Moneybox
A blog about business and economics.

Sept. 14 2016 5:51 PM

Will the Feds Go After Wells Fargo’s Executives?

It looks like the feds have some serious questions for Wells Fargo and its CEO, John Stumpf. The Wall Street Journal reports that federal prosecutors for the U.S. Attorney’s Offices in the Southern District of New York and the Northern District of California have opened an inquiry into whether the bank’s fraudulent sales practices meet the standard for a criminal or civil case.

The Wells Fargo scandal re-entered the news last week, when the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Los Angeles City Attorney levied $185 million in fines on the bank. The $100 million that will go to the CFPB is the largest fine the agency has collected in its five-year existence.

Legal authorities are now reportedly trying to determine whether bank employees were following the direction of more senior management when they opened more than 1 million bank accounts and several hundred thousand credit cards without permission of customers. They’re also attempting to determine whether high-level executives deliberately looked the other way so the fraudulent activity could continue.

From what we know, these seem like reasonable suppositions—certainly ones warranting further investigation. Wells Fargo senior executives had to know something wasn’t right at their bank long before last week. Now-retired Los Angeles Times reporter E. Scott Reckard first wrote about the strange goings-on at Wells Fargo in 2013. He reported on numerous bank employees and managers who claimed that unrealistic sales goals set by higher-ups led many of their colleagues to engage in shady behavior, signing people up for bank accounts and credit cards without their knowledge. “Anyone falling short after two months would be fired,” Reckard reported.

On the off chance that Wells Fargo executives missed out on Reckard’s investigation, they certainly found out about the misbehavior when the Los Angeles City Attorney’s Office filed a civil suit against its bank in May of 2015, saying unrealistic sales goals pressured workers into “unfair, unlawful and fraudulent conduct.” In fact, bank officials would ultimately decide to study the period between May of 2011 and July of 2015 to determine just how much fraud their employees engaged in.

Moreover, it also defies reason to believe that thousands of bank employees over a period of years, working in different regions of the United States, on their own initiative, could independently decide to engage in the same illegal behavior, without even a halfway-competent CEO wondering if this was indicative of a bigger problem at some point before the authorities began banging on his door.

Yet, amazingly, this is what Wells Fargo executives would like the public to believe. In an interview Tuesday with the Wall Street Journal, CEO Stumpf placed the blame for the epic and widespread consumer fraud on rogue employees. The 5,300 workers the bank fired as a result of the scandal didn’t “put customers first,” or “honor our vision and values,” Stumpf hmphed.

Actually, given the extent of the fraud, it seems likely the now-axed workers understood Wells Fargo’s values all too well. Here’s hoping someone asks Stumpf about this next week. That’s when he’s scheduled to testify before the Senate Banking Committee on the matter. Among his expected interrogators? Longtime banking industry nemesis Sen. Elizabeth Warren. Get ready for fireworks.

Sept. 14 2016 4:44 PM

Ford Is Moving Some U.S. Production to Mexico, and Donald Trump Is Going to Have a Field Day

Ford is just begging for an angry tweet from Donald Trump. The automaker confirmed Wednesday that it would move all of its U.S. small-car production to Mexico, a step that will save on labor costs thanks to lower wages south of the border, where it's building a $1.6 billion factory.

Obviously, this sort of thing is political catnip for Trump, who has promised to do all sorts of unpleasant things to manufacturers that attempt to shift production abroad. Back in April, when Ford announced its plans to build that plant in San Luis Potosi, the Republican presidential candidate called the move an “absolute disgrace” and promised that such travesties wouldn't take place under his watch. But leaving aside the politics, I think this development might illustrate a happy story about trade effects on the U.S. economy.

