Why should Americans trust refugee process?

Posted on by j.giglio

Everyone loves a good argument and few questions are more likely to start one right now than “should we allow Syrian refugees into the United States?” Answering the question requires balancing competing concerns. First and foremost is the moral imperative of protecting American citizens versus the humanitarian concerns of providing for refugees.

But that isn’t the only set of competing concerns. What about the question of whether the United States should be helping its own -thousands of homeless veterans, for example -before helping others who may represent a unique security threat? Should America’s self-interests be sacrificed in the pursuit of high ideals. And in the 21st century, that self-interest is threatened by the specter of global jihad.

The Obama administration plans to increase refugee admissions for fiscal 2016 to at least 85,000, with 10,000 of the refugees coming from Syria, despite the horrific Paris attack in which at least apparently one of the attackers is believed to have posed as a Syrian migrant to get into France. The plan would move these refugees to the front of the immigration line, ahead of “undocumented” immigrants and those on the “legal” immigration list.

White House Deputy National Security Advisor Ben Rhodes employed the usual self-assured bureaucratic rhetoric, saying that the government has a “very careful vetting process” for all Syrian refugees. Still further, he argued that these refugees are tragic victims; women, children and orphans of the Syrian civil war that has raged since 2011. Put like that, who could disagree with the canonical view of the administration?

The director of the FBI, for one. James B. Comey testified before Congress in October that his agency has neither the resources nor the necessary information to fully vet Syrian refugees. He could not offer assurances that terrorist fighters could not slip in by posing as refugees. Nobody can guarantee ISIS could not use the Syrian diaspora as a way to kill Americans and serve as an ISIS Trojan Horse. There are no solid background records available to confirm that refugees are who they say they are.

All this should not be surprising given that we are dealing with refugees from a broken country in the midst of years-long civil war.

Overlooked in the discussion are security risks presented by the estimated 40 percent of the 11-to-12 million unauthorized residents who came here legally, then stayed after their student, business, or tourist visas expired. Lest Americans forget, on 9/11, 19 foreign terrorists came through America’s front door on legitimate visas, hijacked four planes and murdered almost 3,000 innocent people. On the day of the attack, four of them were continuing to live in the shadows even thought their visas had expired.

If the federal government has not been able to track the arrival and departure of foreign visitors, why would Americans believe their government can effectively screen Syrian refugees. To put it nicely the average American lacks confidence in the competency of their government to identify covert operatives. That is not irrational.

All it takes is one terrorist to get through the screening process. In other words, the government agencies conducting the screening have to be perfect. If you believe they are capable of such behavior, it is likely you think it’s possible to fight a war without collateral damage to civilians.

It is said that the definition of insanity is doing the same thing over and over and expecting a different result. It is a definition Americans should remember as we consider the issue of allowing Syrian refugees into the United States.

Originally Published: November 28, 2015

Corporate mergers and income inequality

Posted on by j.giglio

You can’t look at the Wall Street Journal or any other business publication nowadays without reading headlines about yet another megadeal. Many industries are consolidating, and that translates to fewer jobs.

This year alone has brought major mergers resulting in a number of industries being dominated by a few firms. Look no further than big-box retailers, too-big-to-fail financial institutions, airlines, health insurers, communications, utilities markets and a broad range of industrial sectors including defense and the beer industry with the $104.2 billion deal between Anheuser-Busch InBev NV and SABMiller.

Last month, after approving Lockheed Martin’s $9 billion acquisition of Sikorsky Aircraft, Pentagon officials warned against further consolidation in the U.S. weapons industry because fewer defense contractors could inhibit innovation, lead to higher costs and result in less competition. Four airlines (American, Delta, United and Southwest) control over 80 percent of the domestic market. There were nine major carriers in 2005.

The wireless industry is also dominated by just four firms. Even there, AT&T and Verizon are much larger than T-Mobile and Sprint, controlling about 70 percent of all subscribers.

In retail, Walgreens, the largest U.S. drugstore, just announced it would acquire Rite Aid, the third­ largest drugstore chain, for $17.2 billion in an all-cash transaction for $9 a share, a 48 percent premium to Rite Aid’s closing price of$6.08. The proposed deal would essentially consolidate the industry into two large retail chains: Walgreens and CVS Health. It follows on the heels of CVS acquiring Target’s nearly 1,700 pharmacies over the summer and the potential merger of Staples and Office Depot.

