Monday, April 30, 2012

Will No One Rid Us of This Turbulent Myth?

While I don't generally advocate for violence, I might make an exception in this case.

I consider Horatio Alger, and the other boy-who-makes-good characters like him, the most dangerous American myth around (I touched on this issue about two years ago, when pleading for my taxes to be raised).

As I wrote then, the "bootstraps myth" -- the idea that, by your own efforts alone, you can propel yourself from deepest poverty to greatest wealth -- is embedded in American psychology, and it's (a) a myth, and (b) a dangerous one. Why? Because no one makes it entirely on his or her own. There are scores of individuals who helped propel Young Mr. Alger onward, and there are institutions of law and government (not least, the very concept of "rule of law") that further paved the way for his success.

So I was cheered last September, when Elizabeth Warren, now the Democratic candidate for the U.S. Senate in Massachusetts, made a similar point, which promptly whizzed around the Internet (or at least, the progressive portions thereof). Speaking to a group of supporters (CBS News report by Lucy Madison,  here), she said: 
There is nobody in this country who got rich on his own. Nobody.

You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along. 

I was cheered by her remarks (and even -- full disclosure -- sent a small check to support her candidacy; as a resident of CT, I can't vote for her ... although I briefly considered moving!), but didn't write a blog post about it, as this does not aim to be a political forum.

What prompts this post is a review by Sara Robinson in today's Salon (re-posted from AlterNet) of a new book by Brian Miller and Mike Lapham, The Self-Made Myth: The Truth About How Government Helps Individuals and Businesses Succeed.

Miller is executive director of United for a Fair Economy, and Lapham is a director of UFE's Responsible Wealth project (which I mentioned in the April 2010 post). Together, Robinson reports, they "argue that the self-made myth absolves our economic leaders from doing anything about inequality, frames fair wages as extortion from deserving producers, and turns the social safety net into a moral hazard that can only promote laziness and sloth."

They make a strong case that, as Warren said, "nobody ... got rich on his own." From interviews with a range of wealthy individuals, Miller and Lapham point to several key elements to "self-made" success, including:
  • A good, and often public, high school and university education;
  • The steady support of the Small Business Administration and other government agencies;
  • A strong regulatory environment;
  • The Internet, created by government investment;
  • A fair (and regulated!) marketplace to issue and trade stock;
  • Enforceable copyright and trademark laws;
  • The (relatively) robust network of roads, rails, and airports; and -- last but certainly not least -- 
  • Luck and timing.
So, please: Can we kill off Horatio Alger?


Wednesday, April 25, 2012

What's an ER's First Mission?

... To heal the sick and injured, or to collect on past-due bills?

Imagine this situation: You slip and fall, and realize that the blood gushing from your leg is not going to be fixed with a small Band-Aid. So you head to the nearest emergency room, where the first person you are met by is:

(a) A triage nurse
(b) An ER doctor
(c) A debt collector

The most likely answer is: Any of the above.

Today's New York Times has a depressing article by Jessica Silver-Greenberg outlining the "tough tactics" (I can think of other words) used by Accretive Health, "one of the nation's largest collectors of medical bills."

Now under investigation by the Minnesota attorney general, Accretive was known for "embedding debt collectors as employees in emergency rooms and demanding that patients pay before receiving treatment."  (emphasis added)
To patients, the debt collectors may look indistinguishable from hospital employees, may demand they pay outstanding bills and may discourage them from seeking emergency care at all, even using scripts like those in collection boiler rooms...

In possible violation of federal privacy laws,  Accretive employees reportedly "had access to health information while persuading patients to pay overdue bills."

Yes, hospitals are in a crazy situation here, required by law (the Emergency Medical Treatment and Active Labor Act, passed by Congress and signed by then-President Ronald Reagan in 1986) to provide emergency medical treatment to anyone who needs it regardless of ability to pay (or citizenship or legal status). In a still-reeling economy, people have let insurance policies lapse either through an inability to make the payments or through loss of jobs (and employer-provided coverage, followed by the inability to pay for private insurance). The ER has therefore become the go-to place for medical care.

And, Yes, health care is expensive, and hospitals have a right to try to recoup their costs. But it's how you do it that makes all the difference. It's certainly true that

Hospitals have long hired outside collection agencies to pursue patients after they have left hospital facilities. But financial pressures are altering the collection landscape so that they are now letting collection firms in the front door.... 

