Wednesday, June 26, 2019

Local Government Is an Engine of Inflation

Insolvency isn't restricted to private enterprise; governments go broke, too.
One reason the economy is so much more precarious than advertised is inflation has pushed households and small businesses to the edge--and one engine of that inflation is local government. This is not to dump on local government, which is facing essentially unlimited demands from the public for more services while mandated cost increases in government union employee wages and benefits ratchet higher.
Since personnel costs are 70+% of city and county budgets, those ever-increasing payroll, pension and benefits costs are the key driver of budgets expanding.
But local governments' ability to increase revenues are also essentially unlimited. There are all sorts of fees that can be created or increased if outright tax increases have been voted down by the public.
What amounts to blackmail is generally effective, however: if you want the giant potholes filled in your streets, you have to pass this municipal bond--or else.
Official inflation, growth in the economy (GDP) and increases in wages are typically pegged at around 2% to 3% annually. But cost increases in local government and agency services are soaring at rates far above the modest rates of economic expansion.
Here's a list of tax and fee increases hitting residents of one of the counties I call home; the list includes taxes/fees raised in 2017 and 2018:
1. Property taxes: between 6.5% and 10%, depending on the property class
2. Gasoline tax (county), from 8.8 cents to 23 cents, phased in over 3 years
3. General excise tax, up 6.3%
4. Garbage fee (commercial): up 27%
5. Sewer fees: up 44%
6. Electricity (base rate): up 7.4%
7. Annual vehicle safety inspection fee (state): up $5.81
8. County water service: up 8%
9. Accommodation fee (a.k.a. hotel tax) (state): up 10%
I may have missed a few, but you get the idea: while wages have supposedly gone up 3% in 2018, taxes and fees are rising at much higher rates.
Small businesses are exposed to higher business license and other fees. Some cities have tripled certain classes of business license fees, charging a percentage of gross income, not net income, meaning a business that's losing money still has to pay the full annual licensing fee if they're struggling to keep afloat.
All these increases are manifestations of the Ratchet Effect: organizations and institutions only know how to expand, so budgets, head counts, administration, etc. are always ratcheting higher.
There are no institutional memories or mechanisms for contraction, i.e. reduced revenues, so when revenues decline sharply, the institution breaks down.
The Ratchet Effect sets up The Rising Wedge Model of Breakdown: as complexity, costs and layers of management all ratchet higher, the organization loses the flexibility required to deal with outright declines in revenues. As a result, any sustained drop in revenues causes the institution to break down, i.e. fail systemically.
Allow me to explain another mechanism of rampant inflation triggered by local government. Cities and counties discovered a new revenue source in the late 20th century: real estate development fees. Building permits that once cost a few hundred dollars now cost thousands of dollars, and a host of new fees are now standard: sewer hookup fees, plan review fees, and development fees.
Then there are transfer fees for every sale of real estate, and mandated subsidized housing requirements for new apartment buildings: a percentage of the new apartments must be made available at below-market rents for qualified tenants. The cost of the subsidized units are borne by the owner/developer, not the taxpayer, so the subsidy in effect raises the market rents.
Partly as a result of these local government fees, the cost of building new apartments is very high. As a result, rents are also higher. If demand is strong, some desperate (or rich) tenants will pay the much higher rent.
The owners of existing buildings look at the high rents and their natural response is to raise their rents accordingly: the new market price for a one-bedroom apartment has been set by the high-cost new building, and rents throughout the city ratchet higher.
The same dynamic pushes commercial rents higher, too. The ground-floor commercial space in the new complex is rented out at sky-high rates to a corporate chain, and suddenly that insanely high rent is the new baseline for every equivalent space in the city.
When an old building is demolished to make way for a new apartment complex with ground-floor commercial spaces, the old tenants never return: they can no longer afford the rent. As I've discussed here before, this gentrification drives out diversity, leaving the city's commercial districts a homogenized, lifeless cluster of Corporate America outlets.
Corporate America has zero loyalty or interest in local economies: the moment an outlet doesn't make its numbers, HQ shutters it.
Since rents have risen beyond what local small businesses can afford, there are no new tenants for the empty space when the chain outlet closes.
This sets up the rising tax/fee spiral of death, as local government seeks to replace the lost revenues by jacking up taxes and fees on the remaining small businesses. The higher costs appear "affordable" to a public and city staff who don't have to pay the soaring costs of keeping the doors open, so they're mystified when one small business after another closes their doors forever.
The Ratchet Effect has pushed costs above the point the businesses can survive, so they close.
Local government then increases tax and fee burdens on the remaining businesses, pushing more of them over the edge.
At some point, the trickle of businesses closing becomes a self-reinforcing flood. As vacant storefronts become the norm, cities respond to the loss of tax donkeys by launching desperate marketing campaigns which do nothing to address the real problem, high costs: come spend money in our commercial districts! These campaigns fail to move the needle, and as the economy slips into a long-delayed recession, city revenues plummet, triggering even more onerous fees and taxes.
The resulting collapse in small business eventually leads to a collapse in city finances. Insolvency isn't restricted to private enterprise; governments go broke, too.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
 
