Late Stage American Capitalism

In prior posts, I have written how the professional classes abet the kleptocracy, using the 1MDB scandal, perhaps the greatest financial fraud in history, to illustrate how Wall Street, bankers, lawyers, and accountants were all integral in perpetuating that theft. I have also written how American business elites are going all-in for Trump in 2020 because of their fear of actually having to endure regulated capitalism and to pay their fair share, depicting such efforts as the adoption of “socialism” that will turn America into Venezuela, something Trumpian capitalism seems like it’s doing a pretty good job of on its own. In addition, I have highlighted how a gorge-fest of corporate greed perpetuated by drug manufacturers, prescription drug distributors, doctors, pharmacists, and captured state agencies created and fueled the opioid crisis that especially targeted vulnerable populations. Across the board, it appears that our universities and graduate schools are managing to matriculate a significant number of ethically challenged, morally bankrupt, pathologically greedy professionals.

Alex Tabarrok has a shocking story about the high percentage of doctors, even when there was widespread awareness of the addictive dangers of Oxycontin and the associated opioid crisis, who still opted to fuel that crisis and pad their profits when a safer alternative was made available. In 2010, Purdue Pharma, aware of the increasing negative publicity surrounding OxyContin addiction, put out a revised version of the painkiller that was designed to reduce the chances of its abuse by making it more difficult to turn the pill into an injectable. Since the newer version of Oxy was just as good as the old version in terms of pain management, the expectation was that doctors would start prescribing the newer version in larger numbers and reduce prescriptions of other kinds of opioids.

But a study of 100,000 doctors showed that a full 40% cut back or stopped prescribing OxyContin entirely and switched to other opioids instead. Another 30% did both increase Oxy for some patients and reduce its use for others. In other words, the majority of doctors in the study were just feeding their patients’ addiction, acting like any other drug dealer, and four out of ten were acting that way exclusively. Other patients turned to illegal and more dangerous opioids like fentanyl and heroin instead of the new OxyContin, resulting in higher death rates. So, what originally looked like a recognition from doctors about the dangers of OxyContin and a reduction in the number of prescriptions actually masked the fact that a significant number of doctors were simply switching the addictive opioids they were prescribing, primarily because the new Oxy was harder to abuse. For a large number of doctors, it is clear that the Hippocratic oath of “first do no harm” was treated, shall we say, hypocritically.

It’s not like the bureaucrats who theoretically manage doctors are much better. The Zuckerberg San Francisco General Hospital (ZSFG), so named because the oligarch gave $75 million to do so, is the only top-tier trauma center in the entire city. It is also unique in that it is one of the few emergency rooms that does not accept any private health insurance. As a public hospital, it is focused on providing services for only those with public health insurance, the typically underserved portion of the population. However, in order to offset those costs, it charges higher prices to those with private insurance. As one hospital spokesperson described it, “Our mission is to serve people who are underserved because of their financial needs. We feel like we have to recoup what we’re able to from people who are insured because we’re supporting people who don’t have insurance”.

As Sarah Kliff reported, this creates a problem for those unfortunate enough to taken to ZSFG in an emergency. Kliff tells the story of one patient who ended being taken to ZSFG after a bike accident which left her with a broken arm in a splint and required an X-ray of the arm and a CT scan of her brain and spine to check for potential neurological damage. She was also provided pain medication and subsequently discharged. The biker received a bill for $24,000 for those services of which her private insurer agreed only to pay just under $4,000, leaving her with an over $20,000 bill to pay on her own. The $24,000 bill was 12 times the Medicare billing rate for such services and six times the acceptable rate of the private insurer. Under present law, the only way for emergency room patients at ZSFG who are intentionally overcharged in these situations is to try and negotiate with the hospital or their own insurance company, usually a hapless effort, or fight the hospital in small claims court. Patients who end up going down the small claims court route end up incurring thousands of dollars in legal costs with no guarantee that the original bill will be significantly reduced.

So, if the medical industry hasn’t destroyed your life through addiction or driven you into bankruptcy for a fairly common accident where you happened to end up in the emergency room, you still might be lucky enough to still have a minimum wage job that manages to pay the bills but not earn enough to build any real savings to cover for emergencies, such as the breakdown of your car. In that case, the payday lenders are there to come to your “rescue”. These lenders offer misleading repayment plan information and often end up charging usurious rates of close to 1000%, (yes, that number is correct) on the original loan since it usually requires taking out new loans to pay back the old ones. Going to the local mafia loan shark would actually make more sense, but the payday lenders have the benefit of actually being legal.

