Mooney, Green, Baker & Saindon's
Archive Page

Prepared by Paul Green

Photograph from "Ground Zero" by labor photojournalist Earl Dotter.

On this page, we present some of the classic articles that previously appeared on our main Labor Page.  To see our current articles, essays and stories discussing issues of interest to labor and workers everywhere, click here.  A table of contents for this page and the other pages that together constitute our Labor Pages appears in the frame on the left.

The Other War

The concept of class warfare is an old one, well known to the likes of Marx, Mao–and the majority in Congress. Buried deep within the rhetoric of social conservatism and international jingoism is a brand of economics-based class warfare that is as little understood as it is dangerous. The signs of what these people have in mind, however, are not hard to find.

For more than sixty years, the federal income tax system has included provisions designed to encourage employers to provide health care as an employee benefit. When an employer pays health insurance premiums for an employee, not only is the cost of that premium deductible for the employer, it is not taxed as income to the employee. The reason for this beneficial tax treatment is a judgment made long ago, initially by the Executive Branch and ultimately by the Congress, that it is a good thing to encourage employers to provide health care to employees. The result is that more than 100 million Americans receive health care through this employment-based system. While a far cry from the universal health coverage that is the standard in the rest of the industrialized world, it represents a remarkable success of tax policy. It now appears that it has been too successful, according to a recent report from the Congressional Joint Economic Committee (JEC).

The JEC is one of four committees of the U.S. Congress that includes both Senators and Congressmen. The JEC has long propounded the view that the U.S. tax system is fundamentally unfair because it overtaxes the rich and undertaxes the poor and middle class. Recently, these ideologues have managed to produce a set of reports that meld two of their themes–the unfairness of the tax system and the concept that health care is a privilege to be reserved for the wealthy, rather than a right that should be equally available to all.

Twin reports entitled "How the Tax Exclusion Shaped Today’s Private Health Insurance Market" and "The Health Benefit Tax Exclusion Distorts the Health Insurance Market" were released by the JEC on December 17, 2003. The theme of these reports is that employer-provided health care deprives people of the opportunity to make their own health care choices. Even worse, because too many people have health insurance that will pay for their care when they get sick, the demand for health care services is just too high, driving up the cost. The report even has a term for this excessive consumption of health care–"Moral Hazard." According to the report, Moral Hazard occurs whenever health insurance permits someone to obtain health care services they could not otherwise afford. As stated in the report:

Moral hazard occurs whenever [the amount of insurance people have] alters their behavior that affects their expected losses. Moral hazard squanders scarce resources by encouraging individuals to spend more on health care instead of on other goods and services that would be more valuable (absent insurance considerations).

In other words, without employer-provided health insurance, employees could have the benefit of choosing between health care and more important things–like food and shelter.

Are these guys serious? You bet they are. The real question is what is their true motivation. Certainly, they are concerned with rising health care costs. In their view, if health care were rationed more intelligently–that is to say by price–then, not only would national expenditures on health care go down, but costs probably would drop for those remaining people who could afford to foot the bill. Plus, the waits in the doctor's office would be shorter. Without doubt, however, there are other motives as well.

By taxing one of the most important middle class and working class benefits, the share of the overall tax burden borne by the rich would be driven down even further than it already is.  This serves the goal of the Congressional ideologues of making the tax system more fair--for the rich.

Additionally, with some major exceptions, the difference in wage rates between unionized and non-unionized employees is often fairly small. Otherwise, the non-unionized employers would have trouble hiring people, or keeping unions out. One thing that unions have been able to deliver for their members, however, is employer-provided health care. In fact, according to the U.S. Bureau of Labor Statistics, a unionized employee is about fifty percent more likely to have health insurance than a non-unionized employee. By attacking employer-provided health care, the Congressional ideologues are taking aim at organized labor.

Were health benefits to become taxable, employees with health coverage would see their pay checks reduced, with the additional taxes owed on their health coverage deducted from their pay.  This, in turn, would result in employers dropping health coverage.

If one of our common social goals is to make health care available and affordable for all, it is pretty obvious that eliminating the tax exemption for health care would be a disaster because it would only increase the number of uninsured. While, in the words of Dickens, it would decrease the surplus population, it would do so at a tremendous moral cost–a genuine "moral hazard."

Will these ideologues succeed? They will if we let them. And so far, nobody has really tried to stop them. With all the sloganeering going on, the real issues–the issues that literally mean life and death to millions of people–have gotten lost. It is time to act, before it is too late to undo the damage.

Deja Vu All Over Again–The Health Care Crisis in America (Updated March 1, 2004)

In the late 1980s and early 1990s, the major issue dominating collective bargaining around the country was health care. As the result of the unprecedented spike in the cost of health benefits, the continuation of employer-provided health care became the overarching concern of both labor and management, crowding out such traditional issues as wages and pension benefits. With the escalating expense of providing health care, employers sought ways of capping their increases, even if that meant doing little more than shifting the costs to their employees. Employees, in turn, finding their wages already stagnant as the result of the Reagan-Bush era recessions and "jobless recovery," saw increases in their share of health costs for what it was–a cut in real wages.

Today, we find ourselves in a very similar situation. As before, the cost of health benefits is spiking upwards, with annual increases in the double digits. Also, as before, we see the stagnation of wages, this time as the result of the (W.) Bush recession and jobless recovery. With these factors in place, it comes as no surprise that labor negotiations around the country are focusing on the thorny issue of health care. From grocery chains in Southern California, Missouri, West Virginia, Ohio and Kentucky, to transit workers in Los Angeles, tens of thousands of workers have walked off their jobs and taken to the streets seeking to preserve their health care.

The cost of health coverage has increased by more than 50% over the past three years, and is expected to continue its double digit annual rise for the foreseeable future. Currently, the national average cost for family health coverage is over $9,000 per year, with more than a quarter of that amount paid by the employee. Paradoxically, the share of health insurance premiums required to be paid by employees rises as wages drop. At companies with significant numbers of low-wage workers, employees pay more than a third of the cost of family health coverage. In other words, the lower the wages, the greater the share of health insurance costs required to be paid by the employees. As a result, the people who can least afford to pay are required to pay the most.

The result of this paradoxical and unfair imposition of health care costs on employees, as reflected in actual plan participation rates, is both obvious and profound. According to a recent study by the Bureau of Labor Statistics, among workers earning $15 or more per hour, fully 61% participate in employer-provided health coverage. Among workers earning less than $15 per hour, less than half that amount–a mere 30%–participate in their employers’ health plan.

According to a recent study, less than a quarter of U.S. employers pay the full cost of individual health coverage, and a paltry 8% provide family health coverage without requiring their employees to share in the premium. As the cost of health benefits continues to spike, it is safe to expect that the percentage of employers providing fully-paid health care will continue to drop, while the share paid by employees will continue to rise.

What does all of this mean? Some of the implications of the rising cost of health care are obvious, while others are more subtle.

One obvious result is that the rising cost of health care has created a divisive issue between labor and management, with employers seeking relief from rising costs and employees fighting to hold onto what they have. It also means that the numbers of the uninsured will continue to rise, as employers–particularly non-unionized employers–drop coverage or make it increasingly unaffordable for their lower-paid employees.

Another result is that, even where the employees’ share of health care costs is rising, the amount actually paid by employers continues to increase. This drives up the cost of U.S. manufactured goods. On the other hand, in every other industrialized nation, the provision of health care has been nationalized. Only in the U.S. does the burden of health care fall almost entirely on employers. This places American-produced goods at a competitive disadvantage to foreign goods.

One of the less obvious results of the dramatically rising cost of health care is the overall effect upon the economy. Recently, the Bureau of Labor Statistics pronounced that the U.S. economy has undergone the largest single-quarter of growth in 19 years. At the same time, however, the U.S. economy actually lost more than 140,000 jobs. Why have employers continued to shed employees in a time of economic growth? Some economists are now pointing to the staggering cost of health care as the culprit. With health coverage as expensive as it is now, and with the cost of coverage expected to continue to skyrocket, not only are employers reluctant to add to their employment rolls, they are continuing to reduce them. In other words, the continued loss of jobs in the economy is at least in part attributable to the nation’s dysfunctional health care system.

Putting all of this together, it is clear that rising health care expenditures are hobbling the U.S. economy and are costing jobs. Furthermore, they are creating an ever increasing disparity between the "haves"–the people who can afford health care–and the "have nots"–those who must go without. Unless something is done, the problems will only get worse. To their credit, most of the Democratic Presidential candidates have specific proposals to address problems in the delivery of health care. Since the only domestic policy the Republicans can agree on is tax cuts, they are unlikely to deal seriously with the problem in anybody's lifetime.

The last time we went through a similar health care crisis, one Presidential candidate–Bill Clinton–ran on a platform of national health care. Although the implosion of the Democratic party in Congress prevented him from implementing his proposals, the Clinton administration’s efforts nevertheless scared the bejesus out of the health care industry. The result was a moderation in health care costs that lasted through the term of the Clinton Presidency. Unfortunately, we can no longer count on this "fear factor" to provide a sufficient solution to our problems in the delivery of health care. The time has finally come to catch up to the rest of the industrialized world and adopt a comprehensive national solution to the health care crisis. Only with such a comprehensive solution can we unshackle the U.S. economy, and secure equity in our health care delivery system.

Rolling-Back Labor Standards

Recently making the news has been the coordinated series of raids of Wal-Mart stores and offices across the country, dubbed by federal officials as "Operation Rollback."  Wal-Mart is accused of hiring contractors to perform basic janitorial and maintenance services which, in turn, are staffed with undocumented aliens. Based upon information gleaned from federal wire taps, Wal-Mart is accused of conspiring with the contractors to hire these undocumented workers.

To anyone familiar with Wal-Mart’s own employment practices, this story is replete with ironies.

Wal-Mart is utterly shameless regarding its pro-poverty practices. It has gone so far as to distribute hand-outs to its employees giving them advice on how best to apply for government anti-poverty services like Medicaid, food stamps and temporary assistance to needy families.

Wal-Mart is well known as among the worst employers in the country. At Wal-Mart, a typical sales associate makes $8.50 an hour. Unlike fellow big-box retailer Costco, where a sales associate may start as low as $10 per hour, Wal-Mart provides little or no benefits. While health care is available, the monthly cost is over $100 per month for coverage. For someone already earning wages below poverty level, this makes health coverage an impossibly expensive luxury.

So, if Wal-Mart is already paying poverty-level wages with virtually no benefits, why would it then flout the law by hiring contractors with whom it conspires to hire undocumented aliens? The answer, of course, is greed. Why pay even $8.50 per hour, or even the Federal minimum wage of $5.15 per hour, when you can get by by paying even less, sometimes as little as $2 per day? After all, who will complain? The undocumented aliens? If you think that is true, what do you think happened to all of those undocumented aliens who were rounded up in these Wal-Mart raids? By and large, they are being held in detention pending deportation, if they haven’t been deported already. What do you get when you complain? A trip to Club Fed, followed by a ticket home.

Why, then, wouldn’t Wal-Mart just hire these folks themselves, instead of relying upon middlemen? The answer is insulation. Even now, Wal-Mart spokesmen defend their conduct by pointing out that they didn’t actually employ these people, but that it was actually their contractors who were violating the immigration and labor laws.

The major irony, of course, is that Wal-Mart, which keeps tens of thousands of its employees in poverty, is well known for its pattern of discrimination against women and minorities, and is one of the most virulently anti-union, anti-worker employers in the country, can actually save money by contracting some of its work out to contractors who exploit their workers even more than Wal-Mart itself. In its effort to further "rollback" labor standards, Wal-Mart has provided us with a compelling demonstration that, no matter how low you go, you can always go lower.

Labor Day 2003

In many ways, this Labor Day is one of the strangest we have seen in a while. While the forces opposed to workers and workers’ rights become more and more brazen in their attacks, few people seem to care. The Bush Administration and its right-wing allies continue their war on workers, and the American public is not up in arms. Want an example?

Recently, the President signed an executive order exercising his "emergency powers" to trim the automatic cost of living adjustment provided by federal law. His basic rationale is explained in the following statement:

A national emergency has existed since September 11, 2001, that now includes Operation Enduring Freedom in Afghanistan and Operation Iraqi Freedom. Full statutory civilian pay increases costing 13 percent of payroll in 2004 would interfere with our Nation's ability to pursue the war on terrorism. Such increases would cost about $13 billion in fiscal year 2004 alone -- $11 billion more than the 2 percent overall Federal civilian pay increase I proposed in my 2004 Budget -- and would build in later years.

Such cost increases would threaten our efforts against terrorism or force deep cuts in discretionary spending or Federal employment to stay within budget. Neither outcome is acceptable. Therefore, I have determined that a total pay increase of 2 percent would be appropriate for GS and certain other employees in January 2004.

In other words, President Bush will cut the automatic pay increases by about 85% because the country just can’t afford the $11 billion cost without jeopardizing the wars in Afghanistan and Iraq and the continuing war on terrorism. And yet only a few months ago, the Administration and its Congressional allies crowed with unrestrained glee over their enactment of a tax cut that even the Administration admits costs $350 billion. And, of course, that doesn’t count the much larger tax cut passed two years ago. Nor does it take into account the accounting tricks that were used to generate this low-ball number.

Why, then, are we so overextended that we cannot afford $11 billion for a cost of living raise for federal workers, but we have no problem borrowing against our future for a $350 billion tax cut? This one’s pretty easy to answer. A pay raise goes to government workers, while the bulk of the $350 billion tax cut goes to the corporate behemoths and wealthy individuals that own this administration.

Want more proof? It has recently come to light that, in an effort to make the delivery of logistical support to our troops in the field more "efficient" (and to artificially reduce the number of troops), the Administration has "privatized" this function. This means that the job of delivering essentials like food, drink, ammunition, clothing and (considering the 100E + days in Iraq) air conditioning has been "contracted out." Which company has the largest of these logistical support contracts? The largest is Vice President Cheney’s old haunt, Halliburton, which has recently won $1.7 billion in federal contracts, and stands to win hundreds of millions of dollars more, most of which are no-bid, as part of the war in Iraq. Number two in this grab for federal dough is engineering giant Bechtel. As long as our troops are getting the support they need and we are saving money in the process, what does it matter that the support is provided by private contractors rather than by American soldiers?

The answer is that, first, our troops are not getting the support they need. Even though the military has promised relief from the intense heat to our troops by providing air conditioners, those air conditioners have not materialized. Private donors (organized by the parents of heat-stricken troops) are contributing air conditioners by the hundreds because the Halliburtons and Bechtels have failed to do so. Even worse, neither the government, the military postal service, nor these fat-cat contractors will even ship these air conditioners to Iraq. These parents who scrounged up the air conditioners have had to raise the money to pay a private shipping firm to ship them to Iraq. Come on now.

Well, even if it means that our troops are suffering, that’s their job, right? No one said this would be a cake walk, and besides, we’re saving money, right? No on all counts. Let’s not forget that about 185,000 of our troops in the field right now are not professional soldiers, but are reservists. These are people who signed up with the understanding that they might be called up to serve for a couple of months, or even, in a worst case, up to a year, but many of whom have now been serving pretty much nonstop since the beginning of the war in Afghanistan--nearly two years ago. This isn’t what they signed up for. Don’t they deserve to at least get the support they need from their own military? Our government says no.

And the upshot is that nobody even contends that this system, providing no-bid logistical contracts to huge corporations, is either more effective or less expensive than just providing this support in the traditional way–having the military provide its own logistics. And yet, this is just one obvious–and stupid–example of what the current administration wants to do to the entire government.

Putting this all together, what does it mean? It means that our government is more interested tax cuts for its wealthy supporters than in supporting its own workers, whether they be in civilian service or in the trenches actually fighting the war on terrorism. It means that our elected officials are more interested in providing lucrative, no-bid contracts to their corporate cronies than in delivering services efficiently and economically. And maybe most galling of all, it means that these ideologues are willing to do all of this without apparent shame, cynically exploiting our horror and despair over the events of September 11 to advance their radical agenda. The most shocking thing about it all, however, is that we are letting them get away with it.

Where does that leave us on another Labor Day? The Administration’s (and Congress’) war on workers should provide organized labor with an opportunity to garner public support. Couple that with the stagnant economy, the growing health care crisis and problems with pension plans around the country, and you should have an opening to for Organized Labor to make its case to the American people. Is Labor’s inability to effectively make its case due to its own lack of imagination, or have the American people become so complacent that they are willing to believe whatever ridiculous words our elected officials and their media henchmen spout off?

Will the American people wake up before things get worse? Do we need to hit bottom first? Will it take another horrible terrorist attack before we wake up and see that our government is more interested in fighting its war on workers than in winning the war on terrorism? Let’s hope not.

Turning on the Power

The U.S. Northeast and Southeastern Canada are recovering from the worst power outage in history. While the experts and pundits argue over the specific causes of this particular blackout, one thing is clear: At its heart, this disruption is the direct result of a poorly thought-out and ineptly implemented drive toward deregulation.

Prior to deregulation, power generation and distribution was in the hands of a series of local and regional power monopolies. These monopolies, which were subject to extensive government regulation, were responsible for everything from generating the power, transmitting it from the power plants to local distribution points, and then delivering that electricity to homes and businesses. The costs of running this system were all paid for by the consumers of electricity, whose rates were set by government regulators.

This system had its good and bad points. On the plus side, it, along with instances of direct federal intervention (such as the creation of the Tennessee Valley Authority and the building of huge Western dams), led to the electrification of the entire United States. Furthermore, with the environmental movement that arose in the 1970s, power companies were in a position to make the capital investment to install new clean energy technologies (such as coal scrubbers), amortizing the costs and passing them on to the consumers. While the implementation of these technologies resulted in relatively small increases in electric rates, the environmental and health benefits were enormous, more than making up the cost. Additionally, when it became clear that local power systems were subject to periodic temporary failures and shortages, while simultaneously other local systems might have excess capacity, the power companies linked their systems up under the watchful gaze of the federal and local regulators, forming today's power grids. Because of these grids, when one local system has a shortage, it can buy surplus energy from another system.

