Lost in the Amazon

My friends over at Left Voice (a newspaper published by a Marxist group of NYC college professors, grad students, and assorted failed academics) have finally found some real workers to champion--Amazon warehouse employees. These workers actually earn an honest paycheck, unlike the teachers, professors, and grad students who just mooch off taxpayers and are the typical topics of Left Voice journalism. 

The article, entitled Grassroots Unionism: Lessons from the Victory at Amazon, written by Tatiana Cozzarelli (grad student, Urban Education) and James Dennis Hoff (English Prof, CUNY), is a comprehensive review of the successful unionization effort at an Amazon warehouse on Staten Island. The authors are competent reporters and good writers--the piece is worth your time.

What always astonishes me is how such intelligent, well-educated academics can be so hopelessly ignorant about basic economics. Here is a lede paragraph (links in original):

Amazon, the second-biggest employer in the United States and the third-largest corporation in the world, has made record profits off the backs of its more than 1.5 million employees, many of whom work in unsafe, sweatshop conditions in warehouses where they are treated like human machines. In 2021 Amazon raked in an astounding $33.6 billion in profits, yet it still pays its warehouse workers on average less than the living wage. Meanwhile, the company spent more than $4.3 million last year alone on anti-union lawyers in an attempt to kill organizing efforts at warehouses across the country, including Bessemer, Alabama, and Staten Island. After all, demands put forward by a union, including the end of forced overtime and a higher wage, would significantly hurt the profits made off hyperexploited workers.

Let's give credit to our authors for linking to sources--most other pages on my Beat don't do that. Accordingly their facts are largely correct--but incomplete because Amazon is really several, mostly independent, businesses. There is the retail business, which produces by far the largest revenue, but which is barely profitable. It competes directly against Walmart and Target, stores which have margins on the order of 3%--it's hard to imagine Amazon's margin is any bigger.

Then there is Amazon Prime, which is mostly in the entertainment business, competing against Netflix and Hulu, etc. I don't believe this is earning much money.

Finally is Amazon Web Services (AWS), competing against Microsoft Azure and the Google Cloud, providing basic infrastructure software and hardware for large and small enterprises around the world. AWS is hugely profitable.

Take, for example, the 4th quarter of 2021. During that quarter Amazon had a net operating profit of $3.5 billion. Of that, AWS alone generated $5.3 billion in operating profits, meaning that all other Amazon businesses lost $1.8 billion. In the Q1, 2022, it seems the retail business is barely breaking even.

So unlike what Academicians Cozzarelli and Hoff claim, Mr. Bezos is doing a shit-lousy job of hyperexploiting those poor warehouse workers. Apparently they can't even cover their own salaries and need to be subsidized by the folks over at AWS. If that continues then obviously the retail business will gradually be shut down.

One way to return Amazon retail back to profitability would be to lower the salaries of their employees. If you take our Left Voice friends literally, then Amazon could do that quite arbitrarily--after all, the workers have absolutely no choice but to work at Amazon "where they are treated like human machines." So why doesn't the company do that? There is only one reason--the workers (who are not slaves) will quit. In order to have a work force large enough to get the job done, Amazon has to pay enough in wages and benefits to make it worthwhile for them to come to work. This is effectively the market rate.

The new union now established at a Staten Island warehouse is claiming that Amazon could without penalty raise wages to $30/hour. But naturally there is a penalty--Amazon would have to raise prices to consumers. It costs me $30 to have 24 rolls of toilet paper delivered to my door. I'm willing to pay a little more than Walmart since at my age the home delivery is a real advantage. But if the price were to go up to $45 or $60 then I'd buy toilet paper at Walmart instead (or Target or Aldi or wherever).

Amazon retail is in a very competitive business--they can't arbitrarily raise prices. Now inflation forces them to raise prices--but their competitors are under the same pressure and they all have to do it in together.

Here's the rub that Ms. Cozzarelli and Mr. Hoff don't understand. Jeff Bezos doesn't pay his employees anything--not one solitary dime. The people who pay the employees are the consumers--people like me. It's all fine and dandy when out of sympathy I think warehouse workers should get a raise, but when that cost is inevitably passed on to me I'm gonna jump ship and buy my toilet paper someplace else.

So what's wrong with a union? If all the union did was advertise the plight of warehouse workers and plead for me to pay more for my toilet paper, then there's nothing wrong with the union. But that's not what a union does. An example will illustrate.

There's a guy who mows my lawn for me, and every time he does that I pay him $40. He's running his own business and I pay him directly--there is no company and certainly no union involved.

Ideally I'd do that with the Amazon driver who delivers my package--she drops off the toilet paper and I give her $30. But of course it's not that simple. Probably half that money has to go to the manufacturer, and the other half is spread amongst a whole lot of people. Not only is there the delivery driver, but there are truck drivers, warehousemen, forklift operators, packing & shipping people, etc. It wouldn't surprise me if a couple hundred people touched my box of toilet paper en route from the factory to my house. All of them need to get paid for their services.

I have no way of knowing who any of those people are, and even if I did I have no way of apportioning my $30 between them. So I hire somebody to do that accounting for me--his name is Jeff Bezos. His job (insofar as he has a job beyond building his yacht and cavorting with his girlfriends) is to make sure everybody gets paid their share.

Or, put more generally, that's what management does. Obviously management has to be kept as small and efficient as possible--otherwise it costs me money, and/or the workers I want to pay won't get paid.

The problem with the union is that it inserts another layer of management that I have to pay for. They want control over how overtime is distributed, how long and how many breaks workers get, what the specific job descriptions are, etc. This is just inefficient, and the money will come from me, or more likely it will come out of the workers' hides. Or the AWS employees will have to pay for it, which is also unfair.

I think most Amazon workers understand this. The company's employees in Alabama voted down the union, as did workers at a second warehouse on Staten Island. It is only at the JFK8 warehouse that voted in the union. Ms. Cozzarelli and Mr. Hoff do a good job explaining why that happened--the union had a charismatic champion in the person of Chris Smalls, and management behaved rather stupidly. Without disputing their account, I think it's probably a bit one-sided--one would like to hear the company's side of the story, too.

But Cozzarelli and Hoff do appear to be substantially correct--Amazon has fired several managers from the JFK8 warehouse because they obviously blew it.

Further Reading:

• Amazon Defeats the Union
• "A Program to Unify the Exploited and Oppressed"
• Book Review: The Everything Store

Amazon Defeats the Union

The Retail, Wholesale and Department Store Union (RWDSU) tried to organize the Amazon warehouse workers in Bessemer, Alabama, and they failed. The vote was 1798 against and 738 for the union, from a total of 5698 workers.

I get my information from several articles at Left Voice (LV - here, here and here), from Socialist Resurgence (SR - pdf, see p. 4), from Vice (here) and from the Wall Street Journal (WSJ - here and here).

My correspondents give several reasons for the loss. First, they claim that Amazon cheated. There was an "illegal" USPS mailbox set up at the employees' front door to make it easier for them to mail in their ballots--but gave the impression that the company would check the ballots. Employees were required to attend meetings where the union was denigrated. The size of the bargaining unit was inflated to include supervisors and managers, and workers were subject to a barrage of text messages. The WSJ partially disputes some of these points, and I doubt--even if true--that any of this could have swung the election to such an overwhelming extent. If the workers really wanted a union, none of these tactics would've mattered.

