Partners - Stock market, economic and political commentary by Patricia Chadwick

Archive for March, 2015

A Tale of Two Cities (Both in One) Paris

Friday, March 27th, 2015

Paris is arguably the most sensually appealing city in the world, and that’s probably damning it with faint praise. Walking the streets of the Left Bank is like being treated to an afternoon massage. All the tension evaporates from one’s shoulders and neck.

Entering a restaurant — fancy or simple — puts a smile on one’s face. And enjoying the meal that has been prepared with exquisite attention to both flavor and presentation slows the pulse and lowers the blood pressure. Foie gras, steak tartar, escargot — in Paris they enhance good health rather than clog the arteries.

The pace of life in Paris is conducive to longevity, even though smoking is rampant. There seem to be far more cigarettes than cell phones. Cigarettes are the symbol of pleasure; cell phones of pressure.

Paris is art — its bridges, gardens, shops and ateliers; its architecture, designed to allow the sun to grace the sidewalks along its wide boulevards all day long. And, of course, its myriad museums — best enjoyed in small doses and unrushed. Support for the arts is manifest everywhere, paid for by a steep tax rate that doesn’t seem to ruffle French feathers.

That’s the glorious side of Paris, a cultural paradise — a heaven on earth that makes one want never to leave.

But there’s another Paris, and it’s a puzzling one, so seemingly incongruous in the atmosphere of elegance and sophistication that defines the city and makes you breathe deeply and say, “Oui, this is what life is all about.”

The other Paris is the city that says, “Non!”

“Non”, we will not serve you and your friends at the café until the last person in your party of twelve has arrived.

“Non”, you may not check your coat in the cloakroom at the museum, even though I am on duty and being paid, the museum is open and the coat closet is empty.

“Non”, you may not evict the stranger who has broken into your apartment while you were away and is now living there as a squatter. What? Isn’t one’s home sacrosanct from invaders? “Non”, not in Paris.

As a visitor, I find myself at a loss to understand this paradox. I wonder about its origin, since this attitude seems to have been a part of the city for ages. Could it date as far back as the French Revolution? Is this the way an oppressed people rose up and showed that they too could have a voice?

Interestingly, the Paris of “Non” is unaffected by the political party in power; it is neither left-wing or right-wing; it’s beyond politics.

When one discusses this puzzling anomaly with Parisian friends, they simply shake their heads and groan. They too experience it; it’s not reserved for foreigners.

Fortunately, experiencing the elegance and sophistication of the Paris of “Oui” is such a delight that the Paris of “Non” acts like a mere footnote. As it should be.

The Middle Class — Strangled by Corporate Cost Cutting

Wednesday, March 11th, 2015

Last Friday’s employment figures sounded like good news. Total employment increased by 295,000 during February, and the U.S. unemployment rate declined to 5.5%. But there’s another side to the employment story, and it has to do with middle-class workers’ wages.

During the Great Recession of 2008 and in the several years following, many corporations — large and small, public and private — found it necessary to pare their employment costs through layoffs, as well as by cutting benefits to their remaining workforce. For some companies, the measures taken were essential to survive; for others, it helped to alleviate significant declines in profits. That’s the real world of business.

The cost-cutting measures included slashing or eliminating bonuses. I’m not referring to C-suite bonuses that run in the seven figures, but the small ones — the $500, $1000 and maybe $2,500 given to the rank and file employees as a goodwill gesture.

Another money-saving tactic utilized during that period was to reduce, or even do away with, the corporate match for employees’ retirement plans. That “free” return on employees’ 401(k) plans was a valuable asset in building a nest egg for later years.

Health care costs also came under sharp scrutiny. Companies were able to negotiate lower premiums with insurers by raising deductibles and co-pays for employees. In many cases, both the employer and the insurer benefited from reduced costs, while the employee was saddled with higher out-of-pocket expenses.

Now, nearly eight years later, the economy has improved significantly. GDP is at an all-time high, as are corporate profits. That should be great news for workers — solid, profitable growth ought to imply that salaries are increasing, previously cut benefits have been restored and bonuses are once again being paid.

But in fact, it seems that many companies have conveniently forgotten the fact that they took benefits away from their employees when times were tough.

From 2000 through 2013, (a period that includes both a robust economy and the Great Recession) corporate profits increased by 132% (a 6.7% annualized growth rate), while wages and salaries grew by only 47%, or the equivalent of 3% per year. The graph below shows how profits (blue line) are becoming a larger share of the economic pie at the expense of wages (red line).

Source: U.S. Bureau of Economic Analysis

To some extent, the divergence in those two lines is a function of cheap capital replacing more expensive labor. But importantly, it is also the result of productivity gains, and one of the advantages of productivity is that it allows employers to increase wages and benefits without an inflationary impact. Unfortunately, that doesn’t seem to be happening to any major degree in the U.S.

With a mere 3% annual increase in salaries and wages barely outpacing inflation, together with rising out-of-pocket expenditures for health care, it is no wonder that the middle class feels trapped.

Good corporate stewardship entails dealing fairly with all stakeholders — owners, employees, customers and vendors. Many companies in this country embrace that responsibility; however, many more tend to act as though the only stakeholder that matters is the owner (private or public).

Now is the time for companies that are thriving to restore to their employees the benefits that were curtailed or eliminated during the recession. The goodwill created among the workforce should be reward enough, but we all know that the reason for the anemic recovery from the Great Recession has been weak consumer spending. A robust expansion depends on strong consumer expenditures. We need higher real wages to take the economy to the next level.



Sunday, March 1st, 2015

Here to Stay – Side by Side with the Taxi Industry

It’s easy to bash Uber — a brash new-age “bull in a china shop,” gunning to upend the traditional order of life that was the yellow cab system of transportation. And it’s fair to say that Uber’s cofounder and CEO Travis Kalanick has done little to make himself loved by the powers that regulate the taxi industry.

That being said, Uber is a prototypical example of “disruptive technology,” whereby an emerging technology upends existing markets and products. In this case, Uber is fulfilling a need — specifically, providing the public with rides on demand, something the taxi industry has been unable to achieve. Why? Because the taxi medallion industry has for years been able to limit the supply of taxi cabs.

Now, smartphones (themselves an example of disruptive technology, by annihilating regular cell phones, MP3 players and a horde of other now-defunct hand-held devices) are allowing ride seekers to get on-demand service.

There has been much hand-wringing over the safety of hiring an “unvetted” Uber driver or the Uber drivers’ lack of insurance coverage, as well as their paltry wages. Much of that angst is unwarranted, and as Uber expands, so does the sophistication of its communication and security.

Two days ago, I ordered an Uber-x (the cheapest and least flamboyant option) in Boston. Because it was during the evening rush hour, my smart phone told me I would have to pay 1.6 times the “normal rate,” and I had to type in the digits 1 and 6 to confirm that I understood and accepted that premium. As the vehicle approached my hotel, I received a notice on my smart phone: “Be sure to check this picture and license plate before getting into the car,” and below the notice was a picture of the face of the driver and the license plate on the vehicle. That was the first time I had ever received such a notice. Is Boston ahead of New York? Or is this an example of Uber responding to the social media rumors that Uber rides were unsafe?

I love to chat with taxi and Uber drivers. This driver shared with me that he had been on the job for three weeks, having left his cab company after forty years. Why did you quit? I asked. He replied that the cost of the medallion fee was too much ($800 per week, whether he worked or not), and now he was able to work whenever he wanted and keep 80% of the revenue he generated. But you’re using your own car, I said, and putting all those miles on it. I know, but it’s worth it to be my own man. What about insurance, I asked, knowing that some people have made an issue about Uber drivers being underinsured. He had the answer: Uber has a $1 million policy on each car, the driver told me.

When I arrived at the restaurant, not only did I receive an email receipt on my smart phone, but I also had the opportunity to rate my driver (I gave him 5 stars), and I was able to see exactly how many minutes the trip took (15 minutes and 31 seconds) and, importantly, the route that the driver took. In other words, Uber itself can monitor how its drivers take you to your destination. Oh, and by the way, the 1.6x fare for the trip cost a total of $12.38. That implies $7.73 during non-peak hours, which I thought was very reasonable.

Pondering that conversation, I realized how Uber is providing the opportunity for individuals to be entrepreneurs, in control of their hours and their earnings. If an Uber driver does not want to use a personal car, Uber will provide one on lease, and from my discussion with other drivers who use that approach, the weekly lease payments are far less than the medallion payments paid by a taxi driver.

Is this the end of the yellow taxi industry? Certainly not! When I’m in New York, I grab a taxi first and go for Uber second. And in my conversations with taxi drivers about the impact Uber is having on their business, almost all of them acknowledge that there is enough business to go around.

The medallion industry is smart, and I fully expect that it too will develop an on-demand service. Uber is the wake-up call the industry needed; if they respond creatively, the outcome will mean even better and faster service for consumers. That is good news.