To achieve promised savings, hospitals turn over the management of their front-line staffing — like patient registration and scheduling — and their back-office collection activities.
Doesn't that sound uncomfortably cozy to you? Doesn't it sound like a situation just asking for abuse? How is "looking indistinguishable from hospital employees" ethical behavior?

I believe that health care should be a basic right, along with public education, police and fire protection, and the like. And just as we don't run our police departments on a for-profit model, thankfully, we shouldn't be running health care on that model.

Article 25 of the United Nations' "Universal Declaration of Human Rights", adopted in 1948, includes the following: "Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services..."

But you can disagree with me about health care as a right, and still agree that Accretive's behavior stinks.

Monday, April 23, 2012

Wal-Mart: The Bad and The Worse

In our ordinary lives, ethics questions can be difficult not simply because of right-versus-wrong choices, but more commonly because of right-versus-more-right or wrong-versus-less-wrong choices.

It can be tempting just to let something slide: the cashier gave me an extra dollar in change because two bills were stuck together, and I should go back and return it to her, but I'm already running late, and what difference will $1 make anyway? (Answer: Not much ... except that it will be taken out of her pay.)

But for corporations chasing ever-higher-growth and ever-better-returns, the temptation to go really wrong can be huge.

As evidence, I draw your attention to the long, extraordinarily detailed, and compelling article written by David Barstow and published in yesterday's New York Times, about bribery at Wal-Mart Mexico.

Dating back several years, the investigation revealed a pattern of bribe payments as Wal-Mart built stores throughout Mexico. When Wal-Mart's headquarters eventually learned of the problem, instead of exploring the situation more deeply, it shut the investigation down:
Under fire from labor critics, worried about press leaks and facing a sagging stock price, Wal-Mart’s leaders recognized that the allegations could have devastating consequences, documents and interviews show. Wal-Mart de Mexico was the company’s brightest success story, pitched to investors as a model for future growth. (Today, one in five Wal-Mart stores is in Mexico.) Confronted with evidence of corruption in Mexico, top Wal-Mart executives focused more on damage control than on rooting out wrongdoing.
Most disturbing of all, "Primary responsibility for the investigation was then given to the general counsel of Wal-Mart de Mexico — a remarkable choice since the same general counsel was alleged to have authorized bribes."

Are you surprised? Sadly, I'm not.

That doesn't mean that I want to see Wal-Mart given a free pass on this issue. Some reader comments are along this line: "Why the outrage? This is apparently the method of doing business in Mexico and in many other Southern Hemisphere countries."

Such behavior might be common -- although that's tarring a whole continent with an awfully big brush -- but bribery is illegal both in the U.S. and in Mexico. Moreover, Wal-Mart prides itself for being a model corporate citizen. In its Statement of Ethics (note: launches as .pdf), there's great emphasis on "integrity". The first three "guiding principles" are:
  • Always act with integrity.
  • Lead with integrity, and expect others to work with integrity.
  • Follow the law at all times.

So how well are those principles holding up here?

Actually, the principles don't seem to held up that well in the U.S. either. Showing a preference for hiring part-time workers over full-time (no benefits!); driving "less efficient" small-town stores out of business thereby (with other "category killers") hollowing out Main Street; resisting attempts to unionize, and so much more.

This is where the crucial difference between ethics and legality comes through. All too many of us assume that "if it's not illegal, it must be OK."

That's not integrity. That's rapaciousness.

Wednesday, April 18, 2012

"Shareholder Value" Isn't the Same as "Shareholders' Values"

If "shareholder value" is the rallying cry for the current crop of crony capitalists -- which is why they so "valiantly" repel attempts to regulate their industry -- why is it that shareholder votes are non-binding?

Yesterday, as reported by the New York Times' Jessica Silver-Greenberg and Nelson D. Schwartz, and others (e.g., Slate's Matthew Yglesias, here, or here for the American Banker's report), Citigroup shareholders voted down a $15 million pay package for Vikram S. Pandit, the banking giant's chief executive officer.

The Times reporters quoted an analyst with Credit Agricole Securities, who said that excessive pay has long been a problem at Citigroup, which has had the unhappy combination of poor stock performance among large banks together with some of the highest compensation for its top executives.