Business people may be the leading champions of free markets and competition, but Marx, writing in Das Kapital, was spot on when he wrote, “One capitalist always kills many,” meaning that markets that are originally open and diverse evolve into oligopolies with a few firms using their power to keep competitors out and cornering the spoils of a particular industry for themselves.

In theory, consolidation can create economies of scale that reduce costs and consumer prices and save jobs at firms too weak to make it on their own. When it comes to mergers, “synergy” – cost efficiencies including combining complementary assets, eliminating duplicate activities, consolidating stores, integrating computer systems, and increasing profit margins by using increased volume to squeeze concessions out of suppliers – is an often-used word.

It’s all about eliminating redundancies, and that means jobs. Of course, it may be easier to pan for gold than to actually achieve these vaunted cost reductions because the savings are often overestimated and don’t always account for take-over premiums.

On the other hand; it is reasonable to assume that consolidation has played some role in the income stagnation suffered by American workers. This contributes to income inequality, the loss of many middle-level jobs and a record number of American workers no longer participating in the labor force as firms pursue cost efficiencies.

Big corporations hope consolidation makes it harder for new competitors to enter an industry and leads to increased market power. By controlling the market you control the customer and can raise prices unilaterally. And while coordinating pricing strategies is illegal, a smaller number of players in an industry makes tacit collusion easier.

Under current antitrust laws, two agencies -the Antitrust Division of the Justice Department and the Federal Trade Commission- can review proposed mergers and decide whether they are anticompetitive. American consumers and labor should hope these regulators have a grasp of the downsides of consolidation that is better than Roger Goodell’s understanding of due process.

Based on the regulators’ performance in the run-up to the financial crisis, the truth is that if these folks were convicted of being competent, we would be convicting innocent people. Let’s hope we are not going to sit shiva over the notion of competition that rewards hard work and promotes innovation and meritocracy.

Originally Published: November 11, 2015

When corporations treat society like casinos

Posted on by j.giglio

People joke that there is no such thing as “business ethics.” They call it an oxymoron – a concept that combines contradictory ideas. Sadly, the critics are right. Changing that may require holding those guilty of unethical behavior personally responsible for their actions.

In just the last several weeks a former peanut company owner was sent to prison for 28 years for his role in knowingly selling salmonella-tainted peanut butter that killed nine people. Volkswagen, the world’s biggest automaker, had software in the firm’s diesel-powered cars that cleverly put a lid on emissions during testing. Turing Pharmaceuticals jacked up the price of a 62-year-old lifesaving drug from $13.50 to $750 a pill. And the beat goes on.

All these examples capture the zeitgeist of an unethical, winner-take-all business climate in which bottom line-obsessed high flyers treat society like a giant casino and give the public the middle finger. Is it any wonder that business leaders are among the nation’s least trusted groups, ranking only slightly ahead of members of Congress?

People’s trust in business and those who lead it is eroding. It seems to many that executives no longer run their companies for the benefit of consumers or even shareholders and employees, but rather for the pursuit of personal ambition and financial gain.

In the wake of recent corporate scandals, it is again time to ask the most fundamental of questions: What is the scope of corporate social responsibility?

Maximizing shareholder value has for decades been executives’ top priority. Milton Friedman put it succinctly in a famous New York Times Magazine piece: “The Social Responsibility of Business is to Increase its Profits.” He referred to the concept of businesses having social responsibility as a “fundamentally subversive doctrine.” For Friedman, the role of business was clearly not to act as a social worker.

This formulation is one side of an ongoing debate regarding corporate responsibility. Milton Friedman’s formulation overlooks the fact that, as shareholders’ agents, business leaders have important responsibilities that extend beyond maximizing stockholder wealth. Simply put, many people believe that corporations are licensed by society to pursue profits with the expectation that they will produce goods and services that are of value to society.

Corporations should also remember that the way to maximize shareholder value is by maximizing customer satisfaction. Or as Peter Drucker, hailed as “the man who invented management,” put it, the purpose of business is to create and keep customers. For him, shareholders benefit when customer satisfaction: is the major priority.

While there are no black-and-white judgments, corporations can reasonably be expected to identify stakeholders beyond owners and investors, such as customers and employees.

Balancing shareholders’ expectations of maximum return against other priorities is a fundamental problem confronting corporate management. For starters, being responsible means obeying the laws and also behaving in a fashion that society universally values even if it is not required by law.