One of the points you often hear economists raise in favor of the North American Free Trade Agreement is that it has allowed the U.S. auto industry to thrive by moving low-margin manufacturing to Mexico, where wages are cheaper, while leaving more profitable work in the U.S. Often, this means integrating the supply chains between the two countries, so U.S.-made raw materials are turned into parts in Mexican factories, and shipped back again over the border to be assembled into trucks and SUVs. But Ford's announcement also fits into that framework. The big U.S. automakers have historically had difficulty making much money on small cars manufactured on American soil (it's not impossible to do, but it's not easy). They have much, much less trouble earning money making bigger SUVs, crossovers, and pickups domestically. Ford, for its part, will be moving production of its Focus and C-Max out of an assembly plant in Wayne, Michigan. But, as the AP notes, the factory “will be getting new products under a contract signed last year with the United Auto Workers union. They will likely be larger, more profitable vehicles like the Ford Ranger pickup.” Moreover, Ford has said Americans won't be losing any jobs (which is a pretty good illustration of why it's nice to have a union around).

This seems like a fairly efficient outcome for all involved. High-value production stays in the U.S., while lower-value work moves to Mexico, where it can be done at a cost that keeps Ford's products price-competitive. You can protest that Ford should find a way to consistently churn out profits while manufacturing small cars at home, but that's easier said than done. And given that the whole American auto industry was on death's door less than a decade ago, it doesn't seem so wrong to root for these companies to stay financially healthy.

None of this will stop Trump from turning Ford into a whipping boy. But that goes without saying.

Sept. 14 2016 12:59 PM

Raise a Glass to the Return of the Bar Car, America’s Much-Needed Antidote to the Quiet Car

Once, one of the great civilized things about trains was that—unlike automobile, buses, and planes—they had different cars for different activities: a car for eating, a car for sleeping, a car for card games, and even a car for cars. They were tubular little societies, conveyances worthy of Imaginary Cities.

On a plane or bus, getting from here to there requires you to be strapped like a movie-house mental patient to a chair-and-desk contraption as versatile as a rusted Swiss Army Knife. Look down at your splayed shoes, your crumbs, your worn socks, your mangled newspaper—the indignity of being a couch potato cooked four ways, slathered in ketchup, mustard, and sour cream. Did any Flemish merchant ever subject a fabric pattern to greater scrutiny than you give your ratty seat cover? How’s that plastic tub of lasagna? They were serving oysters and filet mignon on the Orient Express in 1882.

Bottom-line efficiency comes for all our indulgences sooner or later, though, and train society was no exception. By the Great Recession, most American trains had but two types of specialty cars to break the monotony of the benched wagon: The Bar Car and the Quiet Car. (OK, there’s a Café Car too, but I promise, it has never inspired any affection in anyone and is as far from a Viennese coffeehouse as Tostitos draped in cheese whiz are from apple strudel.)

Sept. 13 2016 5:03 PM

Medical Expenses Still Drive an Outrageous Number of Americans Into Poverty

On Tuesday, the Census Bureau's big annual report on U.S. income and poverty trends confirmed that the country's uninsured rate continued to drop in 2015 thanks largely, no doubt, to the effects of Obamacare. However, the report contained a subtle down note about the health care landscape. Even though the percentage of Americans who lack insurance is declining, the percentage being driven into poverty by medical expenses has remained stubbornly stuck in place.

Based on an analysis of its so-called Supplemental Poverty Measure, the Census Bureau reports that 11.2 million individuals were pushed below the poverty line last year thanks to out-of-pocket medical spending, including insurance premiums, prescription drug costs, and doctor's office co-pays. Overall, those expenses drove up the supplemental poverty rate by 3.5 percentage points, little changed from most recent years.

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Jordan Weissmann

Economists widely consider the Supplemental Poverty Measure, or SPM, to be an improved, modern alternative to the official poverty line. There are a few reasons why. First, the official poverty figure we're used to hearing about is pretty anachronistic—it was set at three times the cost of food in 1963, and has mostly just been updated for inflation since. It also only counts cash income, so in-kind government benefits like food stamps that play an essential role in the safety net aren't counted. The SPM, in contrast, is based on the the average spending on essentials for contemporary lower-income families and is adjusted to reflect how housing costs differ across the country. Most crucially, it also counts a family's total financial resources, totaling up income after taxes and government transfers, while subtracting work and medical expenses.