On the minus side, incompetent management teams, coupled with lax regulators, could shield their mistakes, passing the costs of their follies through to consumers. At least occasionally, regulated utilities became bloated and inefficient, investing in dubious and untested technologies.

The government’s solution? Energy deregulation.

The theory was that, by permitting limited competition in the production and distribution of energy, inefficiencies could be squeezed out of the system, costs could be reduced, and lots of money could be made by savvy investors (who also happened to be major campaign contributors). In a crazy scheme concocted by the architects of deregulation, the creation and distribution of electricity was broken into three pieces. First, there is power generation. The power plants, formerly operated by local and regional utilities, will now be separately owned and operated. Second comes national and regional power distribution, including the power lines and distribution facilities connecting the damns and power plants to the local distribution facilities and that make up the regional "grids."  Finally, there is local electricity distribution, which includes the gaggle of local power companies that deliver electricity to our homes and businesses.

As part of this process of deregulation, the local utilities that used to produce the power are, more and more, limiting their activities to merely providing the local distribution of electricity. Electric power generation, where the greatest benefits of deregulation were expected to be realized, is more and more in the hands of large companies who are, at least in theory, subject to market forces. Unfortunately, these power oligopolies are frequently operating old, out of date facilities, and lack incentives to modernize because they have a very limited ability to recover their costs. Coal scrubbers? More efficient generators? Other new, clean technologies? Who’s going to pay for them?

Nevertheless, the real bastard children in this scheme are the regional power distributors. Although their services are absolutely necessary, there is simply no profit in upgrading facilities that work–most of the time. The result is that our power "grids" are woefully out of date, terribly inefficient, and lack sufficient capacity to handle our nation’s needs, as clearly demonstrated in the massive blackout. A small problem (whatever that problem was) that should have been contained locally, tripped the power off in the entire region. This is not supposed to happen.

The problem of nationwide power distribution is not helped by the laws of physics, which make the transmission of electricity terribly inefficient. As electricity flows through power lines, resistance in the lines causes them to heat up and power is lost to the atmosphere in the form of generated heat. The more electricity that flows, the hotter the lines get. The hotter they get, the greater the resistance. Not only does this mean that much power is lost (so that the amount of power generated needs to be substantially larger than the amount that will actually be used), it also limits the amount of power that can be transferred over these lines before they burn up. This also means that the farther electricity has to travel, the greater the power loss. Further compounding the problem is the sad fact that our nation’s power grids are replete with older, smaller, lower capacity lines that greatly limit the amount of electricity that can be transferred from place to place. The cost of upgrading these out of date facilities is huge, and, in the absence of direct federal intervention, is just not going to happen.

Curiously, the example of energy deregulation is often cited as a deregulation success story. As anyone in California (if you remember the power crisis they had so recently) or in the Northeast can tell you, if this is success, how bad does it have to be before it is considered a failure? How do we fix the problem? Clearly, we have to move beyond the simple minded slogans and code words, like "deregulation" and "privatization," and actually try to develop a system that works, and that is capable of continuing to meet our needs into the future.

Disingenuous Drug Debate

It is not surprising the lengths the pharmaceutical industry will go to protect the sweet deal that it has in the U.S. marketplace. After all, the system (if you can call it that) now in place has permitted the drug companies to reap huge profits over the past twenty years, unparalleled by any other major industry. The reasons for the drug industry’s success are not hard to understand. In the U.S., most people have some form of insurance, either through their employment or from the government. This means that neither the people who prescribe the drugs–the doctors–nor the people who use the drugs–us consumers– really have any idea how much these drugs cost. As a result, the drug companies are free to push their latest, greatest, and most expensive new patent-protected drugs on both doctors and consumers, and the market forces that would ordinarily control prices in a real free market simply do not work. Although health plans have tried to institute managed care programs to push people off of these pricy new drugs onto older, cheaper, yet equally effective drugs, it is an uphill battle.

This has led some critics of the current system to propose a means of introducing a little competition into the mix. The scheme, known as "drug reimportation", would permit pharmacies to import into the U.S. prescription drugs from other industrialized countries where either market forces or direct government intervention have kept down prices. As matters now stand, the same drugs often cost half as much or less in Canada than they do in the U.S. The effect of such reimportation would be two-fold. First, it would create an instant supply of cheaper, identical drugs that pharmacies could stock and sell to their U.S. customers. Second, it would force the drug manufacturers to lower their domestic U.S. pricing so that they can continue to sell in the U.S. through their domestic supply chains.

So what’s the problem? Shouldn’t this be a no-brainer?

If you listen to the intensive lobbying campaign of the Traditional Values Coalition, a right-wing conservative Christian advocacy organization, the major effect of permitting drug reimportation would be to flood the market with RU-486, the "morning after" abortion pill. The logic goes that the law currently prohibits RU-486 from being distributed through the mail. According to the TVC, any drug reimportation legislation would vitiate this prohibition, and allow our 14-year old daughters to borrow our credit cards and order abortion pills willy-nilly, flooding our mailboxes with these agents of infanticide. Obviously, the purpose of this lobbying campaign is to pressure the many socially conservative legislators who support drug reimportation into switching their positions.

There are at least two problems with the TVC’s argument. First, it is fabricated out of whole cloth. The currently pending legislation simply doesn’t do what the TVC says it does. Second, according to published reports, the TVC’s campaign was written, bought and paid for by the pharmaceutical industry itself. In other words, rather than representing a principled (if somewhat wacky) criticism of drug reimportation, it is really a cynical effort by the drug manufacturers to cloak their own greed and avarice in the guise of conservative Christian values. In fact, the only "value" that they seek to protect is the value of money.

Nor has the pharmaceutical industry limited its anti-reimportation efforts to using Christian right front groups. Another innocuous-sounding group, United Seniors Association (with the patriotic acronym USA) has also jumped into the fray. USA has been in the midst of a heavy-duty lobbying campaign raising the alarm that reimportation will disrupt the currently-secure drug supply chain and allow fleets of trucks groaning from their loads of counterfeit drugs to stream in from across the border. Like the TVC’s efforts, according to published reports, this campaign was also bought and paid for by the drug industry.

Nevertheless, just because this criticism comes through a shill doesn’t necessarily make it wrong. It is, however, highly misleading for several reasons. First, the bills currently pending in Congress all require authentication of drugs brought into the U.S. Second, all of the pending bills would limit reimportation is to industrialized countries, each of which has measures in place to protect its own citizenry from ingesting phony medicines. What the USA and its drug industry supporters do not mention is that the major industrialized countries with one of the most serious counterfeit drug problems is the United States itself, a problem the drug industry has done little to address. Considering their lack of attention to this extremely important problem, the drug industry’s protestation of concern for the welfare of the American drug consumer reeks of cynicism and hypocrisy. Clearly, counterfeit drugs are a problem, but they are a problem that needs to be dealt with, not used as a bogeyman to protect drug industry profits.

Another argument raised by the drug industry and its allies is that the huge profits generated by the outrageous pricing in the U.S. market is necessary to finance the drug industry’s enormous research and development activities. Once again, this argument is misleading. For one thing, the drug companies actually spend far more on marketing than on research and development. Perhaps if they spent more on research and less on physician junkets they wouldn’t need their huge monopoly revenues to finance their development of new drugs. For another, is it really fair that Americans are saddled with the responsibility for paying for research and development? Why should the rest of the world benefit form the drug companies’ gouging of American consumers? Already, the outrageous health care costs shouldered by U.S. industries has placed us at a competitive disadvantage around the world. Is it really necessary to cannibalize America’s industries in order to pump money into medical research and development? Isn’t there a better way? Finally, most of the money being pumped into this research and development is going toward developing potential new blockbusters, without regard to the actual benefit of the new drugs. This means that there is a lot of research for the next drug to calm an upset tummy or to still our hay fever, but very little directed toward cures for malaria or tuberculosis.

Does this mean that drug reimportation is a panacea that will solve the problems with our medical delivery system? Certainly not. Millions of America lack access to quality health care. At the same time, billions of dollars are squandered on a system that is irrational and out of whack. Even the most optimistic proponents of drug reimportation see it as providing little more than modest relief from some of the extremes in drug pricing. Until we are willing to admit that we have a serious problem will we be in a position to seek a meaningful solution that addresses all aspects of the health care system in the U.S.

Hula Hoops, Beanie Babies and Other Corporate Fads

Like consumers throughout the industrialized world, Corporate America regularly finds itself sucked into the latest fad. In the 1960s, U.S. corporations were driven by the perceived need to increase shareholder value by pumping out dividends, even while neglecting their U.S.-based production facilities. For example, a company like Chrysler continued to pay record dividends, all the while lumbering toward financial collapse. Utterly failing to anticipate the onslaught of better-designed, better-engineered, more reliable and more efficient Japanese cars, Chrysler permitted its production capabilities to deteriorate. Who were the big losers from these corporate missteps? Typically, it was the workers who saw their jobs eliminated, squeezed out by more efficient, more productive foreign competition.

During the 1970s, drunk with the corporate imperative to diversify, the trend was for conglomeration. Rather than make the investment necessary to maintain their competitive edge, these behemoths chose to buy assets that were often incompatible with what had been their core business.  Besides lacking focus and being impossible to manage, these unnatural conglomerations of unrelated enterprises continued to lose ground to their more focused, better managed foreign competitors. Who were the big losers from this short-sighted trend towards corporate diversification? Typically, it was the workers who saw their jobs eliminated, as their employers became increasingly uncompetitive.

The 1980s was the era of the leveraged buy-out and the junk bond. Free from the scrutiny of federal regulators, undercapitalized wannabe tycoons sold high interest "junk bonds" and used the proceeds to buy-up the stock of their target companies. They would then either sell off assets from their newly-purchased businesses to pay down the bonds or they would simply saddle the businesses with a crushing burden of debt. It was precisely through such a purchase that Woodward & Lothrop, a successful, unionized enterprise and one of Washington, D.C.’s oldest department store chains, was looted and destroyed. Who were the big losers in these shenanigans? Typically, it was the workers who lost their jobs as their new owners pillaged what had previously been successful businesses.

The early 1990s brought with it a new paradigm, along with a host of gobbledy-gook buzzwords (like "new paradigm"). Under the cloak of meaningless slogans like "work smarter, not harder," the 1990s was an era where downsizing was the key to increasing stock prices. It did not matter that those production workers and middle managers who got the ax actually did something (like manage and build stuff), or that, while firing your research and development staff may reduce your payroll expenses, it might make it harder to stay competitive. No, as far as the financial markets were concerned, any layoff announcement was sure to drive up stock prices. Who were the big losers from this corporate short-sightedness? Typically, it was the workers who saw their jobs "downsized" as their employers "streamlined."

The current hot corporate fad is toward "consolidation."  Unlike the 1970s vintage conglomeration, this latest trend involves the merger of companies that do pretty much the same thing. In some cases, they may do it in different places serving different markets, but in others, they are direct competitors. Whether it is defense contractors (with the merger of Lockheed, General Dynamics and Martin Marietta), airplane makers (such as the merger of Boeing with McDonald-Douglas), or consumer products (with the merger of Kraft and NABISCO under the umbrella of the former R.J. Reynolds), big business is growing ever bigger.

So what’s wrong with consolidation?  More than 100 years ago, the government and people of the United States decided that artificial monopolies are bad, and that free competition is good. Today, however, while the government uses the buzzwords of free enterprise, like "competition" and "efficient markets," their actions belie this belief. In the long run, what will be the effect of this latest corporate trend?  Will consolidation result in the greater productivity promised by its proponents?  Or will it turn out to be just another dangerous fad that distracts corporate America from investing in the retooling and recapitalization that is necessary to stay competitive in our global economy?  If past is prologue, the prognosis is not good, and, ultimately, it is the employees who will suffer.

Treating Our Addiction to Drugs

The health care system in the U.S. is once again heading into crisis, in a way that we have not seen for over ten years. Just as in the 1980s and early 1990s, health care costs are rising out of control. What finally reined in the explosion in medical expenditures in the early 1990s was the "failed" effort by the Clinton administration to adopt a system of government-mandated, universal health coverage. While the Clinton administration may have failed to adopt the comprehensive legislation that was so desperately needed, it clearly succeeded on at least one level. Those efforts scared the bejesus out of the health care industry. The result was that the double-digit annual increases in health care expenditures leveled off, rising only 5% to 6% per year for the period from 1994 through 1998.  At the same time, the Clinton expansion of the U.S. economy reduced the number of unemployed who were without health coverage. Unfortunately, the election in 2000 has ushered in a new (old) era.

Despite the similarities between what is going on now and what happened in the 1980s and early 1990s, there are some important differences. During the era of Ronald Reagan and the first George Bush, the upward spiral of medical expenditures was broad-based, covering many areas of health care. This time, however, it is primarily focused in one specific area–prescription drugs.

Maybe as a result of their own strong medications, the one group that started pushing prices back up at double digit levels even during the Clinton administration was the prescription drug industry. In 1998, for example, while expenditures for hospitalization increased a paltry 2.9% and expenditures for physicians’ fees and clinical services increased a mere 6.6% (still ahead of inflation), prescription drug expenditures rocketed upwards at 15.2%. Nor has this trend abated, as shown by the following table:.

In terms of the overall health care "pie", this means that prescription drug expenditures are grabbing an increasingly larger share. In 1980, expenditures for prescription drugs were less than 5% of total national health care expenditures. By 1998, that share had increased to about 7.5%. By 2001, it had increased to nearly 10%. For those people with health insurance, this rise is even more dramatic. In one health plan with which I am associated, the share of the plan’s expenditures for prescription drugs has climbed from less than 10% in 1995 to more than 25% in 2002. Over the same period, a different plan that covers retirees has seen the share of its expenditures for prescription drugs skyrocket to 50% of its total expenditures. It is no surprise that employer health insurance premiums, which increased a mere 8/10ths of 1% in 1996, increased an average of 12.7% in 2002. This year, the situation is even worse, with employers, unions and insured individuals seeing premium increases often in excess of 20%.

How has this happened?

There are a number of factors at work. The drug companies will tell you that it is because they have continued to devote huge sums of money on research and development for new, cutting-edge medications that have extended our life expectancies, improved the quality of our lives, and have made other forms of medical care (such as hospitalization) unnecessary. While there is a grain of truth in this argument, for the most part, it is a gross distortion of reality.

The single largest expenditure for the major drug companies is marketing, far exceeding anything spent on research. Moreover, even as ubiquitous as the new-fangled direct-to-consumer marketing seems to be, the drug companies’ expenditures for marketing to physicians, the gate-keepers to prescription medications, is estimated to be 10 times larger.

Notwithstanding all of this marketing, the obvious question is why haven’t health plan efforts at prescription drug cost containment made more of an impact? After all, virtually every health plan now requires the use of generic versions of drugs, where available. Moreover, during the last few years, such highly-used blockbuster drugs like Prozac and Claritin have gone generic. Why hasn’t this resulted in a drop in prescription drug expenditures?

The case of Prozac is instructive. Shortly before Lily’s patent on Prozac expired, it introduced a new 7-day, time release Prozac that only needs to be taken once a week. Otherwise, this new Prozac is exactly the same as the old stuff. But look at the pricing. Retail, a month’s supply of the new 7-day Prozac costs $100. If bought through a typical health plan, the total cost (that is, the amount paid by the plan plus the amount of any copayment) will be about $77. For comparison, old-style, brand name Prozac retails for about $89, with a negotiated plan price of about $87. Generic Prozac, however, retails for a mere $34, with a negotiated plan price of about $27! And these drugs all do exactly the same thing!. Indeed, Prozac is one of a group of anti-depressant medications known as "Selective Serotonin Re-uptake Inhibitors" or "SSRIs", including Paxil, Zoloft, etc. Each of these other drugs remains under patent, and costs pretty much the same as the 7-day Prozac for a month’s supply. Even though not chemically identical, each of these drugs does pretty much the same thing. While some people will react better to a Zoloft or Paxil than Prozac, most people will not notice a difference. In view of this dramatic price difference, you would expect more physicians to be prescribing generic Prozac, and you would think that its market share would double or triple above the share occupied by the old (and expensive) brand name Prozac.

Maybe that would have happen if our system of medical care made any sense. Instead, since Prozac lost its patent and began to be sold in generic form, it has actually lost market share. In other words, after Prozac got cheap, physicians began to shift their patients away from Prozac and towards the more expensive (but no more effective) patent drugs. Why? The answer is marketing, both direct-to-consumer and to physicians. Because of the low profit margin, no one is marketing generic Prozac. It is the patent drugs that have gotten the big push, and each of us is stuck paying for it.

Another case in point is Claritin. Did you know that you can pick up a 75-day supply of generic Claritin at a local warehouse club, without having to bother going to see a physician, for $24 (this works out to $10 per 30-day supply). Clarinex does exactly the same thing as Claritin. However, it remains under patent. To get a 30-day supply of Clarinex, you must go to a doctor and get a prescription. Then, if you are buying it retail, you will pay about $78. If your health plan is paying, the negotiated price will be about $62. Even excluding the cost of the doctor’s visit, this means that either you or your health plan is paying 6 to 8 times as much for a drug that does exactly the same thing, and works exactly the same way! Even if you say this doesn’t affect you, because all you pay is your copayment, that’s not true. Ultimately, we all pay for these new, expensive drugs, one way or another.

Over the past few years, collective bargaining has focused on health care costs. Employers are, understandably enough, seeking to limit their exposure for their employee health care expenditures. Workers, also understandably, are trying to do the same thing. Wage increases? Forget about it–that money is needed to pay the rising cost of health care, which, in turn, is being driven by the skyrocketing increase in prescription drug expenditures.