Second, the loss is blamed on "business unionism." That is, the union tried to organize from the top down, and failed to do the grass roots work necessary to sway the vote. LV's reporter, Tatiana Cozzarelli, relates that, as a reporter, she found it nearly impossible to interview actual Amazon workers. They weren't involved in organizing activity at all. The union dismissed this, saying that they were keeping them under wraps to prevent retaliation. But to me (and apparently also to Ms. Cozzarelli) it was because the workers just weren't interested. The lopsided vote, along with the large number of non-voters, bears out this hypothesis.

Finally, the WSJ suggests that workers didn't think the union could do anything for them. They already get, as starting wages, $15/hour, which in Alabama is pretty good scratch. Amazon recently announced that, while keeping starting salaries the same, it was raising wages nationwide of many employees by as much as $3/hour. The workers didn't believe a union could improve on that, and then would take a cut off the top for union dues.

Amazon has a reputation (probably never entirely fair) of treating its employees like disposable commodities--as casual labor. If somebody quits, a new worker could replace them easily enough. But this is no longer true, for two reasons.

• There is a labor shortage in this country. Demand for labor is strong as we recover from the pandemic, and the supply of workers is diminishing for demographic reasons.
• Amazon is automating its warehouses. This means that it needs fewer employees, but they require higher skills. They need to work well around complicated and potentially dangerous machinery.

The result is Amazon has to pay higher wages, it has to provide some kind of career track, and it has to cover medical and retirement benefits. It's doing all those things. This is no longer a job for casual labor. Amazon can and will raise wages as much as needed to make sure it has the labor force it needs. If wage increases are what workers are after, they don't need a union--and the workers knows that.

So instead of promising wage increases, the union offered better working conditions. LV guest contributor Michael Goldfield describes it as "dignity."

And, there were not clear sets of public demands the union put forward, just dignity, etc. They should have said, if the union is certified, we will ask for $20 or so per hour, union safety and health committees, longer and more frequent breaks and lunch periods, less monitoring by computers and supervisors, no discussion of output and breaks without a union steward present, etc., demands that could have been developed at public meetings of workers, not to put in stone the examples that I have given.

Unfortunately, this dignity thing is expensive! And not just that--it destroys Amazon's entire business model. The company can't run a business paying employees to take longer breaks, extended lunch periods, and endless discussions with shop stewards.

But the real clinker is the "monitoring by computers and supervisors." Amazon has invested millions in equipment--robots if you will--and it's the robots who drive the speed of work. The investment is wasted if the employees purposely slow down the line. From the company's point of view this is complete non-starter. If the workers can't work, then Amazon will just pick up its robots and move them some place else.

The bargain is: you (worker) promise to arrive on time, every day, and to work as hard as you can during your shift. In return, we (Amazon) will pay you as much as you need to make that happen. For all that, Amazon is doing its best to improve working conditions within the constraint of running an efficient shop, e.g., by rotating workers from job to job to reduce repetitive motion problems.

What the union really asked for was the right to sabotage Amazon's business. The workers, by overwhelming margin, understood that for what it was, and rejected it. Because they realized that a secure future with a solid paycheck, health and retirement benefits will not be forthcoming if the business is destroyed.

This illustrates an important point: the incentives for the union differ from those of the employees. The workers benefit from higher pay and benefits, and reasonable attention to working conditions. 

The union, meanwhile, benefits most by increasing the total number of employees--for union dues increase more by employee number than by salary level. That's why they want to gum up the works as much as possible, for by minimizing worker productivity they maximize headcount. Apparently Amazon employees saw through this scam, too, and understood that their long-term future is not well served by sabotage.

I think the traditional union with contractual bargaining rights is a dead letter. It's very expensive, it leads to an unaccountable bureaucracy, and has incentives that don't correspond to the employees'. A strike to form a union benefited first and foremost the RDSWU--and that's why Ms. Cozzarelli couldn't find many workers involved in the effort.

More successful will be an informal employees' association, similar to what the West Virginia teachers had when they won their strike. An association travels light--it doesn't suffer under the legal and bureaucratic constraints of a legal union, it needs little or no staffing, doesn't need to pay dues to an "international," and is under no contractual or legal constraints.

My Trotskyist friends might call this suggestion-box unionism. And they'd be right in those cases where labor-management relations are good. But if there's any conflict, an association could make life very difficult for their employer. Recall that the West Virginia teachers' association actually called a strike--despite not being a union. Note that Amazon has a reputation for treating workers poorly--no union is necessary to make that case if the charge is true. The company would be forced to respond--as it is currently doing.

By voting down the RDSWU, the workers at Amazon's Bessemer warehouse showed they are much smarter than the college professors and grad students who write for Left Voice and Socialist Resurgence give them credit for.

Further Reading:

• Book Review: The Cult of the Smart
• "A Program to Unify the Exploited and Oppressed"
• Unionizing Hotels?

Trickle-Up Economics

Michael Roberts says nothing but the truth. Comparing our current pandemic-recession with that of 2009, he writes,

But so far, [unlike in 2009--ed] there has not been a ‘financial shock’.  On the contrary, the stock and bond markets of the major countries are at record highs.  The reason is clear.  The response of the key national monetary institutions and governments was to inject trillions of money/credit into their economies to bolster up the banks, major companies and smaller ones; as well as pay checks for millions of unemployed and/or laid off workers.  The size of this ‘largesse’, financed by the ‘printing’ of money by central banks, is unprecedented in the history of modern capitalism.

With massive money-printing one would expect inflation, perhaps even hyperinflation. And there has been considerable food inflation, likely due to a severe food shortage in China.

Cost of food in the United States increased 3.70 percent in November of 2020 over the same month in the previous year. source: U.S. Bureau of Labor Statistics (Source)

On the other hand, energy prices have declined sharply, and other prices have trended down. The net result is inflation for 2020 is near a record low--despite the Fed's desire to hit a 2.0% inflation rate.

(Source)

So what happened? All those trillions of dollars in stimulus and bail-outs had to go somewhere! They obviously didn't get spent. Some of the money is sitting uselessly in the Fed's vaults, and much more of it is tied up in assets. As Mr. Roberts points out, there's no problem with liquidity--we're drowning in it.

In short, while the quantity of money has increased dramatically, the velocity of money (the rate at which money changes hands) went through the floor.

(Source)

Still, it's all a little weird. Lots of money has been printed, but it's all been "sterilized", that is somehow taken out of circulation. But here's the catch: many people were forced out of the labor force in March, 2020, as shown below. While there has been some recovery, as of last month there were nearly 10 million fewer employed people than there were a year ago. That inevitably means that fewer goods and services are being produced today than were produced in 2019.

(Find more statistics at Statista)

It's easy to identify the missing product: restaurant service has been severely curtailed if not shut down entirely, airlines are flying a small fraction of last year's customers, hotels are empty or closed, theaters have gone dark. It's now very difficult to spend money on any of those items.

So not only is there way more money being printed, but there is less stuff to spend it on than we used to have. If this isn't a recipe for massive inflation, then what is? But all we've got is crickets.

There are three kinds of inflation. One measures the cost of consumer items, often reported as the Consumer Price Index (CPI), shown above. Despite all the liquidity, consumer prices ain't budging. Why not? Likely because automation and globalization have made manufactures cheaper. As I believe Raoul Pal put it, a Domino's Pizza made by robots isn't going to cost more. Or, another example, today's cars contain fewer parts put together by fewer workers built from globalized supply chains. There's no way cars are going up in price (unless they also go up in quality, e.g., from an econobox to an SUV).