Currently, about 45.6 million Americans, or 14.32 percent, are in poverty as measured by the SPM (that's slightly higher than the official rate). Again, the bureau notes that were it not for medical out-of-pocket expenses (MOOP, on the graph below), “11.2 million fewer people would have been classified as poor.” That means medical expenses are driving more people into poverty than refundable tax credits or food stamps are pulling out of it.

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Census Bureau

It's discouraging that these numbers haven't noticeably improved in the wake of Obamacare's Medicaid expansion, which was designed to extend health insurance to more of the poor and near-poor, and went into effect in 2014 (yes, as my graph shows, the percentage in poverty due to medical bills fell that year, but the spike in 2013 looks sort of aberrant). After all, research has shown that, as you might expect, families that enroll in the program tend to experience less financial hardship due to health care bills. If the expansion were to succeed at anything, you'd think it'd be reducing medical poverty. Of course, part of the problem is likely that many states have refused to expand eligibility, and those holdouts have higher overall uninsured rates among the borderline poor at risk of being knocked into statistical impoverishment by an unexpected doctor's bill. If states like Texas and Florida ever embrace the expansion—I know, big if—we might one day see fewer Americans going broke because they got sick.

Sept. 13 2016 4:23 PM

Paris Is Turning Its Central Highway Into a Park. American Cities Need to Pay Attention.

Every summer for the past 15 years, Paris has closed a portion of its central riverbank highway to cars. For six weeks, the Georges-Pompidou Expressway is transformed into a temporary waterfront park. There’s no swimming in the Seine or topless sunbathing—so it’s not your classic French beach experience—but there are deck chairs, games, food stands, and of course, tracts of sand. To paraphrase the ’68 student slogan >: On top of the paving stones, the beach!

That initiative has served, over the sleepy summer months, as a kind of test case of what it might look like for the French capital to lose two lanes of highway that motorists consider indispensable.

This month, Paris begins a six-month experiment to do just that: Close the 50-year-old expressway. The road will function as a riverfront greenway for pedestrians, joggers, cyclists, and other activities. Barring a resulting Parisian traffic apocalypse, Mayor Anne Hidalgo hopes the closure will become permanent.

It’s part of an ambitious plan to reduce vehicle usage in central Paris. The proportion of Parisians without a car has grown from 40 percent in 2001 to 60 percent today. To reduce pollution, cars manufactured before 1997 are banned from the city during the weekday. By 2020, Hidalgo wants to limit key thoroughfares like the Champs-Elysées to hybrid and electric vehicles. Last fall, she introduced the city’s first Day Without Cars, for which vast swaths of the city were closed to traffic.

With its highway closure, Paris followed in the footsteps of U.S. cities like San Francisco, Boston, and Milwaukee that have converted mid-century highways back to surface streets, buildings, and public space.

The real reason the project matters, though, is that it marks a tangible and likely brief juncture between Paris as a city where Life Sans Cars seems impossible and a city where Life Sans Cars seems inevitable.

Sept. 13 2016 12:28 PM

We Just Got Some Fantastic Economic News About Middle-Class Families

America's long, slow, and frustrating economic recovery hit an important milestone last year, as middle-class incomes rose for the first time since the Great Recession. According to the latest annual analysis from the Census Bureau, real median household incomes jumped by a surprisingly strong 5.2 percent in 2015, which as the White House Council of Economic Advisers notes, is the fastest rate on record. The latest yearly increase occurred in 2007, before the housing bust and financial crisis put us all through an economic thresher.

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Census Bureau

To put it another way, 2015 may go down as the inflection point when the recovery started to meaningfully filter down to typical American families. Economists and journalists have been wondering for years when middle-income households would finally see a reasonable raise as incomes lingered in their post-crisis ditch. But last year, they were up across almost all age groups (there was no significant change for 15- to 25-year-olds), races, and income bands. As this graph from the White House shows, the gains were in fact strongest toward the bottom.

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White House Council of Economic Advisers

Because the census changed its survey methods in 2013, it's a bit hard to compare the latest figures with past years. But at $56,500, the median household income was only 1.6 percent lower in 2015 than in 2007 (the revised approach is designed to pick up more of a family's income). We haven't climbed all the way out of the hole created by the recession, and stats like our depressed workforce participation rates show we still have a ways to go. But judging by what households are actually earning, we've also clearly been headed in the right direction.

