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"Capitalism is the worst economic system ever invented...except for all the other ones." - Winston Churchill (paraphrased) et al. One of the main effects of this virus - and our response to it - has been to shine a light directly on all the broken parts of our societal system. A really harsh, fluorescent light. In some cases even a seizure-inducing strobe light. Whether your particular flavor of failure du jour is institutional, political, economic, macro, or micro, there is something there for everyone. Remember all the outrage over "faithless electors" a few years ago? That was people waking up to the fact that their vote doesn't matter. In point of fact, you don't actually vote for President at all. You are really voting for which party you want to appoint a donor fundraiser elector to vote for you. This is like that, but with everything. In the interest of page limits, we'll stick to our broken economic system for now: Covid killed capitalism. Or rather, our response to Covid has been the final nail in the capitalism coffin. It's not terribly surprising though...capitalism was already suffering from multiple comorbidities. Let's pause for a moment and zoom out. Capitalism is about private ownership of the "means of production" in a society. Broadly, capitalism demarcates two classes: those with capital, and those that are paid wages in exchange for labor. Capitalism can feature a wide spectrum of government involvement, from laissez-faire free markets on one end to more of a "command economy" run by state-owned enterprises (think China) on the other. Critics of capitalism point to the possible exploitation of the working class in the pursuit of profits à la Victorian England or third-world sweatshops. We would argue that the move away from a strict free market capitalism through government intervention in these areas (workplace safety regulations, minimum wage, etc.) was a positive development. Yes, there are most certainly ongoing debates about what those levels should be for minimum wage and, more recently, what constitutes workplace safety regarding viral infection. But let's agree that we have a capitalism with some government intervention to support the lower end of the socioeconomic spectrum. Zoom back in. What is still needed is government intervention to regulate the upper end of the socioeconomic spectrum. If you can't quite believe you read those words coming from us...we kind of feel the same way. But the issue isn't capitalism itself - capitalism is merely a system with defined rules. The issue is that the "capital" and "working" classes have become synonymous with "power" and "not power" in our society, and "power" is blatantly abusing the system at the expense of "not power". And that - regulation of equal opportunity (or maintenance of a level playing field, if you will) - we believe is one of the exact roles of government. Let's go to the charts. This is not the problem:  We have zero issues with the fact that these lines are at different levels. This is the problem:  Real income (that is, after adjusting for inflation) has barely moved for most of the country in the last 50 years. Half a century. We said "most" of the country, because the higher echelons of the socioeconomic ladder have been partying like it's 1925 (nothing particularly notable about that year, other than it was in the Roaring 20's and happens to rhyme with 1999). Part of the problem is taxes. Capital gains are taxed at a lower rate than the median family's income tax rate, so if you have capital it's inherently easier to get more of it. Payroll taxes are also part of the problem, because they're really pretty regressive. Consider: the earnings base this year for social security tax (6.2%) is $137,700. There's no wage limit on the Medicare tax (1.45%). There is an additional 0.9% Medicare surcharge tax on incomes over $200,000 (single) or $250,000 (joint). So if you make under $137,700 as an individual (which is something like 92% of the country), you are paying 7.65% in payroll taxes, whereas the top 5% based on income pay, on average, 4.6% in payroll taxes, and the top 1% by income pay only 3.3%. On a relative basis then, the top 1% of earners pay less than half the payroll tax of the bottom 90%. Part of the problem is corporate management. Did you know that corporate stock buybacks were illegal until 1982? Before then, it was considered a form of stock manipulation. Which it is. Rather than using cash for anything productive like future investment or development, companies are using it to buy back their own stock. This lowers the amount of shares outstanding, so it's a lot easier for companies to beat their earnings per share metrics, usually resulting in large performance-based bonuses being awarded to management. Part of the problem is the Fed. For the last 10+ years, you don't even have to be generating positive cash flow as a company to buy back stock because you can borrow at close to 0%! We've written about zombie companies before. A zombie is a company that doesn't generate enough profit to cover the interest payments on its debt. About 16% of US companies are zombies that should have died a long time ago. Think it's a coincidence corporate debt is now at all-time highs? Think it's a coincidence that stock buybacks just happened to become legal right when income inequality started widening? Let's look at the airline industry as a case study. They got a $25B Covid bailout from the CARES Act. Over the last 10 years, the airlines (specifically Southwest, Alaska, Delta, United, American, JetBlue) have generated $49B in free cash flow. $47B went towards buying back their own stock. American in particular stands out, as they generated negative $8B in free cash flow yet still managed to spend $13B on stock buybacks. There's your bailout - wasted on juicing management's incentive awards. Boeing by itself generated $58B in free cash flow and spent $43B of it on stock buybacks in that timeframe. Just a thought here, but maybe some of that money should - or at the very least could - have been spent on R&D for that new MCAS system that has killed 346 people and grounded an entire fleet of airplanes? Boeing is a classic poster child for the comorbidities that were afflicting capitalism. You have a company mired somewhere just below mediocrity that lacks any kind of innovation and is being slowly driven into the ground (unfortunate pun not intended) while the management team siphons billions of dollars out of the company and into their own pockets. Quite literally billions of dollars that should have instead been going to employees and shareholders (feel free to peruse this article from Ben Hunt for a more detailed