Thank you, Royce M. ($150), for your outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.
 

Read more...

Sunday, June 23, 2019

The Human Cost of "Recovery": We're Burning Out

The asymmetries are piling up and we're cracking under the weight.
Judging by the record-high stock market and the record-low unemployment rate, the "recovery" has reached new heights of prosperity. Academics and think-tankers viewing the global economy from 40,000 feet are brimming with policies to bring the remaining laggards into the booming economy.
You can imagine them rubbing their hands with glee as they quote statistics such as: the 53 metropolitan areas in the U.S. with populations of 1 million or more accounted for two-thirds of the GDP growth and three-quarters of the job growth. A staggering 93% of the population growth in the U.S. in the past decade occurred in these urban centers.
And this asymmetry is even greater if we separate the top 10 metropolitan areas from the rest: super-cities with super-charged economies, fueled by enormous influxes of capital and people, which just so happen to make life unbearable as overcrowded, aging infrastructure breaks down and costs for housing, rent, taxes, utilities, fees etc. skyrocket out of reach of the bottom 95%.
The well-paid pundits viewing glowing statistics of growth never get around to examining the human costs of this lopsided "recovery": the "winners" in increasingly unlivable urban centers are cracking under the pressure-cooker stress, burning out, flaming out, crashing.
The residents of all the regions sucked dry of capital and talent--the "losers" of neoliberal globalization's concentrations of mobile capital and talent in a few favored megalopolises--are also cracking under the weight of a loss of dignity and secure livelihood, the two being intimately bound, much to the dismay of the supporters of "just pay them to go away and not bother us" Universal Basic Income (UBI).
In other words, the "winners" are losing, too. They're losing their sanity in 3-hour daily commutes on jammed freeways and equally jammed streets as thousands of other commuters seek a work-around to the endless congestion.
They're losing their dreams of a better life, as all the average-wage worker can afford to rent is a bed in a cramped living room that has been converted into sleeping quarters for two workers who don't make six-figure salaries and who don't have stock options in a Unicorn tech company.
They're fixated on FIRE--financial independence, retire early--because they hate their job, their career and the sector they toil in, and they count the days until they're free, free, free of the pressure, the stress, the BS work, and the insanity of daily life in a teeming rat-cage.
No wonder the FIRE movement is spreading like (ahem) wildfire. Nobody in their right mind wants to do their job for another 10 years, much less 20 or 25 years. Everybody is bailing out the moment they can, or if they burn out and crash, when they're forced to.
Let's say you want to start a business in a super-progressive city that fulfills all your most cherished ideals: paying your employees good wages, providing customers with value, and paying all your taxes and fees, of course, as a responsible progressive citizen.
Welcome to burnout and bankruptcy. This story is a microcosm of small-business reality in mega-cities choking on monumental asymmetries of wealth, income and power: Why San Francisco Restaurants Are Suffocating: What I witnessed during my two years in the industry.
Where do we start? How about the reality that virtually no one employed in the restaurant sector can afford to live in San Francisco unless they inherited a rent-controlled flat or scored one of the few subsidized housing openings?
The city's solution--mandating a $15/hour minimum wage--doesn't magically make healthcare or rent affordable; all it does is increase the burden on small businesses that are hanging on by a thread.
The writer doesn't even mention the sky-high rent she paid for her restaurant space. Rent alone drove this small food service business into the ground: Via Gelato owner plans to close Ward store, file for bankruptcy.
Working 100 hours a week couldn't compensate for the crushing rent.
Even the well-paid are burning out. Astronomical household incomes (say, $300,000 annually) aren't enough to buy a decayed bungalow for $1.3 million and pay for childcare, private-school tuition, healthcare, an aging parent and all the services the overworked wage-earners don't have the time or energy to do themselves. Oh, and don't forget the taxes. You're rich, people, so pay up.
No wonder people who can afford to retire are bailing at 55 or 60, on the first day they qualify. Life's too short to put up with the insane pressure and stress a day longer than you have to.
Not everybody feels it, of course. People who bought their modest house for $100,000 30 years ago can hug themselves silly that it's now worth $1,000,000 (but with a still-modest property tax), and if they're retired with a plump pension and gold-plated medical benefits, their biggest concern is finding ways to blow all the cash that's piling up.
These lucky retirees wonder what all the fuss is about. "We worked hard for what we have," etc. It's easy to overlook being a lucky winner of the housing-bubble lottery and the equally bubblicious pension lottery, and easy not to ask yourself how you'd manage if you arrived in NYC, San Francisco, et al. now rather than 35 years ago.
The asymmetries are piling up and we're cracking under the weight. When do we recover from the "recovery"? The answer appears to be "never."
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
 