How do we get a handle on this? As in any 12-step program, if we are to reduce our addiction to the latest and greatest prescription drug, we have to acknowledge that we have a problem. No doubt, any solution will be painful. Only when we acknowledge the gravity of the problem can we prepare ourselves to take the steps necessary to resolve the problem.

The Steeling of America

Recently, I spent the afternoon in court.  The subject of the hearing that I attended was the bankruptcy of one-time steel giant LTV Steel. From its beginnings as Ling Electric Company in 1947, LTV grew through a series of mergers and acquisitions until, by 1961, it became known as Ling-Temco-Vought, shortening that inelegant name to LTV during the 1970s. In 1968, the company bought a majority interest in Jones & Laughlin Steel, which, in 1984, it merged with Republic Steel to form LTV Steel, the nation's second-biggest steelmaker. This was LTV’s zenith.

Even as it built up its steel-making capacity, LTV began to rid itself of its non-steel assets, including, most notably, its coal mines and coal processing plants. However, its efforts were insufficient to achieve profitability, and, in 1986, LTV filed its first bankruptcy. During its nearly 10-year bankruptcy, LTV continued to shed its non-steel assets, reduced its steel-making capacity from 24 million tons per year to 10 million tons, moved its headquarters from Dallas to Cleveland, and paid hundreds of millions of dollars in attorneys’ fees. Although the company made a profit for about 5 years during the mid-1990s, it returned to red ink as cheap imports began to crowd it out of the market.

Finally, in 2000, LTV filed its second bankruptcy. Although it continued to operate for a period, it eventually became clear that LTV was going to stiff its creditors and leave its retirees hanging without their promised health care and with inadequately-funded pension plans. Now, it has sold off the bulk of its operating assets and is in the process of liquidating the remainder.

What happened? How did the second largest steelmaker in the U.S. come to this?

Unfortunately, the fate of LTV reflects the current state of the U.S. steel industry over all. With the exception of U.S. Steel, it is hard to even think of an American steel company that is not in bankruptcy. In part, the collapse of the steel industry was the result of increased overseas production and declining prices. Part of the collapse was also due to bad management decisions, and poor choices in the allocation of assets. Yet another factor in this collapse was the rise in so-called "legacy costs," attributable to large under-funded pension liabilities and retiree health expenses.

While some U.S. steel companies, may survive, albeit with reduced productive capabilities, others will meet the fate of LTV, with some assets scrapped and others picked up by "bottom feeders," like ISG (International Steel Group), which buys them up cheap, without any responsibility for these "legacy" costs. This fate has also befallen another steel giant, Bethlehem Steel. Whatever happens, it is clear that the U.S. has lost a significant portion of its steel-making capacity, and is now completely dependent upon a steady supply of cheap imports.

Is this necessarily a bad thing? If other countries can produce steel more cheaply than the U.S., isn’t it more efficient to make that steel overseas, and invest our capital in those areas where the U.S. can effectively compete? There are a lot of responses to these questions, and most of them lead to the conclusion that we should not let this happen.

During the Second World War, the U.S. turned its massive industrial machine to war production and saved the world from Nazi Germany, Imperial Japan and their fascist allies. Again, during the cold war, the U.S. was, in the prophetic (albeit backwards) words of Nikita Kruschev, able to "bury" the Soviet Union and its communist allies in a sea of industrial, consumer and military production, against which the Soviet Union could not compete.  Eventually, its efforts to match the U.S. resulted in the bankruptcy and eventual collapse of the Soviet Union and communist eastern Europe. Can the U.S. surmount the challenges of the 21^st Century, without the productive capability that brought it to its position of power and influence?  How will it face the immediate crises of terrorism around the world, a looming war in Iraq, the continuing instability in Afghanistan, a potential disaster in North Korea, multiple civil wars throughout Africa, the lack of a functioning peace process between Israel and its Arab neighbors, and a host of other perils that may explode at any time? How many wars can a nation fight as it disposes of its productive capability?

On another level, the loss of high-paying industrial jobs creates problems in our own country. With the elimination of the jobs that supported a well-paid working class, how can we maintain a general standard of prosperity? Can we even preserve social and political stability as our nation experiences an increasing stratification between rich and poor?

Additionally, the adverse consequences of industrialization in places lacking effective environmental, safety and workplace standards can be extreme. Proof of this lies in the largely uninhabitable swaths of Eastern Europe and Asia that have been blighted by the worst horrors of unregulated industrialization. Bhopal, India, is just one of the best know examples. Does it really do anyone any favors when the cost of cheap steel imports is a ravaged and poisoned landscape, and lost lives and limbs?

Identifying a problem, however, is the easy part. Finding solutions is much more difficult. Simply imposing barriers to imports is, at best, a short-term solution. As the current world situation clearly demonstrates, an impoverished world neither benefits the security nor the prosperity of the U.S. Clearly, any solution must preserve and augment the wealth and productivity of the U.S., without sacrificing the rest of the world in the process. Indeed, it falls to the U.S. to lead the world into a bright and prosperous future. Simply stated, nobody else is capable--or willing--to take on that job.

Getting back to where we started, LTV is all but gone, and Bethlehem Steel is soon to follow. How much longer before we wake up and realize that something must be done? How many more of our basic industries will we allow to collapse before we decide that we have a problem that deserves our serious and immediate attention?

Independence Day 2003

On this, the 227^th anniversary of our Nation’s founding, it is once again time to reflect upon where we are, and where we are headed. This past year has been full of triumph and tragedy, and it’s often hard to tell them apart.

Most notably, we have seen our human grief and anger over the crimes of September 11 cynically exploited and misdirected to topple the regime in Baghdad, ostensibly because of its links to the September 11 terrorists and the imminent threat to our lives and safeties from that regime’s possession of Weapons of Mass Destruction. Of course, neither the fact that there has yet to be one shred of credible evidence actually linking Iraq to the September 11 attacks nor the mysterious disappearance of those Weapons of Mass Destruction, seem to have bothered our political leadership in its orgy of self-congratulation. Obviously, Saddam Hussein is a really bad guy, and deserved to be removed from power. Perhaps if the invasion of Iraq had been justified on that basis, we could have had a meaningful national debate on the merits of military intervention. And maybe we would have reached the same conclusion. However, we had no such debate. One thing we have learned. When the current administration ran for election, one of the major planks in its platform was its promise of "No Nation-Building."  Only now do we truly see the wisdom of this promise.

We have also seen unconscionable violations of America’s democratic values through the long-term imprisonment of foreign nationals. Often held on evidence that could be easily discredited if only these imprisoned soles were given the opportunity, their detention remains shrouded in a cloak of secrecy. While it may be true that most of these people really are threats to U.S. national security, we have no way of knowing. Rather, we are asked to trust the judgment of our political leadership instead of the wisdom of our founding fathers who wrote the constitution that purported to guarantee civil liberties and the right to due process of law.

We have also seen the brief spurt of prosperity that characterized the late 1990s collapse, much like the stock market. The government tells us that the answer to our current plight is to keep cutting taxes, as if, somehow, bankrupting the U.S. government will ultimately lead to greater prosperity. Besides being absurd on its face, the proponents of these measures conveniently ignore one of the lessons of the Clinton administration–a fiscally responsible government, one that lives within its means while still providing the array of services that we have come to expect in a liberal democracy, goes hand-in-hand with economic growth and prosperity. Of course, the reality is that the current economic debate is fundamentally dishonest. The objectives of the tax cutters have nothing to do with spurring economic growth in a stagnant economy. Rather, their goals are two-fold.

First, as Reagan-era budget director David Stockmen candidly admitted, the reason for cutting government revenues while increasing spending is to bankrupt the government, thereby not only preventing it from providing the new services demanded by the populace, but also forcing it to curtail existing services. Whether that means fewer police, less funding for education, cutting maintenance for federal highways and mass transportation, or simply reducing social services is besides the point. These people have an ideological opposition to government and want to prevent it from functioning, consequences be damned.

Second, as the administration candidly admitted last year, our tax-cutting policy makers believe that the rich are over-taxed, while the poor and middle class are not pulling their weight. It is, therefore, no surprise that the wealthiest Americans are the principal beneficiaries of the latest round of tax cuts.

The past year has also seen an acceleration in the assault on working people and on their representatives, organized labor. By exercising its regulatory authority, the Department of Labor is issuing regulations that will sharply curtail the ability of many workers to get overtime pay. At the same time that workers are losing their legal rights, the government’s assault on the representatives of workers–their labor unions–is increasing. The Department of Labor remains intent on "staying the course" toward adopting new reporting and disclosure requirements for unions that are not only burdensome and expensive (and far beyond what corporate America is subjected to), but that will also lay unions open to ongoing litigation by such anti-union organizations as the National Right to Work Foundation.

On the other hand, the forces that should defend working people remain in disarray. The AFL-CIO has been distracted by the ongoing scandal at union-owned insurer ULLICO. We can only hope that, with the newest reforms in place, this matter is now behind us.  The Democratic Party, which has long been more amenable to labor and working people than its Republican counterpart, remains in chaos. It continues to be torn between those who believe that it must appeal to the "center" by becoming, in essence, a more moderate version of the Republican party, and those who believe it should become more ideological in its approach. Even among the more ideological, there is little consensus on what ideology to adopt.

Where do we go from here? Are we like the alcoholic who cannot seek recovery until he or she has hit bottom? Where is that bottom? How bad do things have to become before we wake up and realize that something must be done?

During the last national election, less than half of eligible U.S. citizens bothered to vote. The result is that we have a government that didn’t even win a plurality of those who cast ballots, let alone a majority of eligible voters. Our country truly was founded upon noble ideals of justice, liberty and equality. Despite our frequent and repeated failures to live up to those ideals, they must remain at the center of our national identity. It is, after all, the striving to fulfill the promise of America that defines who we are, and gives the world its last, best hope for the future.

Contracting Out America

One of the oft-repeated slogans of the far right in this country is that services currently provided by the government could be provided more effectively and cheaply by private enterprise working under contract with the government. Whether called "contracting out", "open competition", or "privatization," it all means the same thing: replacing government workers with private employees. Today, with the influence of the far-right at an all-time high, controlling both the White House and Congress, more and more of our national policy incorporates this ideological bent.

A case in point is the proposed Medicare prescription drug benefit. As everyone knows, it now appears that this long awaited addition to the Medicare program is soon likely to become a reality. At the center of this debate over the shape of this added coverage is the issue of privatization. The versions of this Medicare drug package that will likely form the core of the legislation that is expected to be enacted this year depend upon private managed care systems to deliver this benefit. What Congress seems to have forgotten is that its last attempt to privatize Medicare–the Medicare+Choice program–was a failure.

Congress enacted the Medicare+Choice program in 1997, which was intended to encourage entrepreneurs to establish private alternatives to the government-administered Medicare program. Seniors would then have the option of remaining in the existing Medicare system, or moving their care into the one of the private plans. To induce seniors to make the switch, these private plans would offer enhanced benefits over and above the normal Medicare benefits. Ironically, in view of the current debate over a Medicare prescription drug benefit, it was generally assumed that these private plans would provide prescription drug coverage. These Medicare+Choice plans would be compensated by receiving a fixed monthly payment for each enrolled beneficiary, at a level lower than the cost of benefits for an average beneficiary under the existing Medicare program. How would these private plans be able to afford to provide these additional benefits, for less money than traditional Medicare? That would be through the expected savings they would realize through their greater efficiency and flexibility in managing care.

Unfortunately, it did not work that way. The fundamental problem is that it turns out that these private plans have not been more effective in managing costs than the government-administered Medicare system. Rather, the most efficient provider of medical benefits remains the old, government administered Medicare program. In fact, the few Medicare+Choice Plans that have been financially viable have only done so by "cherry-picking." In other words, the successful plans have succeeded in signing up the healthiest of the elderly who utilize the fewest services, leaving the sicker, less healthy Medicare beneficiaries in the government-administered program.

This failure of the Medicare+Choice program can also be demonstrated by its low levels of enrollment. Even at their height, only 16% of Medicare-eligible beneficiaries actually opted into one of these plans, far short of the expectation that more than a third would sign up. Since reaching that peak in 1998, the percentage of Medicare beneficiaries in Medicare+Choice programs has dropped by one-third to 11%. At the same time, the availability of these programs has declined, with many plans either withdrawing from the program or reducing their coverage areas.

Moreover, the remaining plans are not evenly distributed. In 19 states plus the District of Columbia, these programs are either not available at all or have virtually no enrollees. Another 15 states have less than 10% enrollment. Even in the state with the largest proportional enrollment, the massive state of Rhode Island, only 34% of Medicare-eligible beneficiaries have enrolled in these private plans. The reality is that, in most of the country, Medicare+Choice Plans do not exist.

Even the numbers of physicians and other providers agreeing to participate in these programs has been woefully inconsistent, with an average annual turnover of 14% nationwide. In some states, the annual turnover rate has been as high as 36%.

Nor have the enhanced benefits that were supposed to be the hallmark of these plans lived up to expectations. Either they have only come at the price of a high premium, or they have been eliminated entirely.

In the end, all this experiment has done is to drain resources from the Medicare system. The fact that this failed model forms the basis for the new prescription drug benefit shows that the debate is being driven by ideology, rather than by any real consideration of good policy.

Another example of this form of double-think is the resilient, and absurd, notion of partially privatizing Social Security. How drawing 10% of all contributions out of the Social Security and investing it in the volatile stock market will resolve the inevitable shortfall in the system is something that the proponents of this scheme have not even bothered to try to explain.

Finally, in perhaps the most audacious example of the influence of this right-wing ideology is the effort by the Bush administration to fire about half of all government workers and replace them with contractors. While it may be true that private bill collectors, unrestrained by such limitations as the Taxpayer Bill of Rights, may be more effective than the IRS at collecting unpaid taxes, do you really want to be dunned by a collection agency for your back taxes? Even worse, do you really want your private tax information, now protected by stringent government privacy laws and regulations, to be freely turned over to these private bill collectors? That’s what the Bush administration and its right-wing allies want.

Clearly, we all want our government to run better. We also desperately need to improve our nation’s health care delivery system, not only for the elderly, but for everyone. Maybe, if we can focus on figuring out how to improve the efficiency and effectiveness of the delivery of services, rather than trying to impose extreme ideologies, we can actually have some success.

The Death of Live Music

American Federation of Musicians (AFM) Local 802, which represents the musicians who staff the orchestras in Broadway musicals, went out on strike on Thursday, March 6 against the theater owners and producers. In contrast to so many of today’s labor disputes where the issues center on health care, this dispute is focused on an older, more traditional issue. Like the recent lockout at the West Coast ports, the major dispute on Broadway involves issues of job security and the introduction of new technologies.

The controversy involves the requirement that theaters utilize a minimum number of musicians in their orchestras. In the 1993 contract, in response to the theater owners’ complaints that the existing minimums were too rigid, the parties negotiated a more flexible arrangement. Under this revised system, orchestra sizes varied, depending upon the musical needs of a show. A panel of prominent orchestrators, arrangers and musical directors was created to arbitrate disputes over orchestra size, based upon artistic criteria. Now, however, the theater owners want to revisit the deal they made in 1993, arguing that the decision as to how many musicians a show needs should be vested solely in a show’s "creative team."  The Union responds with several points. First, they contend that, in the absence of minimums, the theaters would short-staff their musicals. Indeed, the Union has presented testimony by members of these so-called "creative teams" stating that they have been pressured to reduce orchestra size below what is artistically required, and that it is only the contractual minimums that permit them to adequately staff their orchestras. Second, they argue that the theater owners’ real goal is to reduce the number of musicians in each show, or to eliminate them altogether, replaced by recorded or computer-generated music. Moreover, although this dispute involves the preservation of jobs, it is really about the survival of live music in the theater.

The issues raised in this strike have echoes from the past. At least twice before, musicians have fought the battle to save live music from the onslaught of new recording technologies.

It is no small irony that the same technologies that initially create large numbers of jobs eventually result in the elimination of those same jobs. Such was the case with moving picture technologies. When movies were first developed, they were, of course, silent. Although recorded music existed, there was no means of either amplifying those recorded sounds sufficiently to fill a theater, nor was there any way to synchronize the sounds to the pictures. While the lack of dialogue could be addressed through titles, it was apparent that people needed something to listen to that would complement and emphasize the action on the screen. Consequently, musical scores were developed, and live musicians were needed in each theater to play those scores. Although some movie houses would employ only a single organist, many would employ a band or orchestra. The use of musicians required that theaters be built with orchestra pits and other facilities for live music. To maximize the return on their investment, both in terms of recouping their construction costs and recovering the expense of maintaining orchestras, many theaters augmented their movie showings with live musical and comedy performances. These live shows were, of course, what we know as vaudeville. For this reason, the enormous popularity of silent movies helped to spread vaudeville across the country. This was a boon for musicians and other performers. Indeed, tens of thousands of musicians were employed at these multi-purpose theaters.

In the late 1920s, however, a number of new technologies were developed to permit moving pictures to be accompanied by sound. Although the early efforts were riddled with problems (particularly in both the quality of the sound and the continued difficulty in synchronizing the sound with the picture), in 1929, a new process was developed by Western Electric, known as the Kinegraphone or Photophone. This new system placed an image of the recorded sounds directly on the film, resolving the problem of synchronization. This technological revolution not only made possible the introduction of so-called "talkies," it also permitted the recording of musical scores.

The public demanded talkies, and silent movies lost their audience. This meant that theater owners needed to make a large investment in the necessary equipment to play the recorded sound. To recoup their investment, the theater owners typically fired their musicians, eliminated all live music and other performances, and began to play movies all day. Tens of thousands of musicians lost their jobs. Moreover, as new theaters were built, they no longer included orchestra pits or other provisions for live musicians. Thus, the introduction of the new "talking picture" technology also led to the death of vaudeville, and the elimination of thousands of more jobs.