breakdown). Other companies have found themselves in hot water recently over PPP loans (another creation of the CARES Act). These are small business loans of up to $10M for a company with under 500 employees, ostensibly for companies with no other access to funding. Initially, about $900 million went to publicly traded companies (publicly traded companies, by definition, have access to other funding than SBA loans). After some public outrage, mostly concentrated around Shake Shack ($459M revenue, 6,100 employees, CEO salary $4M), Potbelly ($409M revenue, 6,000 employees, CEO salary $1.7M), and Ruth's Chris ($468M revenue, 5,700 employees, CEO salary $6M), the rules were revised and $160M of that $900M taken by large public companies has been returned. And yes, that means that $740M wasn't returned. Without the public outrage, let's consider what might have been, using Ruth's Chris as the most egregious example: You can read the whole story yourselves here (note: the story was published before they returned the loan), but the upshot is that they got $20M (double the supposed max) while furloughing all employees except managers and shutting all stores that weren't profitable on takeout alone. Here's the kicker - Ruth's Chris can spend all $20M just paying executive and senior management $100,000 salaries and be in compliance under the terms of the PPP, so the $20M loan gets forgiven. And the 5,000+ furloughed workers (median Ruth's Chris employee salary: $32k) still don't have jobs or see any of that payroll money. And another kicker, Ruth's Chris has $86M cash on hand right now because they have lines of credit they drew down. While technically in compliance with the letter of the law, we can probably all agree that the spirit of the law (small business support) was violated here. And the violation here is not just an example of larger, more powerful companies taking advantage of the system at the expense of the smaller ones, but also within the company itself of the wealthier and more powerful taking advantage of the system at the expense of the workers. The CARES Act also allocated $14B to support higher education institutions. Here are some fun facts about those institutions:
Harvard originally made this list, receiving $8M despite having a $40B endowment, but after public backlash (again), it declined the money, as did Stanford, Princeton, and others. We would draw attention to a couple things from the above list. Do private university presidents really need to make 5x what public university presidents make? If Columbia and UPenn had been paying their presidents only $2M since 2015 (still more than double their public university counterparts), there's their bailout money. If you have a $1B endowment, it is a generally accepted rule of thumb in finance that you will be able to spend $40M per year forever and still maintain your $1B endowment also forever. And yes, we cherry picked that list specifically for schools with large endowments, but you know who doesn't need $10M? Any school on this list. You know who does? All the community colleges and professional schools that got shafted by the wording in the CARES Act (to allocate funds based on full-time enrollment). Once again, we find larger, more powerful institutions benefitting at the expense of the smaller ones. There is nothing inherently wrong with paying presidents and CEOs exorbitant amounts of money. There is nothing inherently wrong with taking on debt to buy back your own company's stock. But actions should have consequences. If a company makes bad choices with what to do with its money, or business strategy, or whatever, it should fail. Failure and the concept of risk/reward are central to capitalism. Zombie companies should not be a thing in a healthy economy. Failure doesn't mean the end of a company. Just for kicks, here's a list of companies that have filed for bankruptcy:
And guess what? They're all still around as companies. From John Hussman's recent market comment: Properly done, corporate bankruptcies, and even bank failures, simply wipe out stockholders and subordinated bondholders. The company doesn’t fire its employees. Depositors don’t lose a cent. The products of the company continue to be produced. What happens is that the bankrupt entity, relieved of part of its balance sheet obligations, is sold to an acquirer or recapitalized, and then everything moves on. Those are the rules. Or those were the rules. At some point, it became not okay to let a company fail. Maybe it was the mortgage crisis, when Hank "former CEO of Goldman Sachs turned Treasury Secretary" Paulson gave $700B to his alma mater Goldman Sachs instead of using it for mortgage modification (Matt Taibbi's article for Rolling Stone back in 2013 about the gaming of the system by the big banks during the bailout has aged unfortunately well almost a decade on). Maybe it was before that, with the bailout of the Long-Term Capital Management hedge fund. In any case, it happened. And continues to happen. Here's Matt Taibbi again, from his current Rolling Stone article: The $2.3 trillion CARES Act, the Donald Trump-led rescue package signed into law on March 27th, is a radical rethink of American capitalism. It retains all the cruelties of the free market for those who live and work in the real world, but turns the paper economy into a state protectorate, surrounded by a kind of Trumpian Money Wall that is designed to keep the investor class safe from fear of loss. This financial economy is a fantasy casino, where the winnings are real but free chips cover the losses. For a rarefied segment of society, failure is being written out of the capitalist bargain. That second paragraph is so well said. The emphasis on Trump is unfortunate, since we would argue the CARES Act is the result of compromise between Democrats and Republicans in both the House and Senate and is perfectly representative of the "those in power gaming the system" dynamic that has been playing out ever more egregiously for the last couple decades under Presidents from both parties. (It may, in fact, even be dangerous to assign blame to any one individual since this kind of "elite system-gaming" has become institutionalized, and the idea that it will go away as soon as anyone in particular leaves office is farcical). And it is exactly that dynamic - the insulation of the capital class from loss specifically at the expense of the working class - that leads to nonsense like this:  The first reforms to capitalism dealt with limiting the exploitation of the working class in pursuit of profits. It is well past time to bring in reforms to similarly limit the exploitation of the working class in pursuit of loss avoidance.
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