Thank you, David W. ($25), for your much-appreciated generous contribution to this site-- I am greatly honored by your support and readership.
 

Read more...

Saturday, June 22, 2019

The Lessons of Rome: Our Neofeudal Oligarchy

Our society has a legal structure of self-rule and ownership of capital, but in reality it is a Neofeudal Oligarchy.
The Inheritance of Rome: Illuminating the Dark Ages 400-1000 is not an easy, breezy read; its length and detail are daunting.
The effort is well worth it, as the book helps us understand how the power structures of societies change over time in ways that may be largely invisible to those living through the changes.
The Inheritance of Rome focuses on the lasting influence of Rome's centralized social and political structures even as centralized economic power and trade routes dissolved.
This legacy of centralized power and loyalty to a central authority manifested 324 years after the end of the Western Roman Empire circa 476 A.D. in Charlemagne, who united much of western Europe as the head of the Holy Roman Empire. (Recall that the Eastern Roman (Byzantine) Empire endured another 1,000 years until 1453 A.D.)
But thereafter, the social and political strands tying far-flung villages and fiefdoms to a central authority frayed and were replaced by a decentralized feudalism in which peasants were largely stripped of the right to own land and became the chattel of independent nobles.
In this disintegrative phase, the central authority invested in the monarchy of kings and queens was weak to non-existent.
In the long sweep of history, it took several hundred years beyond 1000 A.D. for central authority to re-assert itself in the form of monarchy, and several hundred additional years for the rights of commoners to be established.
Indeed, it can be argued that it was not until the 1600s and 1700s--and only in the northern European strongholds of commoners' rights, The Netherlands and England--that the rights of ownership and political influence enjoyed by commoners in the Roman Empire were matched.
It can even be argued that the rights of Roman citizenship granted to every resident of the late Empire were only matched in the 19th and 20th centuries.
The rights of commoners were slowly chipped away by civil authorities and transferred to the feudal nobility. As the book explains, these rights included limited self-rule within village councils and ownership of land. These rights were extinguished by feudalism.
The connections between these civil society/legal freedoms (of self-rule and ownership of land/capital), the Protestant Reformation and the birth of modern Capitalism are explained by historian Fernand Braudel's masterful 3-volume history Civilization and Capitalism, 15th-18th Century, a series I have long recommended:
The self-reinforcing dynamics of religious, civil and economic freedoms are key to understanding the transition from feudalism/monarchy to the world systems of today, in which some form of self-rule or political influence and economic freedom are expected of every civil authority.
Let's fast-forward to today and ask what relevance these histories have in the present era.
There are two points worth discussing. One is the acceleration of change; what took 300 years now takes 30, or perhaps less.
The second is the slow erosion of commoners' self-rule and ownership of meaningful, productive capital.
This gradual, almost imperceptible erosion is what I call neofeudalism, a process of transferring political and economic power from commoners to a new Financial Aristocracy/Nobility.
If we examine the "wealth" of the middle class/working class (however you define them, the defining characteristic of both is the reliance on labor for income, as opposed to living off the income earned by capital), we find the primary capital asset is the family home, which as I have explained many times, is unproductive--in essence, a form of consumption rather than a source of income.
Ultimately, all pensions, public and private, are controlled by central authorities, even though "ownership" is nominally held by commoners. (Ask middle class Venezuelans what their pensions are worth once central authorities debauch the nation's currency.)
In a globalized, financialized economy, the only capital worth owning is mobile capital, capital that can be shifted by a keystroke to avoid devaluation or earn a a higher return.
Housing and pensions are "stranded capital," forms of capital that are not mobile unless they are liquidated before crises or expropriations occur.
I am also struck by the ever-rising barriers to starting or even operating small businesses, a core form of capital, as enterprises generate income and (potentially) capital gains.
The capital and managerial expertise required to launch and grow a legal enterprise is extraordinarily high, which is at least partly why a nation of self-employed farmers, shopkeepers, artisans and traders is now a nation of employees of government and large corporations.
What sort of capital can be acquired by the average commoner now? Enough to match the wealth and political power of financial Nobility? This is the source of our fascination with tech millionaires and billionaires: a few commoners have leveraged technology to join the Nobility.
As for political influence: a recent study found that voters had very little power in the U.S., which is effectively an oligarchy: Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens.
Summary: "The U.S. government does not represent the interests of the majority of the country's citizens, but is instead ruled by those of the rich and powerful, a new study from Princeton and Northwestern universities has concluded."
Neofeudalism is not a re-run of feudalism. It's a new and improved, state-corporate version of indentured servitude. The process of devolving from central political power to feudalism required the erosion of peasants' rights to own productive assets, which in an agrarian economy meant ownership of land.
Ownership of land was replaced with various obligations to the local feudal lord or monastery-- free labor for time periods ranging from a few days to months; a share of one's grain harvest, and so on.
The other key dynamic of feudalism was the removal of the peasantry from the public sphere. In the pre-feudal era (for example, the reign of Charlemagne), peasants could still attend public councils and make their voices heard, and there was a rough system of justice in which peasants could petition authorities for redress.
From the capitalist perspective, feudalism restricted serfs' access to cash markets where they could sell their labor or harvests. The key feature of capitalism isn't just markets-- it's unrestricted ownership of productive assets--land, tools, workshops, and the social capital of skills, networks, trading associations, guilds, etc.
Our system is Neofeudal because the non-elites have no real voice in the public sphere, and ownership of productive capital is indirectly suppressed by the state-corporate duopoly.
Our society has a legal structure of self-rule and ownership of capital, but in reality it is a Neofeudal Oligarchy.
I discuss these dynamics in greater depth in my three compact books:
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
 
