structure that is balanced on the checkbooks of people who can leave and take their money with them, spread it out to all but the most destitute and make it low and fair for all.

New York has no business driving people out of the state for financial reasons, and only because of a wide-spread yet horribly misguided ideology are they doing so. Our founders foresaw the situations we are facing today that directly result from that ideology, they saw them as clearly as if they had a crystal ball, and they gave us a foundational document—the Constitution—written specifically to head these problems off. It is time to reacquaint our government with its foundation. If it’s been a while since you read it, visit the Constitution of the United States and explore. You might be surprised by what you find.

Then contact your legislators and demand change—real change—the kind you can believe in!

Credit Card Overhaul Passes Senate

charles@gowithabc.com (Charles Cooper) — Tue, 19 May 2009 16:21:02 GMT

Name

Yesterday, this page discussed plans by Advanta to close down its credit cards to new purchases and securitize its debts. One can only wonder if one of the things that drove this small business lender to this rather drastic decision was the legislation that passed the Senate today by a vote of 90-5.

This new legislation, called the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act of 2009) offers a number of changes to the way credit card companies do business. These changes include new mandates as well as amendments to various federal regulations such as:

Title I: Consumer Protection

Amends the Truth in Lending Act to require advance notice of any increase in the annual percentage rate of interest (APR) pertaining to a credit card account under an open end consumer credit plan.
Requires such advance notice to include a statement of the obligor's right to cancel the account before the effective date of the increase.
Imposes a freeze on interest rate terms and fees on canceled cards.
Sets limits on fees and interest charges, including a prohibition against penalties for on-time payments.
Authorizes consumers to elect to prohibit a creditor from completing any over-the-limit credit card transaction that will result in a fee, or constitute a default.
Allows for over-the-limit fees only when an extension of credit causes the account credit limit to be exceeded. Prohibits such a fee when the credit limit is exceeded only due to fees or interest charges.
Allows imposition of an over-the-limit fee only once during a billing cycle. Prohibits its imposition in a subsequent billing cycle with respect to such excess credit, unless the consumer has exceeded their credit limit during that subsequent cycle.
Prohibits a separate fee to allow the consumer to pay their bill regardless of method--mail, electronic transfer, telephone authorization, or other means.
Requires reasonable fees for cardholder agreement violations and currency exchanges.
Prohibits a creditor from furnishing information to a consumer reporting agency concerning a newly opened credit card account until the credit card has been used or activated by the consumer, thus granting the consumer a right to reject a credit card before notice of the new account is given to a consumer reporting agency.
Sets forth requirements for the terms of any credit card account, particularly fixed rate and prime rate, under any open end consumer credit plan.
Revises requirements for prompt and fair crediting of card payments.
Increases from 14 to 21 days the length of the billing period for imposition of the finance charge in credit statements.
Prohibits universal default except in certain circumstances.
Prohibits unilateral changes to cardholder agreements until after the date on which the credit card will expire if not renewed.
Increases the civil penalty against any creditor who fails to comply with specified requirements in the case of an individual action relating to an open end credit plan that is not secured by real property or a dwelling.
Specifies such penalty as twice the amount of any finance charge in connection with a transaction, with a minimum of $500 and a maximum of $5,000, or an appropriate higher amount in the case of an established pattern or practice of such failures.
Requires specified federal regulatory agencies to evaluate the policies and procedures used by credit card issuers for compliance with this Act.
Specifies additional transaction or event information to be included in APR information the Board of Governors of the Federal Reserve System (Federal Reserve Board) must collect, publish, and disseminate to the public.

Title II: Enhanced Consumer Disclosures

Revises payoff and repayment timing disclosure requirements, as well as those for civil liability determinations for creditor compliance violations.
Requires the creditor to provide a toll-free telephone number at which the consumer may receive information about accessing credit counseling and debt management services from agencies certified by the Secretary of the Treasury.
Instructs the Secretary, through the Office of Financial Education (OFE), to issue guidelines for the establishment and maintenance of such a toll-free telephone number.
Revises requirements relating to late payment deadlines and penalties.
Requires a periodic statement of account to disclose: (1) the date by which a payment must be postmarked, if paid by mail, in order to avoid the imposition of a late payment fee; and (2) any possible resulting increase in interest rates for late payments.
Repeals the special rule for disclosure of APR and annual fee before a credit card account renewal.

Title III: Protection of Young Consumers

Prohibits issuance of a credit card on behalf of a consumer under age 21, unless the consumer has submitted a written application meeting specified requirements.
Directs the Secretary of the Treasury, acting through the OFE, to make and publish a list of all courses and programs that have been certified for financial literacy or financial education purposes appropriate for young consumers.
Prohibits issuance to students of certain affinity cards, pursuant to any agreement between the creditor and an institution of higher education, unless certain requirements have been met.
Amends the Fair Credit Reporting Act to allow consumers between ages 18 and 21 to elect to be included in any list provided by a consumer reporting agency in connection with a credit or insurance transaction that is not initiated by the consumer.
Amends the Truth in Lending Act to require approval by such individual to increase credit lines for credit card accounts for which a parent, legal guardian, spouse, or any other individual is jointly liable until the consumer attains the age of 21.

Title IV: Federal Agency Coordination

Amends the Federal Trade Commission Act to require all federal banking agencies and the Federal Trade Commission (FTC) to coordinate rulemaking and regulations.
Requires the Comptroller General to a report to Congress on the status of regulations of the federal banking agencies and the National Credit Union Administration (NCUA) regarding unfair and deceptive acts or practices by depository institutions and federal credit unions.

Title V: Gift Cards

Declares that, with respect to a gift certificate, store gift card, or general-use prepaid card, it is unlawful, except in specified circumstances, to: (1) impose a dormancy fee, inactivity fee, or a service fee; or (2) sell or issue such a certificate or card subject to an expiration date. Prescribes disclosure requirements for such cards.
Empowers the FTC to enforce these prohibitions.

Title VI: Miscellaneous Provisions

Directs the Comptroller General to study and report to certain congressional committees on the extent to which interchange fees must be disclosed to consumers and merchants and how such fees are overseen by the federal banking agencies.
Directs the Comptroller General to establish the Credit Card Safety Rating System Commission to: (1) to determine if a rating system to allow cardholders to quickly assess the level of safety of credit card agreements would be beneficial to consumers; and (2) assess the impact on credit card transparency and consumer safety of various rating system policy options.
Authorizes appropriations.
Amends the the Federal Deposit Insurance Act (FDIA) and the Federal Credit Union Act (FCUA) to increase the borrowing authority: (1) of the Federal Deposit Insurance Corporation (FDIC) from $30 billion to $100 billion; and (2) of the NCUA from $100 million to $6 billion.
Authorizes temporary further increases for the FDIC of up to $500 billion, and for the NCUA of up to $18 billion, through calendar 2010 if the FDIC Board of Directors or the NCUA Board, as the case may be, together with the Federal Reserve Board and the Secretary, determine that additional increases are necessary.
Amends the FCUA to direct the NCUA Board to establish a National Credit Union Share Insurance Fund Restoration Plan whenever the Board determines that the equity ratio of the National Credit Union Share Insurance Fund will fall below a specified minimum amount.

One can imagine how unhappy the credit card industry is with this legislation. No more jacking-up their interest rates, no more surprise fees. True, the law does nothing to keep consumers from over-extending themselves and it doesn’t necessarily keep credit card companies from coming up with new and creative ways outside the scope of the law to extract money from their customers, but consumer groups are hailing it as a significant blow against abusive credit card practices.

There is no doubt that credit card issuers have gotten pretty shady over the last few years, especially so when the economy began to freefall into the current recession, but one returns to the Advanta decision and has to wonder whether there was a connection.

It is clear from a March 30th letter to Senators Chris Dodd and Richard Shelby from American Banking Association Executive Vice President, Congressional Relations & Public Policy, Floyd Stoner that the organization is against the bill. He writes, in part, that the bill, “if enacted as currently drafted, would exacerbate the problems facing the U.S. economy by imposing serious restraints on card lenders’ ability to serve consumers and small businesses.” Stoner then lays out his argument as follows:

Among other things, S. 414 seeks to put into statute the sweeping card reforms adopted by the Federal Reserve Board (Fed) and other financial services regulators in December 2008. These regulations, which entirely revamp disclosures and address a wide range of concerns expressed by policymakers over card practices, involve a complete reworking of credit card internal operations, risk management, and funding mechanisms, among other things. As such, they represent an enormous drain on the resources and lending abilities of both large and small card lenders. S. 414 seeks to codify these regulations, but does not do so precisely, and would force regulators to go back and revise card rules that were carefully crafted and based on detailed regulatory analysis, extensive consumer testing, and over 66,000 public comments. Lenders of all sizes have already taken extensive efforts to comply with these sweeping reforms, and if confronted by new requirements, will have even more difficulty serving their customers at a time their customers most need it.

S. 414 also goes far beyond the Fed’s broad, new regulatory mandates by adding provisions that would micromanage how lenders, for example, price and market their products and how they may be paid. These detailed prohibitions have not been subject to close scrutiny to determine what impact they may have on the availability and price of credit for tens of millions of Americans with imperfect or limited credit records, or who otherwise receive substantial benefit from credit card loans. Nor has the overall impact on the broader economy been fully explored. For example, there has been no analysis of the impact on immigrant populations with limited credit histories, those who have had credit problems in the past, the college student population, small businesses that use personal credit cards to help fund their operations, or even efforts by the Administration and Congress to jumpstart our economy.

Moreover, there has not been careful consideration over potential unintended consequences of various other provisions of this legislation. It should be fully explored, for example, whether the provision on limiting reporting to credit bureaus on the opening of card accounts actually facilitates identity theft, as well as what impact a short implementation period under the bill would have on credit card operations or available credit. Such issues may compound the broader concerns already expressed.

Essentially, it all boils down to this: If this legislation is enacted, it would create hardship for lenders and so there will likely be problems for consumers looking for credit, which does describe what happened at Advanta rather well. Credit card companies will, in other words, do what they feel they need to do to protect themselves from the economic difficulties of their customers. If you rely on credit cards, for your business or for yourself, one thing you can bet on is that the rules will change. How they will change is, at this point, anyone’s guess, but remember that credit card companies are not in business to support your success and ask yourself this: Do these things usually change for the better?

That said, before things begin to happen, you should position yourself and your business so that any changes in the credit card industry have little, if any impact, and that means making arrangements for some other form of funding. Check out Finding Your Funding or our Q&A Section for more information on funding your business.

The Bottom Line

While wrestling matches between industry and government rarely satisfy everyone, and usually leave the tax payer holding the proverbial bag, this action and the credit card industry’s reaction may not amount to the worst thing in the world. If it goes far enough, which is not very likely since these companies would have to reinvent themselves, not to mention the whole credit-driven global economy, it will mean a shift away from consumer credit cards and back to a more cash-based economy. Personal debt, which has been encouraged here in the US since the 1980s, may finally begin to dry up as debt regains the stigma it once had and Americans relearn the lessons of thrift. It is a lesson that most of us have forgotten, and that—more than anything else—is what has brought us to the current recession. If we don’t want our children and grandchildren to go through this again, it is time to relearn those lost lessons and assume a far more conservative stance toward our economy.

Pulling into Their Shell: Advanta Shuts Down New Credit Purchases

charles@gowithabc.com (Charles Cooper) — Mon, 18 May 2009 16:42:08 GMT

Last week’s announcement was terse and to-the-point. Advanta’s Board of Directors, expecting a continuation of the recession as well as the further erosion of the company’s capital, approved a plan to “dramatically limit the Company’s credit loss exposure and maximize its capital and its liquidity measures.” These measures include the following:

The Company’s securitization trust will go into early amortization based on May’s performance. Early amortization will officially be determined on June 10.
Since the securitizations will not be permitted to fund new receivables after June 10, the Company will shut down all credit card accounts to future use at that time. Neither Advanta Bank Corp. nor any other Advanta-related entity will fund activity on its balance sheet from the accounts. Therefore, the Company will not take any off-balance sheet receivables onto its balance sheet. Shutting down the accounts will not accelerate payments required from cardholders on existing balances.
In early amortization almost all of the receipts from cardholders are required to be paid to the securitization trust’s noteholders and to the Company’s seller’s interest (its on-balance sheet share of the receivables). The securitization trust’s notes are obligations of the trust and not of any Advanta entity. The Company is only at risk with respect to the off-balance sheet obligations to the extent of its residual interests.
Advanta Bank Corp. will use up to $1.4 billion to make a cash tender offer for Advanta Business Card Master Trust Class A senior notes at a price between 65% and 75% of their face value in a modified Dutch Auction.
Advanta Corp. will make a cash tender offer for any or all of the $100 million of 8.99% Capital Securities issued by Advanta Capital Trust I at 20% of their face value.
The Company will continue to service and collect the securitization trust’s credit card receivables and its own receivables. This, along with taking appropriate actions to adjust expenses to be consistent with these activities, will be the Company’s first priority. The Company will be free to do new business in the future to the extent it chooses, but it does not expect to do so in a significant way until implementation of the plan is well under way.
Advanta Corp.’s senior retail investment notes are unlimited obligations of Advanta Corp. and will remain outstanding and continue to be issued in the ordinary course. The benefits of the plan to the Company are designed to benefit the senior retail note program holders as well as the Company’s shareholders.

