The Good Corporate Citizen

Apple Computer (Stock symbol APPL) makes a metric buttload of money. They make a gross margin of 60% on their computers, roughly five times what any other computer company makes. Their stock price is plump as a result. One of the many reasons they make this kind of money is that they have close control of their supply chain, one end of which is in China. Having 100,000 workers in one place, working for peanuts and putting in 40 hours of overtime a week results in great cost savings.

Now, I don’t want to pile on Apple over their sweatshop suppliers. The use of sweatshop labor in the electronics industry is universal. It isn’t my point. Let me illustrate my idea with a fairy tale.

Steve Jobs, the founder and CEO (now former CEO, but this is a fairy tale) looked upon the teeming masses at Foxconn and the teeming masses of unemployed people in the U.S. and had an epiphany. He went before the board of directors of Apple and said “I have had an epiphany!” The board of directors Googled the word “epiphany” and then said, “Ok Steve, did you get religion, or what? Are we going to market an iPray?”

“No,” Steve responded, “I have had an epiphany about sweat labor and U.S. unemployment. I am a compassionate man and a loyal and patriotic American. I propose that we move all our iPhone production from China to the parts of the U.S. that need jobs the most. We’ll have to knock our margin from 64% down to 50%, but we’ll still be making four times as much per computer than any other company. Then our potential domestic customer base will be expanded and the dead end of the U.S. trade deficit will be slowed.”

The board of directors of Apple paused for a moment with their mouths open and then nearly pissed themselves laughing. One of them, wiping tears from his eyes and catching his breath, managed to say, “Steve, Steve, that’s why we love you. Not just a great designer, but a great comedian. Damn, I think I pulled a muscle. 50% margin, oh god!” He collapsed in merriment.

Steve Jobs stood up, put his hands on his hips and glared at the board. “I’m serious!” he shouted. “Americans need jobs! Our trade deficit is climbing! In-sourcing is the morally right thing to do! I insist!”

The directors sobered up fast at that. They looked back and forth at each other. They exchanged significant looks, raised eyebrows, and subtle nods. Finally, one of them spoke.

“You’re serious about this, Steve? In sourcing the iPhone and accepting a 50% margin?”

“Absolutely.”

“Well, Steve, we know you’ve been ill, and you’ve been dealing with the specter of end-of-life issues, and you’ve still been working really hard. Maybe too hard. Maybe you deserve some time off.”

Do I even need to continue the story at this point? Steve gets the heave-ho, the shareholders keep the 64% margin, U.S. workers stand in the unemployment line, Foxconn employees keep their 80-hour weeks, and the Apple juggernaut rolls on.

As I said before, I don’t mean to pile on Apple, except that they have margin to spare compared to their competition. CEOs at Dell or HP would sell their mothers for even 20% margin. And maybe that’s the point.

Imagine Tony Heyward, the former CEO of BP, getting religion after the Macondo oil spill and proposing that BP go all environmental to the detriment of profit. Same result. Same result at any corporation. This is no shock to anybody.

It’s the concept of fiduciary responsibility that is the problem. Fiduciary responsibility is part of corporate law. It means that the officers of a corporation are legally obligated to maximize shareholder value, meaning stock price and dividends. It also means that corporate officers need to practice fiduciary psychopathy, the choice of corporate profit over human life and health.

Consider the infamous Ford Pinto memo, where Ford executives pointed out to the Highway Safety Administration that letting a predicted 180 people burn to death in their cars was less than half the cost of fixing the Pinto’s fuel tank problem. In the end, it turned out that the Pinto wasn’t any more dangerous than other similar vehicles, but the execs were willing to make that calculation.

Consider Kellogg, Brown, and Root, the Halliburton subsidiary and military contractor. KBR had a fuel trucking contract in Iraq and got paid by the mile. KBR managers decided to run empty trucks up and down the dangerous highways of Iraq, risking (and sometimes sacrificing) the lives of drivers and soldiers. (The soldiers called it “sailboat fuel.”) It was a singular combination of greed, fraud, cold-bloodedness, and disloyalty.