Thank you, Judith S. ($5/month), for your superbly generous pledge to this site-- I am greatly honored by your support and readership.
 

Read more...

Thursday, June 20, 2019

The Fed's Casino Is Giving Away Free Gambling Chips (But Only to the Super-Rich)

The rest of us eat our losses, either all at once or in bitter bites as we trudge through the financial wasteland left after bubbles burst.
The news that the Federal Reserve Casino is giving away free gambling chips triggered a frenzied rush that trampled the bears, including poor Yogi:
There's just one catch to the giveaway: you have to be rich, and if you want more than a token free gambling chip, you need to be super-rich. Then you get a pile of free chips.
If you're not rich--none for you, debt-serf! If you're already super-rich, the Federal Reserve Casino has plenty of free gambling chips for you, which you are free to "invest" (heh) in just about any asset, since they're all going higher: gold, silver, bitcoin, stocks, bonds, bat guano, quatloos and of course shorting volatility, since volatility dies when the gambling chips are free.
If you're not rich, you're only allowed to gamble with cash you've saved from hard-earned income. And since your income has been stagnant for years or decades when adjusted for real-world inflation, that means you'll never have the leverage the super-rich have to acquire assets and watch them loft ever higher as the Federal Reserve Casino continues issuing free gambling chips to financiers, global corporations, banks and the super-wealthy.
The non-rich are allowed to borrow--but only at high rates of interest for worthless college degrees, rapidly depreciating pick-up trucks, groceries, $5 coffee beverages, etc.
When all is said and done, what's left from all this borrowing by the non-rich is the interest due the super-wealthy, who just so happen to own all the debt.
The only Federal Reserve Casino table open to the non-rich is housing, but with prices at bubble highs, it's a risky bet. Although you won't find any corporate media coverage of this, if you poke around the legal notices in newspapers (yes, the dead-tree variety), you'll find a steady trickle of mortgage foreclosures, as all the losers from the casino's housing roulette wheel are foreclosed by entities such as Deutsche Bank National Trust Company as Trustee for Morgan Stanley ABS Capital I, Inc. Trust and Deutsche Bank National Trust Company as Indenture Trustee for New Century Home Equity Loan Trust 2004-2.
Many of these defaulted mortgages date from the last housing bubble a decade ago. The lenders and mortgage-backed securities pools (legally, trusts managed by entities such as the Deutsche Bank National Trust Company) have kept these bad loans (non-performing loans, in the polite language of financial ruin) on the books, often under purposefully misleading guises to mask the enormity of the losses that are yet to be taken.
The bagholders of the defaulted mortgages are slowly liquidating the thousands of foreclosed homes under the radar now that absurd valuations are once again the norm. Since many of the foreclosed homes have not been maintained, they don't fetch much on the auction block.
The main point here is that there are losers even when the Federal Reserve is giving away free gambling chips. Since the stock market is the key signaling device that every gambler is a winner (so keep buying!), everyone reading the headlines and listening to to the daily reports of stocks rising to new highs is lulled into a very hazardous complacency: only the super-rich get bailed out when their bets go bad.
The rest of us eat our losses, either all at once or in bitter bites as we trudge through the financial wasteland left after bubbles burst.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
 
