Have Private Equity "Reformers" Spurred U.S. Productivity?

David Brooks is no economist and that shows in his recent column about private equity, in which he claims that private equity firms have pushed corporate America to get leaner and smarter. As Paul Krugman pointed out today, nothing of the sort happened -- because, in fact, productivity has not been higher since the advent of LBOs and private equity, starting in the 1980s.

Data from the Bureau of Labor Statistics confirms that claim. According to the BLS, labor productivity gains averaged 2.8 percent a year between 1949 and 1973 -- compared to 1.4 percent in the 1980s, the golden age of LBOs; 2.1 percent in the 1990s; and 2.5 percent in the Bush years. In other words, the supposedly complacent years of "welfare capitalism," when union power was at an all-time high and Wall Street sharkers were kept in check by heavy-handed regulation and tax rules, was when American workers were also most productive.

Perhaps the bigger problem with Brooks' idolatry of private equity, though, is that it's hard to know what, exactly, its role has been in influencing productivity. Workers can become more productive for a variety of reasons: Because their skills improve; because they utilize new technologies; because they are well-managed and highly motivated; or because they are forced to do more work than they did before.

For example, productivity gains in the 1990s and in early 2000s might be best explained by the advent of the Internet and other technologies that made workers more efficient -- just as many new technologies came on the scene in the postwar era. The recession of 2001 also led to cost cutting and restructuring that pushed workers to do more during the subsequent Bush years. 

As for the motives driving companies to boost productivity, having a Gordon Gekko breathing down your neck could certainly be one incentive. But owners might also just want to make more money for it's own sake; or logically utilize the latest labor-saving technologies; or see the benefits of improving management and human capital of their workers; or be responding to competition.

It's one thing to measure the impact of private equity firms on the companies they take over, as researchers have done. It's quite another to make big claims about  their broader impact on the economy, either positive or negative.

Facebook and Wall Street's Inside Game

It's too early to say whether serious misdeeds were committed by Facebook or its Wall Street underwriters in the lead up to its IPO. Or whether, instead, this was a case of miscommunication and incompetence. Regulators and litigators will eventually get to the bottom of things.

The story as it now stands, though -- with insiders enjoying an edge over ordinary investors -- supports a broader narrative depressingly familiar to most Americans: Which is that the stock market is a rigged game.

Evidence that the little guy is apt to be burned by Wall Street has been piling up since the dotcom boom. After the crash of the Nasdaq in 2000, we learned how the Internet stock bubble was designed to favor insiders: How Wall Street firms and investors scored big on tech IPOs for companies with no profits; how investment bank analysts like Henry Blodget publicly touted dubious Internet stocks in ways that helped their banks' bottom line but misled investors; and how, after the bubble burst, we learned that top tech executives at doomed firms had dumped much of their stock when it still had value, making a fortune, even while urging Main Street investors to hold onto their shares.

Investors got screwed big time again just a few years later when the banks bundled subprime mortgages, ratings agencies turned a blind eye to the risks of these securities, and anyone who bought this crap ended up losing their shirt. The broader crash of the market, courtesy of Wall Street risk addicts, also wiped out trillions in stock value.

Some of the revelations of how insiders raked over investors during this episode have been stunning, like how Goldman knowingly peddled out junk to its clients and allowed a top hedge fund manager to profit at the expense of other investors.

Oh, and let's not forget about MF Global, a more recent shameful episode, in which a Wall Street brokerage basically stole $1.6 billion from customer accounts that, by law, it was never supposed to touch.

The mishandling of Facebook's IPO doesn't seem all that malovent to me, based on the information that's come out so far. It's not clear there was a deliberate and self-interested effort to keep small investors in the dark about earnings projectsion, as much as just bad management of the process.

Still, it fits a pattern. Which is that Wall Street can't be trusted to act in the interests of Main Street.

After the dotcom crash, and the frauds at Enron and Worldcom, there was bipartisan agreement that stronger regulation was needed to ensure public faith in financial markets and thus keep the capital flowing that business requires to grow. Sarbanes-Oxley was the result, signed by President Bush. No such consensus existed after the bigger crash of 2008 and a pitched battle is now being fought to stop Dodd-Frank from ever being implemented.

All this is weird. Conservative apostles of supply-side theory say that want to do everything possible to facilitate capital formation and make more money available to grow the economy. But they are hostile to one of the most basic ways of ensuring a robust stock market: Which is to guarantee that the game isn't rigged against investors.

How Federal Early Childhood Education Standards Are Increasing Inequality

A guest blog published today by the Washington Post in Valerie Strauss' regular "The Answer Sheet" is both a fascinating and alarming indictment of how policy people are screwing up education. The article is by a group of career educators and professors specializing in early childhood.

The article outlines in very specific, eloquent, and compelling terms what is wrong with current federal mandates for early childhood programs. The critique is drawn from the work of the Defending the Early Years coalition, a group whose "principal concern is defending children’s right to play, grow, and learn in an era of so-called standards and accountability."

As the Post piece states, DEY's concern is that:

...Federal Race to the Top policy mandates on early childhood education are undermining education practice that research tells us is in the best interest of young children’s optimal development and learning. 

Here is DEY's logic:

1. Current standards are not based on knowledge of child development — both how children learn and what they learn.

The standards require that children learn specific facts and skills — such as naming the letters — at specified ages. This has led to more teacher-directed “lessons,” less play-based activity and curriculum, and more rote teaching and learning as children try to learn what is required. Yet decades of research and theory tell us that young children learn best through active learning experiences within a meaningful context. Children develop at individual rates, learn in unique ways, and come from a wide variety of cultural and language backgrounds. It is not possible to teach skills in isolation or to mandate what any young child will understand at any particular time.

2. Current policies support an over-emphasis on testing and assessment at the expense of all other aspects of early childhood education.

Already strapped for time and money, schools turn valuable attention and resources toward preparing teachers to administer and score tests and assessments rather than meet the needs of the whole child. As teachers strive to raise test scores, they increasingly depend on scripted curricula designed to teach what is on the tests. We know, however, that children learn best when skilled and responsive teachers observe them closely and provide curriculum tailored to meet each child’s needs. Standardized tests of any type do not have a place in early childhood education, and should not be used for making decisions about young children or their programs. Individualized assessments of each child’s abilities, interests and needs provide teachers with the information they require to individualize teaching and learning. 

3. Cumulatively, current policies are promoting a de-professionalization of teachers.

The growing focus on standards and testing disregards the strong knowledge base early childhood teachers have. It undermines teachers’ ability to teach using their professional expertise, to provide the optimal, individualized learning opportunities they know how to offer. Instead, teachers are often required to follow prescribed curricula taught in lock step to all children. At the same time, more teachers without strong backgrounds in early childhood education are being hired, increasing the dependence of teachers on standardized tests and scripted curricula.

The full article is worth reading, especially as it talks about ongoing efforts -- including a large scale teacher survey -- to continue to understand the impact of policy mandates on the work of early childhood educators.

But there is also an important implication that needs to be mentioned regarding socioeconomic inequality.

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Trade War between U.S. and China over Solar?

A trade war is brewing over renewable energy imports between the U.S. and China. Last October, several U.S. solar firms filed a federal trade complaint against Chinese companies for “dumping” solar products on global markets to artificially lower prices with a glut of supply. The complaint also alleged that China unfairly subsidized its industries with land grants, contract awards, trade barriers, financing breaks and supply chain subsidies.

Last week, the U.S. Commerce Department sided with the solar companies and ruled that Chinese solar product imports were being sold below the cost of production and imposed tariffs of 31 percent to 250 percent on the imported products. In response, China lodged a complaint at the World Trade Organization over the decision and its Ministry of Commerce ruled yesterday that renewable energy subsidies in five U.S. states violate free trade rules. As one analyst stated, while every country provides subsidies to certain industries, “The absurdity is the scope and depth of the subsidies in China. . . You’re competing against a sovereign when you’re talking about the Chinese solar industry. It’s economic warfare.”

The problem with China’s solar industry is not that there is strong government support. Indeed, we have argued again and again that the U.S. needs to significantly increase its support for the solar industry and renewable energy, in general. The problem is that the level of support the Chinese government is providing distorts the market by making the price of its products artificially low. The danger is that the low cost drives competitors out of business and Chinese products will reach complete market domination. At which point, China will have complete control over price and the cost of solar products could skyrocket overnight.

In some respects, conservatives should be at the front line of this trade fight. Unlike other red herrings, like Solyndra, the China example is a clear case of what happens when too much government intervention distorts market conditions. Yet, people like Representative Cliff Stearns have thrown in the towel and declared, “We can’t compete with China to make solar panels and wind turbines.” The irony, of course, is that Stearns’ home state is the second largest producer of solar energy in the country.

So, what will come of this trade war? Imposing tariffs on imported solar products only works if domestic solar production is able to meet demand, otherwise solar becomes prohibitively expensive, which doesn’t help anyone. The solar industry is showing strong growth, but the uncertainty of future tax credits and government support leaves the future growth of the industry in question. The only way we can compete with China is to stop politicking and start supporting industry growth through renewable energy targets, which create steady demand, and continued government support through policies like feed in tariffs.

Fighting this battle through a trade war is to no one’s benefit.

Standardized Science Tests Or Substandard Tools?

Fourth and Eighth-graders across New York State are in the midst of taking their 2012 standardized "science performance tests." With some exceptions (see the May 2012 memo issued by the NYS Department of Education, "all public school students in Grade 4 and Grade 8 must take the State assessments administered for their grade level."

The 2012 manual for administrators and teachers involved in the fourth-grade tests says that NYS Science Performance Test is meant "to serve as a basis for determining students’ needs for academic intervention services in science." The test is designed to measure the content and skills contained in the Elementary-Level Science Core Curriculum, Grades K–4. It has two parts, a written test and a performance test.

The Written Test consists of multiple-choice and open-ended questions and requires about one hour to administer. The Performance Test (Form A) consists of hands-on tasks set up at three stations and requires about 75 minutes to administer.

Here is a question from the 2011 written test:

It rained on a hot summer afternoon and a puddle formed. After several hours, the puddle was gone. Which two processes made the puddle form and then disappear?

A precipitation followed by evaporation

B deposition followed by evaporation

C precipitation followed by runoff

D deposition followed by runoff

The hands-on portion of the 2012 test involves setting up stations along prescribed diagrams. The three stations are named: Measuring Objects and Liquids, Electrical and Magnetic Testing, and Ball and Ramp. At each station, test administrators are supposed to print out the diagram and fold it on the dotted line and tape it to the bottom of the station so that the diagram faces the student.    

Here is what the "measuring station" looks like: 

Source: The University of the State of New York Grade 4 Elementary-Level Science Test, Performance Test. Form A. Station DiagramsHow wonderfully mechanistic and well-organized. If only it all proceeded like clockwork, giving educators diagnostic tools that they could immediately use as "a basis for determining students’ needs for academic intervention services in science." 

Is the testing system set up to achieve this goal? Probably not.  

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The Nuclear Regulatory Commission Is In Free Fall

The resignation of NRC Chairman Gregory Jackzo puts the issue of nuclear safety smack on the middle of Obama's desk, and then into the presidential race. That's a good thing.  The NRC is not doing the job that the law and common sense require it to do.  It is a captive of the nuclear industry, operates in secret and without due regard for the public health and safety. The NRC's relationship to the nuclear industry today is just what the SEC's relationship was to Wall Street four years ago.  We are skating on very thin ice.  The nomination of a new chairman, with the public debate that will follow is the best way to get it pointed in the right direction.

Full disclosure:  I've been active for many years in the efforts to close Indian Point, because it's dangerous in design and operation, and within 50 miles of 22 million people, unlike any other American reactor.  Those efforts have included litigation to force IP to stop taking three billion gallons of water a day from the Hudson River and returning it in polluted form, efforts to make the NRC adopt a real and workable 

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Fracking Work Is Risky Business

Natural gas extraction (fracking) isn't only risky for the environment, it's dangerous for workers.

As the AFL-CIO, Mine Workers of America and Steelworkers of America said in a new letter to federal regulators, working in oil and fracking is risky business. On-the-ground employees in this industry are over seven times more likely to die in a work-related accident. Between 2003-2009, there were 27.75 deaths per 100,000 workers. 

The health risks posed to workers are present at multiple steps in the fracking process. In order to extract the natural gas, silica sand is mixed with water and chemical additives. Workers and machines then drill into the shale rock and inject the sand and water mixture under very high pressure. Massive quantities of sand are used and workers are at risk of high levels of exposure during multiple points of the fracking process. 

This kind of exposure to silica puts humans at risk of developing crippling conditions, including silicosis and lung cancer. To make matters worse, the fracking industry is adding new jobs (though not as many as they would like to believe), which in turn exposes increasingly inexperienced workers to these risks. 

In the letter, these major unions urges the Occupational Safety and Health Administration, National Institute for Occupational Safety and Health and the Mine Safety and Health Administration to take immediate action and issue a joint “hazard alert” that identifies the occupational safety and health hazards in the fracking industry, with a special focus on silica exposures. 

There is precedent for federal intervention to help Americans suffering from silica poisoning. In 2000, Congress included compensation of silicosis victims on Federal nuclear testing sites in the Energy Employees' Occupational Illness Compensation Program Act of 2000.

Fracking is no doubt a dicey political issue. Federal regulators should set aside any other controversies surrounding fracking and act to protect the industry workers from preventable harm. 

Private Equity: Can't We Have the Good Without the Bad?

The best defense of private equity is that this industry does both good things and bad things.

Sometimes private equity firms rescue troubled companies, pump in new capital and management talent, and make them better and more productive -- saving or creating jobs along the way.

Other times, though, today's LBO artists buy companies, load them with debt, suck them dry, and accelerate their path to bankruptcy. The bad things private equity firms do are pretty bad; just read Josh Kosmen's book, The Buyout of America.

That private equity is a mixed bag seems to be the consensus of academic scholars who have closely studied this industry, as discussed today in a Times background story by Julie Creswell. The ever balanced Matt Miller made pretty much the same point in a piece yesterday in the Washington Post.