The second kind of inflation is commodity inflation. I refer here to the industrial sort, not the scarce stuff such as gold. And at least some commodity prices are going up! I've already mentioned the price of food. Copper prices (often referred to as King Copper, since it's often indicative of the health of the industrial economy) are also up dramatically.

Copper price ($/lb), 2019-20

Industrial metal prices have gone up this year, though not as much as copper.

(Source)

So that's a partial solution to our problem--there is inflation in commodities--certainly in food and industrial metals. So Mr. Pal's "Domino's Pizza" example isn't entirely apt--while the assembly and delivery of the pizza now costs less, the raw materials surely cost more today than they did a year ago.

The third kind of inflation is that of scarce commodities. These are items they're not making any more of, or at least not a whole lot more. Gold is the premier example--gold mines add only 2% annually to the existing supply, and the price has gone up nearly 22% in 2020. Silver has done even better, rising 37% so far this year.

The stock market is also a scarce commodity.

Between the lack of IPO activity, the pickup of M&A, and buybacks, the U.S. equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes.

The number of stocks available is about half of what one could buy in 1997. So needless to say, the price of shares gets bid up, and all the more so when the Fed is printing money. The S&P 500 is up 65% from its low last March, despite the fact that corporate earnings are expected are expected to decline by nearly 14% in 2020. People are buying stocks because they have no place else to put their money.

All kinds of scarce commodities are getting more expensive: real estate (esp. luxury), fancy/antique cars, famous art, one-of-a-kind baseball cards, and indeed, collectables of all kinds. The most famous scare commodity today is bitcoin, which nearly tripled in price in 2020.

I'll suggest that inflation in scarce commodities has been dramatic, and is where most of the excess money is flowing. This is great for those households with investable assets, i.e., the those in the top 10% of the wealth distribution. It doesn't really help anybody else.

In light of this, what are the appropriate goals of fiscal/monetary policy?

First and most important, those ten million unemployed people need to get back to work. This is not just for their own benefit, but if we can't increase production then the economy has to shrink--no amount of money-printing can change that outcome. This will be bad not just for the unemployed, but for everybody. So getting them back to work in productive jobs (i.e., not government-funded, make-work jobs) is crucial.

Second, financial and (most) corporate accounts are liquid. Accordingly, lending money to money center banks is not helpful, and neither is lending money to most corporations.

Third, many institutions are not illiquid, but rather insolvent. This means that they're not just short on cash, but instead their entire business model is broken. Indeed, what we face in this country is not a liquidity crisis, but rather an insolvency crisis. Insolvent organizations must be allowed to go bankrupt, however painful that is in the short term.

For example, the airlines are likely insolvent. Their business model--flying business people around from meeting to meeting--has been permanently disrupted by Zoom software. So at least one or more of the big three airlines probably has to go out of business. Neither the Fed nor Congress should bail them out.

Likewise, the states of Illinois and New Jersey (among others) are bankrupt. They need to fail--i.e., default on their obligations. The bondholders should take a big haircut, along with other state creditors such as pensioners (for whom an expansion of the welfare state will likely be necessary). Once the debts are wiped clean (bankruptcy does that) then the states can be reorganized along fiscally responsible lines.

Politically and legally, state bankruptcies will be really hard to pull off. But under no circumstances should they be bailed out.

Finally, it is my hope that the ten million unemployed are not insolvent, but merely illiquid. In other words, I'm suggesting that they can all be reemployed over the next year, and that there will be no increase long term unemployment. They need a bridge loan--aka bailout--to tide them over in the meantime. This means a longer extension of unemployment benefits, albeit at a level that doesn't keep them from seeking employment.

Think of it this way. Because of the bailout, our friendly waitress can pay her rent. Which means the landlord can pay his mortgage. Which means the bank can pay its depositors who want to withdraw money. Which means the financial system remains both liquid and solvent. Eventually the waitress--because she's solvent--will be reemployed productively, making us all richer.

It's called trickle-up economics.

So beyond extended unemployment benefits (and something comparable for small businesses), I'm against any other bailouts. Nothing for the banks. Nothing for the corporations. Nothing for the bondholders. Nothing for the corruptocrats running states like Illinois. These bailouts--unlike that awarded the waitress--will do nothing but inflate asset prices and make bitcoin investors rich.

Further Reading:

• Austerity Comes to Campus
• Trotskyists on the Economy
• Let Them Eat Little Bits of Green Paper

Unionizing Hotels?

Ernie Gotta and Erwin Fried post a useful article in Socialist Action (SA) entitled Shifting the balance of power in hotels. It concerns the unionization of Sheraton and Hilton hotels in Stamford, CT.

I'm sympathetic. Hotel maids work very hard for low wages. The ladies (and a few gentlemen) who get up at 4am to serve breakfast (free to guests) are heroes in my book. I depend on them whenever I travel, and I make sure I leave them all a tip. They deserve it.

So if a union is being formed to demand higher wages, I'd tend to favor it. After all, I'm as much against poverty as Misters Gotta and Fried, and if it's at all practicable to raise the salaries of hotel maids, surely that's a no-brainer.

But raising salaries is not what this union local in Stamford has in mind. Instead their goal is simply to reduce productivity. To wit:

• Employees should be allowed to talk on their cell phones during work hours and get paid for it.
• Cooks, who are paid more because they bring essential skills, should spend valuable time doing work that servers can do more efficiently and cheaper.
• Managers should be forbidden from helping out--they can't clean a room or assist with service. 

None of this actually helps the maids. Yes, she can now talk on her cell phone instead of working, but how this substantially improves her life is beyond me. And worse: why should I leave a tip to a maid who takes twice as long to clean my room because she's yakking on the phone?

Consider:

At the Sheraton, workers are now fighting for their first contract, but before voting to join Local 217 workers were often made to staff positions other than their own, regularly taking on two or more different jobs in the same shift. This allowed the bosses to hire fewer people and cut hours for positions like the café. By keeping a skeleton staff that is worked to the bone, they save a lot of money on labor costs, but at the same time the hotel cannot maintain a high level of customer service. Management proves again and again that they prioritize profits over guest satisfaction.

This is perverse. Surely an employee who can flexibly do several jobs as needed is more likely to be working full time than one who can only make beds (but not vacuum floors). It's hard to see why a guest should have to wait for the unionized vacuum operator to come along before the room is cleaned.

All it does is featherbed the workforce. The hotel will have to hire more maids to do the work of the phone talkers--and each of those additional employees will pay additional union dues. It's the union bigshots who come out ahead on this.

On the other hand, if instead of featherbedding all the maids just got a raise, the union's additional take would at most be a trivial percentage. This is a classic example where the interests of the union diverge from that of the employees.

Misters Gotta & Fried, being Marxists, claim that capital deserves no return--all proceeds should go to the employees. The net profit margin (as percent of operating costs) for Hilton Worldwide in June, 2019, is 8.71%. In another article, Mr. Gotta writes "Right now, hotels in Stamford, Conn., the second largest market in New England, are bringing in big profits for the owners. They can afford to pay their workers a living wage, but they’re too greedy to concede a few bucks."

So let's play that out. Suppose Hilton sacrificed their entire 8.71% margin. The employees all get a raise by that amount. Presumably suppliers receive a similar bump--they'd have to give their own employees an 8.71% raise. Of course not just workers, but managers also get a raise. Most front-line managers are not paid much more than the hourly workers.

So what happens then? Hilton's profit margin has just gone to zero.