Believing that the markets will eventually sort the good from the bad is naive. What the public can now see, in hindsight , is that discussions about market discipline and increased government regulation are endless and don’t amount to much.

With the rise of institutional investing represented by large private and public pension funds, ownership in many large corporations is concentrated in the hands of a relatively small number of investors. The public may well have to rely on these investors to monitor managerial misconduct and corporate social responsibility before embarking on another wave of regulatory reform.

Of course, the dearth of personal risk associated with performance failures increases the incentives for corporate misbehavior and argues for personal punishment of the perpetrators. Real punishment may not cure the disease that lies at the core of the business culture and create a new vision of corporate responsibility, but behaving responsibly would surely be taken more seriously by all concerned.

Originally Published: October 24, 2015

Corporations’ interest vs. the public interest

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There is much truth to the cliche that politicians are primarily interested in getting re-elected. To achieve this goal they cater to the small group of voters who are paying attention to the details of the legislative process – and often looking to cook up a raiding party on the public interest to promote their own goals.

Take a provision tucked into the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd­ Frank), one of the most sweeping financial reform bills in U.S. history, which President Obama signed into law in 2010. Dodd-Frank demonstrates that policy making is dominated by powerful businesses and other well-organized special interests.

In the aftermath of the historic bailout of the financial system and major banking houses in 2008 and 2009, which precipitated the worst economic downturn since the Great Depression, the financial industry fell under intense criticism and scrutiny. The omnibus 2,300-page bill was passed in response to this financial and economic crisis.

Its stated aim was to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purpose.” It was supposed to reduce system-wide risk and prevent a financial collapse like the one in 2008.

While the law did not lay a hand on Fannie and Freddie Mac, major players in the 1997-2007 housing bubble and the subsequent financial crisis, it did address the subject of “conflict minerals” that was promoted by certain non-governmental organizations supported by celebrities such as George Clooney and Brad Pitt.

These activists lobbied Congress and got them to state that the exploitation and trade of certain conflict minerals was fueling a humanitarian crisis in the Democratic Republic of the Congo that warranted the imposition of disclosure requirements.

The NGOs argued that profits from conflict minerals have helped fund the conflict between rebel militias and government troops in Congo that has claimed millions of lives and resulted in widespread human rights abuses, including violence against women and the conscription of children as soldiers.

The conflict minerals are tantalum, tin, tungsten, and gold, which are used in many industries. Tungsten, for example, is used in the screens of cellphones and tin is used to solder circuit boards.

Congress directed the Securities and Exchange Commission to promulgate a rule requiring thousands of publicly traded U.S. companies to investigate whether they or any of their suppliers use minerals mined in the conflict-ridden parts of Congo and to annually disclose the origins of conflict minerals necessary to its operations if the minerals originate from Congo or an adjoining country.

Supporters of the Dodd-Frank conflict minerals provision and of the SEC implementing rule argue that such disclosures reduce the violence involved with the mining of conflict minerals. Opponents argue that they are burdensome and costly to administer.

Combating brutal human rights abuses in the Congo is surely a good idea, but is a Wall Street Reform bill the appropriate place to do it? And is the SEC the right entity to implement the law?

And what are the boundaries of corporate social responsibility? How much responsibility does a firm have for its supply chain? Are there alternative and transparent approaches to dealing with the issue of conflict minerals? Corporations cannot be asked to solve all the world’s problems.

The financial industry was widely criticized for its intense lobbying efforts to shape Dodd-Frank’s legislative and rule making process. But they were not the only ones to convince lawmakers eager to curry favor with powerful special interests to include provisions in the legislation that promote their own rather than the public interest.

Originally Published: October 10, 2015

Fed’s ‘hard cheese’ for the average American

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The Federal Reserve’s long-awaited September meeting ended with the Fed once again deciding not to raise interest rates. We have seen this movie before.

Consider a society in which government has been traditionally run by the Old Guys political party. They are great believers in “prudent government,” and their definition of prudence includes balanced budgets; having the government spend no more than it collects.

But along come the ambitious New Guys. They form their own political party with the goal of winning control of the government in the next election and begin campaigning aggressively on a platform that discredits the competence of the Old Guys.

“Look at our unpaved roads,” the New Guys thunder in their campaign speeches. “The people deserve paved roads so they can travel more safely and easily. But the incompetent Old Guys who run our government won’t give us the roads we need.”