The Consumer Financial Protection Bureau (CFPB), rather than cracking down on such usury, is actually going to make it easier for those lenders to intimidate and harass borrowers into paying. For decades, debt collectors have been limited to using the US mail, the telephone landlines, and, rarely, in-person visits in order to contact debtors about repayment, relying on interpretations of the decades-old law, the Fair Debt Collection Practices Act. That Act also limited contacts to between 8am and 9pm. Since such a law came into being before cell phones and the internet, it has no specific rules covering those technologies as a tool for debt collectors. The CFPB is now glomming on to that lack of specificity to allow debt collectors to expand the ways they can reach and harass debtors.

Under new proposed rules, debt collectors could call debtors seven days a week, but must wait one week before beginning that process again if they actually reach the debtor. In addition, collectors can send unlimited numbers of texts and emails. Lastly, the proposal strengthens the ability of collectors to go after debts that have even outlived the statute of limitations. According to the Center for Responsible Lending, the new CFPB proposals also weaken the provisions that cover “lawsuits or threats to sue on debt that has passed the statute of limitations”.

There is something surreal and obscene about the administration of a President who has stiffed creditors for hundreds of millions, if not billions, of dollars pressing poorer and less well-connected families and individuals to pay back usurious loans in order to put money in the pockets of the executives of the $11 billion payday loan industry. Of course, taking money from the poor and middle class and shoveling it to the 1% has been the raison-d’etre for the Republican party for the last forty years and Trump is implementing that plan to the max. The President, and his GOP co-conspirators, who are in the process of taking a sledgehammer to our democracy in their quest for power, have had just one significant legislative achievement over the last two years, namely the passing of the Trump tax plan that cut taxes by $2 trillion over the next ten years, most of which goes to CEOs and wealthy shareholders.

The ostensible theory behind those tax cuts, besides the myth that they will pay for themselves, relies on the belief that free markets result in an efficient allocation and use of capital, which, in this case, would result in a boom in corporate investment and either an employment surge or corporate benevolence that would actually raise employee wages. Instead, the majority of the corporate tax cut has gone into stock buybacks and dividends. As Jared Bernstein notes, “It’s not that CapEx [Capital Expenditure] has shut down. It’s that it’s largely on it’s pre-tax-cut trend, while buybacks show clear and obvious increases since the 2017 cuts”.

Similarly, Trump’s aluminum and steel tariffs were supposed to generate a boom in those domestic industries. Instead, according to the Washington Post, “U.S. consumers and businesses are paying more than $900,000 a year for every job saved or created by Trump steel tariffs”. The tariffs on washing machines are apparently costing $185,000 per job created. And, despite Trump’s absurd claims to the contrary, it is primarily US consumers who pay the cost of those tariffs. On the state level, Wisconsin provided over $4 billion in subsidies to Foxconn to build a plant in Mount Pleasant that the company promised would create between 3,000 and 13,000 jobs. Even if that were to actually happen, the cost to the state for each job created would be between $220,000 and $1 million per job created and was not predicted to create a positive return on investment for the state until 2042. In addition, the state is blatantly abusing its eminent domain laws to make room for the factory. It has been nearly 18 months since the deal was made and Foxconn has already backed away from its original idea for the plant and it is currently unclear how many, if any, jobs will be created in even the near future.

At present, it is clear that the tax cuts, tariffs, and corporate giveaways are not doing what they were promised to do. And when you look at the capital markets generally, it is hard to see how they are working with efficiency either. Climate change poses an existential threat to the economies of the world, at a minimum, and to the plight of humanity and the living world as we know it more generally. So you would think that there would be massive investments into how to mitigate the problem. You would be wrong. Nathaniel Popper had an article in the New York Times that describes how difficult it has been to find venture capital money willing to invest in technologies to reduce the carbon in the atmosphere and mitigate climate change. As one previously successful Silicon Valley entrepreneur found out, “Despite all the money sloshing around Silicon Valley, few venture capitalists have been willing to join him in backing companies trying to address climate change”. In fact, one study showed that “funding for clean-tech startups fell during most of the last decade”. As the entrepreneur noted, “We don’t need another photo-sharing app or another blockchain start-up. We need to solve the carbon crisis. But a lot of folks are chasing the easy money rather than taking responsibility for what needs to be done.”