Most of that has to do with the company’s internal financial arrangements; they are going to turn their current receivables into securities in order to raise cash. However, notice the first sentence in that second point:

Since the securitizations will not be permitted to fund new receivables after June 10, the Company will shut down all credit card accounts to future use at that time.

That means, in order to protect themselves from further loss and liability, if you have one of their cards, even if you have a perfect record of payments, your credit is going to be cut. That will cut into your credit rating, it will make it that much harder for you to do business and it will put you in a position of having to replace Advanta during one of the most difficult times in history to obtain credit. Happily, Advanta is not accelerating payments on these accounts, and will continue to service them until they are paid off, though one cannot count on that. If the economic conditions demand it, or the securities sales don’t go off as advertised, there can be little doubt that Advanta would call in its outstanding debts in order to protect itself.

From a big picture point of view, Advanta is just the latest in the parade of credit card suppliers—both for business and consumer cards—to have taken steps to minimize the risk they face in the admittedly risky business they are in. So, in that sense, this is really nothing new. However, there is a bright side in that SBA loan programs are picking up as banks begin to make loans. SBA chief Karen Mills said: “More than 10,000 Recovery Act loans have been approved. These represent about $3 billion in credit supporting small businesses.” What does that mean for you? It means that while credit card companies may be pulling back from the market, banks are beginning to make loans again, guaranteed by the Small Business Association.

The Bottom Line

Let’s not sugar coat it—there are going to be small businesses that will be deeply hurt by this move from Advanta. There will likely be some litigation behind it. After all, they are pulling the rug out from under their customers, and that is never a good thing to do no matter what the circumstances are. On the other hand, there is movement from the banks. They are making SBA loans again and that is welcome news. Certainly, it will not be like it has been during good economic times, but if you are a victim of Advanta’s self-defense, there is hope.

Will Unionizing Your Business Help Rebuild the Middle Class?

charles@gowithabc.com (Charles Cooper) — Tue, 12 May 2009 16:47:27 GMT

It’s nere, and it’s going to revolutionize the corporate office

I have to wonder if what the Vice-President said was true or just another one of his personable gaffes, like advising (on national TV) that people avoid planes and other crowded, enclosed places during the height of the swine flu scare. I mean, was it Joe being Joe, or does he have a point? Is a renewal of trade unions key to the rebuilding of the American middle class?

His comments, made to a conference of the American Federation of State, County and Municipal Employees, presuppose that there is a connection between the labor movement and the middle class and it likewise presupposes that the Vice-President can, in fact, define the term “middle class.” People talk about the middle class all the time, yet if you try to pin it down to some concrete demographic, things get a bit hazy. Do you define it by income? If so, plenty of people making six digits but living in expensive areas could be middle class. How about using the poverty line as a baseline? How much money on the upper end of the scale would you have to make in order to be upper class? On the other hand, it could all be a mindset. Warren Buffet is a wealthy guy, yet he has a fairly middle class mindset.

That is the problem. The idea of “class” in the US is, at best, an artificial one. We have no nobility, no serfs, no peasants—the stratified class society of old Europe—it has all been eliminated and replaced by political power, profession and money, all of which are available to anyone with the drive and the connections and a bit of luck. So, what does it mean to “rebuild” the middle class and, more to the point, what does union membership have to do with it?

If you look at it strictly from the point of view of income, the more union members there are, the more people will be earning what many people think of as a middle class wage. If the reasoning could end there, and that is where the unions and their supporters would have end, with that simple relationship, then all would be well. Unfortunately, that is not where it ends.

Biden drew a comparison between government employees, 37% of which are unionized and private sector employees, 7.5% of which are union members, saying that private sector managers “use every trick in the book to undermine unions.”

Of course they do! Not, as some in the labor movement would have you believe, in order to take advantage of their workers, but in order to remain competitive in an increasingly difficult marketplace. Unions mean higher wages, more expensive benefits, more rigid work rules, an adversarial relationship between labor and management, and all sorts of other issues that don’t exist when unions are not involved.

It falls upon the business owner to figure out how he can make a reasonable profit while keeping prices low enough to encourage sales and wages and benefits high enough to satisfy the union. These higher personnel-related costs lead employers to raising their prices, which tends to lower their sales as consumers look for better deals elsewhere, which leads to lower income, which leads to layoffs. Likewise, the employer may well understand that he will have to raise prices and so cuts his workforce in order to keep from doing that. Again, job loss.

We hear a lot about “fair” wages and benefits, but fair has to go both ways. People who own businesses are not in business to create jobs. This may seem like an odd thing to say, but it is true. Job creation is a side effect of doing business. Entrepreneurs are in business to make a living; companies are in business to make money. Prices are determined for the most part by the market and labor costs have to fit into this scheme along with every other cost of doing business. If they don’t, you end up with situations like GM and Chrysler, neither one of which are role models for anyone to emulate. Unless a fair, market-based wage can be negotiated, employers faced with a situation where their labor costs are too high will reduce their workforce. Those employees that survive will make the higher wages, but what of those who have to lose their jobs in order for the rest to benefit? That is what it really boils down to, a sacrifice on the union altar. How is that “fair” to them?

The Bottom Line

If Joe Biden is really serious about stimulating the growth of the middle class—any class, for that matter—he would not be counting on union membership to do it. Membership declined over the years for a reason—it has lost most of its relevance—and the Employee Free Choice Act is an attempt to force workers to join-up, whether the union is relevant to their needs or not. No, Biden and his own employer, President Obama, would be looking for ways to stimulate business growth and the by-product of that growth—job creation—through lower taxes and lighter regulations. They would be making it easier for businesses to take on employees, but they are not. The nation is already at 8.9% unemployment and it is poised to keep climbing. Can small business—can our economy, can you—afford to take the hit that will come when the unions get their big pay back?

After the Bailout: GM to Increase Foreign Production

charles@gowithabc.com (Charles Cooper) — Fri, 08 May 2009 13:56:53 GMT

I thought the idea of pouring billions of dollars down the various corporate rat-holes had a point, and that this point was to save the economy by making sure that these huge corporations remained in business. By doing that, the logic follows, many thousands of American jobs would be saved, thus saving the US economy and bringing back prosperity to all and sundry.

Maybe the folks at General Motors missed that memo.

According to Peter Whoriskey, a Washington Post Staff Writer, a document that General Motors has been quietly circulating on Capital Hill details how the number of cars that GM sells in the United States and builds in Mexico, China and South Korea will roughly double. “The proportion of GM cars sold domestically and manufactured in those low-wage countries will rise from 15% to 23% over the next five years, according to the figures contained in a 12-page presentation offered to lawmakers in response to their questions about overseas production.”

This is going to be a major political challenge for the White House and Congress, and points up some of the great weaknesses inherent in having the government involve itself in the running of private corporations. The company says it needs to be able to do this to remain competitive. They say that it makes both financial sense—foreign workers are paid far less than American workers—as well as logistical sense since it plans to introduce some of its foreign models, like the tiny, Korean-made Chevrolet Spark, to the American market. The government, however, has a number of distinctly conflicting priorities.

Obama poured all the money into GM in order to save an American company and American jobs. As former Treasury Secretary Robert Reich commented, “It raises fundamental questions about the purpose of bailing out these big companies. If GM is going to do more of its production overseas, then why exactly are we saving GM?" One viable answer to that question is that Obama owes the unions, especially the United Auto Workers, and they are dead against the idea of sending American jobs overseas.

Ultimately, though, it will be the public outcry that will be the most damaging. The people of the United States are frustrated, to say the very least, with the bailouts, TARPs, stimulus, rescues and all the other monetary shenanigans that have been going on in Washington. For GM to do this would be a terrible slap in the face. For the government to permit them to do it would be a knife in the back.

This brings us back to the political challenge for the Obama administration. Do they have the intestinal fortitude to bring GM, the unions, the company’s creditors, and all the other concerned parties back to the table to negotiate a reorganization that does not put GM in a position where it feels the need to cut domestic employment in favor of overseas jobs? That would mean wringing additional concessions from the unions and given the pro-union actions thus far, such as cutting the enforcement budget for the unit in the Department of Labor that investigates union corruption, giving the union a major ownership stake in Chrysler and pushing card-check legislation, it seems somewhat unlikely.

The Bottom Line

In the end, it will be interesting to see if the President can squirm out of this. What I expect is for GM to toe the line like the TARP-laden banks did in the Chrysler deal and do what Obama says regardless of the damage it may do to the company, which would be a true waste of the money spent to save it. That is what I expect, but not what I hope. You see, the rebellious hedge fund managers Obama excoriated for acting in the best interests of their investors have shown that the private sector still has some power, and that some still have the will to use it. In the end, the GM board may find its spine and do what it sees as being in the company’s best interests regardless of what the unions or the President have to say about it. If that is the case, then the money spent would have been spent wisely for GM would have a better shot at survival. Of course, if they do, they will bring down the wrath of the public, both on the heads of the company leadership and on the heads of the politicians who gave them all that bailout money in the first place. They will also set into motion the retributive aspect of that recently much-maligned force – the free market.

This will be an interesting summer.

The Other Side of the Chrysler Hedge Fund Fight

charles@gowithabc.com (Charles Cooper) — Thu, 07 May 2009 11:06:31 GMT

The President’s sharp words against those investment companies—he called them ‘speculators’—who refused his 30-cents on the dollar ROI deal to keep Chrysler out of bankruptcy court, have been aired far and wide. Now, you should get the other side of the argument. In an open letter to the nation, Clifford S. Asness, the Managing and Founding Principal at AQR Capital Management, LLC, answers the President. His letter, obtained from Zero Hedge, is reproduced here in its entirety.

Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter”, was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It’s really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.

Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.

Let’s quickly review a few side issues.

The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.

I am ready for my “personalized” tax rate now.

The Bottom Line

For those out there looking for investment capital for their business, this rift between the White House and the financial services industry does not bode well. People don’t make investments when there is a chance that the government, instead of working to protect those investments, gives the money to a third party in the name of “fairness” or “shared sacrifice”, which is precisely what happened in the Chrysler deal.

This, of course, runs entirely counter to Obama’s avowed intention to heal our economic woes. How, may I ask, do you do that when you raise the risk on investments? After all, the riskier the investment, the less likely people are to make it and, if they do, they seek a higher return to compensate them for the increased risk. That, in and of itself, is not the problem. That is free-market fairness in action. The problem is with governmental actions that put investors into that riskier position, and Obama’s handling of the Chrysler bankruptcy does exactly that. It is unnecessary and it is unfair to those who invest their hard-earned money, those who manage these monies, and the companies that benefit from that investment. If our economy is to recover, these kind of abuses must stop.

The New Language of Global Warming

charles@gowithabc.com (Charles Cooper) — Mon, 04 May 2009 10:20:27 GMT

When it comes to “global warming”, you have the skeptics, the die-hards, and everyone else. The problem, from the point of view of the “Al Gore the Prophet” set is that the skeptics are picking up a lot of support as the science behind their claims receives more and more of that cleansing light of day, to paraphrase former Supreme Court Justice Louis Brandeis. That simply won’t do, especially when they want to impose cap-and-trade energy taxation in an effort to reduce greenhouse gas emissions. The Europeans have tried that and so far it hasn’t worked for them, but it does raise prices for everything, harms small business, creates another trading commodity and it sure brings in revenue to the government.

So, what is the solution? To learn from the European example, or maybe to do the math and see what spending all that money on cap-and-trade would actually do to the ailing US economy? Nope. According to some pretty extensive polling and focus group work conducted by the nonprofit, Washington-based environmental marketing and messaging firm ecoAmerica, and reported by the New York Times, the solution is to change the way they talk about the issue in order to pull the synthetic wool over your eyes.

In addition to various recommendations on addressing the issues of energy and the environment that include using inspirational language and talking about shared American ideals, like freedom, prosperity, independence and self-sufficiency while also avoiding the use of jargon, policy details, science, economics or technology, here are some specific recommendations:

Global Warming. Currently, it is referred to as “climate change.” This way, if the global cooling folks are right, then “climate change” covers that as well. Now, ecoAmerica suggests changing that to the even vaguer “our deteriorating atmosphere.” With that, people will think of pollution in general, not specifically about global warming.

Fossil Fuels. Oil, coal and natural gas now take on the pejorative “dirty fuels of the past.” Here we imply that these are obsolete fuels and conjure up visions of smokestacks pouring filth into the air.