Thank you, Brian M. ($10), for your most generous contribution to this site-- I am greatly honored by your support and readership.
 

Read more...

Wednesday, June 19, 2019

Dear Central Bankers: Prepare to be Swept Away in the Next Wave of Populism

The political moment when the "losers" connect their discontent and decline with central bankers is approaching.
The Ruling Elites' Chattering Classes still haven't absorbed the key lesson of the 2016 U.S. presidential election: the percentage of the populace that's becoming wealthier and more financially secure in the bloated, corrupt, self-serving Imperial status quo is declining and the percentage of the populace that's increasingly insecure and financially precarious is increasing, and candidates that mouth the usual platitudes in support of the bloated, corrupt, self-serving Imperial status quo lose to those who speak of the failing status quo as a travesty of a mockery of a sham, i.e. a "populist" speaking truth to power.
Donald Trump steered clear of the status quo's favored platitudes and embraced a bit of populist cant, and so to those who understand that the majority of Americans have been abandoned by America's hubris-soaked, self-serving managerial / ruling elites, his victory was not entirely surprising.
Just as we've reached Peak hubris-soaked, self-serving managerial / ruling Elites, we've also reached Peak Central Bank Cargo Cult: from now on the majority that's been abandoned by the managerial / ruling elites will become increasingly aware that the unprecedented asymmetries of wealth and power that have undermined American social and economic life can be traced directly back to the central bank, the Federal Reserve, which has become the all-powerful Cargo Cult of the global economy.
The same awareness of central bankers' responsibility for soaring wealth-income inequality and the decline of social mobility is spreading in other nations as well.
Longtime readers are probably tired of the chart below, depicting the incredible expansion of wealth in the already super-wealthy and the stagnation in the prospects of the bottom 95%. But let's shake off the boiled-frog syndrome and check the temperature of the political water we're immersed in: It's getting hotter--a lot hotter.
The ideological rhetoric of the next wave of populism matters less than its intensity. It's not just possible but increasingly likely that the next populist wave will assume many of the populist positions of the Left, positions which the "progressive" status quo is desperately attempting to co-opt and water down.
The core reality that powers populism Left and Right is the economy no longer works as advertised for the bottom 80%, and by many measures, the bottom 95%. The "conservative" camp generally holds that the "problem" is markets have been throttled by heavy-handed government regulations while "progressives" see private-sector wealth / power as as the problem and "taxing the rich" and redistributing the wealth as the solution.
What neither status quo camp dares mention is the domination of central bankers and the "winners" of their dominance, financiers, global corporations and state-enforced monopolies / cartels. (The losers are of course the rest of us: tax donkeys, debt-serfs, wage slaves, the restive crowd demanding more bread and circuses, etc.)
The political moment when the "losers" connect their discontent and decline with central bankers is approaching. Perhaps the wires will arc in 2020, or maybe it will be 2025; but whatever the timing turns out to be, the all-powerful Cargo Cult of the central bankers will be swept away in a global political convulsion unlike any in memory.
If you harbor any doubts about the demise of the Central Bank Cargo Cult, reflect a bit longer on the meaning of this chart:
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
 
Thank you, Zachary H. ($50), for your massively generous contribution to this site-- I am greatly honored by your support and readership.
 

Read more...

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:

Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Adsense and Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative)
If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.

Our Commission Policy:

Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP