Month: February 2015

Intellectual dishonesty and the MBTA

Posted on by j.giglio

The bacchanal of charges, counter charges, accusations, and recriminations concerning the MBTA’ s highlight-reel non-performance  over the last several weeks is redundant. In sum, you would be right to conclude that a lot of people had a lot of years to get a job done and failed to do it, and that failure haunts the region in numerous ways.

Of course the public is told that this crisis is the equivalent of a “Sputnik moment,” a blessing in disguise, a wake-up call for elected officials to redouble their efforts to reimagine and modernize the MBTA.

Let’s hope so.

One is reminded that after Winston Churchill’s electoral defeat in 1945, his wife tried to cheer him up. “It might be a blessing in disguise,” she told him. “At the moment,” he replied, “it seems quite effectively disguised.”

A cynic might be forgiven for insisting that the recent MBTA crisis reminds us that there is much is to be said for intellectual dishonesty. She would argue that part of the criminal neglect of the T is that we are much more likely to enjoy an adequate supply of the public goods and services that are so vital to the commonwealth’s welfare if we can convince ourselves that someone else is paying for them. Whenever the cost is coming out of our own pockets, we inevitably try to cut corners, do things on the cheap, and ultimately deprive ourselves of much that we really need.

One definition of intellectual dishonesty is ignoring reality when it interferes with what we want to believe about the way the world works. This is what government enterprises do when they pretend that operating and maintenance are not part of the true costs of providing a public service and are not truly accounted for in the price charged for a public good.

The public is as much to blame for this as elected officials who underestimate true project costs.  People’s expectation of receiving more services from government than they are willing to pay for leads to those officials to provide numbers that have all the accuracy of a Brian Williams anecdote. Taxpayers want more for less and elected officials lack the courage to tell them flatly there is no free lunch.

For example, when former Gov. Deval Patrick announced a nearly $1 billion federal grant to finance the MBTA’s $2 billion Green Line extension, little attention was paid to the fact that the commonwealth still has to foot another $1 billion in construction costs. Still further there is little if any discussion at all of how the project’s life cycle operating and maintenance costs will be covered.

People seem to have forgotten that public transit has to live in the real world and the biggest real-world concern these days is how to pay for it. In simple terms, this comes down to a choice between taxes or user fees – fares in the MBTA’s case.

The deterioration of the MBTA is testament to the consequences of deferring maintenance to disguise the true cost of providing the service. In the T’s case, maintenance has been deferred for decades.

The public is misled about the true life-cycle costs of public transportation assets. It is being economical with the truth to continue to believe you can pay for the overhaul of the MBTA or any other public provider of public transportation without either charging fares that reflect real life-cycle costs or increasing taxes to include operations and maintenance.

Hopefully, elected officials will finally catch the joke, end the intellectual dishonesty and truly embrace the hard work of cutting the MBTA’s financial and managerial Gordian Knots beyond the mere telling of words.

originally published: February 21, 2015

Bringing corporate earnings back into the U.S.

Posted on by j.giglio

A member of Congress was walking along one of St. Bart’s sandy beaches on holiday. Suddenly she stumbled on an old lamp that had washed up on the beach. She picked it up, rubbed it and, of course, a genie appeared.

The genie said, “I am the most powerful genie who has ever lived. I can do great and wonderful things, including granting you your dearest wish, but only one.”

This member of Congress was well attuned to international affairs, so she pulled out a map of the Middle East and said her dearest wish was a solution to the Israeli-Palestinian conflict.

The genie stroked his beard; looked around worried and said, “Oh dear that is a tough one. You should probably make another wish.”

The congresswoman was disappointed.but understood. “Alright,” she said, “I want you to rewrite the American tax code so everyone can understand it.

After a long silence, the genie said, “Let’s have another look at that map.”

With Republicans back in charge of Congress, corporate tax reform is on the agenda for 2015. Although it is hard to see how they can reduce corporate tax rates without also doing something for individual taxpayers.

If congressional leaders can cobble together a set of reform proposals, their next problem would be how to pay for them. Given the large federal debt, many policymakers believe corporate tax reform should be revenue neutral. To do that, any reduction in corporate tax revenue must be made up for by things like eliminating tax preferences, cutting spending programs, or adding to the deficit passed on to future generations.

Achieving broad tax reform is further complicated by political realities of 2016 presidential politics. Several senators are considering a run.

While the prospects for broad tax reform may be dim, one bright spot is a bipartisan proposal by Sens. Barbara Boxer, D-California, and Rand Paul, R-Kentucky, to bring back some of the estimated $2 trillion of foreign earnings that are now parked in foreign banks by reducing the corporate tax rate on profits earned abroad from 35 percent to 6.5 percent for the next five years.

Revenue from this short-term tax would be used to maintain the solvency of the Highway Trust Fund that is scheduled to run out of money in May unless Congress and the president do something.

In theory, repatriating the money would also increase investment in plant and equipment and new technology, thereby strengthening the economy and creating jobs at the same time it increases federal revenues.

There is no assurance that the repatriated corporate earnings wouldn’t instead be used for things like executive compensation, higher dividend payouts, and stock buybacks.

The president also waded in this week. Instead of a voluntary repatriation tax holiday, his $4 trillion 2016 budget proposal includes a one-time 14 percent tax on the $2 trillion of foreign earnings held overseas, with much of the proceeds going to fund infrastructure. There is no reason to believe that Republicans will embrace this proposal.

It doesn’t have to be this way if Congress and the administration had the minerals to fund the HTF by increasing the 18.4-cent per gallon federal fuel tax for the first time since 1993. If adjusted for inflation, the fuel tax would be 30 cents a gallon today.

Corporate taxes should be addressed in the context of broader tax reform. The American people are sick and tired of short-term fixes and lurching from crisis to crisis. They want a system that is simpler, eliminates unfair and inefficient loopholes, and levels the playing field for the middle class.

originally published: February 7, 2015

When fiction is too much fact

Posted on by j.giglio

You know what they say about birds of a feather. So I guess it was only natural that I would meet up with Nathan Feldman after the Federal Bureau of Prisons moved us from our respective minimum security prisons to a Manhattan halfway house. We both had several months left on the sentences they hung on us for securities fraud that swept our Wall Street careers down the drain.

I knew Nathan by reputation and recognized him in the halfway house because we had actually met once years ago at a Wall Street charity function for the homeless. So at the first opportunity, I walked up to him in the cafeteria with my right hand outstretched.

“Nathan,” I said.

“I think so. At least I was when I got up this morning.”

“Hi, I don’t know if you remember me, but I’m Tony Leonardo. And everything they say about me is true.”

“Oh yeah,” said Nathan. “I remember you. But only half the things they say about me are true. The question is which half?”

“I’m glad to see prison hasn’t dulled your well-known wit,” I said.

We sat across from each other at a cafeteria table. Nathan took several folded sheets of paper from his inside pocket and laid them out before me. One was a multi-colored chart showing the tremendous growth of the financial sector in the United States, with annotations handwritten here and there in red.

“Here, take a look at this,” he said.

The chart clearly showed that in the 1950s the finance and insurance industries accounted for about 3 percent of U.S. Gross Domestic Product. By 1970 it was up to 4.2 percent. But by 2012, even after the 2008 financial apocalypse, they represented 6.6 percent.

“That’s a great chart, Nathan,” I said. “Where did you get it?”

“Put it together myself,” he said “Here take a look at this other chart Tony.”

This one showed that the finance sector had grown disproportionately more profitable. In 1950, the financial sector claimed around 8 percent of U.S. corporate profits; now, it’s about 30 percent. It has displaced manufacturing as the biggest profit center in the economy. For sure, the money made from making things pales by comparison with the amount of money made from moving paper around.

You could also reasonably assume that just as profits shifted from labor-intensive businesses, such as manufacturing to the comparatively low-employment finance sector, wealth became concentrated in fewer hands, contributing big time to the huge rise of inequality that started in the mid-1970s.

“Actually, Tony,” Nathan said, “these figures understate how much finance dominates the economy because they don’t include the nonfinancial firms that have finance businesses. For example, GE Capital at one time generated over 40 percent of General Electric’s earnings.”

“Is it any wonder,” I said, “that our former industry gets favored treatment in Washington?”

“The rich are always listened to more than the poor and that’s especially true with how the finance sector dominates the economy, government, and society,” said Nathan. “Just think about the millions the industry spends on lobbyists and how many millions they donate to political campaigns.”

“And then there are all the senior government officials who have spent most of their careers in finance,” I said. “They have a mindset that is more closely attuned to Wall Street than Main Street.”

“For sure, just think about the number of Goldman Sachs and Citigroup people who navigate the revolving door, moving in and out of high government positions.”

“Well, time’s up, Nathan,” I said. “I have to go visit with the staff psychologist to take another one of these personality tests. All part of the prison bureau’s inmate rehab program, designed to help us return to society as decent citizens, whatever that means.” I laughed. “Let’s talk again soon.”

originally published: January 31, 2015