Cap-and-Trade. Here is the most insidious recommendation from ecoAmerica. Instead of calling this cap-and-trade, they suggest calling it “cap and cash back” or “pollution reduction refund” so as not to confuse people.

ecoAmerica and other environmental groups have been speaking with Congress and the administration, hoping to use the findings of this study to change the terms of the debate now under way in Washington. However, since the memo that contained the findings of their study was prematurely released to the media—and reported upon—there is a very good chance that the recommendations will go nowhere.

On the other hand, this is the same administration that turned “terrorist attack” into “man-caused disaster”, “Islamic terrorist” into “enemy combatant”, “War on Terror” into “Overseas Contingency Operation” and “Swine Flu” into “H1N1 virus.” Given this track record of changing the vocabulary for important issues, there is no reason not to expect the terms in this debate to shift away from the precise, easy-to-understand terms of today to something far more disingenuous in order to advance their agenda.

The Bottom Line

I am not sure if the current Administration understands that their election was not a mandate for their proposals, but a condemnation of George W. Bush and Republicans in general. I am also not certain that they understand that more Americans are concerned over their jobs and the economy than over the environment. Whether the administration understands this or believes that they have a mandate to do as they will, they have already shown that they are more than willing to go to Machiavellian lengths to force their agenda onto the American people. We cannot expect cap-and-trade, a tax on the use of energy that will, in the President’s own terms, cause energy costs to “skyrocket”; one of the pillars of this administration’s energy policy, to simply go away. No, as this leaked memo shows, we can expect propaganda and Orwellian doublespeak.

Regardless of what they want to call it, the cap-and-trade energy tax is a business-killing proposal, especially during a time when businesses are barely making it, and it must be opposed by the very people who will be the most effected—and the most harmed—by its tenets: Small business.

US vs. Them in the Chrysler Bankruptcy

charles@gowithabc.com (Charles Cooper) — Thu, 30 Apr 2009 15:56:28 GMT

Chrysler is entering bankruptcy, which—along with its wayward big brother GM—it should have done a long time and billions of wasted dollars ago. That is the good news. The bad news, and a troubling glimpse into how the President sees capitalists, is that he has decided that those investors who didn’t like the deal he and his car czar were offering are nothing more than speculators. Here is how Politico.com described it:

The White House had offered Chrysler’s lenders a deal to take roughly 33 cents on a dollar to write off the company’s debt. Most took the deal, but a few holdouts said it wasn’t good enough — and their refusal to go along pushed the company into bankruptcy.

Now Obama is calling them out. “A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices and they would have to make none,” Obama said.

Some of the hedge funds, Obama said, demanded returns twice as high as other lenders were getting.

“I don't stand with them,” Obama said. “I stand with Chrysler's employees and their families and communities. I stand with Chrysler's management, its dealers and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars.”

First, let’s get one thing clear: All investors are, to one degree or another, speculators. They are taking a gamble that when they invest in a business, their investment will pay off. Does that mean they are nothing more than gamblers? No, certainly not. Unlike the multitudes who flock to Las Vegas or Atlantic City or some nearby “riverboat” each year, these investors make informed and educated decisions and do everything they can to take chance out of the equation. They do, however, share one trait with the poker and roulette set: They are in it to make money.

In this, capitalists tend to take on a rather Darwinian cast. They are not in it for the “social good” and they are not in it for the communities. They are in it for the money. So, unlike the banks—which are already under intense federal pressure and scrutiny—these investors made the rational business decision that they would get a much better return on their investment if Chrysler entered bankruptcy, sold off some assets and reorganized. That is important: reorganized, not liquidated. It should be noted that thanks to Obama, those employees and their families will soon own a lot of the post bankruptcy Chrysler, so I am not exactly sure how much they are suffering. Maybe they are crying on the inside. As for the millions of Americans who own and want to buy Chrysler cars, the government is backing the warranties and most of the dealerships will remain open. Only the production will stop until the new owners and the bankruptcy court gets their respective acts together. Again, I am not sure what the trouble is there, either.

President Obama has to learn that not everyone is enchanted with his ideas and not everyone is going to take his deals. That is because—love them or hate them—these investors and hedge fund managers actually know more about business and finance than anyone in the White House. In particular, they know what they have invested and they know what they need to get out of that investment in order to remain healthy themselves. They also know that if getting that return on investment means driving the company in question into bankruptcy, which is a perfectly viable alternative to allowing it to slowly bleed to death.

That is capitalism at work and there is nothing in the world wrong with it.

What is wrong is a government that seems obsessed with the notion that certain companies are “too big to fail.” Wasn’t Chrysler too big to fail? Wasn’t that the rationale behind all that bailout money, that bankruptcy would be a terrible thing? Of course, that was when Obama was in it for the unions. If he saved the company, he saved union contracts that a bankruptcy judge would certainly have set aside. After working hard to sell the idea that an automaker going into bankruptcy would be an economic calamity of biblical proportions—real wrath of God stuff—now the President is telling us that, "No one should be confused about what a bankruptcy process means. This is not a sign of weakness but rather one more step on a clearly charted path to Chrysler's revival."

You could see the flip-flop coming: At one point Obama used the threat of a “managed” bankruptcy (which this would be) to try to force the automakers to restructure their businesses in a manner that he approved of within a certain time frame. They couldn’t do it. Then he has these negotiations, where he tries to impose his vision of how the company should be and number of the players balk, preferring to take their chances in bankruptcy court, which is no longer a calamity, but is now little more than a “step on a clearly charted path” to revival. It will be interesting to see if a federal bankruptcy judge goes along with it as well.

The President has just discovered that the market will work with or without his approval: After all the money spent to keep Chrysler out of bankruptcy court, that is where it is going. In spite of his recent words on the topic, not to mention the conditions he’s placed on the process to protect his friends in the UAW, this bankruptcy is a spectacular failure for the President, who could not push his agenda through the business reality of Chrysler’s situation and the needs of these investors. So in response, he seems to be gearing up for a turf war with the very people who derailed his plans: Wall Street investors.

The Bottom Line

It will be big government against free market capitalism—against people the president derisively calls “speculators”—for control. If the White House wins, how will this change the way businesses of all sizes find investment capital? Investors of all stripes are already leery due to the recession; anything the President does to assert control as a result of, or in retaliation for, what happened with Chrysler would only make things worse.

Watch what happens in the coming weeks. It should be interesting.

When the FDIC Sells Your Loan

charles@gowithabc.com (Charles Cooper) — Mon, 27 Apr 2009 16:34:03 GMT

Homeowners are not the only people having trouble with their loans. Many small businesses have also been hit and are now either facing default or foreclosure. According to the National Association for the Self-Employed, “These small business owners will be at-risk for “payment shock” and default as their monthly mortgage payments skyrocket during the “resets” that are scheduled to begin in 4th Quarter 2008 and continue through 2012,” said Prof. Samuel D. Bornstein of Bornstein & Song, CPAs and Consultants. “The resulting defaults will be the cause of the upcoming second “tsunami” wave of foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners.”

So, why are small businesses having this trouble? Many of them are being squeezed from both sides. On the income side, with the recession in full swing, it is getting harder to get paid. According to a survey by Intuit, 22 million of the nation’s smallest businesses are waiting for $1,500 in overdue payments each month, creating a collective $33 billion strain on their cash flow. As if that isn’t difficult enough, on the loan side, many of these loans have increased their loan payment as mentioned above. Throw in the rising number of bank failures that push these loans into foreclosure and you can see how this is a pretty toxic combination in the best of times—and these are hardly the best of times—and the results are fairly predictable:

1. When your bank fails, the Federal Deposit Insurance Corporation (FDIC) will usually try to work out new terms with you.

2. If they cannot, or will not, do this, they will then take your loan, pool it with similarly troubled loans and sell the pooled loans to investors for pennies on the dollar.

3. Once the loans are sold, these investors then will come after you to collect.

That is what should happen. It is straightforward. You get to negotiate and, in theory, the FDIC will work with you—in theory. You have to realize that the FDIC is mandated to get as much as they can on the loan and if they think they can make a better deal selling the loan rather than working it out with you, that is probably what will happen. A recent New York Times article tells the story of Bob and Katherine Shoulders, owners of an athletic club in Fayetteville, Arkansas, and details how this can happen:

Mr. Shoulders and his wife, Katherine, who bought the Fayetteville Athletic Club 13 years ago, heard these same warnings [about settling their debts with the bank, which was about to fail]. They offered to pay $6 million immediately, and an additional $1 million upon the future sale of the gym, if the agency would agree to forgive their $10 million in debt.

FDIC officials, seeking to maximize their return for the insurance fund, said they proposed to reduce the loans’ interest rates instead; an offer Mr. Shoulders disputes was ever made. So the loans were bundled with others and auctioned off in late October.

The irony is that the offer made by the Shoulders was actually far more than the FDIC ultimately realized on the loan sale, a fact that irritates the couple. Once the investor, an ex-banker from Illinois named Williamson, bought their loan for far less, he then gave the hapless business owners 10 days to pay the full amount of their loan. When they could only come up with half—about $5 million—Williamson instituted a foreclosure lawsuit citing the value of the lavish property as the reason. He was determined to get it all. The case is now pending.

The FDIC tries not to foreclose on people’s homes, but they have no such scruple regarding business loans. From their point of view, and that of the debt investors, they are cleaning out the economic dead wood, forcing loans to be repaid and getting them off the books. In a way, they have a point. Part of what sent the economy crashing down was the debt load, so from that point of view these debt sales and collection actions are necessary. On the other hand, they presuppose that other businesses will open and replace those that are destroyed by this process. If we were in a robust and healthy economy, that might be a good supposition. But we are not, we are in a recession with record-setting unemployment and so we have to ask ourselves whether these loan sales and foreclosures are really the right things to do.

The Bottom Line

Small business is the engine of the American economy, creating almost all the new jobs and employing the majority of the people, yet it is big business that gets the deals and the bailouts. The small business sector, because it is so tied to individuals and because it lacks the lobbying and political payoff abilities of big businesses like GM, is lucky to get lip-service and loan guarantees, never mind actual bailouts. Big companies are “too big to fail,” while small Mom-and-Pop firms can drop like flies and that’s alright with the folks in Washington. True, there will be speeches and some hand-wringing, a congressional inquest or two, but what will be done? How will the problem be fixed?

Actions, after all, speak far louder than words and so far the action side of the balance sheet has been pretty pathetic. Where is all the concern, shown to those who bought far more house than they could have ever afforded, for small business owners who have been working hard to create jobs and stimulate the economy? What? Is that the chirping of crickets?

These are the people, the job creators, the economy engineers, who need the kind of protection being offered to overextended homeowners. They do not need cynical FDIC officials selling their loans at bargain basement prices, nor do they need to face predatory “investors” seeking to flip properties and liquidate assets.

Sometimes, creative destruction is necessary to clear the way to better times. That is one of the unfortunate truths about capitalism. The problem is that one group of debtors—homeowners—are protected from this while another—small business—is not. Instead of wasting trillions on pushing the nation into socialism, this Administration and this Congress should be putting that money to work in the one reliable economic engine this country has: Small business.

If you agree, contact your Congressmen and Senators and let them know how you feel. If the small business community stands together, then maybe our collected voices will truly be heard.

The Myth of “Green” Jobs

charles@gowithabc.com (Charles Cooper) — Fri, 24 Apr 2009 11:29:50 GMT

I am a sportsman. I spend a lot of time out in the forests and plains, and like all sportsmen—hunters, fishermen—I care deeply about the environment (hunters have done more to preserve our wilderness than any other group), so when I hear about the US going green, I take notice.

President Obama has been talking about a green future for America ever since the election; a future where sustainable technology, renewable energy, plenty of great jobs with high pay and generous benefits would be the rule and not the exception. His rhetoric leads one to believe that the rising green tide will raise all of our boats and that we are about to enter a utopian era of eco-happiness.

A Couple of Questions about Green Jobs

I have a question: What, exactly, is a “green job”? I mean, unless you have a company that specifically creates eco-friendly products in an eco-friendly way, or you work in an eco-friendly service business, some obvious eco-related job, what does it mean? Assuming that we cannot all sell stationary crafted from Southeast Asian elephant dung, plant trees or build windmill farms, what kind of green jobs will people have in Obama’s envisioned eco-utopia?

Along those same lines, I have another question: Will there be a net gain in jobs or a net loss in jobs by going green? The Chinese seem to think that going green will cut jobs and hurt their economy, so do the Indians. China has vowed never sacrifice their economic growth to reduce carbon emissions while India has gone a step further in calling the trade off between carbon caps and economic growth “morally wrong.” Both seem to hold a jobs and prosperity come first stance. Come to think of it, a study performed by researchers at Spain’s Universidad Rey Juan Carlos shows that for every job created in that nation’s renewable energy industry, 2.2 jobs were destroyed elsewhere in the economy. A tad ironic given that Spain is the President’s preferred example of how our green future will go.