The musicians did not take this lying down. The AFM devoted its principal effort to convincing the theater-going public of the superiority of live music, albeit without much success. In some cities, the AFM locals took a more active tack. In places around the country, musicians struck and set up picket lines, which were often honored by other unions. Local 802, the same local involved in the current strike, was particularly active, setting up picket lines and organizing boycotts. In some cities, the union succeeded in gaining agreements from theater owners to continue maintaining orchestras, although generally at reduced staffing levels. In most cases, however, the musicians’ efforts failed, and their jobs were eliminated. Even where the musicians had modest success, eventually even those jobs too disappeared.

Musicians faced a similar issue with the advent of radio. In the early days of radio, stations around the country needed to employ house orchestras, and to otherwise provide a venue for live music. As the quality of recorded music improved, so too did the propensity of radio stations to play those recordings. With the first "disc jockeys" appearing in the 1920s, live music began a slow decline. The AFM struck back. Rather than focusing solely on radio itself, the AFM targeted the recording industry, demanding new royalties payable to its members, not only on the sale of records, but also on the use of recorded music on radio, in movies and in other commercial venues. During 1942, the AFM went on strike, refusing to permit its members to record any music, a strike that went on for about a year. In the end, the Union won its core demands, and musicians began to benefit from royalties for their work. A second strike in 1948 was less successful (although by no means a failure), because both the recording and broadcast industries were better prepared, having stockpiled recordings. Nevertheless, whatever the AFM won in terms of royalties, it could not hold back the progress of technology. Today, live music on the radio is a rarity.

The progress of technology has continued to create new challenges for musicians. With digital sampling technologies and computer-generated music, the temptation to abandon live musicians in favor of this mechanical music is greater than ever.

The ongoing strike by Local 802 is in some ways a last stand for live music. The theater owners’ efforts to cut down their orchestras, something they can only do with electronic augmentation, erodes one of the last pure bastions of live performance. Already, it is not uncommon for live theaters around the country to substitute recorded music for live musicians. Just this week, as the musicians prepared to strike, Broadway actors rehearsed to the sounds of "virtual" orchestras. In the words of that queen of Broadway Harvey Fierstein, it sounded like a roller rink. That is just one reason why the actors, along with the other unionized theater workers, decided to support the musicians, making it impossible for the shows to go on. As a result of this solidarity, nearly all Broadway musicals went silent.

In some ways, this strike is like every other strike that has involved the substitution of machines for human beings. What makes this strike different is that it is about keeping the "live" in "live theater." For those $100 tickets, will the theater-going public tolerate recorded music? What’s next, a "virtual" string section at the symphony? That is really the question: will live theater remain live, or will it go the way of the movies and radio?

Under the watchful eye of Mayer Bloomberg, the parties sat down to a marathon negotiating session, where, at 9 a.m., Tuesday March 11, they were finally able to reach agreement.  Although the minimums have been reduced, they remain substantial, and have now been fixed for a period of at least ten years.  Among other things, the success of this strike shows the importance of union solidarity.  Congratulations to all involved!

Waging War Against Workers

It has only been a few months since the President won his fight to create a Department of Homeland Security (DHS), free from the terrorist influence of labor unions. The newest fight against terror is taking place at an agency that is only slightly older–and, although currently part of the Department of Transportation, one that will eventually merge into the DHS–the Transportation Safety Agency (TSA). As you may recall, the TSA was created in the wake of the terrorist attacks of September 11, with the goal of replacing the system of contractors and its workforce of underpaid, undertrained and overworked baggage screeners, with a professional workforce. In one year, the TSA went from 13 employees to 64,000, including 56,000 baggage and passenger screeners.

The creation of this new agency has not been without problems. For example, at one point, screeners went for more than a month without getting paid. Instances of sexual harassment have been far too common, and workers lack even the most basic protective gear, such as radiation detectors, notwithstanding their close and continuous exposure to X-ray machines of uncertain repair. Naturally, committees of TSA screeners at several airports contacted various unions looking for help.

That is how it came to be that the American Federation of Government Employees (AFGE) filed petitions–each containing signatures of at least 30% of the bargaining unit–seeking a certification election for TSA screeners at Baltimore-Washington International Airport and Laguardia Airport. In response, TSA Director Admiral Jim Loy issued an order prohibiting the unionization of TSA employees. According to the TSA press release, the basis for this order is Adm. Loy’s conclusion that "mandatory collective bargaining is not compatible with the flexibility required to wage the war against terrorism."

Obviously, someone is confused about what this war is all about. While most of the American people thought it was supposed to be about protecting America, American values and the American way of life, apparently the apparatchiks running the government have a different idea. After their convincing electoral victory, they see this war as just one more arrow in their quiver to advance their overall social and political agenda and to crush their enemies. Unions–especially government unions–have never been the friends of the Republicans. The last serious alliance between any government employees’ union and the Republicans was when PATCO supported Ronald Reagan in 1980. After that administration turned on PATCO and destroyed it, the remaining unions learned their lesson–these guys are not our friends. Should it be a surprise that the same people who destroyed PATCO, and who believe that the poor and middle class are not pulling their weight and paying their fair share of taxes, also see unions as a threat to national security?

AFGE has not taken this lying down. It is continuing its organization drive, including petition drives at airports around the country. It has also filed suit in federal court, seeking to overturn Adm. Loy’s order. Unfortunately, with the Republicans having successfully bottled up hundreds of judicial appointments during the Clinton administration, the same people who control the executive and legislative branches now also largely control the judiciary.

Joseph McCarthy used the very real threat of communism as a political tool to destroy his enemies and to advance his own political career. Now, fifty years later, it is happening once again, albeit in a more subtle manner. Will we sit idle and permit further erosion of our rights as Americans? So far, most of us have done exactly that. Until the American people are prepared to answer this question with a resounding no, we are sure to see more of the same.

Shock and Awe

In these pages, we have often carelessly tossed around the words "war" and "warfare" to apply to the Bush administration and its anti-union, anti-worker policies. Perhaps we can be forgiven for this hyperbole, because of the stakes involved. But now, America really is involved in a shooting war. Hundreds of thousands of Americans, along with their British and Australian allies, have placed their lives in danger to wage a war thousands of miles away with the avowed purpose of deposing a dictator, and freeing the people of this distant country from a brutal and thuggish regime.

Whatever our views of the merits of this war, there can be no doubt that we, the American people, feel a deep concern for the lives and safety of our troops abroad, and hope for a speedy, and successful, conclusion to this war. We also feel concern for the people of Iraq. Ostensibly, this war is intended to liberate them. We can only hope that the Viet Nam paradox–that we must destroy this village to save it–will not be visited upon the nation and peoples of Iraq.

For those of us who live and work in the region of the Nation’s capital, this is a very unsettling time. The horrific events of September 11 taught us that distance is no shield: we are at risk. This new war has revived our sense of insecurity and vulnerability. Are we really safer now than we would have been had the government permitted inspections to continue? Assuming that the Iraqi regime continued to obfuscate, would we be at greater risk if we had waited another 30-days to build a comprehensive world-wide coalition? Any answer to this question at this point can be nothing more than rank speculation. Because now, we are at war.

What we do know is that this war is different from any war that has come before. During the second World War, journalists like Ernie Pyle followed the troops around on the front lines, writing their stories. It was a way for the American people to gain insight into what was really happening on the battlefield. Today, we no longer have to wait for the newspaper and weekly news magazines. Instead, we can see bizarre, live images of television reporters crawling on their bellies on the front lines to interview troops engaged in battle. We also see live images from the enemy capital, not only showing the rain of bombs and missiles, but also the reaction of its citizens to their plight. Weird and unsettling.

The AFL-CIO has issued a statement in support of U.S. Troops abroad and, in this, represents the overwhelming majority view of the American people. This does not amount to an endorsement of the policy that led us to this point. Just like the rest of the American people, the labor community remains divided on its reaction to those policies.

What will the long-term results of this war be? Will it usher in a new era of democratic change amongst the oppressive dictatorships and monarchies of the Middle East? Will it enhance American prestige, enabling the United States to use its influence to broker peace throughout the world? Or will it only inflame anti-American sentiment around the world, and increase support to those who would destroy us? At the moment, in the words of Chou En Lai when asked whether the French revolution was a success, it’s too soon to tell. For now, we can only hope for a speedy and successful end to this war.

Reflections on 2003

The year 2002 was a difficult year for organized labor and workers’ rights. With few exceptions, the power and influence of the institutions created and maintained for the sole purpose of protecting workers’ rights have continued to diminish. Under constant attack from the forces of oligarchy and oppression, and in a state of internal disorganization and disarray, the labor movement continues to struggle.

The reasons for this decline are not hard to find. The decline of the older, more heavily unionized industries continued unabated, and has hit organized labor hard. For instance, the year 2002 showed the continuing collapse of one of the nation’s basic industries: the steel industry. During the last five years, we have seen the bankruptcies of Acme Metals (September 29, 1998), Laclede Steel (November 30, 1998), Geneva Steel (February 1, 1999), Qualitech Steel SBQ (March 24, 1999), Worldclass Processing (March 24, 1999), Gulf States Steel (July 1, 1999), J&L Structural Steel (June 30, 2000), Vision Metals, Inc. (November 13, 2000), Wheeling-Pittsburgh Steel (November 16, 2000), Northwestern Steel and Wire (December 20, 2000), Erie Forge and Steel (December 22, 2000), LTV Corp. (December 29, 2000), CSC Ltd. (January 12, 2001), Heartland Steel (January 24, 2001), GS Industries (February 7, 2001), American Iron Reduction (March 23, 2001), Trico Steel (March 23, 2001), Republic Technologies (April 2, 2001), Great Lakes Metals (April 11, 2001), Freedom Forge (Standard Steel) (July 13, 2001), Precision Specialty Metals (July 16, 2001), Excaliber Holding Corp. (July 18, 2001), Laclede Steel (July 30, 2001), Edgewater Steel (August 6, 2001), Riverview Steel (August 7, 2001), GalvPro (August 10, 2001). Bethlehem Steel (October 15, 2001), Metals USA (November 15, 2001), Sheffield Steel (December 7, 2001), Action Steel (December 28, 2001), Geneva Steel (once again on January 5, 2002), Huntco Steel (February 4, 2002), National Steel (March 6, 2002), and Calumet Steel (March 19, 2002). While some of these companies will survive, albeit in a different and reduced form, mostly they have already closed their doors or have announced their intentions to do so.

The transportation industry has fared only slightly better. Two of the nation’s major airlines–United Airlines and U.S. Airways–are operating in bankruptcy.  Although they have indicated their intentions to reorganize, they will do so with substantially reduced capacity, and with substantial financial concessions from their employees. Other major airlines–like TWA–have not been so lucky and are gone forever. Indeed, every single major U.S. airline but one is losing money. Amtrak, the nation’s major passenger railroad line, was threatened with a shutdown as well. Similarly, the U.S. shipping industry has seen has seen a significant decline, as more U.S. ships move their flags abroad.

The year 2002 also saw the closing of the last shirt manufacturer in the U.S.–C.F. Hathaway Co., which, under its one-eyed logo, had clothed Americans since before the Civil War. This was just one more step in the apparently inexorable movement of the clothing manufacture industry out of the U.S. Not only does the decline of these older industries decimate organized labor’s traditional member base, it also contributes to the growing concentration of wealth in fewer and fewer hands by eliminating these well-paying industrial jobs.

In general, the decline of these basic industries has presented a challenge that organized labor has not dealt with effectively. Over the last few decades, rather than focusing its attention on grass roots organizing, particularly in those fields where organized labor has yet to make a significant impact, organized labor has instead sought to extend its influence in the political arena. Not only has that legislative effort yielded few tangible results, it too is now under fire.

Last fall saw the overwhelming success of anti-worker, anti-union candidates. At the federal level, all three branches of government–the legislative, the executive and the judicial–are dominated by enemies of working people. Moreover, the recently-enacted campaign finance reform law will severely impair organized labor’s ability to influence elections. By default, the influence of large corporations and other big-moneyed interests will be increased.

With so many setbacks and obstacles, it is easy to become discouraged. Where are the bright spots in all this gloom? Certainly, there are some, if you know where to look.

They exist in the individual organizers who are engaged in the fight for economic justice at the local level, and are simply too busy to notice the bad climate for organized labor. These dedicated people work too hard at trying to help the people they serve to waste time bemoaning how difficult their task is, or how hostile the political climate.

There is also hope in the changing demographics of the United States. The country’s growing ethnic diversity provides an unparalleled opportunity for organized labor, provided labor can successfully adapt to these changing conditions. New immigrants to the U.S. present special challenges. Not only do they often lack skill in English, they are often susceptible to employer intimidation.

Some labor unions have shown their ability to adapt, both to the new economic realities and to the changing workforce, and are already beginning to change their approach. In some cases, the necessary steps are obvious: using multilingual organizers. In others, unions have begun to build coalitions with other community-based organizations as a way of better reaching out to workers.

Will these small steps be enough to reverse labor’s decline? As long as there remain organizers in the field who are too busy helping their fellow workers to worry about these types of questions, the answer may well be yes.

The PBGC and Me

Did you know that there is an agency of the United States government that guarantees that the monthly pension benefits that were promised to you by your employer will actually be paid? Did you know that the agency that provides this guarantee often provokes controversy among employers and unions alike? Most people don’t. What is this agency, what does it do, and why is it so controversial? By way of explanation, a little history lesson is in order.

With the rise of organized labor in the middle part of the 20^th century came the growth of pension plans. For the first time, no longer was care of the elderly left solely to personal savings and family responsibility. When employees bargained their wages, they also bargained a promise from their employers to set aside some of those wages for a later day. Beginning on a large scale in the 1940s, and growing through the 1950s and 1960s, pension plans began to be established in large numbers. In some cases, these plans were "multiemployer" plans, covering employees of different employers, and managed by boards of Trustees that included both union and employer representatives. In most cases, however, the plans only covered the employees of a single employer, and were exclusively managed by the employer itself.

Unfortunately, in many cases employers could not (or did not) fulfill their promises. In one of the most notorious cases, when the oldest automobile maker in America, Studebaker, shut its doors in 1963, it left behind a pension plan that simply did not have enough money to pay promised benefits. Some of its former employees–the lucky ones–received 10% to 15% of their promised pensions, while others received nothing at all. The hue and cry that arose from this debacle, including the parade of these newly-impoverished elderly to offices on Capitol Hill, began the 10-year push that led to the passage of the Employee Retirement Income Security Act of 1974 ("ERISA").

Among the reforms embodied in ERISA were minimum funding standards that require employers to set aside adequate amounts to actually pay for those promised pensions, fiduciary standards governing the conduct of the people who run the plans, reporting and disclosure requirements, and enhanced investigatory authority for both the Department of Labor and the Internal Revenue Service. One of the most important, but least-well understood of these reforms, was the guarantee program for defined benefit pension plans, and the federal agency that enforced that program: the Pension Benefit Guaranty Corporation ("PBGC").

The PBGC guarantees private pension benefits in much the same way that the Federal Deposit Insurance Corporation guarantees private bank deposits. Just like the FDIC, the PBGC guarantee is subject to limitations and caps.  This guarantee is funded by a premium paid by all private sector defined benefit pension plans.  In the case of single employer plans, the PBGC guarantee comes into play when an underfunded plan is terminated.  If a plan has enough money to pay all benefits, then the employer is required to go to an insurance company and buy annuities to provide those benefits. If a plan is underfunded, the PBGC will take it over, and the PBGC guarantee fund will make up the shortfall up to the full value of the guaranteed benefits. At the same time, the PBGC has the right to recover the amount of the shortfall from the employer.

Since guaranteeing pensions is a good thing, shouldn’t everyone be happy about the PBGC? After all, what’s not to love about a government agency that ensures that people who have worked all of their lives for the dignity of a comfortable retirement will actually get what they were promised?

The reality is far more complicated. While nobody disagrees that guaranteeing pensions is a good thing, the actions that the PBGC takes in effectuating that guarantee often results in controversy. For example, in the largest plan termination ever, the PBGC recently commenced proceedings to take over Bethlehem Steel’s pension plans. Although the plans have assets of $3.5 billion, the value of the benefits promised from by the plans is $7.8 billion. This means that the plans are short an estimated $4.3 billion. With the PBGC takeover, after figuring in the caps on guaranteed benefits, the PBGC figures that it will be on the hook for about $3.7 billion.

Both Bethlehem Steel and the United Steelworkers of America were angered by this action. Why? For several reasons. Most of this ire comes from the fact that terminating a pension plan freezes everybody’s rights. This means that nobody will earn any additional pension, even if they keep working. Even more galling to labor and management alike, employees who would soon have become eligible for special shut-down or layoff pensions can now never earn them. If they had not met the plan requirements for these special benefits as of the date of plan termination, it is now too late.

Furthermore, by terminating the plans, all of the sudden the PBGC has a bankruptcy claim of $4.3 billion. All of the other creditors of Bethlehem (including Bethlehem’s retired employees who have lost their health care) will see their share of any eventual distribution of assets significantly reduced as the result of this huge claim.

How does the PBGC justify this action? From its point of view, the PBGC (and its insurance system) are already on the hook for billions of dollars in this case.  In the wake of Bethlehem’s announced intention to close its doors and stiff its creditors (including the PBGC), it is the PBGC’s view that permitting the plan to continue to operate–and to permit Bethlehem’s employees to continue to earn additional benefits–only increases the liability of the PBGC’s insurance system–a liability that other U.S. pension plans will eventually have to pay for through their premiums.

While the case of Bethlehem Steel is problematic enough, even more serious questions are raised in cases where the PBGC seeks to terminate the pension plan of an ongoing company. In those cases, the imposition of a huge immediate liability that results from the Plan’s termination may be enough to put it out of business. It is this potential that has caused so many raised eyebrows in another well-publicized bankruptcy.

United Airlines filed for bankruptcy near the end of year 2002. Although it maintains several pension plans for its employees, it has not indicated any intention to terminate those plans or to otherwise abdicate its responsibility to fund those plans. This means that United does not currently owe anything to the PBGC. Nevertheless, the PBGC sought–and was granted–a seat on United’s creditors committee, seats that would normally be reserved for United’s largest creditors. Why?