Pandit took a symbolic $1 / year salary in 2009 and 2010, which then got boosted to $1.67 million last year (plus $5.3 million cash bonus) -- despite the fact that Citi's shares fell 44%.

Another analyst noted, "CEO's deserve good pay but there's good pay and there's obscene pay."

The shareholder vote, known as "say on pay", is part of the Dodd-Frank financial-reform law which requires that public companies give their shareholders the opportunity to express the approval, or lack thereof, for executive compensation packages. To date, very few shareholders have opposed the packages presented. Shareholder votes are not binding.

According to the Times article, "Richard D. Parsons, who is retiring as Citigroup chairman, said that he takes the vote seriously and Citi's board will carefully consider it."

Considering it, of course, is not the same as following it.

Tuesday, April 17, 2012

Another Book for my Must-Read List

Driving home from a breakfast meeting in the city, I listened to a great interview on Brian Lehrer's show on WNYC. His guest, Mara Einstein, is an associate professor of media studies at Queens College, and has just published a new book, Compassion, Inc.: How Corporate America Blurs the Line between What We Buy, Who We Are, and Those We Help, which has just gone onto my must-read list.

A critique of cause-related marketing, her book analyzes how companies manipulate us into supporting the companies' bottom lines, rather than the complex social issues they purport to help.

I was particularly impressed by her concern that we are increasingly defined as "consumers" -- as though using things was our most important attribute -- and by the brands we use and wear rather than by who we are.

The good feelings that we get from "supporting" a cause by buying a product are usually just that: good feelings. All too often we don't know how much money a corporation is actually providing to that cause. And usually a direct gift is far more effective. As she said, instead of buying $80 shoes so that the company will give a second pair of shoes to a shoeless child in the developing world, buy yourself a pair of $40 shoes and find a charity that will give multiple pairs of shoes for the other $40.

Full disclosure: It turns out that Prof. Einstein and I are both graduates of Northwestern's Kellogg School of Management ... but I didn't know that when I started writing this post!

Monday, April 16, 2012

Does Monopoly Matter?

Maybe it doesn't, if all that matters is maximizing efficiency.

But it does, if there are other issues at stake as well -- community, the corrosive corruption of power, even serendipity.

I've been thinking about it today, thanks to two articles in the business section of the New York Times. They both cast a little extra light on last week's reports that the Justice Department was suing Apple and five major book publishers, accusing them of price fixing (on e-books). Hachette Group, HarperCollins, and Simon & Schuster have already settled with the government, are ending their "special" deals with Apple, while the other two (Macmillan and Penguin Group USA) have not, claiming that they have done nothing wrong. Apple has not settled either, and will be fighting the legislation.

The first of today's pieces that caught my eye was by "Media Equation" columnist David Carr, which muses about Justice's going after Apple when it is Amazon that is "book publishing's real nemesis."

Carr points out that, back in 2007 when Amazon introduced the Kindle, it began selling "some of the most sought-after books for $9.99 in order to bolster sales of its device." That price point made a lot of bookstores (and publishers) unhappy because "it made physical books sold for $25 or more seen [sic] outrageously overpriced." But there wasn't much that those stores and publishers could do.

With Apple, publishers developed a "so-called agency model", which allowed publishers to set the price. When the publishers all coalesced around what one might call "surprisingly" similar prices, Justice took note.

So yes, Carr decides, maybe there was some price-fixing going on. However:
From the very beginning and with increasing regularity, Amazon has used its market power to bully and dictate. It leaned on the Independent Publishers Group in recent months for better terms and when those negotiations didn't work out, Amazon simply removed the company's almost 5,000 e-books from its virtual shelves....

Amazon's $9.99 subprofit price ...[had been] a virtually impenetrable barrier to entry for anyone who couldn't afford to lose millions in order to gain market share. Remember that it was only after agency pricing went into effect that Barnes & Noble was able to gain an impressive 27 percent of the e-book market.
So, is Carr saying that the ends justify the means, and that since Amazon is a bully, the publishers' price-fixing should be OK?

I don't think so -- and if he did, I certainly wouldn't agree with it.

But I would agree with Carr that it looks as though "Amazon has the Justice Department as an ally to rebuild its monopoly and wipe out other players." And I would agree that this isn't a good thing.

As a consumer of dead-tree books (and e-books -- I'm the more-or-less-satisfied owner of a Kindle Fire), I like low prices. As the author of not-finished-yet-but-I'm-getting-there-and-hope-to-get-published novel, I know that low prices = low royalties. And just how low can they go? And what happens when Amazon is Last Company Standing? Will they stick to their low-prices-means-next-to-no-profit model, when they know that we don't have anywhere else to go?

Amazon also offers authors the opportunity to be "published" by Amazon. Those authors receive royalty rates of 70%, far beyond anything traditional publishing offers. But -- go ahead, call me cynical -- I suspect those rates will drop precipitously, once they're the last "publisher" standing.

That's my "corrosive corruption of power" concern about Amazon.

Then there's community. Bookstores, like other local retail outlets, are part of the fabric of a community. Take them away -- plunk a Home Depot two miles out of downtown where the land's a little cheaper, driving the local hardware store out of business -- and you hollow out the core of a community.

And finally, there's serendipity. I "met" some of my favorite authors by browsing through bookstore shelves, picking things up and reading a few pages. Amazon recommends things for me all the time, and most of them are wrong (That graphic novel I bought last month? It was a birthday present for a nephew, so, dear Amazon, you can take all the other graphic novels out of my face, please. And yes, I know that I could "optimize" recommendations, but why should I have to spend all that time making Amazon's job of smashing things in my face easier?).

Meanwhile, over in the second article that caught my eye today, David Streitfeld provides a nice counterpoint to Carr's note that Amazon had cut off the Independent Publishers Group's offerings when negotiations turned sour:
The Educational Development Corporation, saying it was fed up with Amazon's scorched-earth tactics, announced at the end of February that it would remove all its titles from the retailer's virtual shelves....

It is an unequal contest. EDC has 77 employees, no-frill offices on an industrial strip here [in Tulsa OK] and a stock-market valuation of $18 million -- hardly a threat to Amazon.... But Mr. [Randall ] White's bold move to take his 1,800 children's books away from the greatest retailing success of the Internet era is more evidence of the extraordinary tumult within the book world over one simple question: who gets to decide how much a book costs?
In the EDC case, unlike the case the Justice Department is pursuing, there are no e-books involved (EDC doesn't produce any e-books). Instead:
Amazon was buying EDC's books from a distributor and discounting them to the bone, just as it does with everything it sells. This might have been a boon for readers, but it was creating trouble with other retailers who carry the company's titles, as well as with EDC's network of independent sales agents, who market its books from their homes.
EDC CEO White complained that for his agents, their homes "were becoming showrooms for Amazon."

The Times' Streitfeld notes that late last year, "Amazon encouraged customers to use physical stores as showrooms before ordering more cheaply online, a move that infuriated bookstores in particular."

Some bookstore customers were infuriated, too, because that tactic was simply dirty pool.

EDC wants to think of itself as David to Amazon's Goliath, but White's not a pure hero (not that the Biblical David was one, either). His sales "consultants" operate on something more like a Tupperware Party plan than real consulting, talking up books to friends and acquaintances. It's a system that can be powerful, building on real social networks, and it's also one that can easily be abused.

There were plenty of reader comments to both articles along the lines of "change or die." People who are happy with Amazon's prices, or with the depth of material available, or the convenience of online ordering and downloading, think that they've seen the Future and they like it. "Get out of the way or get run over," they say. "And besides, all the publishers do is rip off the talent."

But it isn't that simple, is it?

I'm as fond of ordering books late at night when the bookstore's closed and of two-day shipping as the next person. I like being able to take one Kindle with me, loaded up with beach reads, on a week-long vacation instead of a stack of paperbacks. I like the depth of Amazon's offerings -- so much more than any physical store could offer.

But embracing the future doesn't mean that we should want to throw out everything about the past. I just read an e-book that I know a friend of mine would like ... and I can't loan it to her the way I could an actual book. I miss the tiny specialty bookshops that had deep knowledge of their own fields. I miss the local bookseller who knew what I would like and could make serious recommendations (as opposed to Amazon's "Recommendations for You").

What I'm still searching for is a way to keep the best of both worlds.

Friday, April 13, 2012

Maybe We Should Call It a Consumer Non-Protection Agency

What else would you call a "consumer protection bureau" when it doesn't seem to be protecting consumers?

It's possible that the Consumer Financial Protection Bureau feels that it needs to pick its fights, but I'd have thought that they would start strong, and make it clear that they mean business, and then offer to negotiate particular issues.

The New York Times' Tara Siegel Bernard reported in today's paper that the agency has "introduced a proposal that would make it easier for credit card issuers to charge fees before borrowers' accounts were officially open."

That's right: Before.

Part of the Credit Card Act, passed in 2009 and in full effect since February 2010, said that, as Bernard reported, "credit card issuers could not charge fees equal to more than 25 percent of the borrower's credit limit in the first year after the account was opened."

The solution? Not, of course, to stay within that limit, but instead to charge "application or processing fees before consumers' accounts were opened."

At that point, the Federal Reserve stepped in and "expanded the rule so that the fee limit would also apply to those upfront charges."

And this is where the Consumer Financial Non-Protection Bureau is stepping in to eliminate that rule.

Let's think about who is most likely to be affected by this. Is it someone with sterling credit who pays his or her bills on time every time? Not hardly. No, it's going to be someone whose credit record has been damaged, for good reason or bad, and likely someone of extremely modest means.

Consumer advocates point out that the battle over the regulatory wording stems from a 2011 lawsuit filed by First Premier Bank of South Dakota, which "began charging a $95 processing fee before the card account was opened, as well as a $75 annual fee. Yet the credit limit on the card was $300."

I wrote yesterday that the risky-lending ghouls are back, and I've written before about the ethically dubious behavior that card issuers are still permitted, despite the "protections" offered by the Credit Card Act. I had hoped that the Consumer Financial Protection Bureau would help plug some of those ethical holes. I guess I was wrong.

Thursday, April 12, 2012

Risky Lending Seems to be On the Rise Again

The ghouls are back again. And it's still months until Hallowe'en.

What else but "ghouls" would you call people whose business model is based on taking advantage of the unsophisticated?

In yesterday's New York Times, reporters Jessica Silver-Greenberg and Tara Siegel Bernard recounted the following story:
Annette Alejandro just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail.
As Alejandro herself said, "Even I wouldn't make a loan to me at this point." (full story, here)

So why are so many "reputable" financial institutions ready to extend her credit?

Because subprime borrowers pay maximum rates (up to 29%), and often get charged late fees as well.

It's a way for the banks to make up for "the billions in fee income wiped out by regulations enacted after the financial crisis."

But subprime borrowers are all too often, in the words of one bankruptcy attorney, "addicted to credit."

Think of the bank, then, as your friendly neighborhood pusher.

Moreover, to many, this signals a return to the risky lending practices that got us all into the 2008 financial implosion. Did we learn nothing? Apparently not.

Monday, April 2, 2012

A Prescription to Prohibit Poisonous Products

What if there were a Financial Products Administration equivalent to the Food & Drugs Administration? That is, an agency that reviewed new financial products before they were introduced to potential customers, and would keep toxic instruments out of the marketplace.

That's the interesting suggestion explored yesterday by New York Times columnist Gretchen Morgenson (full story, here).

Morgenson's column is based on a paper published in February by two University of Chicago professors (one of law and the other of economics). Their proposed new agency would "approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for hedging than for speculation."

Hedging risk is generally considered economically beneficial, while speculation (a.k.a. gambling) is not.

As Morgenson points out, nearly four years after the financial-markets implosion that rocked the entire national economy, regulation of the questionable instruments that underlay that implosion is still a battleground issue.

The Chicago professors argue that bad financial instruments are "at least as dangerous" as bad medicines.

It is not the main purpose of our proposal to protect consumers and other unsophisticated investors from shady practices or their own ignorance. Our goal is rather to deter financial speculation because it is welfare-reducing and contributes to systemic risk.

Moreover, they note that while Dodd-Frank attempts to address the issue, it is, at best, "an empty vessel", because "it authorizes agencies to regulate without giving them much guidance as to how to regulate."

Morgenson finds it "refreshing" to find someone who thinks that financial innovation isn't always a good thing. She notes that "bankers often argue that complex financial products are among America’s great inventions." (cf. Goldman Sachs' Lloyd Blankfein as bankers "doing God's work.") She adds,

But given that exotic instruments played a central role in the credit crisis, it is worth questioning the costs and benefits of such financial innovations.
This paper could be a starting point for an interesting discussion. But -- given the polarized paralysis of political punditry -- I'm not counting on anything but screaming matches.