Consider also that an MIT study of the effects of a cap-and-trade system like the one President Obama envisions showed that a family of four would pay an additional $1600 to $4900 year in increased costs due to higher energy prices. According to Congressman Joe Barton (R-TX), "The debate is not about whether cap-and-trade legislation will raise energy costs; the only dispute is by how much. With a cap-and-trade scheme like that proposed by Chairmen Waxman and Markey, households can expect energy cost increases up to $3,128 per year. Your electricity bill will increase by 77% to 129%. Filling up your gas tank will cost anywhere from 60% to 144% more. The cost of home heating oil and natural gas will nearly double."

These increases will hit business as well, be passed on to the customers in the form of higher prices, sales will decrease—as they usually do under such circumstances—the bottom line will begin to suffer and so cuts will be made and jobs will be lost. The math is simple and the outcome predictable.

The Myth of the Green Future: The University of Illinois Study

What does that all mean? What it boils down to is that the Administration’s vision for a green economy does not fit with the reality experienced by other countries or the lessons of either current events or history. Some have looked at it rationally and have decided that it would cause more harm than good to their societies, and those who have tried it have lost more than they have gained. This indicates that Obama is basing his programs on a number of green myths that have cropped up over the years.

According to Andrew P. Morriss, Professor of Law and Business at the University of Illinois; William T. Bogart, Dean of Academic Affairs and Professor of Economics at York College of Pennsylvania; Andrew Dorchak, Head of Reference and Foreign/International Law Specialist at Case Western Reserve University School of Law; and Roger E. Meiners, Professor of Economics and Law University of Texas-Arlington:

A rapidly growing literature promises that a massive program of government mandates, subsidies, and forced technological interventions will reward the nation with an economy brimming with “green jobs.” Not only will these jobs improve the environment, but they will be high paying, interesting, and provide collective rights. This literature is built on mythologies about economics, forecasting, and technology.

In their study, Green Jobs Myths, they go on to identify the following seven myths associated with green jobs and a green economy in general:

Myth 1: There is such a thing as a “green job.” There is no coherent definition of a green job. Green jobs appear to be ones that pay well, are interesting to do, produce products that environmental groups prefer, and do so in a unionized workplace. Yet such criteria have little to do with the environmental impacts of the jobs. To build a coalition for a far reaching transformation of modern society, “green jobs” have become a mechanism to deliver something for every member of a real or imagined coalition to buy their support for a radical transformation of society.

Myth 2: Creating green jobs will boost productive employment. Green jobs estimates include huge numbers of clerical, bureaucratic, and administrative positions that do not produce goods and services for consumption. Simply hiring people to write and enforce regulations, fill out forms, and process paperwork is not a recipe for creating wealth. Much of the promised boost in green employment turns out to be in non-productive (but costly) positions that raise costs for consumers.

Myth 3: Green jobs forecasts are reliable. The forecasts for green employment optimistically predict an employment boom, which is welcome news. Unfortunately, the forecasts, which are sometimes amazingly detailed, are unreliable because they are based on questionable estimates by interest groups of tiny base numbers in employment, extrapolation of growth rates from those small base numbers, and a pervasive, biased, and highly selective optimism about which technologies will improve. Moreover, the estimates use a technique (input-output analysis) that is inappropriate to the conditions of technological change presumed by the green jobs literature itself. This yields seemingly precise estimates that give the illusion of scientific reliability to numbers that are simply the result of the assumptions made to begin the analysis.

Myth 4: Green jobs promote employment growth . Green jobs estimates promise greatly expanded (and pleasant and well-paid) employment. This promise is false. The green jobs model is built on promoting inefficient use of labor, favoring technologies because they employ large numbers rather than because they make use of labor efficiently. In a competitive market, factors of production, including labor, earn a return based on productivity. By focusing on low labor productivity jobs, the green jobs literature dooms employees to low wages in a shrinking economy. Economic growth cannot be ordered by Congress or by the U.N. Interference in the economy by restricting successful technologies in favor of speculative technologies favored by special interests will generate stagnation.

Myth 5: The world economy can be remade based on local production and reduced consumption without dramatically decreasing human welfare . The green jobs literature rejects the benefits of trade, ignores opportunity costs, and fails to include consumer surplus in welfare calculations to promote its vision. This is a recipe for an economic disaster, not an ecotopia. The twentieth century saw many experiments in creating societies that did not engage in trade and did not value personal welfare. The economic and human disasters that resulted should have conclusively settled the question of whether nations can withdraw into autarky. The global integration of wind turbine production, for example, illustrates that even green technology is not immune from economic reality.

Myth 6: Mandates are a substitute for markets. Green jobs proponents assume that they can reorder society by mandating preferred technologies. But the responses to mandates are not the same as the responses to market incentives. There is powerful evidence that market incentives induce the resource conservation that green jobs advocates purport to desire. The cost of energy is a major incentive to redesign production processes and products to use less energy. People do not want energy; they want the benefits of energy. Those who can deliver more desired goods and services by reducing the energy cost of production will be rewarded. There is no little evidence that successful command and control regimes accomplishing conservation.

Myth 7: Wishing for technological progress is sufficient. The preferred technologies in the green jobs literature face significant problems in scaling up to the levels proposed. These problems are documented in readily available technical literatures, but resolutely ignored in the green jobs reports. At the same time, existing technologies that fail to meet the green jobs proponents political criteria are simply rejected out of hand. This selective technological optimism/pessimism is not a sufficient basis for remaking society to fit the dream of planners, politicians, patricians, or plutocrats who want others to live lives they think other people should be forced to lead.

The study’s authors conclude that:

To attempt to transform modern society on the scale proposed by even the most modest bits of the green jobs literature, such as the Conference of Mayors report, is an effort of staggering complexity and scale. To do so based on the combination of wishful thinking and bad economics embodied in the green jobs literature would be the height of irresponsibility. We have no doubt that there will be significant opportunities to develop new energy sources, new industries, and new jobs in the future. Just as has been true for all of human history thus far, we are equally confident that a market-based discovery process will do a far better job of developing those energy sources, industries, and jobs than could a series of mandates based on imperfect information.

The Bottom Line

Like Keynesian economics and many other approaches to issues facing the nation, this global warming-driven green energy economics doesn’t work. The technology is not there and to depend on its development within a certain time frame while simultaneously cutting back on proven technology is the height of foolishness. Adding to the costs of energy while in the midst of a job-killing recession is likewise foolish since that would only exacerbate existing problems. Yet the proponents of the green economy know all that. So why do they persist? This is, as the authors of the University of Illinois study state, an attempt to transform modern society. Specifically, it is an attempt to transform American society at the expense of business and the consumer into something that it has never been—a European-style socialist state, using the environment as a means to make such a transformation palatable to the people. This is not science, it is politics, red in tooth and claw.

That said, there is nothing wrong with being green, caring about the environment; recycling, using wind or solar power, cleaning up our messes, planting trees; or protecting animals, waterways, prairies, forests, coastlines—it’s all good. The world we live in is very important and we have already overdeveloped far too many of our wild places, polluted too many of our rivers and pumped far too many chemicals into our atmosphere. There are plenty of good ways we can make the earth cleaner that will not drive workers out of their jobs, entrepreneurs out of their businesses or taxpayers out of their minds. If you can make your business—and your fortune—doing it, so much the better.

These things, however, will take a back seat to the kind of heavy-handed regulation and taxation that this Administration, this Congress, and the global warming crowd in general, are pushing on the American people. Are you ready to pay for their vision of a transformed society? Can you afford to? Can your customers afford to?

I will leave you with those questions. Think about them and if the answer is that you cannot, call you senators and congressmen and let them know what a bad idea this cap-and-trade, green economy business really is.

And So It Begins: The EPA Gets into the Global Warming Act

charles@gowithabc.com (Charles Cooper) — Fri, 17 Apr 2009 16:05:48 GMT

The debate is over! The Environmental Protection Agency (EPA) has pronounced on the issue of man-made global warming. Yes, they conclude, global warming is real, we are at fault and it is dangerous to us. Therefore, the regulation of greenhouse gasses from automobile tailpipes and power plants and factories and so on will have to be regulated.

“This finding confirms that greenhouse gas pollution is a serious problem now and for future generations. Fortunately, it follows President Obama’s call for a low carbon economy and strong leadership in Congress on clean energy and climate legislation,” said Administrator Lisa P. Jackson. “This pollution problem has a solution – one that will create millions of green jobs and end our country’s dependence on foreign oil.”

As the proposed endangerment finding states, “In both magnitude and probability, climate change is an enormous problem. The greenhouse gases that are responsible for it endanger public health and welfare within the meaning of the Clean Air Act.”

In addition to threatening human health, the analysis finds that climate change also has serious national security implications. Consistent with this proposed finding, in 2007, 11 retired U.S. generals and admirals signed a report from the Center for a New American Security stating that climate change “presents significant national security challenges for the United States.” Escalating violence in destabilized regions can be incited and fomented by an increasing scarcity of resources – including water. This lack of resources, driven by climate change patterns, then drives massive migration to more stabilized regions of the world.

It’s great that the EPA, always on our side, is working to save us from our own, short-sighted environmental failings. It makes me feel better, or it would but for two little problems. The first being that the science upon which these finds is debatable at best. The second is that these regulations will increase energy prices and thus drive up the prices of everything else in much the same way as President Obama’s cap-and-trade scheme would.

The Problem with the Science

The science that goes into determining global warming is not based on direct observation or sampling in the field, rather, it is based on computer models and it only examines the last thousand years or so. That is a ridiculously small span of time considering the total age of the planet and our ability to look at past climate conditions from ice cores, fossils and other samples. More than that, computer models are, necessarily, based on assumptions made by the designer. The designer of the model determines how data will be handled by the model. This makes the results from such models questionable at best and, compared to the painstaking field research that is really necessary, useless. Moreover, the global data take no account of the existence of dense urban areas that form “thermal islands” and can affect local climate conditions.

You can see that global warming is the result of a number of things that have nothing to do with man simply by understanding that the climate of the Middle Ages, during a period that ran from around 800 AD to 1200 AD, was far warmer than our climate today. This was a period of no real industrial activity, no cars or energy plants, nothing that today’s global warming crowd blames for rising temperatures, melting glaciers and so on. So, what was it? The global warming crowd is oddly quiet on that subject, but others point to increased solar activity.

The World May be Cooling, Instead

So, we have a tiny examined time span, questionable methods and a big example that the theory of man-made global warming cannot explain, and yet the EPA is signing on to this. Moreover, we have evidence that is just as strong that global cooling is actually taking place.

Study of the orbital mechanics of the solar system in the 1970s led Russians to believe the Earth was about to cool and we should prepare quickly because it will be catastrophic. Their arguments were lost in the rush to warming group-think in the 1990s, but the arguments for impending cold are well founded and still believed by many good scientists. As the sun goes even quieter and January, 2008 saw the greatest year to year temperature drop ever (128 years of NASA GISS data) and thru the end of 2008 remains relatively cool, it is clear cooling needs to be considered as a very plausible future. This is highlighted by 2 papers published in March 2008. Scafetta and West showed that up to 69% of observed warming is from the sun and remind us that the sun is projected to cool and Ramanathan and Carmichael show that soot has 60% of the warming power of CO2. Both papers state that these factors are underappreciated by IPCC. The soot may well explain the Arctic melting, as it has recently for Asian glaciers. Many scientists believe the temperature changes are more dependent on the sun than CO2, similar to the relationship in your home with your furnace. With the Sun's face nearly quiet, the monthly patterns over the last 12 months are most similar to those of 1797 preceding the Dalton Minimum of 1798-1823 during the little ice age (Timo Niroma). Globalcooling.org

The Little Ice Age? We had a little ice age? Yes, we did. It lasted from around 1500 to the mid-1800s and our climate has been warming up since. Now, we seem to be at a crossroads—are we warming or cooling? According to historical climatologist, Dr. Tim Ball, the signs of global cooling are everywhere.

Since 1940 and from 1940 until 1980, even the surface record shows cooling. The argument is that there has been warming since then but, in fact, almost all of that is due to what is called the “urban heat island” effect – that is, that the weather stations are around the edge of cities and the cities expanded out and distorted the record. When you look at rural stations – if you look at the Antarctic, for example – the South Pole shows cooling since 1957 and the satellite data which has been up since 1978 shows a slight cooling trend as well.

The Bottom Line

This is in direct contradiction to the EPA analysis. They cannot both be right so it follows that one is dead wrong. Which is it? I don’t know, but I do know this: Making a policy that will affect the lives of millions of people based on questionable science is wrong and, worse, it is political. Yes, global warming has been a political issue championed by the Left, not a scientific one, since the 1990s. If it were, indeed, a scientific issue, no one would be passing final judgment on it. You would not have the President telling people that it is a fact. Science does not deal in facts, it deals in theories. If you want facts, look to mathematics and for truth, try philosophy. Global warming is as much an article of faith to those in Washington now as Keynesian economics and it is just as dangerous. It is not, at that level, science, and the debate over it is far from over.

As long as that is the case, making regulatory policy based on global warming will needlessly drive up the cost of living for everyone in the US, hitting those least able to pay the hardest. Like Obama’s cap-and-trade system, which is also under consideration, it will be a tax on all energy used to create goods and transport them, a tax that you as a merchant will pass onto your customers. It will mean a lot of money for the government, and it will do little to make the world a better place, if anything at all.