And there’s plenty of easy money to be made, much of it by exploiting the damage that will be created by climate change, rather than actually addressing the problem. As an example, a Dallas investment firm bought up the shares of real estate investment trusts (REITs) as hurricanes approached the Texas and Florida coasts and the potential devastation they would create became clear. The gamble was that those properties would increase in value after the hurricane, if they survived undamaged, as the demand for housing from those displaced by the hurricane increased. As the investor noted, “We saw occupancy go to 100 percent in a lot of those hotels. We didn’t crush it. But we made 25 percent, 30 percent, pretty quick”. This investment created no new housing nor did it help in preventing damage from hurricanes in the future. In essence, it was the disaster equivalent of war profiteering.

We can see a similar waste of investment resources with the Uber IPO which valued the company at $82 billion and whose shares fell by over 7.5% in its first day of trading, giving it the distinction of having a “bigger than first day dollar losses of any prior IPO in the U.S”. Uber is a company that has never been profitable and shows no prospects of being profitable anytime in the near future. It burns through unimaginable amounts of cash every quarter, including $1 billion on $3 billion of revenue in the last quarter before announcing its IPO.

Uber has built its business by violating and ignoring state and local laws covering taxicab drivers around the world in an attempt to create a monopoly and treats all its drivers as contract employees. It heavily subsidizes every ride and relies on its drivers to also subsidize its business by making the vehicle depreciation the driver’s expense. Its plan for profitability hinges on the development of technology that is years away and will be widely available to many companies if and when it finally is able to reach a mass market.

The company’s supporters all like to point to Amazon as a successful company that took years to reach profitability and it is true that Amazon benefited from legally not having to pay sales taxes in much the same way Uber has profited by violating the law.  The problem with that comparison is that Amazon was taking market share from a profitable industry, booksellers, almost as soon as it went public and within three years was offering itself as a marketing and inventory vehicle for other profitable business. Uber offers propsects of neither. The only people making a profit on Uber are the early investors who will receive an enormous payout paid for primarily by the suckers who invest in their stock. That doesn’t seem like an efficient allocation of resources under any scenario and certainly not compared to investments in carbon capture technology, for instance.

Uber’s stance toward its drivers, who, after all, are the backbone of its business is reflected in other companies’ attempts to avoid the costs of actual employment by turning as many workers into contractors as possible. Facebook, for example, is potentially facing an existential threat of regulatory breakup because of its inability or unwillingness to abide by privacy laws, monitor and crack down on hate speech and graphic content, and a virtual monopoly status. With that threat looming, you would think that Facebook would, at minimum, want top notch employees as content moderators to remove objectionable content from its platform. You would not be correct. As the Washington Post reports, the team dedicated to removing such objectionable content are contract employees who make just 14% of the median Facebook salary, despite making up 40% of the company’s actual workforce. As one Facebook manager asked, “I mean this non-facetiously: why do we contract out work that’s obviously vital to the health of the company and the products we build?” I think we all know the answer is because it allows Zuckerberg and others to pocket more profits and, like Uber, the company could care less about the workers who are critical to the existence of their business.

These all seem, initially, like disparate stories but the common theme linking all of them is they are all  illustrative of just how dysfunctional our economy has become, with perverse incentives that encourage corruption and discourage necessary investments, instead rewarding the kleptocrats at the expense of the people who actually do the work. The professional classes now largely exists in a world of normalized corruption and graft, with a feudalistic approach to those with less political and economic power, squeezing workers for every last dime even when those workers make up the core of their business. Those elites now reject any attempts to rectify the serious issues with our economy, ignoring the success of other, more regulated capitalist economies, and instead scream about “SOCIALISM!” and highlight the failures of banana republics while they take us farther and farther down the road to becoming one. Late stage American capitalism, like the President who is its ultimate creation, and like the Anthropocene age that spawned it and is destroying the world in its wake, is surreal, ugly, and deadly.