To which the Old Guys calmly respond, “If the people really want paved roads, then the government should certainly provide them. But paving our roads will cost money, which would necessitate a tax increase.”

“Nonsense,” the New Guys shoot back. “Everybody knows the government is riddled with waste, fraud, and abuse. We’ll get rid of it all, which will free up more than enough money to pave our roads without raising taxes.”

Needless to say, the voters are drawn to the New Guys’ message of having the government pave the roads without making people pay more taxes. Getting something for nothing is very hard to resist in a society that lives beyond its means and wants political leaders who make certain the good times never end.

On Election Day, voters hand the government to the New Guys with a solid majority. But not long after they take over, the New Guys come face to face with two awkward realities.

First, there is not nearly as much waste, fraud, and abuse in government as they expected, and it doesn’t come close to adding up to the cost of paving the roads. In fact, the administrative cost of eliminating waste, fraud, and abuse is going to be more than the savings from doing so.

These all-too common realities put the New Guys in a real bind. The savings with which they planned to cover the cost of paving the roads turned out to be illusory.

They respond by punting on the use of fiscal policy to raise the funds necessary to pave the roads and deliver on their campaign promise before the next election.

Let’s get our “independent” central bank to pursue a policy of easy money and near-zero interest rates. That way, government will pay increasing portions of their ongoing expenses by simply “printing more money.” After all, the government has a monopoly on money as a commodity.

Equally important, Wall Street, which helps fund our campaigns, loves low rates and cheap money. Banks will pay almost no interest on savings, lending the savers’ money out to businesses, private equity funds, and hedge funds. Low rates also help companies that export goods.

Variations of this scenario have long played out in governments and it just happened again with the Federal Reserve’s decision not to raise interest rates. It’s a good deal for financial institutions that can play games with the cheap money they have been given without investing in the real economy.

As for the savers, including those who thought they had enough put aside for retirement, they will just have to learn to take more risks to achieve higher returns. As the Brits would say that’s “hard cheese” for the average American.

More evil has been carried out in the name of central banking than by any other force in human history, including religion.

Originally Published: September 26, 2015

Google’s search need look no further than GE

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Google has announced plans to reorganize its businesses under a General Electric-like conglomerate called Alphabet. If the new company wants to maximize overall performance, it should take a close look at Jack Welch’s work as GE’s CEO.

Under the new structure, Alphabet will be the corporate parent of a portfolio of diversified businesses. Google Inc. will be part of the new entity and include YouTube, Android mobile software and other web-based products. Alphabet will also include expanding and emerging businesses such as Nest, the smart-thermostat maker, cloud storage, Calico, Google Ventures, Google Capital, etc., with self-driving cars thrown in at no extra charge.

Each business will operate autonomously with a chief executive officer (CEO) and report to Google co­ founders Larry Page and Sergey Brin, who will serve as Alphabet’s CEO and Alphabet president, respectively.

The average consumer of Google products will see no meaningful change. The co-founders hope restructuring will enable them to have a strong CEO run each business, freeing them to focus on capital allocation and maximizing all the businesses’ long-term performance. Managing a portfolio of diverse units to maximize the overall value to various stakeholders is the key corporate strategy challenge.

For many talented people at Google, the change will provide an opportunity to be their own CEOs, thereby stoking entrepreneurialism and helping to retain great talent. For investors, the conglomerate structure should provide greater transparency into how Google invests in various businesses and how the businesses, including the core, are performing.

Alphabet should study how General Electric (GE) operated as a conglomerate during Jack Welch’s 20- year tenure as CEO, when it managed businesses as disparate as jet engines, dishwashers, and a TV network.

Among the reasons GE succeeded as a holding company was that the majority of businesses within its portfolio shared a set of resources that linked them and could be readily leveraged into new businesses. By transferring and sharing specialized expertise, technological know-how, and other valuable resources across its units, the firm was able to perform better and create value greater than the sum of its individual parts.

For example, value was created by training managers, notably at GE’s famed Crotonville Center, regularly moving its world-class managers among the various businesses and driving strategic initiatives such as best manufacturing practices across all units. It was no accident that Welch spent two months a year on personnel evaluation of his top 400 managers. The focus at GE was not just on managing capital allocation, but on developing human capital as a scarce strategic resource.

GE’s umbrella brand was applied to businesses as diverse as financial services (GE Capital), medical imaging (GE medical diagnostics) and lightning (GE light bulbs). Using an umbrella brand in a diversified firm not only has the potential to reduce costs by spreading the fixed cost of developing a brand across many businesses, but also to link its products to a name consumers trust. This, among other resources, could be exploited, transferred and leveraged across a range of businesses.

Simply put, GE was an astute enabling corporate parent that nurtured its individual businesses to become a whole that was far greater than the sum of its parts. The diversified businesses performed better under the auspices of a single corporate parent that they would have had they been stand-alone businesses. The best parent companies create more value for stakeholders than any of their rivals would if they owned the businesses

Jack Welch identified GE’s critical resources, especially human capital. He created a learning organization and transferred resources over a broad range of businesses and geographies. The challenge for Google under the new structure will be to turn all its businesses into an integrated whole that is truly more than the sum of its parts.

To paraphrase Stephen Sondheim’s song, “Having just a vision’s no solution. Everything depends on execution. Putting it together, that’s what counts!”

Originally Published: September 19, 2015

Will Fed finally raise interest rates?

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Investors are trying to figure out whether the Federal Reserve will increase interest rates for the first time in nine years at its Sept. 16-17 policy meetings. The guessing game is complicated by recent stock market volatility amid concerns about China’s economy, but it is unlikely the Fed would delay its rate hike solely because of the China effect.

The timing of the Fed’s decision to reverse its near-zero interest rate policy is further complicated by conflicting economic signals that emerged from the last major data point before the Fed meets to discuss a rate increase. The Labor Department reported that the U.S. economy created 173,000 new jobs in August, less than expected, but the headline unemployment rate dropped to 5.1 percent, the lowest since April2008 and a level the Fed considers to be full employment.

Weekly earnings increased to a 2.4 percent annual rate in August and average number of hours worked also rose; all good for increased consumer spending.

Wages and GDP from the second quarter that showed a 3.7 percent annualized growth rate may keep rate increase prospects alive. Moreover, a tightening labor market and decisions by several state and local governments to raise the minimum wage might give the Fed confidence that the inflation rate, which collapsed with oil prices, will move closer to their 2 percent target.

On the other hand, the broader measure of unemployment, including those stuck in part-time jobs and discouraged workers who have stopped looking for work, remains at 10.4 percent. The labor participation rate remains low at 62.6 percent.

And just to make things more complicated, the reported jobs and GDP numbers are far from certain. As always, you can expect revisions in the coming months.

In an effort to induce growth during the financial crisis and subsequent Great Recession, the Fed aggressively eased monetary policy in the final months of 2008, slashing short-term interest rates.

The Fed used additional tools to stimulate the economy by easing credit and keeping interest rates low. Making housing more affordable and enabling households to refinance their mortgages at lower interest rates would free up income for consumer spending. For corporations, reducing the cost of capital would promote investment. Commentators routinely argue whether QE has improved the real economy. Critics contend that reliance on ultra-low interest rates is insufficient to accelerate economic growth. The policies may support economic activity, but can’t take the place of fiscal policies such as addressing mounting debt, rising entitlement program costs, the need for infrastructure investment, repairing the tax code, and trade policies that advantage the American worker.

These critics argue that the Fed’s policies transfer wealth away from savers and force savers and pensioners to take on more credit risk in an effort to boost returns in an era of low rates. Corporations use cheap money to engage in stock buyback programs rather than capital investment.

Put another way, the Fed pushed trillions of dollars of new money into banks, but too little trickled down to the real economy and job creation. According to this crowd, the Fed has been fighting for the one percenters.

John Stuart Mill said, “He who only knows his side of the case knows little of that.” It will be very interesting to see what the Federal Reserve does when it meets later this month to sort out piles of conflicting data and decides whether it’s finally time to raise interest rates.

Originally Published: September 12, 2015

Not ‘too big to fail,’ too interconnected to fail

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At about 12:30 a.m. on the morning of Monday, Sept. 15,2008, a press release went out from the 158- year-old investment bank Lehman Brothers announcing it was seeking bankruptcy protection. Lehman’s downfall would become the watershed event of the financial crises.

While this event may not be seared into American memories like the Sept. 11 terrorist attacks, the collapse of Lehman triggered the worst financial tsunami since the Great Depression and was a seismic shock to global financial markets.