The EPA regulations, the Proposed Endangerment and Cause or Contribute Findings for Greenhouse Gases under the Clean Air Act, is in its comment period. Read it and decide for yourself if it is compelling enough to be passed. You will find on the page a place to leave comments for the EPA. I urge you to do so. Your business, the economy as a whole, may well hang in the balance.

The Customer is Always Right, Unless He is too Fat

charles@gowithabc.com (Charles Cooper) — Wed, 15 Apr 2009 10:26:17 GMT

The news was broadcast by Chicago’s WBBM Newsradio 780 radio:

Newsradio 780 has learned that United has instructed its customer service representatives at O'Hare International Airport ticket counters and gates to be extra vigilant beginning Wednesday for passengers they deem to be overweight. Those unable to comfortably fasten a safety belt with one extension or sit comfortably with armrests down will be denied boarding unless they purchase an extra seat, even if they can be placed elsewhere in the aircraft next to an empty seat. If no empty seat exists, the passenger will be forced to take a later flight.

According to the story, this new policy, which is only now coming to general attention after being very quietly adopted earlier this year, is the result of customer complaints. The only exception is for couples as long as neither one of them complain.

A Personal Experience

I have mixed emotions on this one. On the one hand, I have been squeezed into a window seat for several hours while a remarkably obese woman (I have no clue how she squeezed into that middle seat) dripped sweat on me and the somewhat luckier woman with the aisle seat for the duration of a very full flight. On the other hand, I didn’t whine about it. Airline propaganda aside, traveling coach is not a luxury experience—it never has been—and one has to accept that lamentable fact. Would my travel experience have been easier and considerably less damp if my rotund rowmate had been forced to purchase two seats? Sure. No question, but what if there had been two seats, and one of them was empty? Why not simply let her take that empty, adjacent seat? Problem solved, right? Not so fast.

That brings us to the sticking point: Those unable to comfortably fasten a safety belt with one extension or sit comfortably with armrests down will be denied boarding unless they purchase an extra seat, even if they can be placed elsewhere in the aircraft next to an empty seat.

Here is where the mixture of emotions assumes the clarity of a JiuzhaigouValley lake: It is one thing to demand a double seat on a full flight, quite another to demand the same when the plane is empty. Moreover, it’s wrong. What is the justification? Passenger comfort? Perhaps, they do cite customer complaints. Improved service? I doubt it. Money? You can hear the bell of the cash register, can’t you?

Consider the process: Find a vulnerable group (the obese), obtain a reason to discriminate that will stick (customer complaints), and hit them up for double the fees that everyone else pays. Then, when you are called on it, describe as the “industry standard.” This is precisely what happened and it is ludicrous. It’s like the bus company in Montgomery claiming that putting blacks at the back of the bus is “the industry standard.” This is discrimination, pure and simple. It is wrong for United and it is wrong for any other business to do it.

The Bottom Line

This isn’t about the heavy passengers. Should they lose weight? Yes, but not to please United or anyone else. Their own health depends on it, but that is a personal choice nonetheless. This is about the idea that the obese—or anyone else for that matter—can be targeted for this kind of treatment and how that is a sad commentary on how far we have to go as a civil society. Since obesity is a medical condition, why not also charge people with heart issues extra in case the crew needs to break out the defibrillator? How about people with circulatory problems: On long flights, you could charge them a “deep vein thrombosis premium” in case they lose a leg and decide to sue the airline. Maybe charge more for blind or deaf people since they might need extra attention…the list goes on and on and anyone with eyes, a mind and a heart can see it is simply and profoundly stupid.

If you want a model in how not to treat your customers, yet again, we can count on the airlines to come through. As a business owner, you have an obligation to all your customers, not just the trim, athletic ones. Some will need more attention than usual, and you are obligated to accommodate them as best you can. You have to deal with issues on a case-by-case basis. By requiring the purchase of two seats even if the passenger can be accommodated by an available empty seat, United has discriminated against a whole class of passengers, regardless of circumstance, and that is morally unacceptable and legally suspect. I am looking forward to the lawsuits that this decision will spawn, they should be very instructive.

Personally, though, I have four words that would solve the issue entirely: Bigger Seats in coach!

Someone's Gotta Go

charles@gowithabc.com (Charles Cooper) — Wed, 08 Apr 2009 13:49:12 GMT

It was only a matter of time. Once The Apprentice hit the airwaves, with its promise of a job in one of Donald Trump's companies, it didn't take much to imagine an analogous show where someone gets fired. With Fox's new show, Someone's Gotta Go, we have that covered. I just want to know one thing. Why?

The answer, of course, is that it will make money. I hope it doesn't, but if tripe like NEXT, Celebrity Rehab and Temptation Island could make it, the odds are good for this video swill as well. Apparently, we like watching people being torn apart. Where once stood colluseums we now have Tivo. Well, Fox's new entry into the reality show morass will certainly deliver.

The premise is simple: Each week, no doubt through some sort of visually entertaining competition, the employees at the featured company will decide which one of their coworkers should get the boot. There will be conflict, intrigue and at the end you get to see some poor schmuck get the axe in the middle of the worst job market in 25 years. Boy! Won't that be fun to watch? The host, an as-of-yet unnamed business consultant, will offer sage advice to the participating companies.

I return to my orginal question: Why?

The reality of America's employment problems is that at 8.5%, we are closing in on double-digit unemployment. Some states are already there. Throw in those who are undemployed and those who just gave up on finding work, and the rates are well past 15%. When we should be looking for ways to keep people in their jobs, Fox comes along and turns firings into entertainment.

Why would a company go for this idea of turning an otherwise mutually-supportive group of coworkers against each other? What do they get out of turning what is perhaps the most difficult thing a manager can do—and one of the most stressful things a person can endure—into a carnival sideshow? Is it free publicity or cash? I don't know. Is there anything done to help the loser? Again, no word on that. What I do know is that those who survive a round of layoffs generally tend to feel guilt at having been retained while others have been fired, and these are people who had nothing to do with the decision. How much worse will it be when it is the workers themselves who make the choice? Will these people ever be the same once the cameras are gone? Will they go back to trusting each other and working well with one another?

I submit to you the answer is no, they will not. The process of going from coworker to competitor for such high and personal stakes cannot be easily or completely reversed. They will now see their coworkers as rivals not to be completely trusted. Nor, will they trust their company's managers and owners as they did. After all, it would be the owner who signed the deal and put them in that situation in the first place.

The Bottom Line

Without trust and mutual support, between your employees and you and amongst themselves, your workforce cannot perform. This kind of show is designed to destroy the cohesiveness of your workforce and undo any of the good that any teambuilding you may have introduced has done. We are not talking about a friendly softball game at the company picnic, but something that goes deep the heart of everyone—their livlihood.

Someone's Gotta Go is a terrible premise for what will prove to be another in a long line of socially damaging reality TV mediocrity. At least they got the name right, though in my opinion it ought to refer to the guy who thought this up and the Fox executive that gave it the green light. Those two definitely gotta go.

GM Human Resources: Obama Style

charles@gowithabc.com (Charles Cooper) — Mon, 30 Mar 2009 13:36:09 GMT

Tell me, when was the last time an executive for a private firm, someone not accused of any wrongdoing or convicted of any crime, was forced out of their position by the US government? That is what happened over the weekend at General Motors. Rick Wagoner was forced out by the Obama Administration. By all accounts, Wagoner is a well-respected, hard-working sort who has been working to set a new course for the company. The GM Board of Directors had given him their full confidence and they had gone along with some rather radical changes he made in a company where labor has long had an adversarial relationship with management. Now he is out and the signature on his pink slip is Barack Obama's.

True, Wagoner is not the first CEO to lose his job after taking part in a government bailout. The CEOs of mortgage giants Fannie Mae and Freddie Mac were forced out after the government took over the companies in the fall. Robert Willumstad, the former CEO of American International Group Inc., left the company in September. Still, this is different. The government took over Fannie and Freddie and they own 80% of AIG. This is different. GM is still a private company, it is not government-owned, and yet it is the government that has pushed Wagoner out of his job.

The Power of Bailout Money

The Administration's reasoning for the move to oust Wagoner is that it was part of their efforts to save the company. You can read that as it being a condition for GM to get more bailout money to avoid a threatened bankruptcy. In other words, “Get rid of Wagoner and have more money; or we will force your company into a bankruptcy that you don't want.” Somehow I doubt the message was quite that bald and threatening, but this president does come out of Chicago politics so anything is possible. What I don't doubt is that this move is yet another act in the ongoing Bailout Kabuki Theater being played out in Washington. True, it plays to anti-executive, populist sentiments, but it is not likely to change the way the company does business.

According to David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., Wagoner's departure isn't going to change much at GM because his replacement, Fritz Henderson, the company's vice chairman and chief operating officer, had always been the heir-apparent in the company's succession plans. "I think the course that they're on, they're on," he said.

So, if the move is unlikely to produce much in the way of a change of direction in GM, what was the point of the exercise? To pressure the company into moving faster with its reforms? It can move as fast as its primary negotiating partner, the UAW, is willing to move. The union has to agree to the changes being made if they affect the rank and file, and getting that agreement is by no means certain. The Administration, which is vocally pro-union, knows that well enough. No, the point is to make more money for the automaker politically palatable for the taxpayers.

Spending Other People's Money Means Keeping Other People Happy

The government, as well all know well enough, doesn't have any money of its own. It is a conduit through which our tax dollars flow for the good of the nation as a whole. They spend other people's money. Problems, however, arise when these “other people” get tired of the way government is spending their money. In the last sixty days, the federal government has spent more money than ever before in a stated attempt to stimulate the economy and preserve businesses considered too big to fail on the theory that failing to do so would destroy the fabric of the economy and send us spiraling toward some cartoonishly apocalyptic fiscal disaster. The problem is that fewer and fewer Americans are buying the story. Obama, ever vigilant to subtle shifts of support, knew that he had to gin-up his numbers and so he threw Wagoner under the bus. Now he can say that he is being tough with these executives when he rolls out his rescue plans for the auto industry.

According to the Associated Press, senior administration officials said GM will get enough government aid to restructure over the next 60 days, while Chrysler will get up to $6 billion and 30 days to complete an alliance with Italian automaker Fiat SpA. If Chrysler fails to reach a deal with Fiat or another partner, the government won't provide any further financing, likely sending the company into liquidation.

The Bottom Line

American culture is based on the idea that the public and private spheres remain separate and we know from experience what happens when these two areas of life are mixed. The history of intrusive government makes two things very clear: If they can have one person removed, they can have anyone removed, and just because they start with the automakers, that doesn't mean they will stop there. We know what they did, and we know why they said they did it. We also know that Treasury and the Administration are still seeking broad powers over companies that have not taken taxpayer money. This kind of intrusion into the private sector is justified as protection for the economy, but there is no evidence that further government intrusion will be of any help at all. In fact, all these bailouts have been such a failure that socialists around the world are warning this Administration to stop before it is too late.

Neither Obama nor the Congress, however, are in any mood to stop their spending spree as it helps to push their domestic agenda and it gives the government more and more power over private industry. They exercised that power over the weekend, a fact that should give every business owner, entrepreneur and executive a moment of pause. The message is clear: If we don't like what you are doing with your company, we can put you out.

I can hear it now: You are saying that you are not the owner of a big multinational, you have a small business. Sure, if you are small enough then you likely have little to worry about, but that does not hold for all small businesses. The fact is that whether your business is large or small, you can be affected. Some small businesses are fairly sizable, or publicly traded, and most have relationships with larger companies that could be harmed if the government decides to make changes with them. Now is the time to contact your representatives and senators and to stop this government intrusion before it reaches down to affect your business.

In Defense of the Workplace

charles@gowithabc.com (Charles Cooper) — Fri, 27 Mar 2009 11:29:29 GMT

In the grand scheme of things, it is a true observation that the majority of Americans live such cozy and insulated lives that they will never have to discover whether or not they are cowards. There are some, however, for whom that does not hold, who find themselves thrust into situations where they have to act. Here is how the Miami Herald described one such event at a Florida Burger King:

The bloody event unfolded about 4 p.m. Tuesday at the restaurant at Northeast 54th Street and Biscayne Boulevard. It was a time, employees said, when it is usually crowded with schoolchildren and people getting out of work early.

The robber entered wearing a ski mask. He approached a clerk, showed his gun and demanded money, said Miami police spokesman Jeff Giordano.

A customer eyed him and the two started arguing. The customer had a concealed-weapons permit and his gun -- and the two exchanged gunfire.

The robber crumpled to the floor and was pronounced dead at the scene.

The customer, with several gunshot wounds, was in serious but stable condition at JacksonMemorialHospital's RyderTraumaCenter.

Clearly, the unnamed Burger King customer found his bravery, prevented the robbery and saved the other patrons (and whoever else the robber might have run into later) from violence and he did so at great personal cost. These are facts.

The question is this: Do you believe he did the right thing—hero or vigilante—and, more to the point, if this was your restaurant, or if you were a patron in a place being robbed, would you have done the same?

This is just one example of the 2.5 million times a year that an armed citizen either defends themselves or protects others and considering the recession as well as the massive increase in gun purchases since November and the prevalence of conceal-carry laws permitting citizens to be armed in 48 of the 50 states, we can expect far more cases like these. This, however, not the kind of thing the authorities recommend, believing—and rightly so—that the best approach is to prevent the crime from happening in the first place.

Dealing with the Robbery Threat

The California Attorney General’s Office offers these suggestions on how to prevent and, if necessary, face an armed robber:

· Lock unused doors.

· Avoid working alone. If you must, turn on a hidden radio or TV so robbers will think there is someone with you.

· Vary the schedule and route for your bank deposits each day. Keep only necessary cash in the drawer. Then, if you are robbed, you’ll reduce your losses.

· Make sure your cash register is clearly visible to passers-by. Arrange the counter so that the customer or robber is visible from the street.

· Avoid placing signs or displays near windows which block visibility from the street.

· If your business runs an exceptionally high risk of robbery, you may want to invest in a bullet-proof cashier screen. A screen “defuses” the robbers threat, but other prevention measures may be equally effective at lower cost.

· Display signs at entrances and exits indicating that safes require secondary keys not in the possession of employees.

· Advertise your security alarm system with signs in visible locations.

· Develop a mutual aid system among stores on your block. Agree to keep an eye on each other’s buildings and watch for any suspicious activities. Install “buddy buzzer” alarms so you can signal your neighbor to call the police if you are being robbed.

· Record the serial number of the bottom bill in each bin of the cash drawer, and instruct employees not to use these bills in making change.

· Place colored tape markers at exits, at heights of 5 feet 6 inches and 6 feet. If you are robbed, you can then get an accurate estimate of the suspect’s height as he or she leaves.

· Keep “bait” money in a spare compartment of cash registers. The bait packet should be separated by face value as other bills. Keep a list of the serial numbers to give to law enforcement officials if you are robbed.

· Never refuse a robber!

· If you have a silent alarm and can reach it unnoticed, use it. Otherwise, wait until the robber leaves. (Use your alarm with care. Excessive false alarms can cause problems for law enforcement and for you).

These are all excellent suggestions and you should follow them. Doing so will go a long way toward hardening your business, making it a less tempting target, but they will not give you complete safety. Neither will a gun. All either of these can do for you is level the playing field a little between you and the bad guys and, frankly, that is only if you know what you are doing. The final word for your own safety is yours alone.

The Bottom Line

Let me make one thing clear: Gun control continues to be a failure when it comes to stopping violence and you and every other law-abiding American has the right to own a firearm and to defend yourself. Knowing that, however, I have say that there are plenty of people walking around who have no business whatsoever owning a gun. Just because you have the right to do something, that does not mean you necessarily should do it. The folks I am talking about have no training—or very little—and less experience handling a weapon, much less dealing with high-stress situations. Moreover, they have unrealistic ideas about what a gunfight really is and about what they are capable of doing. These are the “I’ll just shoot him in the leg” folks, the sort that can easily get in trouble, even to the point of having their weapon taken and used on them. Now, do yourself a favor and be brutally honest: Does that describe you?

If it does, and you bought a gun to defend yourself or your business, do yourself and those around you a favor and put it away until you can get the training you need, training that will give you skills as well as a vital sense of responsibility regarding this weapon. Instead, work with your local police to make sure that your business, your home and the streets are all as safe as they can be. Do what you can to make your whole environment hostile and difficult for criminals to thrive in.

If that’s not you, and you do know what you are doing, you train hard and you are mentally and physically capable of defending yourself, work with your local police anyway. Do it, not because you are otherwise defenseless, but because you never want to have to use the power at your fingertips.

Is the AIG Bonus Tax Going Too Far?

charles@gowithabc.com (Charles Cooper) — Thu, 19 Mar 2009 10:13:42 GMT

OK, everybody hates AIG. We get that. One of their business groups played a huge part in the financial crisis that is currently burning its way through the American economy and culture. We get that, too. The executives doing this signed contracts with the company that gave them bonuses for reaching certain figures. They did what they needed to do for those bonuses to kick in and the company was obligated to pay. Take away the outrage, look at it objectively, and that is what it all boils down to. These executives did what they were contractually obligated to do and, in return, so did AIG.

The AIG Bailout Morass

We could go on to discuss the fact that it was Congress and past administrations that made it possible for AIG to do what it did. We can talk about the bonuses paid to the executives and Fannie and Freddie (where is Barney Frank’s outrage over them?) and we can talk about Chris Dodd trying to slip in legislation that would have allowed the executives to keep their bonuses. We can talk about how this is a diversion from larger issues that would make the President and Congress look worse than they already do. We can even talk about how George W. Bush set the whole thing in motion. Yes, in the AIG mess, there is a lot to talk about, but there is one thing that is more frightening, more disturbing than any of these since it strikes at the heart of American freedom: The 90% excise tax being proposed to claw back those bonuses. Here is how Reuters describes it:

Channeling the populist sentiment, House lawmakers will vote on a bill on Thursday to recoup most of the bonuses paid to AIG executives. The bill would impose a 90 percent tax on bonuses for executives whose incomes exceed $250,000. The tax would apply to executives of any company that received at least $5 billion in government bailout money.

The Targeted 90% AIG Bonus Excise Tax

I cannot think of a time since the McCarthy Hearings when the force of government was unleashed upon a small group of people who did nothing illegal, lived up to their contractual obligations and were compensated accordingly. Was it bad PR for AIG to pay those bonuses? You bet. Was it immoral? Maybe, maybe not. Was it illegal? No.

Yet here we have the US Government planning to impose a special tax on this tiny group of people who broke no laws. They are financial executives, one of the most distrusted and despised sector of our population today. There is no question, some of that hate is deserved by some of these people, but the rest is pure hyperbole that affects the entire group. They are an easy target for politicians, who have far more culpability in these matters, to condemn and persecute in the name of the people because there are few who will stand up and defend them.

I will not debate whether or not they should be defended, what is at issue here is whether the US Government should be engaged in punishing select groups through special taxes. While it serves a populist political purpose, this proposed tax sets a dangerous precedent. It allows the government to control how people get paid by confiscating money from those the government disapproves of. Yes, it starts with the top earners, but like most things the government does, it will eventually trickle down as new circumstances arise and the politicians look back on this and say “why not do it again?”

Why Do It At All?

That is the big question, and the reason is, plainly, that the Congress and the Obama Administration have in AIG a scapegoat for the problems that they, themselves, are partly to blame for and they plan to exercise their power over that scapegoat to appear to the people to be responsible and concerned. But that is all it is, appearances. More than that, it is unconstitutional appearances. Consider this from Article I of the US Constitution:

Section 8. The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States

No bill of attainder or ex post facto law shall be passed.

The proposed AIG excise tax only affects a few, chosen individuals from certain companies, it is not uniform throughout the United States. Moreover, this certainly qualifies as an ex post facto law, an attempt to change the legal consequences of acts committed prior to the enactment of the law.

Section 10. No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

Section 10, Article I, deals with the states and forbids them from bills of attainder and ex post facto laws and from making any law that interferes with contracts.

The Bottom Line

Our government used to have a line in the sand over which it did not step, the Constitution of the United States. Then came Abraham Lincoln and his suspension of Habeas Corpus, but even then the Constitution provides an exception in the case of rebellion, so Lincoln’s actions were in line with our foundational document and the intent of the framers.

Whether you agree with AIG executives getting bonuses or not, the issue of whether the US can take it upon itself to pass an ex post facto law that takes those monies, lawfully paid in accordance with existing contracts, is a far more important and disturbing question. If it was so important, they should have included a “No Bonus” rule the legislation that gave AIG and all these other failing companies the bailout money in the first place. But they didn’t and now they want to change the rules after the fact—never mind the Constitution they are supposed to defend—and get that money back.

As stated before, this is a dangerous precedent and it is yet another erosion of freedom here in the US. The Constitution protects us, the people, from our government. The more of our freedoms we give them—including the freedom to decide what our employee’s work is worth, the freedom to abide by lawful contracts—the more they take. If they are able to do this, the only question left will be how long it will be before they get to you and your pay?

Escaping the Tax Hikes: When Businesses Go Overseas

charles@gowithabc.com (Charles Cooper) — Thu, 12 Mar 2009 15:46:22 GMT

Back when he was the Democratic vice-presidential candidate, Joe Biden got on the air and told the American people that paying taxes was patriotic. Hindsight suggests that he was trying to put America on a guilt trip over what his boss had in mind for the nation. Whether that was the intent of the now famous “bidenism” or not, one has to wonder if he expected a rising number of companies to be so unpatriotic (at least by his definition) as to flee the country altogether and set-up shop in places that are far more congenial to business than America under Obama is shaping up to be.

The Swiss Energy Boom

According to Reuters, “over the past six months companies including offshore drilling contractors Noble Corp and Transocean, energy-focused engineering group Foster Wheeler and oilfield services company Weatherfield International have all announced plans to shift domicile to Switzerland.” For the canton (state) of Zug, some 30 miles from Zurich, the moves have been called a “virtual energy boom.”

The reason? "Switzerland has a stable and developed tax regime and a network of tax treaties with most countries where we operate," Transocean Chief Executive Bob Long said in a statement in October, when it announced its move. "As a result, the redomestication will improve our ability to maintain a competitive worldwide effective corporate tax rate."

In other words, these are companies that compete on a global scale and they need to be based in a country where that kind of competition is understood and supported. They need to be able to make profits that make their investments worthwhile. They need to be somewhere other than the United States.

The Effects of Redomestication

If you were to pull up stakes and move your business to another state, redomesticate your business, what would happen? Most likely, the folks who work for you would be out of a job, unless they moved with you. Local tax revenues would drop. The fiscal stimulus that your business—through the salaries you pay, the things you and your staff purchase, the rent you pay for facilities, the community things you sponsor, and so on—would vanish.

The new home for your business would benefit, but in the place you left there would be an economic hole in the ground. When companies like these go overseas, they don’t leave holes. They leave craters.

Not only do Americans lose jobs when the company itself leaves, the businesses that service the departed company also lose out, and if their income from that company was large enough, that could mean layoffs at those businesses as well. That effect can ripple through the economy, and the bigger the business, the larger those ripples will be. Not only that, but the tax revenues sought by the Administration will be lost for good. After all, the IRS has no power overseas. On top of that, people who are out of work, companies that have lowered revenues, also don’t pay the sort of taxes that Washington is expecting from America. We have seen what happens when this is taken to its logical conclusion.

Back in the good old days, the Studebaker company, the famed automobile manufacturer, faced a similar economic crisis. It wasn’t taxes. South Bend, Indiana, had welcomed the plant and the company was one of the pillars of the community. Studebaker’s issue was over labor costs. The autoworkers union wanted the same pay as their brethren in Detroit. The company said they could not match the wage and so the union called a strike. Negotiations failed several times over and then Studebaker closed the plant for good and moved to a more business-friendly place—Canada. The closing of the plant, the redomestication of the company, left hundreds unemployed and resulted in the small businesses that serviced the company and were supported by the now out-of-work workers laying off many of their own workers or shutting down completely.

Should the Studebaker company have remained and given in to the union for the good of the town? Should these companies that are on their way to the mountains and trim little alpine villages stick around and be “patriotic”? What would you do?

The Bottom Line

High taxation or low, the fact is that either way, someone prospers. In the case of Transocean and these other companies, the folks in Switzerland will benefit from President Obama’s tax policies, which is kind of ironic given all the talk about stimulating the American economy.

High taxes and high energy costs (cap and trade) are a 1-2 punch to American business at the best of times. They are doubly so during the kind of recession we are suffering through now. As for businesses fighting back: Some will keep swinging, others will escape the ring altogether, and the rest will simply go down after they take one hit too many.

If America is to fight its way back to greatness and prosperity, it will never be through the kinds of policies being forced upon the nation today. American businesses, large and small, need to be nourished and supported by solid, prosperity-oriented policies that have, throughout history, worked. If we don’t, expect to see more companies voting with their feet.

Stimulus Fraud Coming to an Inbox Near You

charles@gowithabc.com (Charles Cooper) — Thu, 05 Mar 2009 13:37:52 GMT

You have seen them, those emails saying that you are owed a piece of President Obama’s $787 billion stimulus package and that, for a small fee, the senders of said email will be happy to secure your money and send it right along to you. It is a lie.

Really, there is no other way to say it. Like all scam emails—the one where some bank needs to “verify” your information, or the one where the sweet dying old lady in Nigeria has picked you to inherit her fabulous wealth, etc.—it is a lie to hook the shady, or the desperate, and with the economy the way it is, there are plenty of both.

The FTC Statement

The Federal Trade Commission is working on this problem and has issued the following statement. Please read it carefully.

The FTC is warning consumers that they could get stung by an economic stimulus scam. The scams come in different forms.

Right now, on the Web and in e-mail, scammers are telling consumers they can help them qualify for a payment from President Obama's economic stimulus package. All they have to do is provide a little information or a small payment.

E-mail messages may ask for bank account information so that the operators can deposit consumers' share of the stimulus directly into their bank account. Instead, the scammers drain consumers' accounts of money and disappear. Or bogus e-mail may appear to be from government agencies and ask for information to "verify" that you qualify for a payment. The scammers use that information to commit identity theft. Some e-mail scams don't ask for information, but provide links to find out how to qualify for funds. By clicking on the links, consumers have downloaded malicious software or spyware that can be used to make them a victim of identity theft.

"Web sites may advertise that they can help you get money from the stimulus fund. Many use deceptive names or images of President Obama and Vice President Biden to suggest they are legitimate. They're not," says Eileen Harrington, Acting Director of the FTC's Bureau of Consumer Protection. "Don't fall for it. If you do, you'll get scammed."

Some sites suggest that for a small sum of money - as little as $1.99 in some cases - consumers can get a list of economic stimulus grants they can apply for. But two things can happen: the number of the credit card the consumer uses to pay the fee can fall into the hands of scam artists, or the $1.99 can be the down payment on a "negative option" agreement that may cost hundreds or thousands of dollars if the consumer does not cancel.

"Consumers who may already have fallen for these scams should carefully check their credit card bills for unauthorized charges and report the scam to the FTC," Harrington said.

The Bottom Line

A bad economy always spurs fraud and thievery and in the end it is up to you not to fall for it. We all have to accept the fact that the stimulus money is not for individuals. It is for government agencies, state and local governments, organizations and projects. From there, it will trickle down to the people.

However, if you have fallen for this scam and want to file a complaint, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad.

Changes Coming to Government Procurement

charles@gowithabc.com (Charles Cooper) — Wed, 04 Mar 2009 10:42:23 GMT

It is a great idea and the time for it is ripe: Rebuild the nation’s government procurement process to make it leaner, less expensive, more efficient and more fair. President Obama is going to have Peter Orszag, Director of the White House Office of Management and Budget, work with cabinet and agency officials to create a new way for the government to buy what it needs and he estimates that by doing so, he can save the taxpayers some $40 billion a year. According to the White House, the new contracting rules, which will have to be developed by the end of September, would make it harder for contractors to cheat taxpayers while making some half-trillion dollars in federal contracts each year more accessible to independent contractors.

The Take for Small Business

That last part, making some half-trillion dollars in federal contracts each year more accessible to independent contractors, hints that small businesses will receive a larger piece of the federal procurement pie. Obama has also said that he will open more contracts to small business and eliminate "unnecessary" no-bid contracts. On the other hand, he also intends to steer outsourced work away from the private sector and back to government employees.

These changes were stimulated by demands by legislators for more financial accountability. During a meeting between administration officials and legislators on Capital Hill, the administration was bluntly told that costs were out of control and that they needed to do a better job. The case in point: President Obama’s fleet of helicopters.

It was Arizona Sen. John McCain, Obama's Republican rival during last year's election, who summed it up best when he dryly told Obama, "Your helicopter is now going to cost as much as Air Force One." A review of 95 defense projects by the Government Accountability Office, the auditing arm of Congress, found that the projects went over budget by $295 billion over the course of several years.

The Bottom Line

The embarrassment of that exchange led to the changes in procurement procedures that are currently under consideration and, overall, it seems that what was lacking for small business in the stimulus bill is now being addressed here. However, the real question is this: Since the stimulus for this review and change was the problem of cost overruns in defense spending, will these new rule, once they are developed, be spread across the entire spectrum of government procurement or will they be focused on the Department of Defense and related agencies? More than that, there is no mention of ensuring that small business contracts will go exclusively to small businesses, a glaring omission that puts the rest of the plan in doubt.

Small business has a great deal to offer the government in terms of goods and services, and this is a good time for the Obama Administration to put the energy and expertise of American Small Business to good use. That, however, can only happen if the President leads on this issue and ensures a real and significant place at the table for small business. If he does not, then it will be all hope and no change and that is no recipe for success.

Don’t Call it “Nationalization!”

charles@gowithabc.com (Charles Cooper) — Tue, 24 Feb 2009 16:55:47 GMT

Harry Reid doesn’t like it when people call the anticipated government take-over of Citigroup—by virtue of stock ownership—nationalization. “It’s not nationalization, it’s protecting the taxpayers’ interests,” said Reid (D-NV) on MSNBC’s “Morning Joe” program last Monday. “In the bailout, the TARP, that we made sure the American taxpayer had a way of getting paid back for their investments. That’s what this is all about and it’s the right way to go.”

The Swedes did something like this a while back, and they called it nationalization. How is this different? Only the political charge of the language is different.

The Power of Words

Words have never been this powerful, at least not since Reagan brought the US out of Jimmy Carter’s malaise. Consider what we have seen:

· The President repeating the word “catastrophe” ever and anon while working hard to make the most of that “catastrophe.” "Catastrophe" equals "opportunity."

· Tax hikes, porky spending and nationalized healthcare redefined as “economic stimulus.”

· Illegal alien redefined as “undocumented worker.”

· Political propagandist redefined as “journalist.”

· Censorship redefined as “fairness.”

The list goes on, but what we are seeing is that the meaning of words—especially those that describe the activities of the Congress and Administration—are being changed into a kind of stunted Orwellian doublethink, the expression of which masks what is really going on.

The power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them....To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth. -- George Orwell, 1984

In the novel, 1984, doublethink is expressed through a highly stylized language called Newspeak, which was based on the idea of never being able to express a negative or disobedient thought. Here in 2009, we have our own version of newspeak, a bit cruder, perhaps, but still as insidious. We simply redefine words.

Sorry Harry: Nationalization is Nationalization

What do you call a bank where the majority owner is the federal government? You call it government-owned. You call it a nationalized institution. There is really no other way to look at it if you are being honest, and this is where we are with Citibank. The federal government is on the verge of converting its holdings in Citibank to common stock. That change would make the federal government the majority stockholder in the company with a huge say in the operation of the company and that would make Citibank a nationalized bank.

What would then happen? The likely answer is that Bank of America would go the same way. In fact, as the economy worsens, any financial institution that received bailout money would be fair game. It is the opening of a slippery slope of increased federal intervention into the power of the states and the lives of the citizenry.

Of course, the Obama Administration is trying to downplay fears of bank nationalization. In a recent news conference, White House Press Secretary Robert Gibbs said this:

This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government. That's been our belief for quite some time, and we continue to have that.

When asked for clarification on the President’s position, Gibbs demurred, wondering how he could be any more clear. The reporter then suggested he make a concrete statement that the President would not nationalize the banks. Gibbs’ response:

I think I was very clear about the system that this country has and will continue to have.

I think, Mr. Gibbs, you have been very clear about the message you are trying to get out to the American people, but it is a message of belief in a privately held banking system, not of your intentions toward said banking system, and no, Sir, you did not answer that question; and it is a very important one since it will affect individuals and businesses of all sizes all across the country.

The Bottom Line

This has been the case in Washington for many years now, but never has it been so critical, never has the public’s right to know the truth, as opposed to facts spinning and whirling like tops. From the repeated and, at times, Orwellian attempts to redefine the language of government to the way our politicians get around a hard question by using their own, ham-handed form of Newspeak, one thing is becoming abundantly clear: The promise of transparency and openness in government will never be kept—even at this economically desperate hour.

No, the truth of what is happening in Washington will be found in the actions of the politicians, in the money trails they cannot hide and in the real meanings of words, once they are parsed out of what the politicians are telling us.

So, Harry, you can dance around the word all you like. Nationalized is nationalized! But, if it makes you feel better, you can call it “happy-fuzzy-stock-smily-face-feel-good-fluff.” How’s that?

The Taxman Cometh

charles@gowithabc.com (Charles Cooper) — Mon, 23 Feb 2009 16:25:47 GMT

I have a question. How do you raise federal social spending and economic control to new heights and then complain about the budget deficit, much less think you will cut that fiscal monster in half?

Taxes Hikes on “The Rich”

The President has not come out officially on this, but his administration is as leaky as all the others so we found out that he plans, in addition to scaling back Iraq war spending, to end the Bush tax cuts for those making $250,000 or more a year, and to streamline government.

With his recent troop surge in Afghanistan and the deteriorating situation over there along the Pakistan border, Iraq war spending will mostly be shifted to Afghanistan war spending. No big savings there. As for streamlining government, it is laudable idea, one that every president of recent memory has pledged to do, yet none have actually managed to accomplish. So, we can probably dismiss that as mere rhetoric as well. From what we have seen so far, any cuts Obama might make will be balanced out by increases and new programs elsewhere, making this, at best, a wash.

That leaves only tax hikes on the very people who make America’s economic engine run. "We can't generate sustained growth without getting our deficits under control," Obama said in his weekly radio and Internet address, justifying what is about to come, and adding that his budget will be "sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't, and restoring fiscal discipline."

Let’s understand what he has done: Obama’s plans call for moving more people off the tax roles than at any time in history. More than that, he has reintroduced the American welfare state by rolling back the Clinton welfare reforms. That means more and more people are going to be recipients of taxpayer money rather than contributors. This narrowing of the tax base increases pressure on those who create jobs by either opening businesses or investing in businesses, people who already pay far more than the lion’s share in taxes. Now they are to pay more.

Soaking “The Rich” Gets Everyone Wet

Imagine that you are the sole proprietor of a small business and your business makes several hundred thousand a year. That does not make you fabulously well-to-do, it makes you a hard working small businessman scraping by. Now, take it a step farther and imagine that you have managed to employ two assistants to help you in the shop. Their salaries are not lavish but they are competitive and you even provide basic healthcare. It is a nice little set-up, at least it is until your taxes go up and begin cutting into your profits. Now you need to hire a tax expert. Will you raise prices? If you don’t, will you be able to keep your employees? What about their health benefits? How about the funding you need? Investors will tighten their activities because the cost of doing business is now higher. Will you be able to keep your business?

These are really not the kind of questions that the Administration is keen on answering, they are details and they want to keep everyone’s attention on the big picture: their wildly disparate promises to stimulate the economy, bailout the banks and the automakers, save the mortgage sector, get us out of Iraq, put us into Afghanistan, give 95% of Americans a tax break and cut the deficit by 50%.

The Bottom Line

For many small businesses, the income from the business goes straight to the owner’s taxes. These tax hikes will do great harm to the small business, especially coming on the heels of the credit crisis. For those who cannot afford the kind of accounting talent to keep the taxman at bay, or have the flexibility to move themselves and their operations to a better tax environment, the only alternative is to pay; and in paying the only benefits are to the government, but even that won’t last.

Money that would be spent to create jobs will go to the government instead, worsening the unemployment situation. That means more federal and state money going for welfare and unemployment programs to support people who could have been employed if only business owners and investors had the money to expand these businesses and create those jobs. Those who would have been taxpayers become recipients instead. Wealth is consumed, not created.

But then, that does seem to be the plan, doesn’t it?

Automaker Bailout Part 2: It is Raining Money!

charles@gowithabc.com (Charles Cooper) — Wed, 18 Feb 2009 16:10:57 GMT

I will give them credit—they cut their white collar payroll, managed to get rid of that union job bank and they came up with restructuring plans—but after doing all of that, they are back with their hands out. Previously, General Motors and Chrysler received $17.4 billion; but now, as part of their restructuring plans, they are looking for a total of $34 billion to stay out of bankruptcy.

What Do They Want, What Will They Give?

GM is seeking $30 billion from the Treasury, which is up from previous estimates of $18 billion and includes $13.4 billion the company has already received. GM claims that it could run out of money by March without the additional funds, needing $2 billion next month and another $2.6 billion in April to keep going. Chrysler is looking for a mere $5 billion to keep going.

What are they willing to do to get this money? The automakers say they are ready to trim the proverbial fat with plans that call for thousands of additional job cuts, the elimination of models and brands, plant closings, union concessions and the possibility of additional expense cutting later on. Word of Union concessions is beginning to trickle out as well, concessions that will eliminate the jobs bank, limit overtime, change work rules, cut lump-sum cash bonuses and get rid of cost-of-living pay raises and generally help bring the companies' labor costs into line with their Japanese competitors with plants in the United States. Talks are continuing regarding retiree healthcare trust funds and the question of whether or not the companies can fund the funds with stock.

And If They Don’t Get It…?

The hammer that the auto industry is holding over the heads of Congress and the Administration is the threat of bankruptcy and the cost to the economy of one or more of the automakers going under.

According to GM Chief Operating Officer Fritz Henderson, the company looked at three bankruptcy scenarios, all of which would cost the government more than $30 billion with the worst costing $100 billion because of a severe drop in GM's revenue. That is a legitimate worry since a bankrupt car company may have a lot of trouble selling cars. Henderson cites research that suggests sales would “fall off a cliff.”

The Bottom Line

I have to wonder, how much worse for the economy would actual automaker bankruptcy be? Considering that these companies, in order to get government relief, are restructuring their businesses tells me that this is really a bankruptcy, but without the name. The automakers are going lay off thousands, close plants, cut models and brands, reduce their contract obligations—they would have to do all these things during their bankruptcy, but they would have to meet certain standards, one of which would almost certainly be a time limit.

The fact that they are coming back to the public trough for another helping, and that they expect to need more funds next month and the month after, tells me that they are going to move on their restructuring at a stately, glacial pace. During a time of crisis, taking it slow is not the way to handle things. These companies need to move to aggressively clean up their acts so they can once more be competitive, so they no longer have to go to Congress to beg for money. After all, it is only a matter of time before the government decides that it is time to nationalize the automakers. If it can do that with the banks, why not the backbone of American heavy industry, the automakers?

This second helping also raises questions about if and when there will be a third, or a fourth. There is already disbursement of TARP II funds and rumors are flying about plans for a second stimulus program, so it is not beyond the realm of possibility. Will this become a quarterly event, and if it does, how long will it be before the cost of keeping GM and Chrysler becomes greater than simply allowing them to go to the wall?

What Would You Do With This Company? Part II

charles@gowithabc.com (Charles Cooper) — Tue, 17 Feb 2009 15:02:40 GMT

In case you didn’t see through the thinly veiled references, yesterday’s column was talking about the federal government. I asked in an earlier entry, after Congress gave itself a generous pay increase, whether the government should be run like a business. Now, with it expanding beyond all reason, doing things that it was never supposed to do, we come back to that question: Should the government be run like a business?

Lies, Damned Lies, and Statistics

Mark Twain said it best, “There are lies, damned lies, and statistics.” The US government has certainly proven that point. In addition to voting themselves pay increases, Congresses and Administrations through history have played fast and loose with information that would have likely affected their ability to remain in power. These include:

· During the Kennedy administration, unemployment was redefined with the concept of "discouraged workers" so as to reduce the popularly followed unemployment rate.

· If Lyndon Johnson didn't like the growth that was going to be reported in the GNP, he sent it back to the Commerce Department, and he kept doing so until Commerce got it right. The Johnson administration also was responsible for gimmicking the accounting that hides most of the federal deficit.

· Richard Nixon had a highly publicized war with the Bureau of Labor Statistics on the unemployment data. Nixon wanted to report the unemployment rate as the lower of the seasonally adjusted or unadjusted number, at any given time, but not specify same to the public. While that approach was unconscionable at the time and never used, basically the same methodology was introduced in 2004 as "state-of-the-art" by the current Bush administration.

· The Carter administration was caught deliberately understating inflation.

· Systemic changes were introduced during the Reagan administration to boost reported GNP/GDP growth on a regular basis. The wildest manipulations, however, happened at the time of the 1987 liquidity panic. In addition to intervention in the futures markets by the New York Fed to help prop the stock market after the October 19th crash, direct and heavy manipulation of the trade deficit data, under the direction of the Federal Reserve and U.S. Treasury, was used in conjunction with massive currency intervention to help bottom the dollar and to contain the currency panic at year-end 1987.

· The first Bush Administration began efforts at the systematic reduction of the reported rate of CPI inflation, and worked an outside-the-system GDP manipulation aimed at helping with the failed 1992 reelection bid.

· As former Labor Secretary Bob Reich explained in his memoirs, the Clinton administration had found in its public polling that if the government inflated economic reporting, enough people would believe it to swing a close election. Accordingly, whatever integrity had survived in the economic reporting system disappeared during the Clinton years. Unemployment was redefined to eliminate five million discouraged workers and to lower the unemployment rate; methodologies were changed to reduce poverty reporting, to reduce reported CPI inflation, to inflate reported GDP growth, among others.

· The Bush administration expanded upon the Clinton era initiatives, particularly in setting the stage for the adoption of a new and lower-inflation CPI and in further redefining the GDP and the concept of seasonal adjustment.

· There is no Social Security “lockbox” or anything else that keeps the money out of the general funds of the government. You invest your money but that goes to pay retirees that are higher up on the line. When you begin to collect, it will be young workers, forced to invest in this, who will pay you. This is a pyramid scheme, plain and simple.

The effect of all this monkey business with important societal statistics? From the point of real decision-making, especially when that decision could help or hurt a given officeholder, candidate or party; they are practically useless. Kennedy redefined unemployment so he could report lower numbers, Reagan boosted the GNP and GDP figures to make it look as if there was greater prosperity than there really was.

Both sides do it, not by cooking the books, but rather by redefining terms and adjusting procedures. Now, with the national books in ruins, America’s CEO is about to sign into law something that only he and his immediate supports want, his nearly $800 billion stimulus package. No one has actually read the thing, Congress voted it in and now it is on the President’s desk ready to be signed into law. The numbers in it, of course, are just as inaccurate as the basic data they are derived from.

The True Cost of Stimulus

Let us consider just one aspect of the bill, the price. You would think that the cost of President Obama’s stimulus bill would be easy to figure out. After all, they are the ones coming up with the numbers in the first place, right?

Not so fast! The cost of it all really depends on how you look at it. From a strictly cash point of view, it is the advertised $787 billion. At least they are keeping it to under a trillion. Wait, what if we add in interest? You see, a lot of that money is being borrowed. The Congressional Budget Office estimates $347 billion in interest over the next decade. That brings the total cost for this bill to $1.134 trillion.

The True Cost of Government

There has been a great deal of hand-wringing and complaint from both sides of the aisle that the deficit would be made so large by this bill that it would be out of control. That is the good news, they recognize that there is a problem. The bad news is that the deficit is already out of control.

If you calculate the deficit on a cash basis, you come up with the official $455 billion figure floating around the media. However, there are two ways of calculating the federal deficit. There is the cash basis method and there is the Generally Accepted Accounting Practices Method (GAAP). GAAP, which the government has been using for several years now, includes the year-for-year changes in the net present value of unfunded liabilities in social insurance programs such as Social Security and Medicare. Their cash accounting method does not.

The results, of course, are somewhat different. Cash accounting gives us a deficit of $455 billion. GAAP accounting brings that up to $5.1 trillion, and that is before we add in any of the TARP program money, the bailouts or the economic stimulus plan. Given the sheer volume of money involved, no form of taxation would be able to tame this fiscal monster.

The Bottom Line

Any business that became so bloated, so financially overextended, would find itself before a bankruptcy judge. It would be forced to reorganize, to shed itself of extraneous activities, to pay off its debts and live within its means. It’s leadership would likely be removed and new leaders appointed, who would bring the company back to solvency under the guidance of a trustee or the judge himself.

Today, America has a new CEO and he and his executives are continuing the same big spending, data manipulating, policies that brought us to ruin in the first place. As the stockholders of this nation, we expect our executives to act in our best interest. They have not been doing so for a very long time, and from the first actions of our new CEO, things don’t seem to be changing.

2010 will be here before we know it, and when those midterm elections finally arrive, the stockholders of America should clean house. Them, perhaps, we will see some of that change we can believe in.

What Would You Do With This Company? Part I

charles@gowithabc.com (Charles Cooper) — Mon, 16 Feb 2009 16:23:34 GMT

There is a corporate entity out there, vast and powerful, big enough to dictate the terms of any contract it enters into, it spends money like water yet it provides lavish perks for its executives and its board while, at the same time, being underfunded to the extent that it has been running so deeply in the red for so long that it has been essentially bankrupt for ages. The only reason it has survived this long is that its influence with consumers is very great, and it has its hands in so many aspects of business and personal life that it is, essentially, too big to fail.

However, even with that its days seem more and more to be numbered. You see, while the uneducated consumer is this outfit’s best friend, especially in their support for the new CEO, many of the dirty tricks that have kept its consumer base strong over the last thirty years are now being noticed. Here are some highlights:

· Payroll data to the shareholders have been manipulated to look better than they actually are.
Production figures are doctored to provide statistics helpful to the executives.

· Operating shortfalls are mitigated or hidden altogether by cleaver accounting gimmicks.

· Dishonest price policies to make consumers believe that products are not nearly as expensive as they really are.
Data regarding layoffs are manipulated for the benefit of the executives.

· Data regarding pensions and healthcare spending are not reported on the general budget to improve the figures.

· It pays current dividends to eligible shareholders with current revenues, which it has traditionally been forbidden to do.

As of right now, this organization has obligations that exceed five times the amount that it produces and it is about to launch a major expansion against the will of the majority of the shareholders, a move being pushed through by the new CEO and his executive board even though the theory it is based on is questionable and flies in the face of experience. More than that, a major portion of its business appears to be, in all but name, a Madoff-style pyramid scheme.

You are a business owner. What would you do to clean up this mess? What is the bottom line here?

Clock is Ticking on Senate Stimulus Vote

charles@gowithabc.com (Charles Cooper) — Mon, 09 Feb 2009 16:54:08 GMT

As time goes on, and more and more people wade through the hundreds of pages that make up the so-called economic stimulus bill, it becomes more and more evident that the Senate, as much as the House, sees this bill as a Democrat wish-list come true that will, like the New Deal, keep our economy in shambles for years. However tempting, I am not going to dissect the package, except to say that like the House version, it is very long on spending and very short on stimulus. What’s more, the area lacking the most in both bills is small business.

What Small Business Can Expect

The House has come up with a generous $880 million out its $819 billion package, or approximately .1% of the total. On the Senate side, the picture is not much better. It is a little better, to be sure, but hardly something to write home about. According to Senator Mary Landrieu (D-LA), Chair of the Senate Committee on Small Business and Entrepreneurship:

The stimulus bill includes $515 million to temporarily eliminate fees associated with 7(a) loans, the most common type of SBA-backed loan. Reducing lender fees will help reverse the downward trend in 7(a) lending, stimulating as much as $15 billion in small business loans. Last fiscal year, 7(a) loans decreased by more than $1.6 billion, or more than 30,000 loans. This fiscal year, 7(a) lending is already down by more than 56 percent.

The package also appropriates $100 million for the temporary waiver of fees on 504 loans, which provide long-term financing to small businesses that are expanding and need to buy equipment, facilities or other fixed assets. 504 loans are down 42 percent this fiscal year compared to this time last year. This funding is estimated to stimulate as much as $5 billion in small business loans.

The bill includes funding for the SBA’s Microloan Program, which provides very small loans to qualifying small businesses. It includes $6 million for the program to handle the increase in demand from micro-businesses that have been crowded out of other financing sources as a result of the credit crisis. This funding will leverage an additional $51 million in microloans, creating or retaining an estimated 10,000 jobs. The bill also provides $24 million for complementary counseling.

To provide accountability, the package contains $10 million for the SBA Inspector General’s oversight of SBA stimulus funds and $15 million for increased lender oversight.

That is $715 million in funds with the expectation of creating or retaining 10,000 jobs and the hope of stimulating some $15 billion in small business loans. The House version only sought to stimulate $2 billion in loans, so I imagine that the Senate version is a step in the right direction. But $715 million in funding—and that includes funding for oversight and enforcement is, like the House version, a mere drop in an $885 billion bucket, some .08% of the total.

Small Business Deserves More Than Pork-Project Spending

There is no secret that the so-called stimulus bills are, more than anything else, pork spending bills, a wish list that goes back a generation or more. At a recent Democratic Caucus gathering, President Obama came out and said as much, telling the audience that the stimulus bill was, in fact, a spending bill. Unfortunately, that is not what America needs right now.

What America needs is a bill that focuses on creating jobs, rebuilding industries, and breathing life into the American economy. These things are done via the private sector, not the public sector. They are accomplished by low taxes and reasonable regulation through the free-market system, not by some quasi-socialist government investment scheme. More than anything else, it is done by encouraging small businesses.

Right now, with such a low level of stimulus for small business, it simply will not work. Yes, the tax breaks will help, but the amount of stimulus needed to shock the system into full function again is simply not there. Remember, it took the dedicated rearmament of World War II to snap the US out of the Great Depression, not the New Deal. There were ships and planes and tanks to build, uniforms to make and food to can. America’s basic industries were called on to produce, and they did. That is not the case here. Our government is not asking us to produce, it is not even thinking how we can rebuild our capacity to produce the way we did all those years ago. No, for the most part the US Government is funding itself, or state or local governments, to pay for things these lawmakers and their parties have wanted for years.

The Bottom Line

The fact is, for small business, which is losing jobs at an unheard of rate, all of this is simply too little, too late. I think that small business, the great jobs engine of the US economy, deserves better. If we are to recover, it must have better than the miserly allowance that Congress and the President have allotted for it.

Like many others, I have contacted my senators as well as the three Republicans who crossed party lines to pledge their support to the bill. I have voiced my concerns to them and asked the Republicans not to vote for the measure (I know the Democrats are fully invested). I hope you have as well, demanding that it do more for small business.