The answer is pretty clear. United’s pension plans are $2.5 billion short of what they need to pay promised benefits. In the event that United changes its mind and seeks to dump its pension plan on the PBGC (or is unsuccessful in its plan to reorganize), it is the PBGC and the PBGC’s guarantee program, that will be left holding a $2.5 billion bag. Moreover, if the PBGC anticipates that such a dumping is likely to occur, it has the power to limit the growth of its liability by seeking to terminate United’s pension plans, as it did in the Bethlehem case. This would automatically generate a $2.5 billion claim payable to the PBGC. Thus, like the 800-pound gorilla, the PBGC can sit anywhere it wants.

In the other major airline bankruptcy, the PBGC has also generated controversy. Recently, U.S. Airways disclosed its proposed plan of reorganization, which it hopes to implement within the next few months. Almost alone among U.S. Airways’ creditors, the PBGC indicated that it could not agree to the plan. Why? Because U.S. Airways’ pension plans are underfunded by $3.1 billion. In its proposed plan of reorganization, U.S. Airways sought to stretch out its payments to its pension plans beyond what is permitted by law.

If the mission of the PBGC is to guarantee pensions, and to ensure that retired Americans receive the benefits that they were promised, why then does it take actions that prevent employees from earning the pensions that they have been promised? Is it really the mission of the PBGC to scuttle possible corporate reorganizations, and potentially put people out of work, in the name of limiting its own liabilities? The answers to these questions are not so clear. The PBGC is faced with conflicting obligations. On the one hand, it has a responsibility to the employees, pensioners and beneficiaries in each case to ensure that they receive the benefits that they have been promised. On the other hand, the PBGC has a longer term responsibility to ensure that the guarantee system remains solvent so that all covered workers may continue to have their pensions protected. It is in balancing these often conflicting responsibilities that the PBGC generates controversy.

What is the best way for the PBGC to balance these disparate concerns?  Is there any way to serve the long-term needs of the PBGC’s guarantee system without inflaming workers, unions and employers in particular cases? That is impossible to answer. The only thing that is clear is that, for the hundreds of thousands of people who already receive their pension checks from the PBGC, and the tens of millions of others whose benefits are guaranteed by that agency, the PBGC may be the difference between poverty and economic security.

Cash Warfare

Already holding the White House and the House of Representatives, and emboldened by their victory in the Senate, the Republicans have apparently lost all shame. The Bush administration and its Congressional allies have never hidden their desire to further cut taxes, notwithstanding the growing deficit and the government’s inability to find money to fund the government's antiterrorism and pro-defense programs. Up to now, however, the White House and the Congressional leadership have largely hidden the motivation for their desperate yen to slash taxes. They are concealing their reasons no longer.

The White House is attempting to fashion a tax reduction package based upon one simple premise:  the rich are paying way too much in taxes, and the poor and middle class are not pulling their weight. What is even more shocking is that the White House is not even embarrassed to admit that this is what they believe. To the contrary, according to the Washington Post, the Bush administration is:

refining arguments for why it may be necessary to shift more of the tax load onto lower-income workers.

* * *

Economists at the Treasury Department are drafting new ways to calculate the distribution of tax burdens among different income classes, which are expected to highlight what administration officials see as a rising tax burden on the rich and a declining burden on the poor.

Washington Post, December 16, 2002, pp. 3, et seq. These arguments are to form the core of a public relations blitz to convince the American people that the rich are being soaked and that the poor are getting away with murder. The opening salvo in this P.R. assault was a November 20, 2002 editorial in the Wall Street Journal. As part of the editorial, the Journal cited the following statistics:

According to the most recent data, from 1999, the richest -- with income above half a million dollars -- constituted 0.5% of taxpayers but accounted for 28% of total tax revenue. Simply put, a tiny group of people (553,380) were responsible for more than one-quarter of the income tax take of $877 billion.

* * *

The most recent data from the IRS, in 2000, show that the top 5% coughed up more than half of total tax revenue. Specifically, we are talking about folks with adjusted gross incomes of $128,336 and higher being responsible for 56% of the tax take. Eyebrows raised? There's more. The top 50% of taxpayers accounted for almost all income tax revenue -- 96% of the total take.

Wall Street Journal, November 20, 2002. Furthermore, argue the apologists for this appalling view, the disproportionality of the tax burden is growing, with more and more of it falling to the oppressed rich.

These arguments are, of course, premised upon misrepresentations, half-truths and outright lies.  This can be shown in a variety of ways.  

First, according to the U.S. Census Bureau, the highest-earning 20% of the population receives more than half of the nation’s personal income, while the lowest 20% only earns less than 1%.  If the top 20% earn more than half of the nation's personal income, what is so wrong with them paying more than half of the income taxes?  Isn't that the way the tax system is supposed to work?

Second, as a matter of public policy, is it so bad to have the poor pay a lower share of their income in taxes? Despite the Republicans’ protestations, doesn’t justice require that those who can afford to pay more should do so? Who ever said that the burden of taxation should fall evenly across all income levels, rich and poor alike? Why shouldn’t the rich pay more?   

Third, when these statistics only take into account the federal income tax, a tax that was specifically designed to be progressive. It does not take into account the host of other taxes that are imposed on Americans. The largest single one of these is the Social Security tax. This tax is regressive because it tops out once a worker hits a set income level. Thus, for year 2003, only the first $87,000 is subject to the 6.2% Social Security tax. Therefore, if you earn $20,000 per year, you will pay 6.2% of your income for Social Security taxes in 2003 (and your employer will pay the same amount). On the other hand, if you earn $200,000 per year, you (and your employer) will only pay 2.7% of your income in Social Security taxes. If you earn $2,000,000 per year, you (and your employer) will pay less than 1/3rd of 1% of your income in Social Security taxes.

Additionally, the administration’s arguments do not take into account the array of federal excise taxes, such as those on gasoline, liquor, cigarettes, automobiles, etc. Because these taxes are imposed upon products, they are really taxes on consumption. As we all know, the poorer you are, the greater the share of your income that you consume. Consequently, consumption taxes are regressive by their very nature, imposing a disproportionate burden upon the poor. Furthermore, the statistics used by the administration do not account for state and local taxes. These taxes include the full array of sales taxes and excise taxes on goods and (in some places) services, which, as consumption taxes, are also regressive. Even real estate taxes tend to be regressive.

Once all of these taxes are taken into account, the total tax burden is far more proportionate based upon income. Nationwide, according to figures from the Congressional Budget Office and the Institute on Taxation & Economic Policy, when the total personal tax burden (including state and federal income, payroll, excise and sales taxes) is all added up, it is only very slightly progressive, creeping up from about 22% for the 20% of the population who earn the least up to just over 30% for the 20% who earn the most. Clearly, this is not the soaking of the rich that the tax cut advocates would have you believe.

Fourth, even the statistics above only measure the level of taxation as compared to income.  If fairness is to have any meaning, the relationship between taxes and total wealth must also be examined. As skewed as income distribution is in the U.S., the concentration of wealth in a relatively small number of people is absolutely stunning. In the U.S. today, the top 1% of wealth holders now own nearly 40% of private wealth in this country, while the bottom 95% own about the same amount. Is it really so unfair that the people who have such a disproportionate share of the wealth pay more?

The so-called tax reform advocates have targeted specific taxes for elimination. First, there is the inheritance tax. Although, prior to the President’s 2001 tax reduction bill, this tax only affected the wealthiest of Americans (because estates with less than $675,000 in assets were entirely free from tax), the Republicans were able to enact legislation to gradually phase out this tax by characterizing it as a "death tax." After all, no one wants to support a death tax, right? In truth, repealing this tax was a give-away to the richest of Americans. 

Second, the Republicans have targeted the capital gains tax for elimination. Already, although 100% of wages are subject to tax, only 40% of capital gains (these are the gains on investments that are sold after they have increased in value) are subject to tax. That’s a 60% tax savings even under current law. And who owns property that is subject to capital gains? It is almost exclusively the well-off. 

Third, the tax-cut advocates want to eliminate the corporate income tax. In their view, taxing corporations is unfair, because corporate stock is owned by people who also pay tax. In reality, this is just one more way for the rich to get a tax break, because it will permit corporations to pay higher dividends to shareholders. Which individuals own the most stock? Obviously, it’s not the poor–they do not invest much in stock.

Finally, the long-term objective of these tax cut advocates is to scrap the income tax altogether. Offended by the very idea of a tax that is designed to impose a heavier burden on those who can most afford to pay, these "reform" advocates would have us replace the progressive income tax with a regressive national sales tax. In this way, the tax burden could be shifted back disproportionately to the poor and middle class, where they feel it belongs.

Will this effort succeed? Not necessarily. Even if the tax burden of the poor were tripled, that would generate very little revenue, since the poor earn so little (that’s why their poor). That means that any program by the Republicans to shift the tax burden away from the richest of Americans would necessarily increase the tax load of the middle class. Thus, although, for the most part, the poor do not vote, and nobody else cares very much about their interests, the middle class do vote. Once the effect of the Republican assault on 100 years of social progress becomes clear, the majority of voting Americans will not stand for it.

Should we therefore be sanguine and assume that this effort to soak the poor and middle class in order to relieve the rich from their tax burdens will collapse of its own weight?  No.  Already, the Republicans were able to achieve a portion of their objective with nary a peep. By changing the terms of the debate, and using creative (if misleading) slogans, they were able to achieve the elimination of the inheritance tax, along with a bevy of other tax breaks and reductions. Having secured their hold on the federal government, and with the Democrats in confusion and disarray, who will stop them? Who will sound that clarion call that will finally waken the American people to what is really going on?

It is clear that this latest effort by the Republicans is nothing less than class warfare. They have set their sights upon benefiting the rich at the expense of the rest of America. They will not cease until the American public finally rouses from its long slumber, figures out what is going on, and puts a stop to it.

Rent-a-Government

In a recent article, we outlined the history of the U.S. Civil Service, and how it was conceived as an antidote to the rampant corruption and cronyism that preceded it. Prior to the inception of a professional, non-political federal workforce, the government labor pool was just one more tool of the prevailing political machine. Just like in some big cities today, government jobs provided both a source of rewards for loyal supporters and a ready source of political capital. In our earlier article, we expressed our concern that the President’s insistence that the new Department of Homeland Security be free of the "restrictions" of the employee protections of unions and the civil service represented an assault on over 100 years of "good government" reform, and a return to the base politicization of government services and the federal workforce that was abolished more than a century ago. We could hardly have foreseen, however, just how ambitious this assault on good government would turn out to be.

Recently, the President announced his plan to fire approximately half of the civilian government workforce.  In their place, the President intends to contract out the services now performed by those workers to private companies.  The employees of these companies will, of course, be entirely free from any sort of civil service protection. In practice, this means that, instead of having our essential governmental services provided by professional civil servants, they will be provided instead by underpaid, overwhelmingly non-union workers employed by companies run by richly-compensated corporate executives.  Supplementing these corporate contractors will be the usual array of overpaid and underperforming consultants, whose jobs are primarily to exploit the budget process to milk out as much federal money as possible.  Why would anyone want to do such a thing?

The reason is obvious:  money.  Not money for the government, since it is unlikely that there will be any real savings to the government or the taxpayers. We are talking about political money.

About a third of federal government workers are dues-paying union members.  (The percentage of unionized government employees is even higher when you exclude the armed forces, the one group that is almost certainly protected from being contracted out.)  By contrast, fewer than one in ten private sector employees belong to unions.  According to analysis by the Center for Responsive Politics, during the period from 1990 until 2002, organized labor was responsible for approximately 7-1/2 percent of federal campaign expenditures, including both "soft" and "hard" campaign contributions, nearly 80% of which was provided through voluntary member contributions to Union PACs. The vast majority of this money–93%–was spent for the benefit of Democratic candidates. By contrast, business interests (even excluding lawyers and lobbyists) were responsible for more than 2/3rds of campaign contributions over the same period. Of these contributions, approximately 60% went for the benefit of Republicans and 40% went for Democrats.  By depriving the unions of their solid base of federal jobs, and turning those jobs over to politically-reliable contractors, Republicans will increase the share of political money that flows to their benefit, while significantly weakening the power of organized labor.

Do our august members of Congress have the temerity to pass the revolutionary legislation that would permit the President to realize his wild scheme?  In the wake of the recent electoral sweep of both houses by the President's party, the better question is why wouldn’t they?

Cashing in on Claritin

In an audacious marketing ploy, Schering-Plough has pushed the FDA for permission to make its block-buster prescription drug Claritin available for sale over-the-counter.  As a prescription drug, Claritin sells for about $100 for a 30-day supply. When sold over-the-counter, the price will fall to less than one-third that amount, to an estimated $30 for a 30-day supply. Up to now, Schering-Plough has resisted any effort to go over-the-counter with this blockbuster. Why should it do so now? What has changed?

An obvious answer is that this action is a response to managed care, which is pushing people away from expensive patent medications, such as Claritin, to older drugs that are available in cheaper, generic form. This factor, however, also affects every other drug on the market, and so is not sufficient in and of itself to cause Schering-Plough to take this step.

The real answer has to do with the age of Claritin. Claritin, with its active ingredient loratadine, is now twenty years old. Therefore, its patent was originally due to expire on December 16, 2002. Without a patent, Claritin would be exposed to competition from cheap generic equivalents. Indeed, at least three different companies have generic versions of Claritin ready to hit shelves once the patent expires.

Having learned from the example of Eli Lily, which suffered a dramatic loss of profits when its blockbuster Prozac was clobbered by cheap, generic competition after its patent expired, Schering-Plough was determined to try a different strategy. This strategy has several components.

First, last year, Schering-Plough introduced an enhanced version of Claritin, known as "Clarinex." Although using a different active ingredient, the two drugs are chemically related, are metabolized in the same way, and there is very little difference in how the two drugs operate in the human body. Nevertheless, Schering-Plough has heavily promoted Clarinex as the greatest thing to happen to Western Civilization since . . . , well . . . , Claritin. In this way, Schering-Plough hopes to wean people off of bad, obsolete ol’ Claritin and on to new and improved Clarinex. Although this is a tried and true strategy that has worked in the past, it remains vulnerable to drug formulary programs imposed by many health plans.

Second, Schering-Plough recently began to test the effects of Claritin on children. Under federal law, the reward for experimenting with drugs on children is an automatic six-month patent extension. This means that the generic manufacturers will have to cool their heels (and store their warehouses full of drugs they cannot yet sell) for an extra six months until the extended Claritin patent expires in June 2003.

The third piece of the Schering-Plough strategy is where we started.  Although Claritin (along with Clarinex and certain other allergy medications) are already available over the counter in most of the world, until recently, Schering-Plough had fought the effort by several large health plans to make these drugs available in the U.S. without a prescription.  As the result of Schering-Plough's sudden change of heart, beginning mid-December 2002, Claritin will be on the shelves of your neighborhood drug store or supermarket.

There are several significant benefits to selling Claritin over-the-counter. Because the over-the-counter market is many times larger than the prescription market, Schering-Plough is banking on the added revenues from increased sales to offset the decreased price. Moreover, with the extra six months before Claritin’s patent expires, Schering-Plough has another half year in which to establish brand loyalty before it has to face generic competition. By the time the generic drug manufacturers are finally permitted to sell their products, Schering-Plough hopes that brand-named Claritin will have so well entrenched itself in the marketplace and the public consciousness that the competition will be effectively shut out. Another benefit to Schering-Plough is that the generic manufactures who had prepared to compete with a generic prescription version of Claritin will have to repackage and retool their product and their sales campaigns so that they can too sell over-the-counter.

Between over-the-counter Claritin and prescription Clarinex, Schering-Plough hopes to remain the number one supplier in the lucrative field of allergy medications. Having already spent hundreds of millions of dollars promoting both prescription Claritin and, more recently, Clarinex, there is no doubt that Schering-Plough will plow hundreds of millions of dollars more to reposition these drugs with the goal of dominating both the prescription and over-the-counter allergy medication markets.

While such a strategy has the potential to preserve the billions in revenues Schering-Plough currently receives from these drugs, what does it mean for the American consumer? In the short run, the ability to buy Claritin over-the-counter will mean that whoever is paying for your medicines will pay less. With a pricing difference of $70 per 30-day dose, that’s a lot of savings. Particularly for those consumers who have to pay for their prescriptions out of pocket, this is a tremendous benefit. Moreover, after Claritin is available in generic form, the knock-offs and store brand equivalents will be even cheaper, probably $10 or less for a 30-day supply.

For health plans, the potential savings is also substantial. However, the issue is somewhat more complicated. Most health plans do not pay for over-the-counter medications. Thus, these plans may realize huge savings because what is now the third-most prescribed drug in the country will no longer be covered. For consumers, however, this means that, instead of paying a prescription copayment (which, depending upon the plan, may range anywhere from $3 to $30 per prescription), they will be paying the full cost of the drug. As long as the cost of the drug is less than the copayment, they still come out ahead. Where the cost of over-the-counter Claritin exceeds a health plan’s copayment, consumers will have an incentive to get their physicians to prescribe Clarinex, so that the expense is covered and they are left with only the copayment. While this may be great news for Schering-Plough, it is not such good news for health plans. Moreover, in the long run, what is bad for health plans is also bad for consumers. The trick, therefore, is to figure out how to get people to continue to use the over-the-counter medicine rather than getting a prescription filled.

Looking at the issue in a broader sense, this episode underscores several fundamental flaws in the U.S. health care system. It does not take a genetic engineer to conclude that prescription medications cost too much. The huge premium that Schering-Plough can continue to charge for its product–along with the huge premiums also charged by other patent drug producers–is one of the major reasons U.S. health care costs are continuing to skyrocket. In addition, the enormous sums spent on marketing, both directly to consumers and (more significantly) to physicians, creates a demand for these patent drugs, regardless of whether there is any significant benefit over older drugs available in generic form. Finally, the enormous profits that flow from these blockbusters distort pharmaceutical research. From a purely human and social standpoint, there is a desperate need for research into treatments for such ailments as tuberculosis and malaria. Because these areas lack the profit potential of anti-allergy medications, it is not hard to guess where the bulk of the research money is going.

Will these distortions to our health care system continue, or will we figure out a way to impose rationality on a system that is wildly out of control? Must the problems grow until we blunder into a crisis of unprecedented proportion, or will we finally learn that we need to act before plunging over the brink? Whatever happens, you will read about it here.

Morgan Stanley Speaks

On November 11, 2002, Morgan Stanley, the brokerage/investment banking conglomerate, issued an analyst report in which it advised its clients: "Look for the union label - and run the other way." Undoubtedly emboldened by the overwhelming electoral victory of the enemies of labor, Morgan Stanley added: "In the face of a difficult economic outlook, investors do not want to own businesses with high fixed costs, pension funding issues, spiraling post-retirement health-care obligations and potential labor strife. . . . Rigidity in labor costs, processes and pension requirements, while perhaps beneficial to employees, may prove toxic to shareholders."

It is no small irony that, at the same time Morgan Stanley is making these anti-worker statements, it is laying off more than 2,000 of its own employees. Overall, Morgan Stanley has lost 15% of its employees since the bursting of the high tech bubble.

Clearly, Morgan Stanley is more comfortable advising people to invest in companies like Enron and WorldCom, where the officers are lying, cheating and stealing, than in companies that are committed to paying their workers decent wages and benefits. Of course, at the same time Morgan Stanley is advising its clients to invest non-union, it is being investigated for providing phony and biased investment advice in order to bolster its investment banking business.

Having joined in the Wall Street high tech orgy, and having sold its integrity for the prospect of handling the next fat IPO, you would think that Morgan Stanley would be a bit more concerned about the effect its anti-union statements may have on the billions of dollars in union pension plan assets that it has been hired to invest. Perhaps that is why, in response to a blast from AFL-CIO President John Sweeny, Morgan Stanley has begun to back away from its earlier outrageous statements.

Moreover, as a matter of economic principal, Morgan Stanley is dead wrong. Its anti-union stance is based on the faulty assumption that lower production costs always mean higher profits. What it fails to realize is that without unions, and without the decent wages and benefits that unions bring to ordinary workers, our economy will eventually starve. Already, we are seeing increasing stratification between the well-off and the ordinary workers, who are falling farther and farther behind. Without a working class that can afford to live above subsistence level, we will eventually become just another third world country, mired in poverty and injustice.  Unless we can change the attitudes that make a company like Morgan Stanley believe that it can make these sorts of sweeping anti-worker statements without shame or compunction, this may well be a preface of things to come.

Falling Markets and Dropping Shoes

Beginning in the early 1980s, the stock market began its unprecedented, and seemingly unrelenting, assent. With only a few bumps along the way, the markets rose to enormous heights. Not until year 2000 did this amazing upward spiral finally begin to reverse itself.

Both on the way up, and now on the way down, the effect of this market run-up has been profound. Over the course of the stock market rise, employer-sponsored pension plans experienced dramatic improvements in their financial condition. The immediate effect of this improvement was to permit some employers–particularly those who maintained single employer defined benefit pension plans–to stop making cash contributions to their plans. In many cases, it even permitted employers to increase pension benefits without making additional contributions, or sometimes, any contributions at all. Similarly, multiemployer pension plans were able to increase benefits with little or no increase in contributions. Indeed, it was not unusual during these heady days of rising markets for unions to negotiate significant pension increases in lieu of higher wages. Often, the savings from stagnant wages were used to finance the skyrocketing cost of medical coverage. This way, everyone benefited: the employees received larger pensions without their employers suffering significant increases in their labor costs.

Another byproduct of the market run-up was the increase in the popularity of defined contribution plans among employees. As the markets continued to rise, individual workers wanted a larger piece of the pie, which they assumed they could get by investing in the market–something they could not do with a defined benefit pension plan.

With the collapse of the tech bubble and the subsequent decline in the markets overall, the first reaction among workers depended upon whether they participated in defined benefit or defined contribution plans. The employees of a company like Enron, are only an extreme example. These employees saw their defined contribution pension plan, which was overwhelmingly invested in company stock, vanish nearly overnight. To a lesser extent, all employees with defined contribution pension plans invested in the stock market have seen their retirement savings diminish as the result of the Bush-era market crash. These employees wished that they had participated in defined benefit plans, which are guaranteed both by their employers and by an agency of the United States government.

With the decline of the stock market now having continued for three years running, defined benefit plans are being pinched as well. After years of promising benefit increases at no cost due to the run-up in plan assets, the other shoe has dropped. Compounding the problem with declining assets is the effect of the current record low interest rates. The lower the interest rate, the larger the amount of the liability for a promised benefit. Consequently at the same time that plan assets have taken a beating from declining markets, the cost of providing promised benefits is rising to near record levels. This double whammy has had the effect of creating dramatic, and disturbing, unfunded pension liabilities. Thus, unless the markets take a sharp upward rise pretty darned soon (something that no one expects), the companies maintaining these plans are going to have to figure out how to pay off all of this unfunded liability.

The issue of how to fund these unanticipated liabilities presents a problem. In year 2000, only an estimated 14% of large corporations made contributions to their defined benefit pension plans. This year, the estimate is that at least 70% will be making contributions. Obviously, this cash outlay is a drain on earnings that have already been depressed by the slow economy.

Besides the obvious effects of all of this newly-found unfunded liability, there are more subtle and insidious problems as well. During the period when pension assets were increasing, many corporations booked their pension surpluses and surplus earnings as corporate income. Among large corporations, it is estimated that from 5% to 7% of their stated earnings during these boom years were actually attributable to these pension surpluses. Because the surpluses had nothing to do with the corporations’ operations, and because these pension surpluses could not be used for general corporate purposes, these earnings were artificial. Some corporations, like IBM and GE were able to artificially inflate their earnings by as much as 10% per year based upon their pension surpluses. The net effect of the market collapse on these corporations’ financial statements is two fold. First, and most obviously, there are no more pension surpluses around to continue to inflate earnings. The second effect is more serious. With the elimination of those surpluses, all of the previously booked gains will have to be reversed, and the corporations will have to now book these losses against their current earnings.  The listing of the major corporations that will be taking these charges against earnings is dramatic: ChevronTexaco – $500 million; Baxter International Inc – $509 million; Citizens Communications Co. – $100 million; AK Steel – over $300 million; U.S. Airways – over $700 million; United Airlines – $1.5 billion; American Airlines – $1 billion; U.S. Steel – $700 million; EDS – $470 million; AON – $500 million; Delphi Corp. – $830 million; Cleveland-Cliffs – over $100 million; and the list goes on.  These charges are in addition to any actual payments these companies have made to their pension plans.  For some companies, the loss of shareholders equity caused by these accounting reversals has even placed them in technical default with their lenders.

The result of all of these charges against earnings, not to mention actual additional pension funding expenses and the loss of phony earnings, has caused the stock market to further punish these corporations, which, in turn, adds further downward pressure on the already depressed stock market.

Where does this leave the average worker? With the double whammy of skyrocketing medical costs and huge pension liabilities, something has to give. Already, we have seen many employers trying to force their employees to bear a greater share of the cost of health care. Now, wages are beginning to take a beating as well. Although companies like United Airlines and U.S. Airways, where employees have actually seen their wages reduced, are unusual, more and more employers are holding wages steady or are providing only very small increases. This trend is not likely to change anytime soon.

On the Waterfront

One of the ongoing labor disputes that has garnered growing concern involves the West Coast dockworkers, represented by the International Longshore and Warehouse Union ("ILWU"), and the port employers (most of which are foreign-owned), represented by the Pacific Maritime Association ("PMA"). As with so many other recent labor disputes, the primary issues include the impact of new technologies and the rising cost of health care.  In addition, as an emblem of the times, the question of port security has also become an issue.

Currently, when information involving port shipments is transmitted from overseas, it is received at the ports and reentered into the port computer systems by ILWU-represented clerks. The PMA insists that this step in the process is unnecessary and costly, and has proposed its elimination to permit what it calls "the free flow of information." For its part, the ILWU does not argue with this. Indeed, the union has indicated that it is willing to accede to the employers’ demand--a major concession--even though it will mean the loss of over 600 well-paying jobs.

Since both sides agree on what is to be done, where is the disagreement?

If the "free flow of information" proposal is implemented, it will result in the creation of approximately 75 new technology and planning jobs. The ILWU argues that, in exchange for giving up over 600 jobs (thereby saving the employers over $100 million per year), it is only fair that members of the union have the right to work the newly-created jobs. The employers, for their part, have refused to share their gains, and insist on either working the jobs non-union or contracting the work out.

Additionally, the PMA has made two proposals intended to fundamentally change the structure of the health care program. First, the PMA insists that all new hires be required to participate in an HMO, rather than the 80/20 indemnity plan that other employees have access to. The ILWU rejects this change, pointing out that if the PMA's proposal is accepted, over time, without the entry of new employees, the indemnity plan will lose its member base until it becomes entirely unsupportable. Moreover, this proposal would create a division between the interests of new hires and older employees. Second, for those who remain in the existing plan, the PMA is demanding that the current indemnity benefit structure be scrapped in favor of a PPO that may result in significantly increased costs for the union's members.

Overall, the ILWU argues that the ports have enjoyed significant profitability over the past years, in large part as the result of past concessions made by the union that permitted the introduction of new technologies. Thus, it is unfair for the employers to now demand new concessions from their workers, without offering anything in return.

A third issue has also surfaced in the negotiations.  Ever since the events of last September 11, it has become increasingly clear that U.S. ports are vulnerable to terrorist infiltration.  In large part, this is a result of inadequate inspection of the large containers used in "containerized" or "intermodal" shipping (see explanatory sidebar).  Not only does this present an opportunity for terrorists to disrupt shipping (and a serious danger to everyone who works on the docks), but it also provides a relatively easy means for enemies to smuggle their instruments of destruction into the U.S.  For the past year, the ILWU has attempted to work with the employers to address this problem, but their entreaties have been largely ignored.  For their part, the employers have responded only that they are more than willing to require in-depth background checks of union members, but have refused to seriously discuss any actual means of improving port security.

This is a very sensitive time for such a labor dispute. First, at least in theory, the U.S. is in the middle of a war. Any disruption in the flow of supplies and materiel may have negative consequences to the war effort. Second, in view of the ports' existing vulnerability to terrorist threats as the result of inadequate inspection of shipping containers, replacing experienced dock workers with inexperienced scabs would only magnify this threat.  Finally, the free flow of Pacific Rim shipping is vital to the U.S. economy. A disruption in the West Coast ports will only exacerbate the continuing Bush recession.

The government, for its part, repeatedly hinted at intervention to prevent a strike. The government has the power to invoke an 80-day "cooling off" period under the Taft-Hartley Act. More troubling are threats by the administration, encouraged by the port employers (and by their ally the West Coast Waterfront Coalition), to limit or eliminate entirely the workers’ right to strike through an act of Congress.

After the expiration of the contract on July 1, the parties operated the ports under a series of short-term extensions to the old contract.  Most of these extensions were for 24 hours, each expiring at 5 p.m. the next day.  The last such extension was signed on August 31, and expired at 5 p.m. on Sunday, September 1.  As the result of a break-down in negotiations resulting from the employers having reneged on matters previously agreed-to (primarily involving health care issues), no new extensions have been signed.  Consequently, there is currently no contract in place.  Although the ILWU indicated that it would continue to work without a contract, the employers announced that it would impose a lockout if the Union initiated a work slowdown.  As if to throw fuel on the fire, the Bush administration, according to the Union, reiterated its threat to use military force to seize the docks.  As described by the Union, the government "has assembled in San Diego trained Navy dock workers from bases around the world and have them ready to move on us."

On September 4, negotiations resumed at the committee level.  After 7-1/2 hours, the parties were able to achieve a major breakthrough by settling (for the second time) their health care issues.  With the "free flow of information" issues at the fore, meetings of the Technology Sub-Committee continued on a day-to-day basis, but without resolution.  The ILWU singled out one PMA member--Stevedoring Services of America (SSA)--as the primary force behind the PMA's intransigence and its unwillingness to share with its members' employees the gains achieved through the increased use of the new information technologies.  As a result, the ILWU conducted a series of rallies targeted at SSA.  

According to the PMA, on Monday, September 16, the ILWU initiated an on-again, off-again slow-down at the ports of Long Beach and Oakland.  The Union, for its part, denied that it ordered any slowdown, but blamed the problems at the two ports on mismanagement by the employers.  In one case, the employer (SSA) had scheduled too few trained crane operators to handle the volume of freight, while in the other, the employer (Sealand/Maersk) had imposed a last-minute change in the workers' lunch schedule, interfering with their attendance at a pre-scheduled union rally and provoking a spontaneous walk-out of a grand total of 19 dockworkers.  Nevertheless, the board of the PMA authorized its president (who also happens to be the president of SSA) to take "defensive action" to counter the purported slowdown.  Ultimately, the PMA made a specific threat to lock out the ILWU at the ports of Long Beach and Los Angeles beginning at 7 a.m. on Friday September 20 unless the slowdown at Long Beach ended.  Late Thursday, September 19, the crisis was temporarily averted when the PMA declared victory and called off the threatened lockout after an adequate number of personnel reported for work.  The Union, for its part, continued to deny that there was any planned work slowdown, and that the lack of personnel at the single port was caused by anything more than a temporary shortage of workers with the skills required by SSA.

Once again, over the weekend of September 21, the PMA accused members of the union of staging a minor work slowdown and a single act of vandalism.  The ILWU denied that there was any orchestrated slowdown, and attributed the problems on the ports to the seasonal increase in shipping volume, made worse this year by the shipping companies' efforts to move as much freight as possible in advance of a work stoppage, coupled with a shortage of workers with the particular skills needed.  As for the single act of vandalism, the union attributed it to an individual worker acting out of frustration.  At the time of these incidents, neither the PMA nor SSA (which was affected by these putative incidents) were prepared to directly accused the union of complicity in these events--at least not yet.

On Wednesday, September 25, the PMA declared that a partial agreement had been reached on the technology issues.  The ILWU negotiators, however, disputed this rosy pronouncement, expressing instead their growing frustration that the employers had continued to refuse to reciprocate for the package of concessions offered by the Union that would permit the employers to achieve their stated objective of introducing the new information technologies.  In addition, the Union accused the employers of ramping up the volume of shipping, requiring members to work double shifts, and taking other measures that both compromised safety standards and slowed the movement of freight through the ports.  The Union pointed out that the employers' actions compromising safety and cutting corners came at a time when there had been a record number of port fatalities.  The ILWU, for its part, has refused to permit its members' lives and safety to be endangered by these relaxed standards.  According to published reports, the ILWU instructed its members to "work safely in strict accordance with all provisions of the Pacific Coast Marine Safety Code and all federal and state health and safety regulations."   The PMA contended that the ILWU effectively gave its members a "green light" to implement a slowdown.

In response, the PMA temporarily locked out its employees at all 29 West Coast ports effective 6 p.m. on Friday September 27, and reopening them at 8 a.m. on Sunday, September 29.  The PMA referred to this temporary lockout as a "cooling off period."  Rather than "cooling off" the situation, the only effect of this lockout was to further inflame matters.  Following the reopening of the ports, the employers continued to have problems filling all of the jobs at some ports and bringing those ports back to full productivity.  Claiming that the ILWU was continuing a work slow-down, approximately six hours later, the PMA locked-out its employees once again, announcing that the ports would not reopen until the union either signed a new contract or an extension to the expired contract.  Of course, after the ILWU agreed to the PMA's request to sign an extension, the PMA changed its mind, preferring to await federal intervention.  While the ports remained closed, food sat rotting in the holds and on the docks, hundreds of ships sat idle, factories began to shut down as they ran out of parts and materials, workers were laid off, and the cost to the U.S. economy was estimated to be in excess of $1 billion per day. 

Not surprisingly, the PMA's close ally, the West Coast Waterfront Coalition, requested that the Bush administration "take whatever steps are necessary to reopen the nation's West Coast ports."  Joining this chorus were groups ranging from the National Association of Manufacturers, the American Trucking Association and the Consumer Electronics Association to such know-nothing organizations as the National Right to Work Foundation.  Even some labor supporters began to suggest that government intervention may be appropriate, including Democratic Senator Dianne Feinstein who had previously urged the administration to butt out.  On the other hand, despite its predilection for intervening on behalf of the employers, the administration was aware that invocation of the Taft-Hartley Act has rarely succeeded in resolving labor disputes, has usually only made matters worse, and often comes with a political price.  Moreover, despite its general anti-union stance, the Bush administration has attempted to build alliances with several factions within organized labor, efforts that would be jeopardized by open intervention on behalf of the employers.  Therefore, the administration had a strong incentive to provide the parties with an opportunity to resolve matters on their own.  In an effort to avoid direct intervention by helping the parties reach agreement, the government dispatched Peter Hurtgen, the Director of the Federal Mediation and Conciliation Service (FMCS), to mediate the dispute.

On Tuesday, October, 1, the parties planned to meet with Director Hurtgen at the FMCS' San Francisco office to discuss a possible framework for mediation.  However, the PMA delegation showed up at the scheduled meeting accompanied by armed guards.  Whether or not this was a deliberate provocation intended to further inflame an already tense situation, it clearly had that effect, and the ILWU delegation walked out.  Demonstrating an apparent penchant for understatement, Director Hurtgen stated:  "the presence of the security personnel [w]as inappropriate and a breach of bargaining protocol particularly when the meeting is under the auspices of the FMCS."  The PMA, in yet one more boneheaded miscalculation, was apparently incapable of issuing a simple apology for its affront.  Notwithstanding the PMA's provocations, mediation sessions (presumably with the employers unarmed this time) began on Thursday, October 3, resuming each day through Sunday, October 6.  Unfortunately, talks broke down late after the employers made a supposed "compromise" offer, in which they refused to address the ILWU's concern that the new technology jobs be covered by the contract.

Additionally, since the PMA first locked out its employees, it had declared that the ILWU port workers could return to work at any time, provided they agree to a short-term extension to the old contract.  In the words of the PMA:

WHY WILL DOCKWORKERS NOT SIGN A CONTRACT EXTENSION?

SAN FRANCISCO, Calif. -- One stroke of the pen. That’s all it will take to open West Coast ports. The ports remain closed because the International Longshore and Warehouse Union has refused to extend the contract it worked under for three years.

On Sunday, October 6, in response to the repeated requests of the federal mediator, the ILWU called the PMA's bluff and agreed to sign a seven-day contract extension.  Yet again, the union agreed to exactly what the employers said they wanted.  So why did the ports not reopen then?  Once again, the PMA changed its mind.  After the union agreed to what the employers said they wanted, the employers no longer wanted it.  In a repeat of what happened early in the negotiations when the employers claimed that implementation of the new technologies was their goal, the PMA changed its mind after the union agreed to accept that proposal.  Is this another example of PMA duplicity, or are the employers just stupid?  Unfortunately, both answers are equally plausible.

Despite the PMA's continually shifting positions, the ILWU repeatedly indicated that it remained prepared to resume negotiations.  The PMA, however, rejected further talks, and no new meetings were scheduled.  

With the collapse of negotiations, direct federal intervention became inevitable and, on Monday, October 7, the administration took the first step in that direction by appointing a "board of inquiry."  The members of the board were former Senator and Secretary of Labor Bill Brock, Professor Patrick Hardin of the University of Tennessee College of Law, and Professor Dennis Nolan of the University of South Carolina School of Law.  The board held a closed hearing at which it heard statements from both the ILWU and the PMA.  On Tuesday, October 8, the board reported back that the bargaining atmosphere had been poisoned and that the parties were not likely to settle the dispute any time soon on their own.  This left the administration free to seek a court order ending the lockout.

In order to avoid the necessity for court action, the federal mediator requested that the parties agree to a 30-day extension to the old contract.  Although the ILWU agreed, once again, the PMA said no.  Late Tuesday, October 8, the Department of Justice filed an action in the U.S. District Court for the District of San Francisco seeking to invoke the provisions of the Taft-Hartley Act to end the lockout.  The court quickly issued an ex parte Temporary Restraining Order ("TRO") (meaning that the order was issued solely based upon the government's papers and representations, and that the ILWU was not afforded the opportunity to be heard) requiring the reopening of the ports, containing the following provisions:

ORDERED that [the PMA and ILWU] are hereby enjoined and restrained from in any manner continuing, encouraging, ordering, permitting, aiding, engaging in, or taking any part in any strike or lockout in the maritime industry of the United States; and it is further

ORDERED that [the PMA and ILWU] are hereby enjoined and restrained from in any manner interfering with or affecting the orderly continuance of work in the maritime industry, at a normal and reasonable rate of speed, and in accordance with the wages, benefits, and terms and conditions of employment provided under the most recent collective bargaining agreement between defendants, the terms and conditions of which shall continue in full force and effect . . . ; and it is further

* * *

ORDERED that all the defendants shall engage in free collective bargaining in good faith for the purpose of resolving their disputes and to make every effort to adjust and settle their differences . . . .

The TRO was effective until 5 p.m. on October 16, with a hearing scheduled for 3 p.m. that same day to determine whether to enter a back-to-work order for the full 80-day cooling-off period.  In response to the order, the PMA instructed its members to recall its workers beginning with the 6 p.m. shift on Wednesday, October 9.

Recognizing that they were very unlikely to prevent the imposition of a Taft-Hartley injunction by the court, the ILWU agreed to the entry of an order converting the Temporary Restraining Order (quoted above) to a Preliminary Injunction that will remain in effect for the full period permitted under the Taft-Hartley Act (normally 80 days), unless terminated earlier by the court.  On October 16, in entering the stipulated order, the court made a series of findings.  First, it concluded that the lockout (and any potential strike) created a "national emergency," justifying the invocation of the Taft-Hartley Act.  Second, it rejected the ILWU's charge of collusion between the PMA and the Bush administration, both as speculation and as irrelevant, noting that, even if true, everyone has the right to petition the government to act, and the government's political motivations are not relevant.  Third, it rejected the ILWU's contention that the order was unnecessary because the lockout was already collapsing of its own weight, concluding that this argument was also speculative and did not effect the fact that the Taft-Hartley standards had been met.  Finally, the court determined that the plain language of the Taft-Hartley Act gave it the power to enter an order prohibiting even a potential strike or slow-down, although none had actually been threatened.

The PMA never hid fact that it preferred to reopen the ports under judicial compulsion rather than pursuant to a voluntary agreement so that it could invoke the power of the court to impose contempt sanctions (which could include fines or imprisonment) in the event the ILWU staged a work slowdown.  Indeed, the employers began their chorus of complaints about reduced productivity on the docks almost immediately after the entry of the TRO.  The ILWU, for its part, denied that it had ever staged a slowdown.  Instead, it pointed to deteriorating safety conditions (with five ILWU workers killed this year prior to the lockout, along with two other non-ILWU dockworkers, compared with a total of one worker killed in the previous two years), only made worse by the exceptional crush of freight that had backed-up at the ports, contending that all it did was advise its members to comply with state and federal safety standards.  Already, noted the ILWU, there had been three separate accidents since the docks reopened, including the electrocution of a mechanic.  The ILWU asked the PMA to train and hire more dockworkers to facilitate the movement of freight, stating that there simply aren't enough trained workers to safely handle the flow of freight.  To avoid any suggestion of a slowdown, the ILWU asked that government safety inspectors be placed on the docks to monitor conditions.  Using logic straight out of Dilbert, the PMA countered that there was no safety problem, and that it was incumbent upon the longshoremen to work faster and safer.  

Furthermore, the ILWU contented that the shortage of trained employees at the ports is the result of a deliberate effort by the employers to provoke sanctions against the union.  In addition to the PMA's refusal to train and employ sufficient numbers of trained longshoremen, the ILWU noted that the "work orders" issued by PMA employers, in which they list workers requested to fill specific jobs, included names of employees who either had transferred to different jobs, retired or died.  For example, at the Los Angeles-Long Beach port complex, one-in-four of the "qualified" crane operators requested by the employers for work were either dead or retired.  Similarly, at the Seattle port, the ILWU noted that the PMA's leading member, SSA, had neglected to recall 26 of the 44 on-call crane operators.  Along the same lines, the union contended that the employers were deliberately withholding equipment needed to move the increased volume of freight.  Alleging that these actions amounted to unfair labor practices, the ILWU filed NLRB charges against the PMA.  For its part, in an effort to get the government to seek court sanctions against the ILWU, on Wednesday, October 16, the PMA, promised the government's attorneys that it would turn over documents the next day that would "prove" that the union has orchestrated a deliberate slowdown.  Although it took most of a week to compile this "proof," on Wednesday, October 23, the PMA announced that it had finally provided documents to the government.  Based upon the PMA's statements, these documents did nothing more than highlight the fact that productivity had fallen at some (although not all) ports, that the employers had some difficulty filling key jobs, that some employees had either shown up late for work or called in sick, and that little progress had been made eliminating the backlog of ships.  (It is hard to know exactly what they say, since the PMA has refused to release the contents of its "proof.")  Hardly a smoking gun (a concept the gun totin' employers should well understand).  In response, the government asked for additional submissions from both the PMA and the ILWU.  On Friday, October 25, both sides responded to the government's request.  Although the PMA again refused to make its submission public, based upon its statements, it is clear that the PMA provided more of the same:  yet more detail of a decline in productivity at particular ports.  Lacking any real evidence of an orchestrated slowdown by the ILWU, the PMA relied instead upon unsubstantiated allegations and innuendo.  The ILWU, for its part, complained that it was at a disadvantage in formulating its response, since it did not have access to the charges and "evidence" to which it was responding, despite its repeated requests.  Moreover, the ILWU noted that the contract contains the following language:

The grievance procedure of this Agreement shall be the exclusive remedy with respect to any disputes between the Union . . . and the [PMA] or any employer . . . and no other remedies shall be utilized by any person with respect to any dispute involving this Agreement until the grievance procedure has been exhausted.

The PMA, however, refused to invoke these "exclusive" contractual procedures (and ignored the Union's direct request to utilize these procedures), preferring instead to complain to the government, the court, and the court of public opinion.  This refusal, the ILWU contended, violated the court's order to comply with the terms of the expired contract.  Finally, the PMA's charge that the ILWU had engaged in an "improper slowdown" was "categorically denied."  Instead, the Union attributed the drop in productivity to "the unprecedented circumstances created by the PMA and the lockout itself, including severe congestion in the terminal facilities, equipment shortages and insufficient numbers of qualified registered workers to dig out from under the cargo backlogs."

The government's attorneys rejected the contention that the contractual grievance procedures applied to this dispute.  Moreover, undeterred by the vagueness and lack of substantiation of the PMA's charges, the government attorneys demanded that the ILWU specifically respond to the PMA's charges -- notwithstanding the fact that the ILWU had not been provided with a copy of those charges.  Interestingly enough, copies of the PMA's charges had apparently been provided to its former attorney, Solicitor of Labor Eugene Scalia.

Eventually--after it had provided its response to the government's original request--the ILWU did get a copy of the PMA's allegations, and, on October 29, it provided a supplemental response.  In it, the ILWU noted that the PMA had failed to produce even a shred of evidence that any of the productivity issues were attributable to the ILWU or to any deliberate slowdown.  Rather, the PMA had only pointed to minor personnel issues that it had refused to seek to resolve through contractual procedures, as well as to its statistics showing a decline in productivity.  The ILWU stressed its efforts to communicate to its local leaders and membership the importance of fully complying with the order of the court.  Moreover, in the response, the ILWU contended that continued delays on the docks resulted, not from a worker slowdown, but from management issues and logistical problems caused by the lockout itself.  In particular, the ILWU pointed to the level of congestion on the yards; the increased vehicle traffic on the docks; an unprecedented shortage of skilled labor caused by the employers' refusal to recruit, train and hire new employees; the employers' failure to properly deploy skilled workers who were available; shortages of equipment; and an unprecedented increase in health and safety hazards. The letter also took issue with assumption implicit in the government's request that delays on the docks must be the fault of the employees, and could not be the result of other causes.  Moreover, the letter noted the fact that, while the ILWU was required to respond to the allegations that the slowdown was the result of the ILWU's actions, no similar demand was made of the PMA.

One of the government's stated reasons for invoking Taft-Hartley was to facilitate the resumption of negotiations.  To that end, FMCS chief Hurtgen attempted to get the parties to resume talks as quickly as possible.  The Union met with Hurtgen on Wednesday, October 16, to discuss the resumption of negotiations.  The PMA, however, preferred instead to focus upon its game of harassing the ILWU by whining to the media and the government and seeking sanctions against the union.  As a result, negotiations did not resume until Thursday, October 24.

As we previously reported, following the resumption of negotiations, the parties remained quiet about their progress (or lack thereof), leading us to the conclusion they must be making headway.  As it turned out, our inference was correct.  With the assistance and support of AFL-CIO Secretary-Treasurer Rich Trumka, at 4 a.m. on Friday, November 1, 2002, the parties reached agreement on the prickliest issue before them--the implementation of the new information technologies and the effect of those technologies on the ILWU's jurisdiction.  In the words of FMCS Director Hurtgen:

Although a final agreement has not been reached, . . . [the] ILWU and PMA [have reached] a tentative agreement concerning the key issues of new technology and retention of union's jurisdiction for marine clerk work.

The same press blackout that applied to the progress of the negotiations continues with regard to the content of the tentative partial agreement, other than the Union's comment that the PMA had met its bottom line position.  As the result of the blackout, of course, details of the agreement remain sketchy.  According to published reports, the parties have agreed that the ILWU's jurisdiction would be extended to cover planning jobs on the docks and in the rail yards, but not to planning jobs on board vessels.

At the PMA's request, negotiations were suspended on November 5 to "evaluate anticipated technology based operational savings and pension funding costs into future years."  Talks resumed on November 13, 2002.  On the same day, the Justice Department indicated that, although both sides may be partly responsible for the slowdown on the ports, there was insufficient evidence to warrant court sanctions against either the ILWU or the PMA.  In the wake of the progress in the negotiations, as well as the report of neutral third-parties that the backlog on the docks has now cleared, it would have been surprising had the government decided to proceed with sanctions.  On the downside, there have been published reports that some factions within the PMA are very unhappy with the technology agreement, and view it as a major expansion of the ILWU's jurisdiction.  If true, these "factions" may be looking for whatever excuse they can find for scuttling the deal.

Near the stroke of midnight on Sunday morning, November 24, the parties announced that they had, at long last, reached a comprehensive tentative settlement.  The technology agreement previously reached among the parties, of course, provides the core of the deal.  In addition, the agreement shares some of the employers' savings from the new technology provisions in the form of higher wages and maintenance of a comprehensive health care package.  Because of the net loss of jobs that will result from the technology agreement (notwithstanding the shifting of the Union's jurisdiction to cover the equivalent jobs in planning and technology), improved pensions--which the package also provides--were a particular priority.  The deal also includes provisions for enhanced safety and security on the ports.  Finally, the new agreement will have double the traditional duration--six years--to ensure stability and continuity on the docks and to avoid further disruptions to the U.S. economy.  Not only do the officers and members of the ILWU who risked fines and imprisonment, not to mention their jobs, in achieving this victory deserve congratulations, particular thanks should go to AFL-CIO Secretary-Treasurer Rich Trumka, whose tireless efforts were instrumental in moving the parties toward agreement.

In order to be finalized, the tentative agreement must pass through the ILWU's lengthy and complicated ratification process.  As the first step in that process, on December 12, 2002, the agreement was overwhelmingly endorsed by the ILWU Longshore Division Caucus, gaining more than 90% support.  Despite tough questions and serious misgivings regarding some of the terms of the agreement, the caucus concluded that the compromises embodied in this deal were necessary, and that this was the best package available under the circumstances.  On January 6, 2003, the ILWU membership began the port-by-port process of ratification by secret ballot vote.  Under the ILWU's ratification rules, if 60% of the membership endorses the contract, it passes automatically.  If, however, the margin is 50% or greater, but less than 60%, then it must gain a majority in each individual port in order to be ratified.  In the end, the pact was approved by an overwhelming margin, with nearly 90% of the membership voting in favor.

Clipped Wings – Airlines in Crisis

The airline industry has been in the news lately.  With some notable exceptions, the airlines are in pretty dire straights.  Within the last year or so, United Airlines has negotiated new agreements with several of its large employee groups, including its pilots, mechanics and ramp workers. Even at the time these deals were negotiated, everyone knew that the troubled airline could not afford them. Rather, it was well understood by all that these wage and benefit packages would have to be renegotiated downward as part of an overall restructuring and cost reduction package. (See Flying the Surreal Skies.)  Without such a restructuring, everyone has known for at least a year that United could not remain viable.

The other shoe has now dropped, and United is seeking those expected concessions from its unions, looking for a total of $1.5 billion in annual labor savings (a 20% reduction), as part of a general package to reduce its annual operating costs by $2.5 billion. Not only does United consider this round of cost cuts to be necessary in and of themselves to stem the flow of red ink, they are essential if United is to obtain government assistance in the form of $1.8 billion in federal loan guarantees from the post-September 11 Air Transportation Stabilization Board.  The unions, for their part, do not reject concessions outright, but fear that they are being asked to shoulder a disproportionate share of the sacrifice, and that United’s management lacks any overall plan or vision for salvaging the airline. Indeed, United’s longstanding lack of a permanent CEO only underscored its lack of direction. Now that United has finally selected a permanent CEO, the Unions have expressed optimism that matters can now move forward.  On September 25, a coalition of the five major unions representing United's employees--ALPA, IAM, AFA, TWU and PAFCA--presented United with a comprehensive package of labor concessions estimated to produce savings of $1 billion per year for each of the next five years.  While the projected savings from this package are only a little more than half of what the company had been asking for, when combined with the other cost reductions and restructuring measures formulated by United, the unions estimate that United will achieve savings and reductions totaling $2 billion to $3 billion per year over that same five-year period.  On October 10,  the coalition agreed to up its package of concessions by an additional 20%.  Although the joint offer provides an overall framework, it lacks specifics, including details on how the cuts would be allocated among the different unions.