That’s wishful thinking. It wasn’t singular. It was, and is, all too common.

It is why there is no such thing as a good corporate citizen. If you get the impression that a corporation is behaving morally, it is due to one of several factors:

The corporation is too small to get away with much.

In this instance the corporation has been successfully restrained by regulation.

The interests of the corporation have momentarily aligned with those of society; a chance event.

The corporation is engaged in effective public relations.

A corporation is not just incapable of moral judgment. It is actively bent in the direction of immoral behavior. Acting morally requires some amount of self denial and self restraint, and those concepts act against shareholder value. A corporation pursues ever more resources, preferential laws, pointless subsidies, low wages, and unrestrained polluting, among many other wretched things.

I cringe when CEOs and the politicians they selected go on about lifting regulations off the backs of business. Yes, let the saber-toothed beast root about in our guts more freely. Businesses do more for us when they are properly regulated. They innovate instead of monopolizing. They create real products instead of defrauding. If you want to ponder the results of eased regulation, look no further than the derivatives market that just collapsed our economy. If you are a nostalgic type, look back to Enron or the Savings and Loan crisis of the 1980s. Bolster your blood pressure with thoughts of the speculative oil market that probably adds a 20% premium to our gasoline and heating bills.

Just don’t ever, ever, fall for the myth of the good corporate citizen.

Helping Out after the Floods

Here are some opportunities for helping Vermont, collected by the Seven Days blog Blurt (If you know of others, please make a comment with the information):

DONATIONS

• Text FOODNOW to 52000 to donate $10 to Vermont Foodbank. The Foodbank will turn each donation into $60 for families in need.
• You can donate to the United Way's Vermont Disaster Relief Fund online, or buy sending a donation to your local United Way. Just make sure your donation is marked for the "Vermont Disaster Relief Fund".
• You can also donate to the American Red Cross of Vermont and the New Hampshire Valley. The Red Cross set up shelters immediately after Irene hit for flooded-out families to stay in.
• The VT Irene Flood Relief Fund is raising money to help people and communities affected by flooding. 100% of all donations will be distributed to businesses and families. The fund is being administered by Todd K. Bailey.
• Vermont Baseball Tours has set up the 8/28 Fund to raise money. Donations of $20 or more get you a cool t-shirt.
• The MRV Community Fund has been reestablished to help Mad River Valley farmers who saw devastating crop losses due to the flooding.
• Independent Vermont Clothing is selling a special "I'm With VT" t-shirt. All profits from sales of the shirt will go to relief efforts.
• Across the lake, upstate New York got hit hard by Irene, too. Donations are being coordinated on the Irene Flood Drive Facebook page.
• Burr and Burton Academy has started a fund to help relief efforts in the Manchester area.
• The Preservation Trust of Vermont is taking donations to help rebuilding and cleanup efforts for the historic buildings and bridges damaged by Irene. Make a donation on their site and be sure to note "Hurricane Relief" in the Comments section.
• The Intervale Center has started a fund to help the farmers at Burlington's Intervale who lost their crops to flooding. To make a contribution, donate to the Intervale and designate your donation to the "Intervale Center Farmers Recovery Fund." Or mail a check payable to Intervale Center Farmers Recovery Fund to the Intervale Center, 180 Intervale Road, Burlington, VT 05401.
• NOFA Vermont is also accepting donations for their Farmers Emergency Fund to help aid the state's hard-hit farms.
• The Deerfield Valley Rotary Club is taking donations to help businesses in Wilmington rebuild. Wilmington was one of the hardest-hit towns, and FEMA funds won't cover much of the damage to private businesses.
• Buy an "I Am Vermont Strong" t-shirt and all proceeds will go to relief efforts.
• City Market in Burlington will donate 1% of sales from Saturday, September 3 through Friday, September 16 to the Intervale Farmers' Recovery Fund.
• The Waterbury Congregational Church has set up the Waterbury Good Neighbor Fund, to help residents who need immediate financial assistance.
• The Stratton Foundation has set up a relief fund to help the towns of Londonderry, Jamaica, Stratton, Weston, and Winhall.