• The stock price also falls to zero. Anybody with a 401K or pension plan invested in Hilton is just plum outta luck.
• The board of directors all resign. Why bother managing a company that can't earn a dime? It's a lot of work to manage a company!
• Most of the C-suite execs also quit. Their pay is mostly in stock options--now worthless. The reservations system crashes.
• Suppliers no longer trust the company to pay their debts. After all, with a stock price of zero Hilton has no collateral anymore. So all transactions are cash only.
• Travel agents no longer book rooms at Hilton. There's no guarantee that the customer will actually get the room she paid for. Even today something occasionally goes wrong and the room fee needs to be refunded. Hilton can no longer be trusted to make those refunds.
• Homeless people move into the lobby.
• The city confiscates the hotel property for back taxes.

If you want to see what a profit-free hotel looks like, just check out housing in Cuba, or the NYC public housing projects. Nobody wants to live like that, much less pay $250/night for the privilege. All that for a once-off, 8.71% raise? Fortunately most hotel workers are smart enough to know that money doesn't grow on trees, something that Misters Gotta and Fried apparently haven't learned yet.

My Trotskyist comrades see themselves as uncompromising radicals, and they urge nothing less on their fellow workers.

A worker’s strength also does not exist in the formal relationship between the union and the boss. ...Strength comes from shop floor militancy. What workers have on their side is the ability to apply pressure on management through delegations, workplace actions, shop-floor campaigns like button ups, or a strike.

In other words, employees should, as a first resort, sabotage the workplace.

This strategy will fail. Most large hotel chains often do not own the real estate. They simply lease it for a period of years, or occasionally operate the hotel on a commission basis. The benefit is that companies like Hilton can just walk away from the property at little cost. The employees know this, and sabotage will be rewarded with everybody losing their jobs.

A hotel--like any business, no matter who owns it--has to be profitable to stay in business. Sabotage certainly doesn't help. What's the point of having a union if you're not going to avail yourself of the grievance procedure?

It's worth noting that once the union is in place, it wants all employees to behave so that it can extract its dues from them as efficiently as possible. Union leaders are smart enough to know that money can't be squeezed out of a bankrupt hotel.

I think the union drive is just a big scam designed to transfer money from hotel maids to union bureaucrats. It's a scandal.

Further Reading:

• Jeff Mackler Interviewed by Paul Duddridge
• Heather Bradford on Abortion
• Louis "Lyndon LaRouche" Proyect

The Militant Hails a Ride

The headliner in this week's Militant is an article by Bernie Senter entitled Uber drivers fight bosses’ pay cuts across California. The lede paragraph:

Uber drivers held a 25-hour strike March 25 to demand the company reverse a 25 percent per mile pay cut it imposed on drivers in Los Angeles and parts of Orange counties. Two hundred of the striking Uber drivers were joined by drivers for Lyft to protest in front of Uber headquarters here. Protests were also held in San Francisco and San Diego against similar cuts.

There's reason for skepticism. Uber drivers go on strike all the time--whenever they turn off their app--say to sleep, eat, or pick up their kids from school. That a few drivers turned off the app for 25 hours to uselessly rage against the machine is irrelevant to the company. I doubt it even noticed.

Then one has to take the "25% pay cut" headline number with a grain of salt. Were the cut that big drivers would be quitting in droves--not simply going on strike. So there obviously has to be more to the story than what The Militant is telling us.

This website lists all changes in Uber pricing in Orange County since way back when. The relevant entries appear to be these:

UberX cost per mile decreased from $1.06 to $0.80 - 3/11/19
UberX cost per minute increased from $0.24 to $0.28 - 3/11/19
UberX minimum fare decreased from $7.30 to $6.10 - 3/11/19

So the dramatic cut in per mile compensation is at least partially offset by a comparable increase in per minute pay. This is good for drivers who spend a lot of time in traffic, but less beneficial for those out on the open road. The decrease in the minimum fare only affects very short trips. I think The Militant's "pay cut" phrase is an exaggeration.

Another website (here) has information about Uber's pay policies--and as Mr. Senter suggests, they certainly are complicated. The company's cut varies by length of service and geography, ranging from 20% to 28%--though in the latter case the company pays the driver's insurance. That percentage only applies to time & distance charges, resulting in a service fee. In addition customers pay additional fees:

• A booking fee--that goes entirely to the company.
• A surge fee--applied in cases when there is a shortage of cars, and that goes entirely to the driver.
• A tip--which also goes entirely to the driver.

The booking fee is per trip and looks to cost about $2.30. On a short trip that will be a substantial fraction of the fare, which inflates Uber's percentage of the total haul. A long post from an Uber driver (well written, despite typos, from somebody who self-identifies as Underachiever (1970-present)) details an example:

• The customer paid $9.90.
• Booking fee--$2.30
• The time & distance charge is the difference--$9.90 - $2.30 = $7.60
• Service fee (25% of time & distance)--$1.90
• Total paid to Uber--$2.30 + $1.90 = $4.20
• Total paid to driver (75% of time & distance)--$5.70

For short trips the booking fee is substantial. For a $50 airport run, on the other hand, it's nearly trivial.

Mr. Senter quotes an Uber driver:

“In 2015, I was making between $1.15 and $1.20 per mile,” driver Esterphanie St. Juste, an organizer of the action, told Los Angeles Magazine. “Today, I’m making 50 percent of that. They call us partners, but we’re not. They dictate everything.”

As just documented, Uber drivers have not taken a 50% pay cut. But let's focus on the last sentence: "They dictate everything." They don't, and here's why.

Uber is a platform--it connects drivers with passengers. An analogy is the stock market, which connects stock sellers with stock buyers. The price of stocks fluctuates as necessary to clear the market.

Uber needs all passengers to get rides and all drivers to get passengers. There is a price that will do that--it's called the market price. If Uber charges below market, it is just leaving money on the table--money that could otherwise be shared with drivers. Conversely, if Uber charges more than market, there will be fewer passengers, and therefore also less revenue.

The market price is the price that maximizes total revenue. Obviously that's good for the company--25% of more is better than 25% of less. It is also good for the drivers collectively, who get 75% of more. It may not be good for individual drivers, since more drivers mean that the money gets split up more ways.

So the drivers, as described in Mr. Senter's article, are pushing to limit the total number of drivers, similar to what cab companies did with the medallion system. This is good for those (relatively few) drivers who have a job, but bad for those who are left at the side of the road. Even worse, it's bad for passengers, who will now have to wait longer and pay more to get a ride. And it's bad for Uber who, by charging above market rates, receives less revenue.

The drivers become rent collectors--selling access to a licensed, Uber slot--and can charge a premium for the privilege. Perhaps that's good for those drivers, but rent collecting never generates social utility.

Contrary to Mr. Senter's quote, Uber does not dictate its prices. The market does.

Still, the drivers have a case. Given that Uber has maximized total revenue, how should that revenue be split between driver and company? The drivers argue for more, while Uber wants to give them less. But the company can't dictate this, either. It is also determined by the market.

The market price is established by that equilibrium where the number of drivers equals the number of passengers. If the drivers are paid more, there will be too many drivers. Conversely, if they're paid less, there won't be enough drivers. The company has no real discretion over what that pay is. Indeed, it varies by time of day--during rush hours more drivers are needed and therefore a surge price is added.

Uber also has to cover its own expenses. It has to handle requests from customers, process payments, and arrange for pickups. Payment processing alone probably accounts for the majority of the booking fee--that's a real expense. The service fee likely pays for the elaborate computer navigation systems, which has to be absolutely fail-safe. That's expensive.

