21st Century Schizoid Boy

According to 2008/2009 BLS.gov and BEA.gov statistics, as compared to a private sector employee, the average local/state government employee (20 million of them, costing $1.1 trillion per year) makes $12 more per hour ($68,000/year versus $60,000/year), has twice the benefits, works 12% less hours, retires earlier, has a 66% less chance of being laid off, rarely gets fired for poor performance or for cost cutting, is being paid sufficiently (66% less voluntary quit rate), has a 5 times greater chance of entering a protective union, and doesn’t worry about collecting benefits since the employer (the government) will tax/borrow/inflate to cover unfunded liabilities.

Moreover, state and local government debt has doubled in the last 10 years, partly to cover these costs. Future liabilities are currently underfunded by at least $1 trillion, but some estimates are $3 to $4 trillion. Public pension plans use very optimistic assumptions which Warren Buffett has called “accounting nonsense.”

(Compensation includes wages and benefits, such as the costs of health care and pensions, in constant 2008 dollars, deflated by the consumer price index)

This article examines the compensation of state and local workers, who account for 20 million of the 23 million civilian government workers in the United States. State and local workers include teachers, college instructors, police officers, health care administrators, and many other occupational groups. Examining state and local compensation is important because it represents a major portion of the overall U.S. economy. In 2008, the total cost of wages and benefits for state and local workers was $1.1 trillion, which was half of the $2.2 trillion in total spending by state and local governments.

Between 1950 and about 1980, average compensation in the public and private sectors moved in lockstep. But after 1980, public sector compensation growth began to outpace private sector compensation growth, and by the mid-1990s public sector workers had a substantial pay advantage.

The public sector pay advantage is most pronounced in benefits. Bureau of Economic Analysis data show that average compensation in the private sector was $59,909 in 2008, including $50,028 in wages and $9,881 in benefits. Average compensation in the public sector was $67,812, including $52,051 in wages and $15,761 in benefits.

The BEA data break down the public sector workforce into three groups: education, public enterprises (such as government liquor stores), and all other government functions. The long-term compensation trends in the three groups have been similar.

But state and local pension and retiree health plans are, in aggregate, hugely underfunded, as discussed below. Thus, these data understate the level of benefits that state and local workers are currently accruing.

In June 2009, total compensation per hour was $39.66 in the public sector, which was 45 percent greater than the average $27.42 per hour in the private sector. The public sector advantage in average wages was 34 percent, while the advantage in benefits was a huge 70 percent.

Why is the public sector compensation advantage much larger in the BLS data than the BEA data discussed above? One important reason is that public sector employees work substantially fewer hours than do private sector employees. The BLS National Compensation Survey (BLS 2009c: Tables 4 and 5) shows that full-time private sector workers averaged 2,050 hours of work in 2008, or 12 percent more than the 1,825 hours worked by the average public sector worker.

The BLS (2009b) provides data on the share of employers who offer various types of benefit. The advantages of public sector employment include:
• Health care benefits are available to 71 percent of private sector employees but 88 percent of public sector employees.
• Retirement plans (defined-benefit or defined-contribution) are available to 67 percent of private sector employees but 90 percent of public sector employees. Among full-time employees, the shares rise to 76 percent and 99 percent, respectively.
• Life insurance benefits are available to 59 percent of private sector employees but 80 percent of public sector employees.
• Paid sick leave is available to 61 percent of private sector employees but 89 percent of public sector employees.

Public sector retirement plans are usually more generous than those in the private sector. The annual benefit of the median public sector defined-benefit pension is more than twice the benefit in the median private plan (Pew 2007: 11).

Aside from all these monetary benefits of public sector employment, there is one very important nonmonetary benefit of working for the government: very high job security. During good times and bad, BLS data show that “layoffs and discharges” in the public sector occur at just one-third the rate as in the private sector (BLS 2009e). Public sector workers rarely get fired for poor performance or laid off because of employer cost-cutting, but those events occur frequently in the private sector.

Finally, there is a very good market indicator of the generosity of compensation in the public sector: voluntary job-quit rates. If an industry has a low quit rate, it indicates that compensation is more than adequate to attract qualified workers. The BLS (2009e) has data on employee quit rates across industries, and over the years the quit
rate among public sector workers has been just one-third the quit rate in the private sector.

In 2008, 38.5 percent of all state and local workers were members of unions, which is five times the union share in the U.S. private sector of 7.6 percent.

Unionized public sector workers have far higher wages and benefits, on average, than nonunionized public sector workers. Their wages are 31 percent higher, on average, and their benefits are 68 percent higher. Overall, the union compensation advantage in the public sector is 42 percent.

In the Pacific region, public sector workers are paid an average $49.02 per hour, which is 60 percent greater than the $30.73 paid in the West South Central region.

California tops the ranking with average public sector compensation of $86,417, which was 64 percent higher than average compensation in the bottomranked state of Kentucky.

Given that average public sector compensation in 2008 was $56,040 in this BEA dataset.

State and local debt outstanding soared from $1.2 trillion in 2000 to $2.3 trillion in 2009—a 92 percent increase (Federal Reserve Board 2009: Table D.3). Governments are increasingly using debt to fund investments that used to be funded on a pay-as-you-go basis, and some governments are using debt to cover routine operating costs. Rising debt levels will make future state and local budgeting that much more difficult.

Officially, state pension plans are currently underfunded by about $1 trillion and many have funding levels far below the lowest level considered adequate of 80 percent (The Economist 2009).

One problem is that public pension plans have used very optimistic assumptions to value future liabilities, a practice financier Warren Buffett has called “accounting nonsense” (Cho 2008). Buffett argues that public pension plans are “ticking time bombs” that are ready to explode in many states as baby boomers begin to retire (Cho 2009).

A recent study by Robert Novy-Marx and Joshua Rauh (forthcoming) found that state and local governments are “severely underestimating” their future pension liabilities by using high discount rates. Using more realistic assumptions, the authors found that at the end of 2008, state and local pension plans were underfunded by $3.2 trillion,
or three times more than the officially reported amount. That represents a shortfall of $21,500 for every U.S. household according to the authors, indicating the possible exposure to taxpayers if these plans are not cut.

Most state and local governments provide health care coverage to retired employees, but these plans are typically completely unfunded. In other words, they have not put any
assets aside to cover future benefits. My colleague Jagadeesh Gokhale and I have estimated that these unfunded health care obligations total at least $1.4 trillion nationwide (Edwards and Gokhale 2006).

Americans need higher-quality government services at lower cost to avert a fiscal crisis in state and local governments. Public sector compensation—and benefit plans in particular—need to be overhauled to ensure financial sustainability. And the whole area of public sector unionism needs to be reexamined given the need for greater flexibility and more restraint in public finances.

Public Sector Unions and the Rising Costs of Employee Compensation, Chris Edwards, The Cato Institute, February 2, 2009, http://www.cato.org/pubs/journal/cj30n1/cj30n1-5.pdf.

“Beware of first-hand ideas!” exclaimed one of the most advanced of them. “First-hand ideas do not really exist. They are but the physical impressions produced by life and fear, and on this gross foundation who could erect a philosophy? Let your ideas be second-hand, and if possible tenth-hand, for then they will be far removed from that disturbing element – direct observation. Do not learn anything about this subject of mine – the French Revolution. Learn instead what I think that Enicharmon thought Urizen thought Gutch thought Ho-Yung thought Chi-Bo-Sing thought Lafcadio Hearn thought Carlyle thought Mirabeau said about the French Revolution. Through the medium of these ten great minds, the blood that was shed at Paris and the windows that were broken at Versailles will be clarified to an idea which you may employ most profitably in your daily lives.

But be sure that the intermediates are many and varied, for in history one authority exists to counteract another. Urizen must counteract the skepticism of Ho-Yung and Enicharmon, I must myself counteract the impetuosity of Gutch. You who listen to me are in a better position to judge about the French Revolution than I am. Your descendants will be even in a better position than you, for they will learn what you think I think, and yet another intermediate will be added to the chain. And in time” – his voice rose – “there will come a generation that had got beyond facts, beyond impressions, a generation absolutely colorless, a generation seraphically free from taint of personality, which will see the French Revolution not as it happened, nor as they would like it to have happened, but as it would have happened, had it taken place in the days of the Machine.”

The Machine Stops, E.M. Forster, 1909, http://archive.ncsa.illinois.edu/prajlich/forster.html.

The first supermarket was opened in New York in 1930 [fmi.org]. Here are some statistics on supermarkets in the United States as of 2008:

• Average number of items carried in a supermarket = 46,852
• Total supermarket sales = $547.1 billion
• Number of employees = 2.5 million [bls.gov]
• Number of supermarkets ($2 million or more in annual sales) = 35,394
• Net profit after taxes = 1.8%
• Median Average Store Size = 46,755 square feet
• Median Average weekly sales per supermarket = $333,000
• Percentage of disposable income spent on food = 5.7%
• Sales per customer transaction = $27
• Average # of trips per week consumers make to the supermarket = 2

Industry Overview 2008, Food Marketing Institute, http://www.fmi.org/facts_figs/?fuseaction=superfact.

The margin for a supermarket business (1.8%) is amazingly tiny because of all of the competition– less then 2¢ for every $1 of sales:

To earn a dollar, supermarkets would rather sell a $1 item 100 times, making a penny on each sale, than 10 times with a dime markup. Low markup to stimulate high volume is the fundamental principle of mass merchandising, which the supermarket industry introduced to the marketplace in the 1930s.

Competition and Profit, Food Marketing Institute, http://www.fmi.org/docs/facts_figs/CompetitionandProfit.pdf.

Food stays cheap because of the marketplace:

Food inflation in 2006 was 2.1 percent, less than the overall inflation rate of 2.5 percent, according to the Bureau of Labor Statistics — continuing a more than two-decade trend of low to moderate rates (Figure 1)…

The sustained low inflation is attributed to technology, increased efficiency in managing inventories and assortment and relentless competition… Consumers have never had more choice in variety, value, nutrition and quality. Many of these retailers emphasize low prices to gain a competitive edge…

Even more telling is the decrease in the portion of family income spent on food (Figure 2) — freeing up funds for other purchases. That figure continues to decline steadily to only 9.9 percent today — down from more than 20 percent a half century ago. In 2005, consumers spent 5.8 percent for food-at-home and 4.1 percent for food away from home.

U.S. consumers spend less of their income on food than people in any other country, including people in industrialized nations such as France (14.9 percent), Italy (14.9 percent) and Spain (17.1 percent). Families in China (26.4 percent), Russia (28.5 percent) and Indonesia (55.1 percent) spend a lot more.

Food Prices, Food Marketing Institute, http://www.fmi.org/docs/facts_figs/foodprices.pdf (Food CPI Outlook: http://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/consumerpriceindex.htm).

Supermarkets are really an amazing spectacle that we take for granted. While most people in the world spend anywhere from a third to almost all of their income on food, Americans’ spending on food went down from 20% to about 5% in just 50 years. That’s not even to mention that a supermarket has, on average, 47,000 items to choose from! A lot of the items are junk, but just as equally, the quality of the staple foods — dairy, meats, fruits, vegetables, etc. — is amazing, whether shipped from thousands of miles away, out of season, or bought from local farmers (as Wholefoods often does).

In communist Russia and China, food lines, shortages, and high prices were notorious. Many people would spend hours of their day, every day, going all over town to different stores to find what they could. Sometimes people would get in line at a store if they saw one — people assumed that if that many people were waiting, it was probably worth waiting for.

Wal-Mart is now the biggest supermarket (http://supermarketnews.com/profiles/top75/2010/).

Here’s the 2009 10-K for Safeway Inc, one of the largest supermarkets. A private supermarket has to constantly worry about margin, competition, and quality, the same engines that drive the growth of any private company, for the sole purpose of providing a valuable good or service to the general public.

Safeway Inc. (Vons, etc.) is one of the largest food and drug retailers in North America, with 1,739 stores at year-end 2008… Safeway’s average store size is approximately 46,000 square feet (5).

Sales revenue of food for 2008 was $36.3 billion (6).

At year-end 2008, Safeway had more than 197,000 full- and part-time employees (9).

Profit margins in the grocery industry are very narrow. In order to increase or maintain our profit margins, we develop strategies to reduce costs, such as productivity improvements, shrink reduction, distribution center efficiencies, energy efficiency programs and other similar strategies. Our failure to achieve forecasted cost reductions across the Company might have a material adverse effect on our business.

We could be adversely affected if consumers lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, whether valid or not, may discourage consumers from buying our products or cause production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims, a loss of consumer confidence and product recalls, which could have a material adverse effect on our sales and operations (11).

Our stores are subject to various federal, state, local and foreign laws, regulations and administrative practices that affect our business. We must comply with numerous provisions regulating health and sanitation standards, food labeling, equal employment opportunity, minimum wages and licensing for the sale of food, drugs and alcoholic beverages. We cannot predict either the nature of future laws, regulations, interpretations or applications, or the effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state, local and foreign regulatory schemes would have on our future business… Any or all of such requirements could have an adverse effect on our results of operations and financial condition (12).

Safeway Inc, Annual Report for 2009, Form 10-K, http://www.sec.gov/Archives/edgar/data/86144/000119312509043434/d10k.htm.

The federal securities laws require publicly traded companies to disclose information on an ongoing basis…

The annual report on Form 10-K provides a comprehensive overview of the company’s business and financial condition and includes audited financial statements.

United States Securities and Exchange Commission, Form 10-K, http://www.sec.gov/answers/form10k.htm (10-K search: http://www.sec.gov/edgar/searchedgar/companysearch.html).

Grocery stores ranked among the largest industries in 2008, providing 2.5 million wage-and-salary jobs. Most grocery stores are small, with 80 percent employing fewer than 50 workers.

Young workers between the ages of 16 and 24 held 29 percent of grocery store jobs… Grocery stores provide many young people with their first work experience.

Bureau of Labor Statistics, U.S. Department of Labor, Career Guide to Industries, 2010-11 Edition, Grocery Stores, http://www.bls.gov/oco/cg/cgs024.htm.

On food banks:

Food banking began in the late 1960s. By 1980, America’s Second Harvest was established as an official clearinghouse for large donations. The supermarket industry has supported food banks since the concept emerged.

Each year, one-quarter of the supermarkets surveyed give food banks one million or more pounds of food — enough for at least 800,000 meals. More than half now donate at least 100,000 pounds annually. Most donations go to local food banks in the national network known as America’s Second Harvest. Supermarkets donate the products that food banks need most — led by dry grocery items, which have the longest shelf life. The survey of food banks found that 86 percent prefer these foods, and 88 percent of supermarkets donate them.

Survey of Supermarkets and Food Banks 2005, Food Marketing Institute, http://www.fmi.org/docs/community/2005foodbanksurvey.pdf.

The next time you enter a supermarket, marvel at it.

There was no profanity, no hate. Just the words, “I love my friends Abby and Faith. Lex was here 2/1/10″ scrawled on the classroom desk with a green marker.

Alexa Gonzalez, an outgoing 12-year-old who likes to dance and draw, expected a lecture or maybe detention for her doodles earlier this month. Instead, the principal of the Junior High School in Forest Hills, New York, called police, and the seventh-grader was taken across the street to the police precinct.

Alexa’s hands were cuffed behind her back, and tears gushed as she was escorted from school in front of teachers and — the worst audience of all for a preadolescent girl — her classmates.

“They put the handcuffs on me, and I couldn’t believe it,” Alexa recalled. “I didn’t want them to see me being handcuffed, thinking I’m a bad person.”…

In 2007, a 13-year-old wrote “Okay” on her desk, and police handcuffed and arrested her. She was one of several students arrested in the class that day; the others were accused of plastering the walls with stickers…

In November, a food fight at a middle school in Chicago, Illinois, resulted in the arrests of 25 children, some as young as 11, according to the Chicago Police Department.

The Strategy Center, a California-based civil rights group that tracks zero tolerance policies, found that at least 12,000 tickets were issued to tardy or truant students by Los Angeles Police Department and school security officers in 2008. The tickets tarnished students’ records and brought them into the juvenile court system, with fines of up to $250 for repeat offenders.

Girl’s arrest for doodling raises concerns about zero tolerance, Stephanie Chen, CNN, February 18, 2010, http://www.cnn.com/2010/CRIME/02/18/new.york.doodle.arrest/index.html?hpt=C1.

L.A. is going to be more aggressive in fining unlicensed dog owners. The way they will do it? Government electricity meter readers have been spying on L.A. citizens for years, keeping a database of those who have dogs and those who don’t. It’s quite unclear what this has to do with reading and reporting a wattage number off of a house for the billing of electrical use. All the city council has done is allow Animal Services access to the database from Water and Power.

The [L.A.] City Council voted Tuesday to have two departments share information in order to track down people who haven’t licensed their pets…

The Department of Animal Services has eight full-time people whose job is to find and license dogs. The Department of Water and Power keeps a meter-reader database of homes with dogs. The council ordered the departments to coordinate to find the pooches…

Licenses cost $15 for a sterilized dog and $100 for an unaltered pet… Getting all dogs licensed would mean at least an additional $3.6 million in fees to the city.

Cash-strapped LA going after unlicensed dogs, The Associated Press, February 24, 2010, http://news.yahoo.com/s/ap/20100224/ap_on_re_us/us_dog_licenses.

Former Deputy Assistant Attorney General John Yoo was the primary author of the Bybee Torture Memos during President Bush’s first term:

Yoo was asked to explain how the torture statute would interfere with the President’s war making abilities, and gave the following answers:…

Q: What about ordering a village of resistants to be massacred?… Is that a power that the President could legally-
A: Yeah. Although, let me say this. So, certainly that would fall within the Commander-in-Chief’s power over tactical decisions.

Q: To order a village of civilians to be [exterminated]? [Exterminated in brackets in the original]
A: Sure.

Yoo added that, were he to have had the opportunity to rewrite the Bybee Memo, he would not have deleted the Commander-in-Chief sections or defenses because they were “important and relevant” (70).

U.S. Department of Justice, Office of Professional Responsibility, Investigation into the Office of Legal Counsel’s Memoranda Concerning Issues Relating to the Central Intelligence Agency’s Use of “Enhanced Interrogation Techniques” on Suspected Terrorists, Top Secret (Declassified), July 29, 2009, http://judiciary.house.gov/hearings/pdf/OPRFinalReport090729.pdf.

That was in relation to:

After September 11, 2001, Yoo authored a number of OLC opinions dealing with terrorism and presidential power. One of the first was dated September 25, 2001… In the opinion, signed by Yoo, he asserted that no law “can place any limits on the President’s determinations as to any terrorist threat, the amount of military force to be used in response, or the method, timing, and nature of the response” (32).

Are extreme examples fair to ask lawyers? Well, that’s exactly what lawyers are for — deciding the broad effects of a legal interpretation. In fact, Dan Levin, who replaced Yoo, used an extreme example to undo one of the torture memo’s clauses:

Dan Levin, “who was Counselor to Attorney General Ashcroft at the time [2006], was asked to serve as Acting AAG of OLC” (130).

Levin approved the CIA’s request to use the waterboard in a letter to Rizzo dated August 6, 2004 (133).

The Levin Memo deleted the Bybee Memo’s discussion of the Commander-in-Chief power because Levin believed it was unnecessary to the analysis, and because Levin considered it to be an enormously complicated question that could not be addressed in the abstract…

Levin modified the discussion of specific intent, which he also believed to be wrong. As presented in the Bybee Memo, Levin thought the section “suggested that if I hit you on the head with a… hammer, even though I know it’s going to cause specific pain, if the reason I’m doing it is to get you to talk rather than to cause pain, I’m not violating the statute. I think that’s just ridiculous” (136).

The report concludes:

Based on the results of our investigation, we concluded that former Deputy AAG John Yoo committed intentional professional misconduct when he violated his duty to exercise independent legal judgment and render thorough, objective, and candid legal advice.

We concluded that former AAG Jay Bybee committed professional misconduct when he acted in reckless disregard of his duty to exercise independent legal judgment and render thorough, object, and candid legal advice (17).

John Yoo accepted the initial assignment from the NSC and the CIA on behalf of the Department… We therefore concluded that he was primarily responsible (257).

Judge Jay Bybee, as the head of the OLC and signator of the Bybee Memo and the Classified Bybee Memo, was responsible for ensuring that the advice provided to the clients presented a thorough, objective, and candid view of the law. Although Bybee did not conduct the basic research… he reviewed many drafts, provided comments, and signed both memoranda… However, this was not a routine project… Bybee’s signature had the effect of authorizing a program of CIA interrogation that many would argue violated the torture statue, the War Crimes Act, the Geneva Convention, and the Convention Against Torture (261).

We recognize that the Bybee Memo was written at a difficult time in our nation’s history, and that the fear and uncertainty… might explain why some Department of Justice lawyers were willing to conclude, contrary to core principles of American and International law… However, situations of great stress, danger, and fear do not relieve Department attorneys of their duty to provide thorough, objective, and candid legal advice, even if that advice is not what the client wants to hear (260).

The report was hampered with many big fish simply not responding to requests from the OPC, some emails were missing or deleted, and systemic flaws were found in the system:

Although we have attempted to provide as complete an account as possible of the facts and circumstances surrounding the Department’s role in the implementation of certain interrogation practices by the CIA, it is important to note that our access to information and witnesses outside the Department of Justice was limited to those persons and agencies that were willing to cooperate with our investigation…

Although we believe our findings regarding the legal advice contained in the Bybee Memo and related, subsequent memoranda are complete, given the difficulty OPR experiences in obtaining information over the past five years, it remains possible that additional information eventually will surface…

Although we refer to works of legal commentary in this report, we did not base our conclusions on any of those sources. We independently researched and analyzed the issues that are discussed in this report (16)…

This investigation was long and difficult. It was hampered by the loss of Yoo’s and Philbin’s email records, our need to seek the voluntary cooperation of non-DOJ witnesses, and our limited access to CIA records and witnesses (20).

In addition to assessing individual responsibility in this matter, we noted, in the course of our investigation, several managerial concerns. First, we found that the review of the OLC memoranda within the Department and the national security arena was deficient. The memoranda were not circulated to experts on national security law in the Criminal Division, or to the State Department… Given the significance of the issue… the memoranda should have been circulated to all attorneys and policy makers with expertise and a stake in the issues involved.

We found that the limitations imposed on the circulation of the draft were, in part, based on the limited number of security clearances granted to review the materials. This denial of clearances to individuals who routinely handle highly classified materials has never been explained satisfactorily and represented a departure from OLC’s traditional practices of widely circulating drafts of important opinions for comment. In the end, the restrictions added to the failure to identify the major flaws in the OLC’s legal advice (265-266).

After 5 years making the report, its conclusions were rebuked:

I do not adopt OPR’s findings of misconduct… OPR’s own analytical framework defines “professional misconduct” such that a finding of misconduct depends on application of a known, unambiguous obligation or standard to the attorney’s conduct. I am unpersuaded that OPR has identified such a standard… and I will not authorize OPR to refer its findings to the state bar disciplinary authorities in the jurisdictions where Yoo and Bybee are licensed…

Yoo’s efforts establishes by a preponderance of the evidence that Yoo intentionally or recklessly provided misleading advice to his client. It is a close question. I would be remiss in not observing, however, that these memoranda represent an unfortunate chapter in the history of the Office of Legal Counsel. While I have declined to adopt OPR’s finding of misconduct, I fear that John Yoo’s loyalty to his own ideology and convictions clouded his view of his obligation to his client and led him to adopt opinions that reflected his own extreme, albeit sincerely held, views of executive power while speaking for an institutional client.

Memorandum of Decision, David Margolis, Associate Deputy Attorney General, U.S. Department of Justice, January 5, 2010, http://judiciary.house.gov/hearings/pdf/DAGMargolisMemo100105.pdf.

