Month: February 2018

Trump’s Big Buyback Bamboozle

Posted on February 8, 2018

Trump’s promise that corporations will use his giant new tax cut to make new investments and raise workers’ wages is proving to be about as truthful as his promise to release his tax returns.

The results are coming in, and guess what? Almost all the extra money is going into stock buybacks. Since the tax cut became law, buy-backs have surged to $88.6 billion. That’s more than double the amount of buybacks in the same period last year, according to data provided by Birinyi Associates.

Compare this to the paltry $2.5 billion of employee bonuses corporations say they’ll dispense in response to the tax law, and you see the bonuses for what they are – a small fig leaf to disguise the big buybacks.

If anything, the current tumult in the stock market will fuel even more buybacks.

Stock buybacks are corporate purchases of their own shares of stock. Corporations do this to artificially prop up their share prices.

Buybacks are the corporate equivalent of steroids. They may make shareholders feel better than otherwise, but nothing really changes.

Money spent on buybacks isn’t reinvested in new equipment, research, or factories. Buybacks don’t add jobs or raise wages. They don’t increase productivity. They don’t grow the American economy.

Yet CEOs love buybacks because most CEO pay is now in shares of stock and stock options rather than cash. So when share prices go up, executives reap a bonanza.

At the same time, the value of CEO pay from previous years also rises, in what amounts to a retroactive (and off the books) pay increase – on top of their already humongous compensation packages.

Big investors also love buybacks because they increase the value of their stock portfolios. Now that the richest 10 percent of Americans own 84 percent of all shares of stock (up from 77 percent at the turn of the century), this means even more wealth at the top.

Buybacks used to be illegal. The Securities and Exchange considered them unlawful means of manipulating stock prices, in violation of the Securities Acts of 1933 and 1934.

In those days, the typical corporation put about half its profits into research and development, plant and equipment, worker retraining, additional jobs, and higher wages.

But under Ronald Reagan, who rhapsodized about the “magic of the market,” the SEC legalized buybacks.

After that, buybacks took off. Just in the past decade, 94 percent of corporate profits have been devoted to buybacks and dividends, according to researchers at the Academic-Industry Research Network.

Last year, big American corporations spent a record $780 billion buying back their shares of stock.

And that was before the new tax law.

Put another way, the new tax law is giving America’s wealthy not one but two big windfalls: They stand to gain the most from the tax cuts for individuals, and they’re the big winners from the tax cuts for corporations.

This isn’t just unfair. It’s also bad for the economy as a whole. Corporations don’t invest because they get tax cuts. They invest because they expect that customers will buy more of their goods and services.

This brings us to the underlying problem. Companies haven’t been investing – and have been using their profits to buy back their stock instead – because they doubt their investments will pay off in additional sales.

That’s because most economic gains have been going to the wealthy, and the wealthy spend a far smaller percent of their income than the middle class and the poor. When most gains go to the top, there’s not enough demand to justify a lot of new investment.

Which also means that as long as public policies are tilted to the benefit of those at the top – as is Trump’s tax cut, along with Reagan’s legalization of stock buybacks – we’re not going to see much economic growth.

We’re just going to have more buybacks and more inequality.

The Next Big Fight Of Social Security, Medicare, And Medicaid

Posted on February 6, 2018

Fresh off passing massive tax cuts for corporations and the wealthy, Trump and congressional Republicans want to use the deficit they’ve created to justify huge cuts to Social Security, Medicare, and Medicaid.

As House Speaker Paul Ryan says “We’re going to have to get… at entitlement reform, which is how you tackle the debt and the deficit.”

Don’t let them get away with it.

Social Security and Medicare are critical safety-nets for working and middle-class families.

Before they existed, Americans faced grim prospects. In 1935, the year Social Security was enacted, roughly half of America’s seniors lived in poverty. By the 1960s poverty among seniors had dropped significantly, but medical costs were still a major financial burden and only half of Americans aged 65 and over had health insurance. Medicare fixed that, guaranteeing health care for older Americans.

Today less than 10 percent of seniors live in poverty and almost all have access to health care. According to an analysis of census data, Social Security payments keep an estimated 22 million Americans from slipping into poverty.

Medicaid is also a vital lifeline for America’s elderly and the poor. Yet the Trump administration has already started whittling it away by encouraging states to impose work requirements on Medicaid recipients.

Republicans like to call these programs “entitlements,” as if they’re some kind of giveaway. But Americans pay into Social Security and Medicare throughout their entire working lives. It’s Americans’ own money they’re getting back through these programs.

These vital safety nets should be strengthened, not weakened. How?

1. Lift the ceiling on income subject to the Social Security tax. Currently, top earners only pay Social Security taxes on the first $120,000 of their yearly income. So the rich end up, in effect, paying a lower Social Security tax rate than everyone else. Lifting the ceiling on what wealthy Americans contribute would help pay for the Baby Boomers retirements and leave Social Security in good shape for Millennials.

2. Allow Medicare to negotiate with drug companies for lower prescription drug prices. As the nation’s largest insurer, Medicare has tremendous bargaining power. Why should Americans pay far more for drugs than people in any other country?

3. Finally, reduce overall health costs and create a stronger workforce by making Medicare available to all. There’s no excuse for the richest nation in the world to have 28 million Americans still uninsured.

We need to not just secure, but revitalize Social Security and these other programs for our children, and for our children’s children. Millennials just overtook Baby Boomers as our nation’s largest demographic. For them — for all of us — we need to say loud and clear to all of our members of congress: Hands off Medicare, Medicaid, and Social Security. Expand and improve these programs: don’t cut them.

The Macroeconomic Effects Of Student Debt Cancellation

Posted on February 6, 2018

More than 44 million Americans are caught in a student debt trap. Collectively, they owe nearly $1.4 trillion on outstanding student loan debt. Research shows that this level of debt hurts the US economy in a variety of ways, holding back everything from small business formation to new home buying, and even marriage and reproduction.

It is a problem that policymakers have attempted to mitigate with programs that offer refinancing or partial debt cancellation. But what if something far more ambitious were tried? What if the population were freed from making any future payments on the current stock of outstanding student loan debt? Could it be done, and if so, how? What would it mean for the US economy?

This report seeks to answer those very questions. The analysis proceeds in three sections: the first explores the current US context of increasing college costs and reliance on debt to finance higher education; the second section works through the balance sheet mechanics required to liberate Americans from student loan debt; and the final section simulates the economic effects of this debt cancellation using two models, Ray Fair’s US Macroeconomic Model (“the Fair model”) and Moody’s US Macroeconomic Model.

Several important implications emerge from this analysis. Student debt cancellation results in positive macroeconomic feedback effects as average households’ net worth and disposable income increase, driving new consumption and investment spending. In short, we find that debt cancellation lifts GDP, decreases the average unemployment rate, and results in little inflationary pressure (all over the 10-year horizon of our simulations), while interest rates increase only modestly. Though the federal budget deficit does increase, state-level budget positions improve as a result of the stronger economy. The use of two models with contrasting long-run theoretical foundations offers a plausible range for each of these effects and demonstrates the robustness of our results.

A one-time policy of student debt cancellation, in which the federal government cancels the loans it holds directly and takes over the financing of privately owned loans on behalf of borrowers, results in the following macroeconomic effects (all dollar values are in real, inflation-adjusted terms, using 2016 as the base year):

The policy of debt cancellation could boost real GDP by an average of $86 billion to $108 billion per year. Over the 10-year forecast, the policy generates between $861 billion and $1,083 billion in real GDP (2016 dollars).

Eliminating student debt reduces the average unemployment rate by 0.22 to 0.36 percentage points over the 10-year forecast.

Peak job creation in the first few years following the elimination of student loan debt adds roughly 1.2 million to 1.5 million new jobs per year.

The inflationary effects of cancelling the debt are macroeconomically insignificant. In the Fair model simulations, additional inflation peaks at about 0.3 percentage points and turns negative in later years. In the Moody’s model, the effect is even smaller, with the pickup in inflation peaking at a trivial 0.09 percentage points.

Nominal interest rates rise modestly. In the early years, the Federal Reserve raises target rates 0.3 to 0.5 percentage points; in later years, the increase falls to just 0.2 percentage points. The effect on nominal longer-term interest rates peaks at 0.25 to 0.5 percentage points and declines thereafter, settling at 0.21 to 0.35 percentage points.

The net budgetary effect for the federal government is modest, with a likely increase in the deficit-to-GDP ratio of 0.65 to 0.75 percentage points per year. Depending on the federal government’s budget position overall, the deficit ratio could rise more modestly, ranging between 0.59 and 0.61 percentage points. However, given that the costs of funding the Department of Education’s student loans have already been incurred (discussed in detail in Section 2), the more relevant estimates for the impacts on the government’s budget position relative to current levels are an annual increase in the deficit ratio of between 0.29 and 0.37 percentage points. (This is explained in further detail in Appendix B.)

State budget deficits as a percentage of GDP improve by about 0.11 percentage points during the entire simulation period.

Research suggests many other positive spillover effects that are not accounted for in these simulations, including increases in small business formation, degree attainment, and household formation, as well as improved access to credit and reduced household vulnerability to business cycle downturns. Thus, our results provide a conservative estimate of the macro effects of student debt liberation.

To read the full report click here.

Meet The New Boss, Same As The Old Boss

Posted on February 1, 2018

The announcement by the CEO’s from JP Morgan Chase, Amazon and Berkshire-Hathaway that they are forming a new healthcare company signals the symbolic end of the ACA-reform era. They recognize the inefficiencies and profiteering of the private insurance companies, who add no value to businesses dealing with healthcare. And should there be any doubt that the end of the ACA is nigh, there’s this from Trump: “We repealed the core of disastrous Obamacare. The individual mandate is now gone.”

Given the record of the CEO-in-chief who now occupies the White House, it’s doubtful we can expect improved healthcare, or lower costs, under his leadership, which should give us pause before putting CEOs in charge of our health.

If the ACA had fulfilled its promises, a new company by these CEOs would not be needed. The ACA sought to lower costs by forcing consumers to put more “skin in the game,” in Obama’s Budget Director Peter Orzag’s infamous phrase. Yes, patients are spending more, and in 2017 insurance premiums went up over 25% in many areas, deductibles have continued to climb to an average of $1440 for employees in large groups, and drug prices have skyrocketed for long-standing medications like Insulin and newer specialty drugs like Harvoni for Hepatitis C. High-deductible plans and a steady shift so workers pay more for insurance (on average 30% of premiums that are $18,000/year) has not lowered overall costs. Even worse, patients who have paid high premiums are not able to get care because they cannot afford the out-of-pockets costs their expensive insurance does not cover.

Into the breach come the heroic CEOs Bezos, Dimond and Buffett (BDB*). What do they offer? A company that can control costs. How will they do it? With technology, of course. Apparently we have come full circle: since the government regulatory program couldn’t enact effective cost control and utilize technology to save money, let’s have a corporation do so. But it is precisely the industry model that has created our dysfunctional, “money is the metric” approach to health. In the present healthcare industry, the war for revenue between insurers, drug companies, and hospital corporations, along with medical equipment manufacturers and other suppliers, has raised prices and created immense profits. Electronic Medical Records, and other technological innovations are supposed to anchor the new healthcare system. They are expensive, in fact more expensive than any savings they generate. The result of the ACA push to pay for “performance” has been to punish clinicians and hospitals with high-needs patients, no lowering of costs, and increased denials of care since there is an incentive to avoid rather than treat patients who will lower your “performance” score.

Somebody or some entity is going to make the decisions regarding the healthcare we get. Do we really believe CEO’s rather than clinicians should make those decisions? If the decisions are based on corporate bottom lines we can expect continued cost shifts to workers, deployment of labor-displacing technologies with unproven impacts on patient care quality, and fragmentation as each corporate castle fortifies its strategic market position: Aetna-CVS will go toe-toe-toe with BDB* as the Ascension hospital corporation (nation’s largest) pushes back, for example. Since less care equals greater profits, and more covered lives means greater revenue, we can see that money will likely remain the metric.

Those who control capital, like the richest guy in the world, investment banks and investors, favor capital-intensive approaches to social problems. Technology fits that bill. Yet, technology only serves the purposes for which it is designed: it is neither socially neutral nor a panacea. Nurses know, however, that human health cannot be reduced to an algorithm, subject as it is to the particularities of an individual’s family history, environment and most fundamentally, socio-economic status. Let’s hope the technologists and CEOs quickly learn from direct care RNs. Standardization of treatments whether through algorithms, protocols, or budget-mandates do not match the needs of individual patients.

Alternatively, the US could expand and improve the current program that puts clinicians in charge, is popular, and works at controlling costs: Medicare. With administrative costs as low as 5–6% compared to the 13% or higher for private insurance, Medicare is more efficient. The growth in Medicare spending, around 2.4% annually, is much less than growth in overall healthcare spending and far less than recent premium increases. Under Improved Medicare for All, benefits would be expanded to include those that ACA, Medicaid and CHIP provide, and Medicare will negotiate prescription drug prices. The biggest shortfalls in Medicare, the escalating privatization pushed by the insurance-financed politicians that have resulted in higher out of pocket costs for seniors, over payments to the private Medicare Advantage plans and the “donut hole” in the private the prescription drug benefit, would be eliminated through a robust Medicare for all plan, such as proposed nationally in Sen. Bernie Sanders S 1804 bill or the California single payer bill SB 562.

Moreover, traditional Medicare enables physicians to deliver the care their patients need without onerous “gate-keeping,” prior authorizations or narrow networks that insurers use to restrict access, limit choice of providers and undermine the clinical judgment of doctors and nurses. In fact, since older Americans tend to be the most intensive users of health services, expanding the pool by including everybody especially low-needs patients will make the program more sustainable.

Should patients, workers and employers be on the hook for the excessive compensation and enormous profits of the health insurance industry? In California between 2011–16, insurers made $27 billion in profits/net income. Why should we subsidize the failed business model of health insurers? (Employers get $342 billion each year in tax subsidies to lessen the cost to them of private health insurance.)

On this BDB is right—health insurance companies add no value, and the profits in healthcare are obscene. That recognition matters and can point the way toward real reform. The solution is not more of the same. We must contain prices in order to control costs. An industry approach cannot do that and also place patient care at the center of a reformed system.

Remarks At The Ethics In Action Conference

Posted on February 1, 2018

My remarks will focus on the ethical challenges of one particular aspect of the financial system: the investment management industry. Given the increasing size and importance of this industry globally, I believe that it is of utmost importance that we develop an ethical framework for its functioning.

In my remarks today, I would like to argue that there is a quiet, large scale “illicit financial flow” happening under our noses – and that is from everyday savers and pensioners to the employees of the financial sector and the shareholders of these companies. I believe that this “illicit financial flow” is deeply problematic for the end investor, who is trying to save for retirement or important expenses in their lives, and for our broader economic and planetary system, which does not have the appropriate stewards in the financial sector. I believe that without a transformation in how our collective savings are managed, we will not be able to achieve the broader goals of sustainable development.

My comments will focus on three particular aspects of the investment management industry that constitute the key pillars of the ethical challenges of the industry: 1) costs and fees, 2) time horizon mismatch the investment management industry versus the beneficiaries, and 3) lack of active stewardship of investments. I will end with a few comments on innovations in the industry that are trying to tackle some of the challenges I have outlined and will close with some reflections on whether they are moving in the right direction.

Before I begin, let me give you a sense of the size of the global investment management industry:

When I speak about the “investment management industry,” I am referring to the thousands of companies involved in the management of our savings in our pension funds, insurance accounts, additional savings we may have accrued.
The total size of the asset owner community – pension funds, SWFs, Endowments and Foundations, Mutual Funds, and Insurance Funds – is approximately $131 trillion. This number has been growing at between 5 and 7% per annum for the past 10 years.
The total size of all professionally managed, third-party investments has reached $79.2 trillion at the end of 2017. Roughly half of these assets – $37 trillion – are in the United States, $22 trillion in Europe, and $13 trillion in Asia excluding Japan.
The total direct revenues associated with the management of professional assets have reached approximately $200-$250 billion a year and is growing as global wealth increases.

The first major ethical challenge of the investment management industry is the extraordinary level of fees that are charged by the various intermediaries involved in the management of money. A recent study by Professor Andrew Clare of the Cass Business School has found that in between you as an end investor placing your money within a pension fund or into an investment account, and that money earning a return in a publicly listed security, there are over 100 fees placed on you by various intermediaries in the financial industry. A recent study by Grant Thornton, a global accounting and audit firm, has found that someone who entrusts a GBP 100,000 with a financial advisor in the UK will end up paying 2.56% annually in the various fees that are levied, which would mean that after ten years, 40% of your return would be eaten up by fees along the way. Given the fact that over 90% of actively managed equity portfolios underperform their low cost benchmark over a ten year period, this is quite troubling. And despite the growth of automation, robo financial advice, the number of financial advisors to manage assets of all kinds is increasing significantly, not decreasing. I could go on and on about the fee structure of the investment management industry, but I will spare you all for the time being.

The second major ethical challenge of the investment management industry is the mismatch of time horizons between financial market participants and the beneficiaries for whom they are managing money. The average, asset-weighted portfolio turn over rate for US mutual funds from 1984-2017 is 57%, which means that the average US mutual fund turns over their entire portfolio less than every two years. What is the benefit of such turnover? It is certainly not for the end investors, who pay a significant cost to the traders, accountants, book keepers, stock exchanges and more for their investors to churn portfolios. In addition, if the average professional investors has less than a 2 year time horizon for holding a stock, do we really think that they will be thinking about long-term, systemic risks in the global economy and financial system – things like climate change, inequality, corruption and so on?

This brings me to the third and final ethical challenge of the investment management industry, which is that of stewardship. Owning a stock of a company, or owning the bond of a company or country, gives you a right to future earnings of these entities, but it also gives you a responsibility as a small owner of the security. It gives you a vote in the election of the company’s board members, it gives you the right to issue resolutions for the company’s board to consider reform their practices on certain issues ranging from environmental impact to pay gaps to gender diversity on corporate boards and more. Over the past forty years, what has happened is that stock ownership has moved from individuals, who in the early 1980s owned 80% of the stock market directly, to institutional investors and asset managers, who now own a large majority of publicly listed companies on behalf of individuals. Although this may have created some efficiencies, it has also delegated an important set of decisions to intermediaries such as pension funds and asset management firms, who I believe, are not putting sufficient resources in being representative stewards of capital on behalf of their beneficiares. To give you one important anecdote, in 2017, there were 63 climate change related resolutions for publicly listed corporations, a small number to begin with compared to the multiple thousands of publicly listed companies. The average vote outcome was only 33% in favor, and only 3 positive outcomes. Do we really think that asset managers and institutional investors are voting in line with the best, long term interests of their clients and customers with a voting record like this? I think not.

Over the past few years, there has been a significant amount of hope that “institutional investors” and “private sector financial institutions” would be leading actors for sustainable development. Every UN and World Bank meeting related sustainable development financing since 2014 has had a significant discussion on “how to get the investment management industry through institutional and retail investors” to contribute to the SDGs? The intuition may be right, given the size and influence of this industry, but the reality is a lot more challenging than what most people expect.

The good news is that innovation is under way to tackle some of the challenges that I have outlined. Low cost index investing has the potential of bringing down the costs of investment management by 1, if not 2, orders of magnitude. Behavioral finance insights are being used to decrease the churn of portfolios. New platforms are being built to give retail investors a mechanism to express their voting preferences to their fund managers so that they vote according to their beneficiaries interests on Environmental and Social issues. But all of this is still at the margin, and a lot more work is needed.

Thank you.