It's worth noting that neither Uber nor Lyft are profitable. So the incipient union (Rideshare) demand that the service fee be capped at 10% is a non-starter. Both companies would go bankrupt.

Likewise, demands that Uber pay for gas, car repairs, taxes, health insurance,... is a non-starter. Uber is a software and payment processing firm. They're not a transportation company. Folks in the transportation business need to cover their own expenses. It's a hard-scrabble, low wage industry to be sure, but asking Uber to manage a business for which it has no expertise will not make it better.

I think Uber is better for drivers than my initial job as a cab driver in the mid 1970s. I worked for Checker Cab in Chicago and received 42% of the meter, plus tips. Tips were about half my income. Apart from social security I got no benefits, but Checker covered all the car expenses (including gas).

It was a lousy job, and within a year I switched cab companies to one that operated more like Uber.

Further Reading:

• Book Review: Tomorrow 3.0
• Teachers' Strikes: The Difference a River Makes
• Precarious Taxis

Louis Proyect and Peter Thiel

Peter Thiel and Louis Proyect will both be astonished to learn that they agree with each other. Neither of them is enthusiastic about the process of "creative destruction," albeit for very different reasons. Mr. Thiel expresses his opinion in a fascinating Youtube video of a conversation between him and Cornel West (along with another unidentified gentleman) in a Harvard University classroom. (It's nearly two hours long. I watched it yesterday and do not have a transcript. My comments are based entirely on memory.)

Mr. Proyect's thoughts are recorded in a post entitled The Boeing 737 Max 8: a case-study in uncreative destruction. The lede paragraph:

On October 29, 2018, a Boeing 737 Max 8 belonging to Lion Air in Indonesia crashed into the Java Sea 12 minutes after take-off. All 189 passengers and crew members were killed instantly. It is extremely unusual for planes to suffer such accidents in clear weather after having reached their cruising altitude. Flight experts concluded that the pilots were not adequately trained in the Maneuvering Characteristics Augmentation System (MCAS), a robotics technology that lowers the nose of a plane to prevent a stall. Although there is no definitive judgement on exactly what happened, it appears to be a combination of inadequate training for the pilots and a malfunctioning MCAS.

His larger argument is that flying has become deskilled, and therefore pilots less competent. Similarly, he bemoans the rise of driverless cars. Noting that pedestrians have been killed by such vehicles, he writes,

Despite such incidents (there have been 4 fatalities already), the bourgeoisie is determined to push ahead since the savings in labor costs will make up for the collateral damage of dead pedestrians. While I am skeptical that completely driverless cars will ever become the norm for Uber or Lyft, I can see people with little driving experience being paid minimum wage just to be a back-up to the computer system—as long as they don’t watch TV on the job. (Fat chance with such a boring job.)

Mr. Thiel agrees with him--the dead pedestrians are a problem. Indeed, Thiel goes further and suggests that driverless cars are mostly propaganda and won't happen for decades, if ever. The reason--we have become way too risk averse. He mentions that two dozen people died from polio vaccines when they first came out--there was a lot of uncertainty about the correct dosage. Had that happened today the whole vaccine effort would have been put on ice--the FDA would never approve a polio vaccine today.

Mr. Thiel's larger point is that we can no longer organize large-scale collective effort. That's readily apparent in public works: the NYC subway, public schools, NASA, Obamacare, etc. But Thiel argues that the rot is spreading into the private sector. The 737 scandal is not simple error or corruption on the part of some individuals--it is instead because the US can no longer manufacture aircraft. It's too complicated and we're increasingly incompetent.

I always thought Mr. Proyect was a pessimistic Luddite, but when it comes to pessimism Mr. Thiel has him beat by a mile. Don't watch the video if you're in need of cheering up.

Mr. Proyect's anti-technology bias does show through big-time, however. He bemoans automation on the flight deck, suggesting it deskills pilots. And it is true: nearly the entire commercial flight is by wire: from accelerating down the runway until landing, the pilots do nothing but oversee the computers. They are still in charge of landing the plane--the last hundred feet descent to the runway still requires human control.

They retain responsibility for when something goes wrong. Most dramatically that happened in 2009 when "Sully" Sullenberger successfully landed an Airbus 320 in the Hudson river after bird strikes had knocked out both engines, saving all lives on board. Mr. Sullenberger was 1) a skilled pilot with military experience; 2) had spent countless hours in a simulator rehearsing emergency procedures; and 3) had a genius IQ. Lucky passengers!

Somebody in the video says "no human should be condemned to do work that a machine can do better." A computer can do straight and level flight much better than a human being. It's not a hard job (even I, a novice flight student, can do that), but it requires unflagging attention. People aren't good at that--certainly not on 14 hour trans-Pacific flights. Computers are much better.

I think Mr. Proyect believes we should go back to digging ditches with picks and shovels. Let's return to the days when men did real work!

Mr. Proyect thinks that we're on the cusp of pilotless planes. I think he's wrong--no computer will ever be able to deal with an emergency. Driverless trucks, if they run into problems, can simply pull over to the side of the road and wait for human assistance. An airplane can't do that; it has to land, one way or the other. For any circumstances outside the training of AI, a human being will have to be on board. Perhaps we'll reduce the number of pilots in the cockpit, but we'll never eliminate them.

I'm more optimistic than Mr. Thiel. I do think driverless trucks on the interstate are on the near horizon. Driverless taxis will be possible in simpler environments--say in small and mid-sized towns. Though it will be a long time before they're feasible in complex places like Manhattan or Mumbai.

Mr. Thiel does not bemoan creative destruction. It is a symptom of technological progress, and at the end of the day any durable improvement in our standard of living is because of new technology. The fact that (in his opinion) technology has come to a standstill means that per capita economic growth is now zero. There is not too much creative destruction, but rather too little. Or maybe none at all.

I'll observe that our current circumstance--full employment at low wages--supports Mr. Thiel's point of view. Technological change implies a lot of churn in the labor market, and that's what pundits keep predicting. (It's even what I predicted in my book on careers.) But perhaps there is no technological change. Perhaps, instead of churn, the problem is stasis. Then everybody works as hard as they can just to stay in the same place. No creativity, and also no destruction.

The worst outcome is zero growth, which is where Mr. Thiel believes is where we're at. Then everything becomes a zero-sum game. In a zero-growth world there is no room for charity.

I hope he's wrong.

Further Reading:

• Book Review: Fischer Black
• Book Review: Tomorrow 3.0
• The Future of Bitcoin

Trade Wars

My friends over at Socialist Action (SA) deserve credit for penning a serious editorial about a potential trade war. To the paper's credit the article contains real facts and arguments--it is not just a throwaway rhetorical piece. Serious it may be, but it is wrong, as the headline proves: Working people have no stakes in a trade war. It deserves closer analysis.

Here, in bullet points, are what I see as the article's main takeaway messages.

• The US economy is in relative decline as other countries (notably China) have grown market share.
• Trump represents a segment of the ruling class that wants to reverse that decline.
• Trump also represents union bureaucrats who want to bring back old-fashioned, blue-collar jobs.
• Globalization leads to a "declining rate of profit" for capitalists, which is the ultimate source of all their difficulties.
• Capitalists respond to the "declining rate of profits" by taking out of their workers' hides.
• Or alternatively, capitalists try to restrain profit rates from declining by rolling back globalization, which is where Trump comes in.

The errors SA makes are common to all Marxists, so it is worth considering them in detail. There are fundamentally two things wrong with their argument.

1)  "Declining rate of profit," in SA's usage, is just wrong, if not completely meaningless.