VOLUNTEERING

• VTResponse.com is working to connect volunteers ready to help with those that need assistance. The site includes a frequently-updated blog and a forum. If you're looking to help clean up and rebuild, or if you're in need of assistance, visit their site.
• The Red Cross is in desperate need of blood donations. Stop by their donation center at 32 North Prospect Street in Burlington, or the Alice Peck Day Memorial Hospital Blood Donation Center at 125 Mascoma Street in Lebanon, NH.
• Montpelier Alive is coordinating volunteer efforts in that city through their Facebook page.
• Volunteer and cleanup efforts are also being coordinated on Twitter via the #VTresponse hashtag.
• The Vermont Flooding 2011 page on Facebook is functioning as a community bulletin board of sorts.
• Vermont Helping Hands is also coordinating relief efforts via Facebook.
• Upper Valley Haven is operating with considerably fewer volunteers due to road closings. They're looking for volunteers who are able to travel there.
• The state is setting up a call center in Burlington to deal with Irene recovery efforts. If you're in the Burlington area and you can man the phones for a few hours, email governorvt [at] state.vt.us or call 802-828-3333.

Floods

Vermont has taken a beating. The heavy rains from tropical storm Irene overloaded rivers and streams all across the state. Anyone reading this from within Vermont already knows the details, or is perhaps living the details. We’ve lost at least three people to the water. Eleven towns are essentially cut off from the world by washed out roads. We’ve lost a few bridges, including one covered bridge built in 1870, swept away like a handful of sticks. Roads are closed all over the state and a number of downtowns are wrecked. Twenty thousand homes and businesses are still without power.

It’s going to be days or even weeks before all the electrical lines get repaired. Some line crews were stranded by the flooding and had to stay with the families they were reconnecting. Some roads aren’t damaged as much as they are just missing. People are using the old cliché, “You can’t get there from here,” with a new tone of voice. The fresh pavement is still visible from the repairs to the damage from the floods in May.

Vermont is set up for this kind of disaster. I’ve always said that around here you can find your way back to town by always turning downhill. Our forebears located town centers down in the river valleys where there was flat land and water power. Many roads in our steep terrain parallel streams and rivers.

As the state rebuilds, we should plan for more of this. The climate models scientists use to analyze the progress of climate change indicate that the northeastern U.S. will see warmer and wetter weather. They predict that the Atlantic Ocean will produce more and larger hurricanes.

Part of our preparation should be the recognition that so-called 500 year floods will show up more often than every 500 years. This means redefining flood zones and building codes. We need to redesign our infrastructure for a new relationship with flowing water. In some places this means building things stronger. In other places it means building vital structures elsewhere. In an absurd development, Vermont’s emergency management center had to be moved out of Waterbury because of flooding. Siting the center in an area susceptible to flooding seems to have been a slight oversight.

The hard part will be, in some cases, accepting that nature is stronger than we are and yielding. Some parts of Vermont may not be viable for human habitation in the future. If a piece of land is going to be neck deep in rushing water every couple of years, then it makes no sense to keep rebuilding. This yielding will also manifest itself in new patterns of agriculture. Wetter springs can mean later planting or changing crops.

Your Minor Heretic is growing a microscopic crop of cold-hardy rice this year. I have just two 4’x8’ paddies, but a wheat farmer in Ferrisburg is hoping to produce 4,000 pounds on a perennially soggy and formerly useless field. A friend of mine who grows organic produce is building more greenhouses, both to control water inputs and to extend his growing season year round. These are small beginnings, but they point in a direction.

Out in the Atlantic, at latitude 12 degrees north, longitude 33 degrees west, Tropical Depression 12 just became Hurricane Katia. The computer models show it heading just north of Haiti and Cuba and becoming a Category 3 storm by Sunday afternoon. It is still far too early to accurately predict the path, but most of the ensemble models show Katia hooking northwards and sweeping up the east coast. We can hope that Katia stays well off the coast, but we need to be ready for even more rain, next week and in years to come.