The Census Bureau reported other good news on Tuesday, as well. The poverty rate saw its largest decline since the recession, dropping 1.2 percentage points to 13.5 percent. Overall, there were 3.5 million fewer Americans living below the poverty threshold than in 2014.

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Census Bureau

And, as other sources have suggested, the uninsured rate continued to fall. The percentage of Americans without health insurance for the entire year dropped by 1.3 percentage points, to 9.1 percent  Since 2013, the uninsured rate is down 4.3 percentage points.

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Census Bureau

Americans at all levels of the income ladder saw their financial lives improve last year. It's been a long time since we've been able to say that. And given that wages have, if anything, been rising a smidge faster in 2016 while inflation has stayed low, I wouldn't be surprised to see similar improvements in next year's report. Which, of course, makes this election year seem all the more insane—just as this ship is starting to right itself, a whole bunch of voters are thinking of handing the captain's wheel to Donald Trump.

Sept. 12 2016 12:57 PM

Is Uber Killing the Public Bus, or Helping It?

This time last year, it was easy to poke fun at Uber when it announced a “bold experiment”—shared cars running on fixed routes—that sounded suspiciously like a bus.

Twelve months later, Uber has begun to replace the bus.

It’s not that Americans are using rideshare services instead of buses, though that may be happening too—bus ridership has fallen in almost every major U.S. city over the last decade.

Rather, transit agencies have begun to collaborate with ride-hailing companies to replace low-ridership bus routes with subsidized cab services or otherwise supplement their coverage. Tesla CEO Elon Musk believes the end of fixed-route transit is nigh, and that smaller, autonomous shared “buses” will soon ferry passengers directly to their destinations.

For the millions of Americans who depend on transit services—and the millions more who could, if transit were more convenient—these public-private partnerships bring promise and risks. The risks include the swapping of well-paid, well-trained transit workers for poorly paid amateurs; and the possible stranding of the disabled, the poor, the distant, the unbanked, and the unphoned, who aren’t exactly about to become everyday users of Uber. (Reality check: Only 15 percent of Americans have ever used a ride-hailing app, according to a May report from Pew.)

The promise—moving more people more cheaply and quickly than ever before— is tantalizing enough to counteract those concerns.

Sept. 12 2016 12:36 PM

Trump Says Janet Yellen Is Keeping Interest Rates Low So President Obama Can Play Golf

After months of surprising restraint, Donald Trump has finally started spewing conspiracy theories about the Federal Reserve. During an interview with CNBC on Monday morning, the Republican presidential nominee suggested that Fed Chair Janet Yellen is keeping interest rates low in order to pump up a “false” stock market during President Obama's final months in office. “She’s obviously political,” he said. “She’s doing what Obama wants her to do. And I know that’s not supposed to be the way it is. But that’s why it’s low. Because as soon as they [interest rates] go up, the stock market is going to go way down.” For good measure, he added that Yellen “should be ashamed of herself.”

This is somewhat surprising, since Trump has been moderately supportive of the Fed chief in the past. "I'm not a person that thinks Janet Yellen is doing a bad job,” he told Reuters in May.* “I happen to be a low-interest-rate person unless inflation rears its ugly head.”

Why the switch? One reasonable-seeming assumption is that Trump has lashed out because he truly believes the Fed is trying to help his opponent, Hillary Clinton. The Fed has held off on interest rate hikes this year. Meanwhile, the economy is adding jobs at a reasonably healthy pace. Despite a big dip in the past few days, the stock market has generally been hovering around new heights. That's undoubtedly boosted Obama's approval rating, which in turn improves Clinton's own chances. To suggest Yellen is in the bag for his opponent would also fit Trump's argument that a corrupt political establishment is trying to rig the system against him. He even sort of seemed to suggest so much later in the interview, after an anchor asked him about the subject of Federal Reserve independence, by bringing up the Justice Department and FBI's handling of Hilary Clinton's email server.