It was the largest Chapter 11 bankruptcy in American history to that point, and triggered the longest and deepest recession in generations. Within 21 months, $17 trillion in household wealth evaporated; the unemployment rate doubled to 10.1 percent in October 2009; and the nation’s credit system froze up, costing millions of Americans their jobs, homes and savings.

The weakest recovery since World War II drags on. Despite unprecedented monetary policy in which trillions spent on quantitative easing and near-zero interest rates benefited those who wear Zegna and Ferragamo, it has not helped the average working American.

Main Street has taken a beating. Wages have been rising at the slowest pace since the 1980s, while the rising gap between workers’ productivity and their wages is diverted to stockholders and management.

The government underestimated the repercussions of letting Lehman fail by failing to anticipate the systemic risks posed by Lehman’s bankruptcy. Both Lehman’s size and its interconnectedness with companies worldwide effectively created a credit event that far surpassed the magnitude of any that had come before.

Financial firms were not “too big to fail,” they were too interconnected to fail. The companies were reliant on one another in a variety of ways that were essential to the smooth running of the financial system. The feds failed to grasp the impact of a mortgage written in California that had been sliced and diced and sold several times and ended up in the portfolio of a Norwegian pension fund.

Six months before the Lehman crisis, the feds kicked in almost $30 billion to facilitate the shotgun marriage of Bear Steams to JP Morgan. But this time they refused to backstop losses from Lehman’s toxic mortgage holdings. Why did the government step in to bail out Bear but fail to rescue Lehman, a firm twice Bear’s size?

In part, Lehman Brothers was allowed to fail because of Bear Steams. The political fallout from Bear’s bailout worked against Lehman. Public backlash against taxpayers potentially assuming Bear’s losses made rescuing Lehman Brothers politically untenable. The feds believed they could not enact a second bailout just weeks before a presidential election.

They also thought a bailout might lead other firms to expect a similar treatment. The feds were reduced to jawboning Bank of America, HSBC, Nomura Securities, and Barclay’s Bank to “rescue Lehman on their own”. This proved fruitless without government assistance.

So the second domino would fall; it would not be the last. Only days later, all hell broke loose and the feds had another change of heart; they opened their checkbook and bailed out insurance giant AIG, which was on the verge of collapse. Since there were no “white knights” with sufficiently deep pockets to buy AIG, they had only one option: To effectively “nationalize” the company. They provided an $80 billion credit line from the Federal Reserve, plus additional loans and other direct investments that eventually totaled more than $170 billion, in exchange for an 80 percent equity stake in its ownership.

So the die was cast. Henceforth, the feds would be the business community’s sugar daddy; passing out allowance money by the billions to unruly children such as General Motors and Chrysler, while trying to keep them from squandering too much of it on “tooth-rotting candy” in the form of huge bonuses and lavish perks for top management.

To paraphrase Ralph Waldo Emerson: “A foolish inconsistency is the hobgoblin of little minds”.

Originally Published: September 5, 2015

Is China in a currency war with U.S.?

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China’s recent surprise decision to devalue its currency, the renminbi (also known as the yuan), versus the dollar sent shock waves through financial markets. It could trigger a race to the bottom to gain an export price advantage, which would have a major impact on the U.S. economy and on looming decisions by the Federal Reserve.

Many believe China’s move was an effort to gain a trade advantage. A drop in the yuan’s value makes Chinese products cheaper, costing thousands of jobs by forcing factories outside China to close.

China said the devaluation was a one-off event, but the move could set off a currency war, which is when two or more countries engage in currency devaluations to improve the competitiveness of their products in global markets.

Over 35 years, China has developed from abject poverty into an economic giant. It is the world’s second largest economy and accounts for about 12 percent of global exports. A country so reliant on trade must maintain the growth of exports, which have been the most important driver of China’s growth since liberalizing its economy in 1978. The U.S. is their biggest customer.

Chinese farmers continuously leave the countryside for higher paying jobs in urban areas. Robust economic growth is needed to absorb this workforce and maintain social stability and the existing political order, which is a top priority. If the economy worsens, China may further devaluate its currency to export its way out of the decline. Chinese exports were down 8.3 percent in July compared to 2014.

More importantly, China’s economic growth has slowed to an annual rate of 7 percent. That’s healthy for most countries- the U.S. struggles to keep annual gross domestic product growth above 2 percent­ but far below the previous decade’s double-digit growth.

Even though its GDP remains smaller than that of the United States, China is the world’s largest trading nation and is many countries’ most important bilateral trade partner. In the future, the yuan may well eclipse the dollar as the preferred currency of trade.

Some believe the devaluation may cause other countries’ central banks to respond, triggering a currency war. Both Japan and the European Union have repeatedly depressed their currencies in the past two years to promote exports. The U.S. certainly does it. The dollar took a deep dive after the Federal Reserve cut interest rates to near zero and flooded the world with cheap money through its quantitative easing initiative.

The devaluation engineered by Beijing also complicates the Federal Reserve’s September decision about whether to raise interest rates, which have been near zero since the 2008 financial meltdown. A weaker yuan would reduce the price of Chinese goods in the U.S. This would further depress the 1.3 percent inflation rate, which is below the Fed’s target of 2 percent.

Last month, the U.S. government reported that the economy added 215,000 jobs and the headline unemployment rate remained at a low 5.3 percent. That could support a Fed decision to raise its key interest rate.

But low inflation, weak increases in hourly wages and continued low labor-force participation could be reasons to delay their planned 0.25 percent increase until early next year. A rate hike would increase the dollar’s value, which would cause even more angst for American exporters, kill manufacturing jobs and sales of American goods; and slow economic growth.

To further complicate the situation, China has stockpiled more than $1.2 trillion in U.S. bonds, which help finance wars and huge budget and trade deficits. If foreign countries stop buying treasury bonds, rising debt would mean higher interest rates because investors would insist on higher returns.

The bottom line is that while there are a number of incentives for countries to devalue their currencies, every effort should be made to avoid the kind of competitive devaluations that exacerbated the Great Depression in the 1930s.

Originally Published: August 22, 2015

Oligopolies – and your wallet

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The term “oligopoly” used to be a negative term to most people, just as “competition” had a positive connotation. Oligopolies occupy the middle ground between monopoly and the idealized world in which numerous firms compete.

An oligopoly is an industry in which a few firms dominate and exercise considerable stroke over consumers and suppliers. The goal of making those firms as profitable as possible is not served by facing off in never-ending cutthroat competition.

But what’s best for companies is not necessarily good for consumers. In an era of rampant consolidation, intelligent regulation is needed to promote competition.

Businesses work hard to insulate themselves from the “invisible hand” of the free market. The few firms in an oligopolistic industry are in the enviable position of setting prices, whether through collusion or silent agreement. The tendency is to cooperate with each other to minimize rivalry so as to maintain a common front against buyers and sellers, and create market power in certain geographic markets, or among particular consumer groups or product lines, which can lead to higher consumer prices and inferior service.

From the consumer’s perspective, oligopolies aren’t much different than a monopoly, where one firm has a stranglehold on a product or service for which there is no alternative. Moreover, oligopolies usually throw their weight around by exerting pricing power over suppliers.

There are oligopolies throughout the global marketplace, and concentration and consolidation appear to be increasing in U.S. industries from cable television, pharmaceuticals and airlines to banking and health insurers. As they concentrate further, profitability increases and consumers are disadvantaged. Left unregulated, these firms have enormous power to strategically restructure their industries and impose very high prices on consumers.

The airline industry is a prime example of an oligopoly, with 80 percent of all domestic passenger travel dominated by just four carriers. A wave of consolidation has been sweeping the U.S. airline industry: American Airlines merged with US Airways, United merged with Continental and Delta with  Northwest. Southwest acquired AirTran.

Consumers appear to be paying the price for this consolidation with fares and fees rising faster than inflation, and one or two airlines dominating particular markets. On June 30, the Justice Department announced it is investigating whether U.S. airlines have worked together to keep airfares high by limiting the number of flights and seats.

Another example is the banking industry. Despite reforms in the wake of the “Too Big to Fail” public bailouts, the five biggest U.S. banks now control nearly half the industry’s $15 trillion in assets. In 1991 the five largest banks controlled just 10 percent of industry assets. The concentration suggests that banking is not a competitive industry and it allows banks to jack up fees.

Health insurance is the most recent example. Over the last several weeks, Anthem reached an agreement to purchase Cigna and Aetna agreed to buy Humana. These two proposed deals reduce the number of for-profit health insurers to three.

But the bottom line is that these waves of consolidation hurt consumers by reducing competition. To change that, the “visible hand” of intelligent regulation needs to operate along with the invisible hand of market forces to promote competition and protect consumers.

Originally Published: August 15, 2015