China and the rule of 70

There is a rule of thumb in finance. If you want to know how long it will take for an investment to double, divide 70 by the annual percentage increase and you’ll get the number of years it will take. This will get you within a few months of accuracy. It works for any other number as well – population growth, or the growth of an economy.

China’s Gross Domestic Product has been growing at a rate of between eight and thirteen percent for the past couple of decades. It averages around ten percent. The math works out, since it has been faithfully doubling every seven years or so.

Here’s a chart I copped from Paul Kedrosky of China’s present share of world commodity resources.

 

 (Click to enlarge)

Try to imagine the year 2018, when China (theoretically) will be using 6.4% more than all the concrete that the world now produces, essentially all the iron ore now produced, plus 90% of all the coal, steel, and lead produced today. Add to that roughly three quarters of the present production of zinc, aluminum, copper, and nickel. I think I’m going to have to knock back a shot of Scotch to imagine that freely.

As vital as these commodities are, consider that China, if it continues on its present growth trend, will use 20% of the world’s oil, a number approaching our own. Try to imagine that with growth in oil production stagnant, despite a geometric growth in spending on oil exploration. That extra 10% will have to come out of everybody else’s share.

Short answer: it can’t happen. None of these commodities are on a trajectory to double in seven years. China would have to take demand shares away from other countries, which would quickly become self defeating as the economies of customer nations would suffer. Commodity prices would soar, driving down consumption.

Take one commodity, lead, as an example. It is vital for storage batteries and electronics. World lead production has been essentially flat since 1976. It hit 3.69 million metric tons in that year and didn’t reach that level again till 2007. It’s not going to obligingly rise to 7.4 million tons per year just because China needs it.

World zinc production has doubled – since 1971. It’s not quite keeping up with the seven-year plan. Aluminum production has been doubling on the 20-year plan and copper around 23 years.

World iron ore production has actually doubled in the past seven years or so. At the same time, the price per ton has gone from below $20 to above $170. Could production double again in the next seven years? I’m doubtful, and I wonder what price we will be paying at that time. Let’s say it does.

How will the Chinese mine and process iron ore minus the lead, zinc, copper, and aluminum needed for the motors, transformers, cables, and electronics of the production infrastructure? The production of any one of these commodities depends on the production of many others. The products that China sells to the world are mostly combinations of multiple commodities. What is the probability of all of these commodities doubling production on schedule? If they don’t, will the prices be doubling, and what will that do to demand for Chinese made goods? And what about that demand? As we slog through the beginning of our lost decade, Europe scrabbles at the cliff-edge of currency collapse. It isn’t a promising growth market.

A couple of decades ago the Chinese government cut a tacit deal with its people. Ditch the pursuit of democracy in exchange for prosperity. So far, they have delivered. Chinese GDP per capita has gone from around $200 in the early 1980s to over $3,500 today. It isn’t evenly distributed, but China does have an emerging middle class and some opportunities for the poor to get ahead, however unsatisfactory by our standards. I can’t see the opportunities keeping up with expectations over the next seven years. Even if the Chinese turn their focus away from exports and towards their own infrastructure and internal consumption they will still require those absurd increases in material supplies to fuel their present rate of growth.

If I were a member of the Chinese political elite I’d be planning my exit strategy right now.

A Quick Shot of Debt Perspective

I was just reading an excellent article by Dean Baker on the national debt and saw something that should be shouted from the rooftops.

"How about that $14.3tn figure for the debt ceiling? That's a really big number, really scary. So is just about every number connected with the United States budget. We are a huge country with a huge economy. Competent reporters would focus on this being about 90% of US GDP.

Is that big? Well, the debt to GDP ratio was over 110% after the second world war. The United Kingdom had debt to GDP ratios of more than 100% for much of the 19th century, as it was establishing itself as the world's pre-eminent industrial power. Japan has a debt to GDP ratio of more than 220% of GDP and can still borrow in financial markets long-term at interest rates of less than 1.5%."

So the U.S. is in the position of someone with an income of $100,000 a year and a $90,000 mortgage. Not so scary now, is it?

Baker accuses the news media of malpractice for ginning up the panic on this, and he's right. Calm down, increase the debt ceiling, and let's get on with things.