John Yoo is currently a tenured Professor of Law at the University of California, Berkeley.

Judge Jay Bybee is currently a permanent, life-time appointed judge on the U.S. Court of Appeals for the Ninth Circuit.

At least 100 detainees in U.S. custody have been killed: http://www.salon.com/opinion/greenwald/2009/06/30/accountability/

The scam’s name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he’d miss the switch, then get home and find a tied-up cat in there instead. Hence the expression “Don’t let the cat out of the bag.”

The “Pig in the Poke” scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.

One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. “All of a sudden, banks were allowed to post absolute shit to the Fed’s balance sheet,” says the manager of the prominent hedge fund…

The Pig in the Poke also came into play in April of last year, when Congress pushed a little-known agency called the Financial Accounting Standards Board, or FASB, to change the so-called “mark-to-market” accounting rules. Until this rule change, banks had to assign a real-market price to all of their assets. If they had a balance sheet full of securities they had bought at $3 that were now only worth $1, they had to figure their year-end accounting using that $1 value. In other words, if you were the dope who bought a cat instead of a pig, you couldn’t invite your shareholders to a slate of pork dinners come year-end accounting time.

But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would “more likely than not” hold on to them until they recovered their pig value. In short, the banks didn’t even have to actually hold on to the toxic shit they owned — they just had to sort of promise to hold on to it.

That’s why the “profit” numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bag. What they call “profits” might really be profits, only minus undeclared millions or billions in losses.

“They’re hiding all this stuff from their shareholders,” says Ritholtz, who was disgusted that the banks lobbied for the rule changes. “Now, suddenly banks that were happy to mark to market on the way up don’t have to mark to market on the way down.”…

Con artists have a word for the inability of their victims to accept that they’ve been scammed. They call it the “True Believer Syndrome.” That’s sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn’t so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn’t matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn’t going to work, no matter what we do. Sure, mugging old ladies is against the law, but it’s also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.

That’s why the biggest gift the bankers got in the bailout was not fiscal but psychological. “The most valuable part of the bailout,” says Rep. Sherman, “was the implicit guarantee that they’re Too Big to Fail.” Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. “It’s evidence,” says Rep. Kanjorski, “that they still don’t get it.”

More to the point, the fact that we haven’t done much of anything to change the rules and behavior of Wall Street shows that we still don’t get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload.

Wall Street’s Bailout Hustle, Matt Taibbi, Rolling Stone, February 17, 2010, http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle/print.

Steve Jobs @ Stanford:

Bill Gates @ Harvard:

What can a human “do” in the world to survive, without coercion or force to other humans?

1. Live off of nature without participating in society,
2. Beg (e.g. homeless people),
3. Contract his/her labor to an entrepreneur,
   1. Without making any moral judgments on government jobs, a job directly or indirectly paid for by a government does not meet “without coercion or force,” as the resources required to sustain that job are taken through coercion and force.
4. Entrepreneurship:
   1. Create a product, at profit, that did not exist before, which will be demanded,
   2. Create a product, at profit, in a different way (more cheaply, better, marketable, etc.) from an existing product, winning away demand,
5. Acquire capital (with an above method or through homesteading) and make investments which have a positive rate of return (e.g. what an apartment building owner does).

A pastor or a non-profit, for example, are not beggars (#2) but are actually entrepreneurs (#4), voluntarily receiving capital through donations and fulfilling the needs of their funders [Rothbard].

Without coercion or force, options #3 through #6 require voluntary cooperation with other humans, and a human will only attain enough to survive if both sides of the cooperation feel a gain in subjective value — i.e. a human gets enough to survive when society (i.e. other humans who would provide him/her food, housing, etc.) judge, through each exchange, his/her participation in society to be productive and valuable.

Optimally, overall labor decreases while entrepreneurship increases.

When there is no central planning government, entrepreneurship “directs” society (in so much as society directly decides which entrepreneurs succeed and fail by “voting” with their purchases) in what, where, why, and how things are done.

In summary, for options #3 through #6, a human must be productive from the point of view of other humans in society.