2)  They completely ignore the consumer in their analysis. Since most consumers are workers, the major benefit to workers from globalization is entirely unrecognized.

There are two ways to measure profits. The most common way (used in the stock market) is Return on Investment (ROI--often expressed as the price/earnings ratio). Investors want to make a risk-adjusted return on their investment, and won't put money into a project where that's unlikely to pan out. There is no evidence that "profit" in this sense is declining at all. Indeed, the recently famous economist, Thomas Piketty, maintains that inflation-adjusted ROI has remained roughly constant at about 5% over the past couple centuries.

Indeed, there can't be any secular decline in ROI. If profits go down, then the stock price goes down, which lowers the total capital invested thereby raising the ROI. By this measure, a steadily "declining rate of profit" implies continuously declining stock prices, which has obviously not been the case.

The alternative definition of "profit", which is the definition I think SA actually intends, is as a fraction of operating cost, also known as profit margin. Margins vary widely from industry to industry and from company to company. Some companies--e.g., Walmart--have very low margins, but then make it up on volume. Indeed, since its very founding Walmart has set its margins at 3%. which is only pennies on the dollar. But multiplied over $500 billion in revenue it adds up to a lot--about $15 billion. Walmart's margins are fixed--they have been neither growing nor declining since the company was founded. It's one of their core business principles.

Other industries--like pharmaceuticals and technology companies--have very high margins. In the case of pharmaceuticals it is because research costs are very high and also unpredictable--the high margins compensate for risk. Apple, on the other hand, charges $1000 for an iPhone because they can get away with it.

There is no long term decline in profit margins. There can't be. If the margin gets too small then capitalists won't invest any more money in that industry. American television manufacturing is an example where the margins shrank to zero--and televisions are no longer manufactured in the US.

So I don't know what SA means by "declining rate of profit." I think they take a phrase from Marx completely out of context and then repeat it endlessly as though it actually meant something. But it's just a rhetorical flourish--nothing more.

More substantively, SA describes the alleged demerits of capitalism in great detail, while completely ignoring any of the benefits.

In their desperate struggle to fight the falling rate of profit, capitalists try to reduce costs by attacking trade unions and workers’ rights, by attacking pay and benefit levels, by attacking general social benefits such as education, medical, and pension benefits, by refusing to accept any responsibility for the massive environmental damage caused by cutthroat capitalist competition, and by transferring production to low-wage, unregulated areas both within and outside their own countries.

This paragraph is approximately correct as far as it goes. (I'd take issue with the "massive environmental damage" phrase, but that's another topic.) It is true that capitalists are in "cutthroat competition," and will do what they can to gain an edge on their competitors by lowering costs, specifically the cost of labor.

But what SA doesn't tell us is what all those capitalists are competing for. They're competing for market share--i.e., they want to sell as many goods to as many people as possible. Every time the cash register rings at Walmart, shareholders pocket 3%. Of course they want that cash register to ring as often as possible.

The very definition of capitalism is a system that wants to maximize consumption--that's how capitalists earn money.

So take Walmart as an example. By sourcing their products in China they were able to lower their costs. Since margins are fixed at 3%, that means the savings are passed directly on to the customer in the form of lower prices. Here are the consequences--all of them good:

• Chinese manufacturing workers earn much more than they would back at the farm.
• Walmart employees--despite generally being low-skilled labor--earn higher wages and enjoy better working conditions than they would if they worked at the Mom & Pop down the street.
• Walmart's volumes increase, yielding more money for shareholders.
• Walmart's customers get more and better products at cheaper prices.

That last item is what SA neglects to mention, and it's a really important point. Walmart has substantially raised the standard of living of most Americans, especially those at the bottom of the income distribution. 

It's best expressed by Sam Walton's original mission statement: "to give common folks the chance to buy the same things as rich people." Their current motto--"Everyday Low Prices"--renews the promise to keep margins at 3% and to pass all cost savings on to the consumer. That's what Walmart does.

What's wrong with that? Only my Trotskyist friends can object, and they do so only by ignoring the huge difference that stores like Walmart make in improving people's lives.

Trump and my Trotskyist friends essentially agree about trade--they both see it as a zero-sum game. For Trump if the Chinese sell something to us, they win and we lose. For SA, if the Chinese sell something to us, capitalists win and everybody else loses. Both of you are wrong--trade is always win-win, and free trade is good thing!

That said, there is something awry when the US runs huge trade deficits for multiple decades in a row. Something is out of balance. While I think Trump is addressing it in the wrong way, he is quite right to bring the issue to the fore.

Further Reading:

• What Marxists Don't Understand About Economics
• Tradable vs. Non-Tradable Goods
• Book Review: Walmart

Strikes, Janus, & Amazon

The West Virginia teachers' strike headlines the news at both The Militant and Socialist Action. The latter's star reporter, Bill Onasch, probably gives the best overview of the situation. The lede paragraph:

West Virginia “Wildcats”—Technically, public sector collective bargaining is illegal in West Virginia. But practically, governors have negotiated in the past with teachers—and school service employees including bus drivers, cafeteria, clerical, and maintenance workers—for salary and benefit packages passed by the legislature. While perhaps better than nothing, the teachers have been falling behind.

He tells us that 20,000 teachers and 15,000 support personnel are off the job, that they haven't gotten a raise in four years, and that West Virginia teachers' salaries rank 48th in the nation. Further, rising health care premiums are a big issue, and that initially caused the rank & file to turn down a 5% raise from the state.

The Militant's Mary Imo-Stike (never heard of her before--may be a pseudonym) reports from Charleston, interviewing actual teachers. She captures the anger and frustration that many of them feel--medical premiums have been rising faster than wages.

As of yesterday afternoon there has been no settlement--the strike now enters its second week. The governor has conceded on the 5% raise but Republicans in the legislature balk, offering only 4%. I have no recent information on the medical issue.

A few thoughts:

• The union's lack of legal status is important. It can't enforce a closed shop, nor can it negotiate a real contract. All it can do is get a widely publicized agreement from the state. That is actually an appropriate role for a union. I support this kind of "union" activity.
• Labor militancy goes up as the economy gets better. With today's low unemployment the teachers are in a very strong position to ask for a raise. Looks like they're gonna get it, too. Bully for them.
• West Virginia seems to be unusual in that teachers' salaries are negotiated state-wide, and not district by district. That gives the union more power.
• Pensions are apparently not on the table. That undoubtedly stems from this being a "voluntary" union. "Real" unions have been lying to their members for decades, promising pensions that can never be delivered. That's been especially true with the United Mine Workers in West Virginia, as discussed here previously. Once burned--twice learned. The teachers are not negotiating for pie in the sky.

So if the only difference between the state's offer and the union demand is 4% vs. 5%, then this really should be pretty easy to settle. (Again, I don't know what's happened to the medical issue.) The governor is asking the state senate to do just that.

I don't think the roadblock is money. Instead, I'll suggest that there's a large constituency that wants the strike to last for a long time. I'm thinking of people like me--retired and no longer having kids in the school system--who resent paying taxes for "overpaid" school teachers. I think that sentiment must be strong in West Virginia, which is among the oldest states in the union, and where private-sector salaries are lower than what teachers already get. Beyond which, education is historically a low priority for the Scots-Irish who live in Appalachia. If the teachers want to go on a two-month, unpaid holiday, it's fine by them. The longer the better.

The other big labor news is the case now before the Supreme Court: Janus vs AFSCME. An Illinois public employee, Mark Janus, sued AFSCME for using his agency fees for political purposes, expounding positions with which Mr. Janus disagreed. A similar case reached the high court previously, but shortly after Justice Scalia's death the court couldn't produce a decisive majority. So they're revisiting the issue.

Oddly, neither The Militant nor Socialist Action has covered this issue at all. But Louis Proyect has.

In as post entitled Mark Janus vs. AFSCME and the need for a real trade union movement, Mr. Proyect suggests that unions that don't have a guaranteed income source are more likely to be radical. Guaranteed incomes make for complacency, and why upset the apple cart with a strike or something? Mr. Proyect quotes Illinois' solicitor general, who argues for the maintenance of agency fees.

“When unions are deprived of agency fees, they tend to become more militant, more confrontational. They go out in search of short-term gains that they can bring back to their members and say, ‘Stick with us.’”

 An interesting idea--not sure if it's true. On the one hand, the West Virginia strike lends credence--the "non-union" has no guaranteed income whatsoever and they're perfectly happy to lead a strike. On the other hand, the Wisconsin Education Association Council--once flush with cash--has, thanks to Scott Walker, been cut off. They're a mere shadow of their former selves--hardly in a position to be more radical.

Those are two anecdotes--the truth of Mr. Proyect's suggestion is an empirical question. I think the jury is out.

For what it's worth, highly regarded, conservative legal scholar Eugene Volokh has filed a friend of the court brief siding with AFSCME. The money quote:

I don't think there's any First Amendment problem with compelled payments of union agency fees at all. The government can constitutionally require people to pay money to the government (in taxes), money that the government can then use for ideological purposes (e.g., supporting a war, opposing racism, promoting environmentalism, and so on). Likewise, the government can constitutionally require people to pay money to unions, money that the unions can then use for ideological purposes.

 We'll see what the Supreme Court decides; I have no clue.

Finally, let me take issue with an article by The Militant's Brian Williams, Trotskyism's only competent economics reporter. But he falls down on the job in this piece about Walmart and Amazon. The lede paragraph:

Walmart and Amazon bosses have been battling for domination in market share and profits. The Walton family owners of Walmart have been winning, as Amazon has proven unable to launch any serious challenge to their utter domination of the brick-and-mortar store market.

But I think he's too much in love with his thesis and fails to report some significant facts. First, Amazon is not really in direct competition with Walmart. Walmart's customer is in the bottom 50% of the income demographic, while Amazon's customer is in the top 50%. Yeah, there's more overlap than that suggests, but there is definitely room in the market for both companies. Neither is going out of business anytime soon.

Second, he fails to note that Walmart has been trying to step up its on-line game, having purchased Jet.com. However in the recent quarter it has performed well below expectations, and the stock dropped substantially.

Third, it's a stretch to say that Amazon failed in launching brick-and-mortar stores. They only recently bought Whole Foods (which, by the way, doesn't compete against Walmart at all), and have not yet had time to assimilate the experience. They haven't failed--they're still experimenting.

The Amazon Go store--one without cashiers which is in beta-testing in Seattle--is a big experiment, as Mr. Williams notes. It potentially puts millions of cashiers out of a job. That's bad, but it's good for consumers who will save both time and money. Trotskyists, including Mr. Williams, are Luddites. Does Mr. Williams think we should ban cars so that unemployed blacksmiths can be put back to work?

So it is not clear that there is a battle royale to the death between these two companies, nor is it true that Walmart is winning.

Further Reading:

• Labor's Legitimacy Crisis
• Abandoning the Working Class!
• Book Review: The Rise & Fall of American Growth

Bitcoin & Big Box Stores

The current issue of The Militant contains two articles of economic interest. One, by Terry Evans, is about bitcoin, while the other, by Brian Williams, covers the travails of big box retail. The paper is alone on my Beat in paying any attention to the economy at all. Further, they're the first to make any comment about bitcoin. While I'll take a smidge of credit given that my recent posts about bitcoin may have been a prompt, they still deserve praise.

Both articles suffer from the same fundamental flaw: they assume that capitalism is in a crisis.

Obviously that's completely wrong. The global economy is running strong, with no recession on the immediate horizon.

Mr. Evans writes,

For decades, as capitalist profit rates have tended to decline, the bosses have been plowing their cash into speculation — or hoarding — rather than investing in capacity-expanding plant equipment and employment.

There's a contradiction here: where does the cash hoard come from if profits are declining? Putting more cash into "speculation" requires cash to begin with, which can only come from profits and/or wages.

As I've said many times, "profit rates" is an ambiguous concept, and in no meaningful way can they "tend to decline." They're certainly not declining now! Still, Mr. Evans is correct after a fashion--there are relatively few opportunities for investment today and therefore there is a savings glut (Larry Summer's term). This leads to low interest rates and a corresponding rise in asset prices, including bitcoin.

But this has nothing to do with a crisis in capitalism. There are at least two other explanations.

1) Demographics. The American population is barely growing at all, and arguably our labor force is shrinking. Fewer workers require less capital, and thus because of continued high profits there is more spare cash left over.

2) Technology. More industries are being computerized. Moving parts (and labor) are being replaced by computer chips--e.g., carburetors supplanted by electronic fuel injection. Computer chips are cheap, which means much less capital is required.

To buttress his case Mr. Evans cites that financial whiz kid, Jack Barnes, specifically a piece written in 2002. Mr. Barnes

explains speculative bubbles are “a manifestation of what Marx called commodity fetishism, the illusion that commodities and capital somehow have a social meaning in their own right, independent of the social labor that went into creating them, a life of their own.”

I think that's gibberish. It sounds like Mr. Barnes advocates a return to a barter economy.

The value of any object is a collective hallucination. A dollar is worth a donut only if a donut is worth a dollar. Both Dunkin' and I imagine that to be true, and hence a market is made in donuts. If they don't want to sell me a donut at that price, or if I don't want to buy one, then donuts will no longer "have a social meaning in their own right," whatever that means.

A Loonie coin is a token, sustained by collective hallucination. However, only Canadians share that imagery. Bring Loonies south of the border and you'll find they won't buy you a donut or anything else. We don't hallucinate about Loonies down here, and per Mr. Barnes we have a better grasp on reality. Does that mean Canadians don't "have a social meaning in their own right?"

Bitcoin is also a token. It has value as long as people believe it has value. There are reasons for people to hallucinate that, which I detailed in my previous post. I do not believe bitcoin's value will go to zero.

By the way, today bitcoin touched $10,000, or nearly a 50% drop from its all-time high. If bitcoin was in a bubble, then it certainly isn't in one now.

Here is Mr. Williams' lede:

While the big-business media has boasted that retail sales were up during the 2017 holiday season — 3.8 percent higher than the year before — the crisis of the bosses in the retail industry continues to unfold as growing numbers of U.S. retail and apparel companies face increasing debt, bankruptcy and competition.

On the one hand he acknowledges consumers are doing well--we got 3.8% more stuff than we got last year. Hurray!

Yet the retail industry is supposedly in crisis, suffocating under debt, bankruptcy and competition.

Later in the article he cites leveraged buyouts as a major culprit, by which speculators took companies private by foisting on them enormous debts. These capitalists, he tells us, made short-term gains while somehow (mysteriously) escaping the long-term losses.

There are two ways of financing any business: debt and/or equity. How capital is structured makes a big difference to the investor, but on net it makes little difference to the firm. The Coase Theorem says that financing via debt or equity or some combination won't matter at all except insofar as transaction costs are different.

That is, an insolvent firm will go bankrupt no matter how it's financed. Either the company will default on its bonds, or the share price will head towards zero. The net outcome is precisely the same. Conversely, a successful company will have a growing share price, or be able to float new bonds at very favorable rates.

So the problems in the retail industry have nothing to do with leveraged buyouts--they'd be just as much in trouble if they relied on selling shares. Toys "R" Us went bankrupt only because technology rendered the company's business model obsolete. A big-box toy store can't compete against Walmart on price, nor against Amazon on selection and convenience, nor with the corner Ma & Pa store on sales of high-end, bespoke items for a niche market.

When was the last time Mr. Williams has ever been to a Toys "R" Us store? I'll hazard never. Even I, when my children were still children, never went to Toys "R" Us. So why should a whole bunch of employees sit around all day waiting for no customers to walk through the door? It is surely much better--for them and for society alike--if their labor is invested in something useful. Or, in Mr. Barnes' precious phrase, doing something that has "a social meaning in [its] own right."

This is the problem with socialists: they're Luddites. No progress is allowed. However novel and revolutionary Sears, Roebuck or Toys "R" Us may have been in the past, we now need to keep them on no matter what--frozen in amber.

Let the companies go bankrupt. So what of the bondholders lose their fortune. Surely Mr. Williams doesn't feel sorry for them--and neither do I. In today's economy (4.1% unemployment) the former employees of those companies will be instantly reemployed more productively. The workers will make out just fine.

The big winner will be consumers--people with children who like to buy quality toys at cheap prices and maximum convenience.

Further Reading:

• What Marxists Don't Understand About Economics
• Louis Proyect and the Pro-Poverty Girl
• If You Really Care About the Poor

Louis Proyect and the Pro-Poverty Girl

In one of the small incongruities of our age Louis Proyect used to work for Goldman-Sachs, though unsurprisingly only for a short time. Nevertheless, he's on CEO Lloyd Blankfein's mailing list, receiving the annual missive to shareholders. To which Mr. Proyect responds with an open letter.

Goldman-Sachs is in the financial services industry. A brief account of what they do is presented on their webpage here. It is highly specialized. Just as the science literature is mostly opaque to people outside of the discipline, much of what Goldman-Sachs does is unintelligible to the layman. As Adam Smith pointed out over two centuries ago, specialization is a good thing. It creates more different kinds of jobs and more opportunities for trade. Indeed, specialization is the mark of rich societies--people working in large, deep, complex markets will be wealthier than those living in simple, subsistence-level economies.

Still, opacity leads to paranoia, and especially on the Left (but also on the Right), Goldman-Sachs has come to represent surreptitious villainy and corruption. That the firm's alumni populate the Trump administration is apparently proof-positive the fix is in. Without in any way excusing actual corruption  (which undoubtedly exists), I simply don't believe it is the major problem with our government, and I think these fears are way over-wrought.

Mr. Proyect objects that Goldman alumni Gary Cohn and Steve Bannon now hold high positions in the Trump administration. He just assumes that these gentlemen's ambition is solely to make the world right for Goldman-Sachs. In particular, he condemns them for supporting the repeal of Dodd-Frank.

I don't understand Dodd-Frank--it's a very complicated bill regulating an industry that is to me opaque. I don't think Mr. Proyect understands it either. But I have it on authority from people I trust that it is a highly intrusive, expensive, and vague set of rules that if completely followed would destroy most financial institutions. It is not followed, and is substantially unfollowable. It's purpose is to prevent a repeat of the financial crisis in 2008. Unfortunately, the world's next financial crisis will not remotely resemble 2008, and hence won't be prevented at all. So the primary effect of Dodd-Frank is simply to inhibit business and make people poorer.

Either way, men from Goldman-Sachs know more about Dodd-Frank than either me or Mr. Proyect. And they are no more in favor of a financial crisis than anybody else. So I'm generally inclined to defer to their judgment. Plus I distrust regulations--they hardly ever work as intended.

Then comes the quote that Mr. Proyect reports as being the takeaway:

(Mr. Proyect quoting Mr. Blankfein) Putting aside one’s individual politics, the outcome of the U.S. election raises the possibility of more stimulative tax and regulatory policies, as well as plans for more infrastructure spending. This represents a substantial change in direction for the U.S., and offers many investors and companies a reason for optimism.

So what is it that makes Mr. Blankfein optimistic? Obviously more money for Goldman-Sachs, but not only that. It also means more investment (in capital goods and equipment), more employees, more consumer products, and even more infrastructure. Why is this bad? Mr. Proyect give us a really silly reason:

A reason for optimism? My god, are you are out of your mind, Mr. Blankfein? Scientists have concluded that climate change is threatening a sixth extinction. You really need to read Naomi Klein or even watch Al Gore’s documentary. By seeing everything through the cash nexus, you are losing the thread.

We all know that Mr. Proyect loses sleep because of the apocalypse du jour. Yesterday's hypothetical disasters have conveniently been forgotten: an asteroid hitting the earth, a new ice-age, peak oil, nuclear war, a global pandemic, or perhaps a population explosion. Scientists, who have and will warn us about lots and lots of things that have never happened, are no better at predicting the future than common undergraduates. Mr. Blankfein--long familiar with failed financial forecasts--rightly dismisses such Luddite fever dreams.

(Mr. Proyect could have cited a truer criticism. If all the good things Mr. Blankfein lists are bought from borrowed money, then it probably is bad. For however much it helps us now, we'll have to pay it back in the future.)

But Mr. Proyect is not alone in his criticism. He has a powerful new ally: a little girl. Or at least the statue of a little girl who stands athwart the ambitions of Wall Street's bull in Lower Manhattan.
             

There she stands--in tailored dress and bespoke shoes--steadfast against wealth and prosperity. Odd, because she's as much a beneficiary as Mr. Proyect.

Perhaps these are her shoes, available from Zappos for $60.

Or maybe she's a more petty bourgeois consumer--akin to Mr. Proyect--and shops at Saks Fifth Avenue, where these can be had for around $400.

I couldn't find her dress on-line (maybe I just don't know where to look), but it's obviously store-bought and fits perfectly. If it cost more than $100 I'd be astonished.

Little Miss Statue lives very well at low prices because of the miracle of modern capitalism. Facilitated in part by the people at Goldman-Sachs.

She is no more inclined to live off the land on an eco-friendly subsistence farm than Mr. Proyect is. The odd thing about her statue is that she doesn't have a cell phone. How many well-dressed little girls in Lower Manhattan do you see who don't own a cell phone? Even Mr. Proyect owns a cell phone! Personally I think she's just trying to fake poverty.

So here she is--she and Mr. Proyect--standing firm for poverty for everybody else besides themselves. Not on purpose, but just because they don't understand that a modern economy needs capital to be efficiently allocated. And such allocation is non-trivial--it requires many very specialized employees doing complicated jobs. What the little girl doesn't comprehend is that her shoes and her dress and her cell phone, along with the electricity at her house and the subway that brought her to Wall Street, all depend on finance (among many other things).

On second thought, maybe I give her too much credit. Maybe she knows all to well that her efforts will make the world poorer. Perhaps she's envious, or evil, or selfish, or stupid. I don't know. Whatever the case, there she is, standing fearlessly in front of the bull demanding her welfare check.

The bull knows what's going on. He's raging for a reason. He doesn't see a little girl. What he sees is the poverty devil in disguise.

Down With Poverty!

Further Reading:

• Book Review: Rise & Fall of American Growth
• If You Really Care About the Poor
• Mr. Proyect's Pro-Poverty Alliance