“I used to think that the Justice Department worked independently also, and I used to think the FBI was independent also, but that’s obviously not possible because Hillary Clinton is guilty as hell, and everybody knows it,” Trump said. “I used to hope that the Fed was independent. And the Fed is obviously not independent. It’s obviously not even close to independent.”

And yet, if such a grand establishment conspiracy is what Trump is thinking, he didn't complete the thought out loud. Instead, he really seemed to suggest this was all about President Obama's legacy.

“They want to keep the market up so Obama goes out and let the new guy—whoever that new, let’s call it the new guy, because I like the sound of that much better—so the new person who becomes president, let him raise interest rates, or let her raise interest rates, and watch what happens to the stock market when that happens, OK,” Trump said. He later added that interest rates wouldn't go up much in the next few months because Obama “wants to go out, he wants to play golf for the rest of his life, and he doesn’t care what’s going to happen after January.”

So Janet Yellen isn't raising interest rates because Barack Obama wants to play golf. Right.

In the end, it doesn't matter what precise conspiracy Trump is alleging. First, even the vague idea that Yellen is doing the White House's bidding is absurd. There was a time when that sort of collusion was a real concern. During the 1970s, Richard Nixon pressured Fed Chair Arthur Burns to pump money into the economy in order to boost his re-election bid, which helped unleash the nasty inflation the decade is remembered for (there's been some historical debate about whether Burns ultimately lowered rates to placate Nixon, or for his own opaque reasons). Modern central bankers, however, are fiercely protective of their independence. Yellen, for her part, has made it clear she would like to raise rates sooner rather than later. And while it's true that the central bank has seemingly been worried about triggering market turmoil with a hasty rate increase, that's because monetary policymakers generally don't like sowing panic among investors—not because they're fretting over the president’s tee time.

Even if Trump's message is muddled, however, it's still damaging. Other presidential candidates have taken shots at the Federal Reserve or threatened to curtail its autonomy—Texas Gov. Rick Perry famously suggested ex-chair Ben Bernanke's policies could be “treasonous,” while Mitt Romney supported Ron Paul's push to “audit” the Fed. But I personally can't think of another recent case in which a candidate suggested that the central bank was taking orders directly from the White House. Trump, as usual, is escalating the crazy. And I'm sure many of Trump's fans will believe his rambling. Insofar as they do, he will have succeeded at further eroding trust in another essential institution of American government.

*Correction, Sept. 12, 2016: This post originally misspelled Reuters. (Return.)

Sept. 9 2016 4:08 PM

Jessica Alba’s Startup Might Be for Sale

This post originally appeared on Inc.

The Honest Co., the startup co-founded by actress Jessica Alba in 2011, is in talks to become acquired by another firm, according to Recode. That firm could be a larger consumer products company, such as Procter & Gamble or Unilever, sources said.

The fast-growing consumer goods company is estimated to bring in some $250 million in revenue this year through sales of its nontoxic, personal care products, including diapers, sunscreen, and baby formula. It was previously said to be considering an IPO this spring, though later scrapped those plans for fear of an unreceptive public market, according to Recode.

Sept. 9 2016 7:00 AM

Cities Are Slowly Putting Puppy Mills Out of Business. These States Are Trying to Stop Them.

Last summer in Iowa, a woman gave Hillary Clinton a mission for her presidency: Shut down the nation’s puppy mills, commercial dog breeders infamous for keeping animals in poor conditions. Clinton responded with sympathy. “From everything I know about them, they really are terrible places for any animal, and particularly for dogs and cats. We need to do more.”

Animal rights organizations have been trying to do more for half a century. And lately, they’ve found a curious formula for success: Local laws that stop pet stores from selling animals raised at puppy mills.

Puppy mills, which breed about 2 million puppies a year, tend to be clustered in Midwestern states and regulated by state legislatures friendly to agribusiness. About half of those dogs are raised in facilities with U.S. Department of Agriculture licenses, though federal regulations are minimal—they require only, for example, that a cage be six inches bigger than the dog it holds, and that it be cleaned just once a week.

But many of those dogs wind up being sold to consumers in big cities. So activists took the fight to the point of sale.

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