Should the two-faced nature of private equity make us all feel better? No. On the contrary, this shows the essential problem with today's financial sector: Practices and products that can play a productive role in the economy can also play a destructive role. Derivatives, of course, have become the most famous example. Once upon a more innocent time, derivatives were mainly used by those in the commodities world to hedge against price fluctuations. Then, in the age of the greed, they were increasingly used as casino chips -- and became, ultimately, what Warren Buffett called "financial weapons of mass destruction," helping to bring down the U.S. economy in 2008.

So, too, with leveraged buyouts and corporate debt. In an ideal world, these are great tools for creating a more productive economy: Borrow money, buy an underperforming company, use more debt to invest in that company, create a better company that employs more people, and then sell it or pay down the debt with higher profits.

And often enough things go that way. But, because we don't live in an ideal world, often they do not -- as profit hungry financial engineers engage in a far less savory game.

Private equity is a fair target in this election because Americans are rightly tired of enduring the downsides of the financial sector. If we learned anything from the crisis of 2008, it's that the instruments of modern finance are too powerful to be a mixed bag. The meltdown of the MF Global and the huge trading loss of JP Morgan have been other reminders of how, when things go wrong, they can go very wrong.

The ultimate goal of Wall Street reform should be to force the financial sector to stick with good practices. What we need is a much smaller, more boring, and -- yes -- less profitable financial industry. It may sound "anti-business" to say that Washington needs to downsize finance, but actually business will do a lot better in an America where Wall Street risk-taking doesn't periodically crash the economy and where Wall Street firms don't firms don't scoop up all the brighest young college and MBA grads and harness their talents to structuring debt deals and whatnot.

Private equity is one corner of finance that needs to change, but which so far has escaped much scrutiny. Reining in this sector, so it focuses just on truly productive behavior, would involve a number of steps -- such as changing the tax treatment of debt and closing the carried-interest loophole that makes private equity so profitable. So far, few politicians are offering a clear reform agenda to stop the "vampire capitalism" of private equity firms. But we need such an agenda.

Which is one more reason it's good to be having a debate about Bain Capital.

Anti-Regulation Senator Pounds Regulators. . . for Not Regulating

The Senate Banking Committee hearings on Tuesday enlightened the public on one extraordinarily important fact. Politicians can be expected to lie, bully, and engage in character assassination to serve the basest of motivations.

The Chairman of the Commodity Futures Trading Commission is Gary Gensler, a former Goldman Sachs partner with deep experience in government service. Many progressives resisted his appointment in 2009, fearing that he would be subservient to industry interests. Nothing could be further from the truth. Gensler has worked tirelessly to implement the Dodd-Frank Act mandate that the CFTC assume the regulatory responsibility for the $30 trillion per year swaps markets. Regulation of derivatives, called by Warren Buffet “financial weapons of mass destruction,” became Gensler’s mission.

Controlling the enormous risks in this market is critically important. The staff of the CFTC, working with fervor that can only be elicited by inspired leadership, has turned out more than 50 regulatory initiatives in a little over 18 months. At the same time, Gensler set a new standard for regulatory transparency, hosting countless meetings and a succession of roundtables in which industry representatives and advocates of the public interest could debate the ongoing rulemaking. If you are interested, just go to the CFTC website and view any of these events.

Gary Gensler is a dedicated public servant, open with his views as only a person who is thoroughly confident and certain of his or her ethics can be.

So Senator Shelby of Alabama chose to attack Gensler using the style of a totalitarian bully, seeking to intimidate with lies so extreme that they just might persuade the casual listener. The contrast with the coolly confident and meticulously honest Gensler is astounding.

The exchange concerned the JP Morgan Chase trading debacle. The level of aggression and misrepresentation is the very best indication that this episode is potential political dynamite for the Republican Party. After all, the main experience of its presidential candidate is a career in the most predatory form of capitalism. He and the congressional Republican have advocated the repeal of financial reform law.

It is not that JP Morgan Chase lost two, three, five or more billions of dollars, depending on the final count. It is that the loss occurred via a “hedging” operation in a department that was tasked with eliminating risks. If a hedge is truly risk reducing, and nothing more, the bank cannot lose money on it. The whole episode calls into question the integrity of bank trading behavior. How on earth can Jamie Dimon and his bosom buddy Senator Shelby be believed when they proclaim that the banking industry should be trusted to monitor their own behavior? (I assume they are bosom buddies since the second largest source of campaign cash for the Senator is JP Morgan Chase.)

Shelby asked Gensler how he had learned of the JP Morgan Chase trades, and Gensler replied that he had first seen them in press reports. The Senator went after this like a pit bull, berating Gensler for the failures of his agency to oversee the markets and the gross inadequacy of the Dodd-Frank Act. Gensler pointed out that the relevant portion of Dodd-Frank had not yet been implemented by final regulations, but the Senator simply ignored the point and kept pounding.

It should be no surprise that Senator Shelby ignored the implementation process. Chairman Gensler has spent more than a year trying to steer his agency between the Scylla of congressional Republicans and the Charybdis of the banks’ countless lobbyists and attorneys. Senator Shelby’s colleagues in the House hold the purse strings and have starved the CFTC of cash. The agency simply lacks the resources to do its assigned duties without proper funding. If Gensler’s agency fulfills its statutory mandate by promulgating proper rules, it risks further punishment at the hands of the Republicans via the budget.

But the Senator’s attack can be analyzed differently. The motivation may not simply be animosity to regulation of the financial interests that contribute so generously to the Shelby campaign effort. By criticizing Chairman Gensler and his agency, Senator Shelby shifts the discussion away from Jamie Dimon, the financial sector figure who is most closely associated with resistance to regulation under the Dodd-Frank Act. In a twisted way, Shelby pounds the table and complains of lack of oversight (that is to say, oversight that is being actively frustrated by his party), all in order to further the goal of industry to avoid oversight.

It is fascinating that politicians like Shelby reference the protection of future generations to evoke fear of deficits, yet seem perfectly willing to expose the next generation to the potential of a new Great Depression. That outcome was avoided in 2008 by throwing trillions of dollars in cash and guarantees at the problem. The next time the banks inadvertently cause the financial system to seize up there may not be sufficient resources to jumpstart the system.  

It sort of makes one wonder what it would have been like for a Soviet citizen to make sense of the Orwellian doublespeak spewing from Stalin’s government.

Rational and respectful treatment by Republicans of this admirable public servant, Gary Gensler, can only be hoped for in a time beyond the election horizon. But, far too often, progressives have misdirected their criticisms of flaws in financial reform in Gensler’s direction. The CFTC’s effort to implement Dodd-Frank is far from flawless. I, personally, spent over a year working on dozens of comment letters on proposed rules, pointing out concerns both large and small.

Nonetheless, Gensler deserves the support of progressives. He is a bulwark protecting the policy of Congress expressed in the Dodd-Frank Act. Under circumstances in which one party actively seeks to restore the deregulated casino that banking had become prior to the financial crisis of 2008, nit picking Chairman Gensler is an unwise path.

How Private Equity Gains by Driving Companies Into Debt

One big question at the center of the private equity debate is whether firms like Bain Capital intentionally set out to burden the companies they take over with debt -- or whether things just sometimes go sour amid failed turnaround efforts.

Defenders of private equity say that piling up debt is nobody's idea of a good business model. People like David Brooks, who yesterday depicted private equity firms as heroic reformers of a bloated business sector, seem unable to imagine that "vampire capitalism" could yield much of a payday.

But, of course, if we have learned anything over the past few decades, it's exactly the opposite: predatory behavior with no productive purpose often does pay in an era of advanced financial engineering and perverse incentives. The leveraged buyout artists of the 1980s famously discovered this and made vast fortunes. Private equity firms, the rebranded heirs to the LBO movement, have found the same thing and one path to riches, it turns out, is by creating bad debt.

The financial reporter Josh Kosman has documented how this works in great detail in his book on private equity, The Buyout of America. Kosman covered the private equity world up close for years as a writer and editor for Buyouts Newsletter, The Deal, and Mergermarket.com. He had exceptional access to leaders in the private equity world and a ringside seat to numerous private equity deals.

A key point that Kosman makes in his book is that, in fact, it can be quite profitable for private equity firms to drive the companies they take over into debt, regardless of whether those companies then end up bankrupt. By taking over companies and having them borrow a lot of money, private equity firms create a pile of cash, some of which they can direct their own way in the form of management fees and dividends. And because interest on the debt is tax deductible, the consequences of reckless borrowing can be kicked down the line. This is exactly what happened with some of the companies that Bain Capital took over. Bain managed to make a huge return on its investments even in cases where companies failed. Creation of new debt made those profits possible.

David Brooks scoffs that "banks would not be lending money to private equity-owned companies, decade after decade, if those companies weren't generally prosperous and creditworthy." But, again, if we have learned anything in recent decades it is that financial institutions are happy to hand out easy money when well-connected insiders who stand to profit are pushing hard for that cash and somebody else can be left holding the bag. We learned that from the S&L scandal, when banks made billions in bad loans so insiders could profit and taxpayers paid the tab; we learned that from the Long-Term Capital Management meltdown when a bunch of "genuises" lost a fortune in borrowed money and almost wrecked the financial system; we learned it from the Internet bubble, when venture capitalists invested in anything with a .com suffix, cashed out after IPOs, and clueless investors took the hit; and we learned this hard lesson yet again from the real estate bubble.

Borrowing lots of money and incurring bad debts is not how real businesses make money in a normal world. But we don't live in such innocent times. Modern American capitalism is rife with sophisticated financial intermediaries who exploit flaws and complexity in the system, as well as insider connections, to make profits off of predatory behavior -- which brings us back to why the attacks on Bain Capital are both accurate and fair.

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Higher Gas Prices Could be Good for Public Transit

Public transit in the U.S. is a classic chicken and egg situation: outside of a few metropolitan areas, transit networks are not dense enough to be useful so few people take public transit. If few people take public transit, there is not enough demand or political will to expand transit networks, leading to low ridership, and so on. With this cycle, it becomes easy for politicians to forgo investing the capital and political will necessary to build out transit networks because they can point to low ridership and say there is no public appetite for it.

We’ve debunked this idea before and now, a new report shows how when gas prices increase, transit ridership increases. Intuitively, that makes sense as a cost saving measure and, if finances were the only issue, transit ridership would decrease in step with gas prices. However, the report found that when people start taking public transportation, they continue to do so even after gas prices decrease due to the numerous benefits it offers. This finding shows that people want to take public transportation, even when they have the option to drive.

The problem with increased ridership, however, is that because we have continually underinvested in public transit, the transit system gets easily overloaded with even a slight increase in ridership. And, as the recent transit bill debacle showed, increasing investment in transit, let alone expanding transit networks will be an uphill battle. The House and Senate met in conference committee for the first time yesterday to try to resolve their differences on reauthorizing the transit bill. Earlier this year, the Senate passed a bill that retains support for public transportation, while the House was unable to pass a transit bill and instead passed a placeholder that allowed it to go to conference committee.

Yet, even with the Senate provision, which maintains funding at current levels, public transportation receives far less support than roads and highways and its effectiveness is further impeded by the chronic underinvestment in our existing infrastructure. A recent bi-partisan report found that the U.S. would have to invest an additional $134-$262 billion per year until 2035 to maintain and improve our existing transit system.

Instead of relying on Congress to do the right thing on its own, the key to building a reliable, extensive public transit system may be to keep gas prices high. High gas pricess would increase demand for transit, and therefore increase pressure on decision makers to finally begin to invest in a long-term investment and expansion of our transit networks. One way to increase gas prices would be to increase the gas tax, which would also provide more money for transit. Currently, the federal gas tax is 18.4 cents a gallon-- the same as it was in 1993 and it is not providing enough revenue. Every penny increase in the tax generates $1.8 billion in revenue so even an increase of a few cents would generate billions of dollars for infrastructure repair and investment.

While the increased gas prices will cause some financial hardship on working families, the benefits of taking public transportation could offset any increased costs. Some estimates find a savings of more than $10,000 for households that take transit at least once a day. Of course, this plan isn’t perfect, as it would disproportionately burden households that have no access to transit. But, we have to start somewhere. Driving less, in general, is better for the planet and for our health. If higher gas prices make people drive less, that’s one benefit that shouldn’t be easily dismissed.

What David Brooks Misses About Private Equity

David Brooks offers up a spirited defense of private equity today in the Times, and many of his points make perfect sense: In fact, many private equity firms don't set out to laden the firms they buy with debt and cash out before the company goes bankrupt. (Although some do set out with very much this goal, as Josh Kosman documents in his book, The Buyout of America.)

The more typical plan is to buy an underperforming company, make it more "efficient" and profitable, and then sell it for more money. Brooks thinks this model is unequivocally good and, even, that it has helped save American business:

Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations.The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient. Now we are apparently going to have a presidential election about whether this reform movement was a good thing.

But the part of the story that Brooks leaves out is that workers have been the big losers in this process, while management and shareholders have been huge winners. Some of the strategies for creating more efficiency have been just unbelievably pernicious for employees. For example, many companies avoid hiring workers full-time with benefits -- instead hiring them as temps, firing them after a certain period, and then hiring them again. Or companies avoid paying overtime through "just in time" scheduling practices that it make it difficult for workers to plan their lives, as Demos documented in a report last year.

Union busting has been another important strategy. As Amy Traub has written here, "analysis of union elections from 1999 to 2003 revealed that when workers attempted to organize a union, 96 percent of employers mounted a campaign against their effort. Three quarters of employers hired outside consultants."

Yet another strategy, of course, has been to pare back pension benefits and shift more healthcare costs to workers, or drop such coverage all together.

In short, a cornerstone of creating more efficiency has been to turn good jobs into bad jobs. That might be tolerable if so many bad jobs were created as to create a tight labor market that drove up the wages for these bad jobs, but this has not been the case. In theory, higher productivity might allow for companies to expand and hire more workers. In practice, greater efficiency often simply means a permanent need for fewer workers overall. Brooks himself notes that a study of private equity firms showed that the companies they take over and streamlined don't hire many new workers. "The overall effect on employment is modest."

If all these efficiency strategies were implemented soley as part of a life-and-death struggle of American companies to survive against foreign competition, that would be one thing. But many of these strategies were embraced by companies, such as retailers, who faced no foreign competition.

What Brooks seems to forget is that the story of capitalism, historically, has not just been about competition among nations for economic dominance. The story has also been about the competition between capital and labor. And some portion of what corporations have done in the past forty years has been aimed at prevailing in this latter battle. Private equity firms have tended to be on the side of capital in this battle, which is why attacking them is now fair game.

Partly as a result of the efficiency "reform movement" Brooks champions, the CBO reported last year that "average real after-tax household income grew by 275 percent between 1979 and 2007" for the top 1 percent, while for "60 percent of the population in the middle of the income scale. . . the growth in average real after-tax household income was just under 40 percent."

Of course, a variety of factors have driven inequality, but the ruthless focus on efficiency by corporations has certainly been an important factor. And it should be mentioned that executives supposedly so intent on squeezing all the bloat out of companies never squeezed so hard as to pare back their own compensation packages. On the contrary, the compensation bloat at the top of companies ballooned over the past forty years and huge new gaps emerged between the performance of executives and their pay --  most egregiously in the form of golden parachutes even when CEOs failed badly.

Credit CARD Act Turns 3: A Regulation Even Stephen Colbert Could Celebrate

“I can afford to get ripped off,” Stephen Colbert informed Demos’ Tammy Draut back in May 2009 “I think it’s the poor people who can’t afford to get ripped off who are ruining this for everybody.”

The joke hit the mark, but Comedy Central’s satirical pundit had it backward, Tammy quickly noted. It was low- and middle-income consumers paying high penalties and fees who were subsidizing his credit card perks. That’s why the nation needed regulation to rein in the abusive practices of “an entire industry is built on gotcha tactics – designed to keep people in debt at a very high cost.” Within weeks, President Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act into law, ending many of the tricks and traps used by credit card issuers.

The law was enacted three years ago today, and new Demos research finds that it’s working as intended to save households money.

We find that the Credit CARD Act is helping households pay down balances faster, with a third of low- and middle-income households that carry credit card debt reporting that new disclosures have caused them to pay down their balances faster. The Act is also helping households avoid excessive fees and interest rate hikes: the percentage of surveyed households paying late fees plummeted from 53 percent in our 2008 study to just 28 percent today. The proportion seeing an interest rate hike as a result of late payments also fell.

The conclusion? Credit cards are a better, fairer financial product for American consumers as a result of the CARD Act. And while Colbert’s income bracket wasn’t part of our sample of low- and middle-income households, the law’s ban on abusive practices likely keeps him from getting ripped off as well.

There, however, a drawback: Demos' new report, “The Plastic Safety Net” also finds that consumer protections alone can’t remedy the deeper problems of lagging wages, high unemployment, and a fraying public safety net that are causing low- and middle-income Americans to rely on their credit cards to make ends meet and cope with emergencies. But we’ll explore those findings in a future post: for today, it’s Happy Birthday Credit CARD Act! It’s good to have something to celebrate.

Apple CEO Payday and the Triumph of Capital

The revelation that Apple chief Tim Cook pulled in $378 million in compensation in 2011, more than any other CEO, has sparked the usual debate about how much CEOs are worth. Cook made $300 million more than the next highest paid exec in America, Oracle's Larry Ellison, leading some to wonder whether he's really that much better than his peers (especially since the late Steve Jobs is widely seen as the genius behind Apple's current success.)

But the more intriguing question about Cook's compensation is not whether he is should be paid so much; it is how he can be paid so much? What are the forces that allow a single executive to extract so much value from a company, albeit even a wildly successful company? How is it that Apple's employees couldn't get a bigger slice of the pie or the government couldn't skim off more in taxes?

The answer, simply put, is that we live in a golden age of capital -- an era more akin to the Robber Baron era than the postwar decades of America's not so distant past. Apple likes to position itself as embodying all that is new and cutting edge; but, in the economic sphere, it is turning back the clock.

Over a century ago, capital was dominant, in large part, because corporations didn't have to worry about two pesky nuisances: taxes and strong labor laws. Prior to the creation of personal and corporate income taxes, as well as the estate tax, the federal government raised most of its revenues from import tariffs -- a burden mostly borne by ordinary Americans. Men like Carnegie and Rockefeller basically paid no taxes, allowing their fortunes to reach mammoth size. These same Robber Barons benefited from weak labor regulations, as the minimum wage and the 40-hour work week weren't invented until the 1930s. Other irritants -- like worker safety laws, employer social insurance contributions, and environmental standards -- also were largely non-existent during the Gilded Age, which further helps explain why it was so gilded.

We tend to think of the world as drastically different today, and hear endlessly about the tax and regulatory burdens on corporations, but actually the clock has been turned back much more than many people realize -- and Apple has helped to lead the way.

As the New York Times recently reported, Apple has been a pioneer of tax avoidance -- using offshore tax havens to dodge billions in taxes. Partly as a result, the company has built up over $100 billion in cash reserves, much of which is stashed overseas -- bolstering the company's stock value (which drives Tim Cook's payday) and laying the groundwork for future profitability by underwriting new offshore investments, as reported here.

Now, of course, Tim Cook is much more heavily taxed than the CEOs of a century ago. But he and Apple are far less taxed than would have been the case a half century ago -- a time when government was stronger and offshore tax havens were not yet invented. In 1955, corporate taxes made up 27 percent of all federal revenues, or 4.3 percent of GDP. Now, it's more like 8 percent of revenue and 1 percent of GDP.

Thanks to globalization, the clock has also moved backwards on labor costs. Sure, the U.S. has all sorts of labor laws that it didn't used to have. But those laws don't matter much if you don't make stuff here. Apple's main concern are China's labor laws -- a country that didn't even have a minimum wage law until 2004. And while the minimum wage has gone up recently in many parts of China, it's still not much more than $200 a month for most workers -- or around $1.25 an hour.

As the New York Times documented, Apple products are made in sweatshop conditions, just not in America. An independent investigation, undertaken after the Times' expose, revealed that contrary to claims by Apple's apologists, the wages it pays (via Foxconn) are not adequate for its workers to meet their basic income needs. Apple is getting rich, in large part, because its workers are so poor -- a business model that Dickens once explained so vividly. In fact, Tim Cook was paid as much in 2011 as 81,000 of Apple's Chinese factory workers put together, according to an analysis by Isaac Shapiro of EPI.

Given the success of Apple's fantastic products, Cook would be destined for a large payday in almost any scenario. But that payday is as big as it is because capital is now able to sidestep many of the constraints on its profits. Making 21st century gadgets in a 19th century economic framework: Now there is a formula for success.

Moms at Home: Depressed, and Also Poorer

In the latest unfortunate news at the intersection of motherhood and politics, stay-at-home moms are doing worse emotionally than their working counterparts. According to a Gallup poll released last week, mothers who don’t work outside the home were far more likely to be depressed, with 28 percent reporting depression, compared with 17 percent of working mothers, and also 17 percent of working women who don’t have children. In fact, stay-at-home moms fare worse than these two groups by every emotional measure in the survey, reporting more anger, sadness, stress, and worry. They were more likely to describe themselves as struggling and suffering and less likely to see themselves as “thriving.”

Gallup offers up the survey as a way to probe the political impact of the recent “war on moms,” the firestorm the followed Democratic strategist Hilary Rosen’s now infamous statement that Ann Romney hadn’t “worked a day in her life.” And the findings do offer some evidence that stay-at-home moms, who make up 37 percent of Gallup’s sample of mothers with kids living at home, are more likely to be unhappy, resentful—and thus perhaps also likely to take umbrage, along with Romney, at being portrayed as lazy or irrelevant. Romney tapped into a long and strong current of resentment among stay-at-home mothers when she tweeted that raising five boys was “hard work.”

She has a point, of course—and not just a political one. Stay-at-home moms’ contributions, which include keeping schools running with by volunteering their time, are often ignored if not outright derided. Caring for kids is hard work. It’s also, at times, emotionally grueling, physically exhausting, tedious, and isolating, all of which could help account for the low morale of the people doing it full-time. And, as Romney suggested, caring for one’s own children is also undervalued work (and thus often not referred to as work at all, as in the case of Romney’s own husband, who suggested that low-income stay-at-home moms be required to experience “the dignity of work” in order to receive public benefits). It’s pretty easy to see how being deprived of the status that comes with employment could leave someone feeling dumped upon, angry and, well, depressed. Humans thrive on recognition. Our happiness hinges on feeling appreciated.

But if Ann Romney was spot-on about both the derision reserved for stay-at-home mothers and how offended they are by it, what she doesn’t get—and what was reflected clearly in the Gallup poll—is the economic expression of this same sentiment: that the work of caring for children is also undervalued economically, which adds to the financial and emotional burdens of mothers who don’t have jobs. Financial strain is, in many ways, a bigger problem than lack of appreciation. It hinders the work of raising kids, and it dogs women long after they’ve returned to the paid work force (as most ultimately do) in the form of reduced earnings and Social Security benefits.

Despite one of our favorite American myths about the stay-at-home mom—that she flits from yoga class to lunch date to mani-pedi appointment or, for that matter, that she could be epitomized by someone whose husband’s net worth is about $200 million—mothers who don’t do paid work are actually poorer, on average, than employed mothers. They also tend to be younger, Latina, and foreign-born, according to the latest census numbers. They’re less likely to have graduated from high school or attained a bachelor’s degree. In short, these are not the Ann Romneys of the world. And both their relative lack of education and wealth in turn contribute directly to their heightened depression and stress.

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