At the same time, the IAM announced that it intends to bargain the specifics of any relief package separately from the other unions, although it nevertheless intends to continue to coordinate its efforts.  For its part, United has indicated its willingness to bargain with the IAM, as well as each of the other unions, separately as necessary.  On October 18, 2002, United announced that it had reached tentative agreement on a package of cost reductions with the four unions remaining in the coalition.  The estimated savings for United amounts to approximately $1 billion per year.  That overall deal remained a framework, however, lacking specifics on how the cuts would be allocated among the four unions.  On November 1, 2002, United and ALPA announced that they had reached a deal, agreeing to wage and benefit cuts estimated at $2.2 billion over the next five-and-a-half years, including an immediate 18% pay cut and the right to furlough 600 more pilots on top of the 844 who have already been laid off.  That tentative agreement was overwhelmingly ratified by a vote of 6,526 to 340.  Two days later, a deal was struck between United and the TWU, providing for an immediate 8% pay cut, with a cancellation or deferral of scheduled wage increases.  In exchange, these TWU-represented meteorologists will receive stock and stock options.  The TWU membership has now ratified the agreement.  On November 10, 2002, United and the AFA announced that they too had now reached a tentative agreement on a concessionary package, subject to ratification by the membership.  On November 15, United announced it had reached a tentative agreement with its PAFCA-represented dispatchers.  Again, on November 20, 2002, United and IAM announced that they had reached tentative agreement on a package of concessions worth a total of $1.5 billion over the next 5-1/2 years.  The tentative agreement was subject to a series of membership ratification votes, involving separate groups of employees.  The Ramp & Stores, Food Service and Security Guards, represented by IAM District 141, ratified their agreement with 63.4 percent of voters approving the accord. The Public Contact Employee group, also represented by District 141, accepted their agreement with 79.2 percent endorsing the contract.  As was always expected, reaching a final agreement with United's Mechanic & Related employees was always considered the most problematic part of the package.  Thus, it was not entirely surprising that the mechanics, represented by IAM District 141-M, rejected their agreement by a 57 percent margin.  Knowing that a final rejection of the package of concessions by the IAM-represented mechanics would mean bankruptcy for United (which, at the very least, would almost certainly wipe out the various unions' and their members' equity interest in the company), United and the IAM immediately resumed talks to modify the pact to see if there was a way to satisfy the IAM members' misgivings.  District 141-M, after commencing discussions with its members, concluded that the principal difficulties with the tentative agreement involved so-called "quality of life" issues.  Among other things, members were concerned that the part of the agreement that required that the membership take some of their vacation without pay was too vague, and would leave the selection of which days were to be unpaid entirely with United's management.  To address this concern, the parties agreed to spell out which vacation days would be taken without pay, and to leave more of the choice with the employees.  In addition, the District noted that many of the problems that had led to the mechanics' dissatisfaction had resulted from United's long-time lack of leadership.  With a new CEO now firmly in place, the IAM secured an additional agreement with United's CEO Glen Tilton to work toward resolving these quality of life issues.  The modified agreement was scheduled for a ratification vote by the affected mechanics on December 5, 2002.  In addition to the concessions provided from its unionized employees, United's management and salaried employees (excluding officers) will suffer wage reductions worth an additional $1.3 billion, with additional cuts in officer compensation.  In exchange for the wage concessions provided by its employees (including both its union and non-unionized employees), United will issue stock options equivalent to an additional 30% of its outstanding shares.

Independently of the deal with the unions, United has announced that it has formulated a cost-reduction plan that will (in conjunction with the negotiated reduction in labor costs) leave it smaller, leaner and, hopefully, profitable.  All told, by the time United is finished, it will have reduced its work force by by more than 25%, retired 139 aircraft, deferred all deliveries of new aircraft until 2005, shut down several maintenance facilities, and otherwise reduced its capital and operating expenditures significantly.  Once these changes are implement, United will have reduced its flight capacity overall by 23%, although some of its lost capacity will be picked up by its United Express contractors--which have expanded their capacity by buying small, efficient regional jets--and its Star Alliance partners.  All told, United predicts annual savings of $1.4 billion in personnel costs and $1.1 billion in non-personnel costs, for total annual "profit improvements" of $2.5 billion.  These projected savings are in line with United's cost reduction targets.  On October 23. 2002, United revised its request for a federal loan guarantee, reflecting these new cost-cutting and revenue-enhancing measures.

All of the concessions and give-backs by the unions and other employees, as well as United's entire recovery package, were premised upon the promise of $1.8 billion in federal loan guarantees under the post-September 11 legislation that was intended to help ensure the survival of the various airlines.  On December 4, 2002, the Air Transportation Stabilization Board rejected United's application for those guarantees by a two-to-one margin, stating that United's business plan was "not financially sound" and that government assistance would not solve the airline's competitive problems.  As a result of this rejection, United and its unions are all back to square one.  The IAM mechanic's second ratification vote, scheduled for December 5, has been cancelled, and each of the other agreements have now been vitiated.  Following this rejection, on December 9, United filed a petition under Chapter 11 of the Bankruptcy Code.  As a result, it is likely that all of United's existing stock, including the shares held by United's employees and unions, will be wiped out, and United's experiment with employee ownership will come to an end.  While it may be that the employees will be able to obtain new shares of United in exchange for additional concessions, that will not happen without a long and painful process of negotiation and compromise.  What is now virtually certain, however, is that United's employees will see deeper cuts in their pay and more profound changes in their working conditions than they had agreed-to prior to the bankruptcy.  

U.S. Airways is also in desperate shape.  Already struggling before the terrorist attacks, with a major hub in Washington, D.C., it bore the brunt of the extended closure of Washington’s National Airport and the reduction in flights out of that airport that followed. Like United, USAir is attempting to negotiate concessions from its unions, seeking $950 million dollars in annual savings from its employees out of a total annual savings package of $1.2 billion. Unlike United, in mid-August, USAir filed for bankruptcy and has invoked the power of the bankruptcy court to "reject" its collective bargaining agreements with its unions. Although tentative agreements have been reached between USAir and its major unions, USAir’s IAM-represented mechanics (District Lodge 141-M) have rejected the proposed concessions.  (By contrast, USAir's "fleet service" employees, represented by IAM District Lodge 141, accepted the proposed reductions by a nearly 2 to 1 margin.).  On September 17, however, the IAM-represented mechanics revoted the previously-rejected proposal as the result of confusion surrounding the original vote.  In particular, the union explained that there was a great deal of misunderstanding among the voting membership about the effect of their rejection of the proposed agreement, and USAir's ability to invoke the power of the bankruptcy court to impose whatever terms and conditions it wants following such rejection.  The second time around, the mechanics reversed their position and ratified the proposed changes, with 57% of the voting membership supporting the package of concessions.  A number of USAir's other bargaining units, including its AFA-represented flight attendants, ALPA-represented pilots, TWU-represented training crews and dispatchers, and CWA-represented passenger service agents have also ratified reduction packages.  Most recently, on October 10, the ALPA-represented pilots of Piedmont Airlines and Allegheny Airlines, two USAir subsidiaries, approved a concessionary 5-year extension to their existing contract.  At about the same time, after more than two years of difficult negotiations, the AFA-represented flight attendants at Allegheny also reached a tentative agreement.  The addition of the mechanics, Piedmont and Allegheny pilots and Allegheny flight attendants to the list of units accepting USAir's reorganization plan moves the company well along in its battle for survival.

In another interesting development, in settlement of the IAM's and ALPA's objection to the payment of a series of bonuses to its managers and executives that were promised before the bankruptcy, USAir has agreed that it will not seek court approval to pay any retention bonuses to any employee with the rank of Senior Vice President or above.

It should come as no surprise that the problems in the airline industry have filtered down to the aircraft manufacturers. Boeing is currently bargaining with the IAM (and IAM District Lodge 751) over their now-expired contract. In these negotiations, as a sign of the depressed times, the major issues are job security, pensions, and, of course, health care. In late August, Boeing offered what it termed its final offer, which the IAM put to the membership for a vote. At the request of the federal mediator, however, the IAM agreed to a 30-day extension to the existing contract in order to continue negotiations. Boeing, however, dug in its heels and rejected the mediator’s request, proclaiming that "there is nothing left to negotiate." Although the union’s membership voted on Boeing’s purported final offer, the Union has indicated that the request by the mediator so confused the issues that the contract will have to be re-voted. Nevertheless, the Union has indicted that it will continue to work under the terms of the existing contract, at least for the time being, notwithstanding the lack of an extension.  On Tuesday, September 3, the parties met with federal mediators in Washington, D.C.  After 5-1/2 hours of meetings, the Boeing representatives went home, continuing to insist that they had nothing left to negotiate (although they have agreed to remain available by telephone).  The IAM's negotiators remained in Washington and continued to meet with the mediators.  However, in view of Boeing's intransigence, they finally went home.  On Friday, September, 13, the IAM put the final Boeing proposal to a membership vote, with a recommendation to reject it.  62% of the voting members cast their ballots against the contract, and 61% voted to authorize a strike.  However, under the IAM constitution, a strike authorization requires a 2/3^rds vote, and anything less results in automatic implementation of the contract.  Consequently, this contract is now settled.

Will the airline and air transport industry follow the path of so many of the U.S. heavy industries? The domestic steel industry has been on a downward slide since the 1960s. Meeting disaster in the 1970s, and again in the 1980s, with only a brief respite during the boom of the 1990s, the domestic steel industry is once again in crisis. Frankly, I have lost count of the number of steel companies that are in bankruptcy. It is only the most successful among the steel companies that are looking to restructure, with the remainder deciding only how to liquidate their assets. Will the airline, travel and transport industries follow the steel industry, or will it find a way to rescue itself?

There are some fundamental differences, however, between the steel industry and the airline industry. First, the U.S. airline industry has not made the mistakes of the steel industry and of so much of the U.S.’ heavy industries. When times were good, much of American industry bled its operations, either by targeting their investments overseas or toward unrelated industries, or by paying excessive dividends. By the time it became clear that such tactics were suicidal, it was too late. Foreign industries had gained a nearly insurmountable edge. While the airline industry has not always invested in the most intelligent and rational manner, it has at least generally directed those investments toward its core operations. Second, while steel and other manufactured goods can be imported, we need domestic airlines.

What happens next?  Undoubtedly, we'll see soon enough.

A Bitter Pill

The drug companies have once again taken a page out of the Tobacco industry’s book. One of the more notorious tactics of the Tobacco industry was to finance phony consumer groups to defend the right to smoke (as well as the right to introduce our children to that fundamental right). Just as the Tobacco industry’s subsidization of phony research organizations whose one goal was to discredit the proof that tobacco is harmful, the faux consumer groups purported to show that tobacco had broad public support.

For years now, groups of mostly elderly U.S. citizens have chartered buses to Canada, where they can go to get their prescription medicines much more inexpensively than in the U.S.  Beginning last year, to publicize this inequity and to demonstrate the need to bring U.S. drug prices under control, roving bands of Congressmen joined some of these road trips.

In what can only be considered as a weird parody of these excursions, a bus load of Canadians, including a doctor and a dozen of his patients, drove south of the border to condemn the single-payer system, and to warn Americans that we are better off with our high prices and lack of universal medical coverage. As much as we might like to believe that this junket represented a spontaneous expression of support for the inherent unfairness of a medical system that denies necessary care to tens of millions of Americans, it really should come as no surprise that it was actually organized by the U.S. drug manufacturers’ industry association, the Pharmaceutical Research and Manufacturers of America (PhARMA).

It is also not unexpected that the drug companies would stoop to such tactics in order to protect their monopoly profit margins. Alone among U.S. industries, the drug companies have experienced double-digit increases in both sales and profits each year for the last two decades. As the result of several factors–including the expiration on the patents of some of the largest blockbuster drugs and the added pressure of managed care–the annual increase in earnings and profits is expected to drop to only 8% over the next few years. Mind you, we’re talking about the increase in the earnings and profits, not the amount of earnings and profits themselves.

Of course, some drug makers have been hit harder than others. Eli Lily may be one of the more extreme examples. After its patent on the blockbuster drug Prozac expired, its revenues dropped by 20%. How has Lily risen to this challenge? The first thing it did was to come out with "new" Prozac. Unlike crummy "old" Prozac, "new" Prozac does not have to be taken daily–it is a once-a-week pill. Producing a "tweaked" version of an old drug is not remarkable–all of the drug companies do it. What is remarkable is the desperation that Lily has demonstrated in its efforts to market this new "feel-good" tablet-form elixir.

Thus, Lily bought the names, addresses and Email addresses of users of old Prozac. It was then able to contact them, both by U.S. Mail and by Email to explain just how much better the "new" Prozac is than the old. If buying lists of users of prescriptions medications strictly for marketing purposes weren’t bad enough, what Lily did with those lists was particularly egregious. In one case, in sending out a mass Email extolling the virtues of "weekly" Prozac, Lily divulged to each recipient the names and Email addresses of each of the other recipients of those messages. Even worse, Lily actually sent out unsolicited free samples of "new" Prozac to many of these people, notwithstanding the lack of an actual valid prescription.  In one case, "new" Prozac was mailed to a 16-year old boy, and in another, to an elderly grandmother who had not used Prozac in 10 years. As a result of these tactics, Lily has been investigated by criminal authorities in several states, and has been the target of at least one law suit.  Although it has reached settlement agreements with several states, the investigations continue.

More generally, the drug companies’ priorities are easily discernable from how they spend their money. Although each of them would argue that their huge revenues are justified by the amount that they have to spend on research and development of new and better drugs, the truth is otherwise. Indeed, according to a recent study by Families USA, during 2001, the nine largest drug companies (measured by revenues) spent more than a quarter of their revenues on "marketing, advertising and administration," compared to a mere 11% on research and development. Even more amazing, their overall profit was 18%.  Merck, for example, the largest of the group, spent a mere 5% of revenues on R&D, while its profits were three times that amount. Compare this with, for example, the grocery industry, where a firm is successful if its profit exceeds ½% of revenues. Clearly, the drug companies have a good deal, and want to keep it that way.

Even if it were true that the huge profit margins actually promote the development of new and better drugs, then the system still needs to be changed. As the bus trips to Canada clearly demonstrate, the prices of drugs outside the U.S. are substantially lower than in the U.S. Thus, even if the drug companies’ claims are true, that means that U.S. drug prices are being kept artificially high in order to subsidize the cost of development of new drugs around the world. For those of us who have insurance, that means that we are paying for this development because of the excessive amounts we are paying for our medical insurance that would otherwise go into our wages. For those of us who are uninsured, this means that we have to go without drugs that could extend our lives or improve our quality of living to subsidize the development of drugs, while consumers in the rest of the world can get cheap drugs that their governments are able to negotiate lower prices for. This is not fair.

Moreover, we know that the drug companies’ rationale is not true. The fact that the drug companies’ R&D budgets are so dwarfed by both their profit margins and marketing budgets demonstrates the baselessness of the drug companies’ claims. Moreover, the argument of the drug companies that, without their double-digit profits, they would cease the development of new drugs, is ridiculous. Companies in other industries, with far lower profit margins, continually innovate and improve their products. For example, no field has developed faster than the microelectronics industry, with far lower profit margins. Additionally, as we have previously discussed, does the world really need more research money for "7-day" Prozac, a medication with no real medical advantage over existing drugs, when there are so many more avenues of research that remain unexplored because they lack blockbuster potential?

What is clear is that for the first time since the Clinton administration, the big drug manufacturers are on the run. Although they remain free to price their patented wares as high as they want, they are facing pressures from a number of sources. First, more and more of their blockbusters are going off patent, leading to generic competition. Second, states and private managed care organizations are increasingly implementing formulary programs to steer individuals away from high-priced patent medicines to equivalent generic medications, absent a demonstrated medical need. Third, states are increasingly requiring drug companies, as a condition to participating in state-financed Medicaid programs, to offer "most favored nations" pricing to uninsured individuals within the state.  Fourth, despite years of cozying up to the drug companies, Congress is finally starting to respond to the public demand that something be done. Among other things, Congress is once again considering the "medicine reimportation" bill, that would permit U.S. drug distributors to buy prescription medicines in bulk in Canada for resale in the U.S.

Will these measures to contain drug costs continue, or will they falter as have past efforts to control drug costs? Also, is it even possible to throw a blanket over rapidly escalating drug costs, without taking a comprehensive look at health care overall? I do not have an answer, but it is time that we, as a society, take a hard look at the question.

Rights, Wrongs and In-Betweens

Tiger Woods recently generated controversy when he was asked about whether he was comfortable playing golf tournaments at private clubs that discriminate in their membership. Tiger’s response was that this is just the way it is. Would he have been so cavalier in his response had the excluded group been blacks, rather than women? After all, until very recently, it was common for major golf tournaments to be played at clubs that barred membership to blacks and Jews.

There are many who defend these private clubs and their discriminatory policies. After all, the Constitution of the United States permits a right of free association, and that right extends even to bigots and their private clubs. Although technically correct, this argument misses the real issue. Just because something exists and is legally protected doesn’t mean that it is right. Broadly stated, this is a case of the confusion between legality and morality. The fact that something is lawful does not make it moral. Put differently, the fact that someone has a legal right to do something doesn’t make the exercise of that "right" right.

In a very different context, we now have numerous examples of corporations, one after another, that have produced misleading, and in some cases fraudulent, financial statements. In some cases, such as Enron and WorldCom, the misstatements violated existing accounting standards. More troubling are the companies that, while in technical compliance with those standards, still managed to misstate and mislead the investing public as to the company’s true financial condition. In these cases, although the reporting may technically have been in compliance with the rules, it was seriously misleading to the point of outright dishonesty, and was therefore wrong.

One of my favorite examples of this same phenomenon is a story related to me by an old friend who used to work for a local chapter of the ACLU. At the time, a conservative Christian group was organizing a consumer boycott against 7-11 for openly displaying the lewd covers of the smutty magazines it sold. A representative of the Lewd Magazine Publishers Association (I may have the name slightly wrong–it has been a while since I heard the story) called the ACLU asking for assistance. This smut-monger insisted that the Christian group was violating the publishers’ First Amendment right of free speech by seeking to suppress their prurient wares. The ACLU spokesman disabused the smut-monger of his misapprehension, explaining that the ACLU’s mission was to safeguard the rights guaranteed under the U.S. Constitution, and not to protect pornography. The ACLU representative pointed out that the First Amendment only protects against government interference. The Christian group’s boycott was itself a form of speech. Indeed, the Christian group’s initiation of a consumer boycott to affect social change is exactly the type of conduct that the ACLU seeks to protect from government interference. In this case, the smut-monger confused the fact that he was not violating the law with the question whether what he was doing was right.

This confusion is not limited to the smut industry. How else can you explain how close a convicted felon like Oliver North almost came to becoming a U.S. Senator? As you may recall, Mr. North was duly convicted of serious federal crimes.  His conviction was overturned, however, on the barest of legal technicalities.  In the minds of his supporters, however, the fact that his conviction was overturned amounted to moral vindication.

Unfortunately, the notion that, if it isn’t actually illegal it must be OK, pervades our society and confuses our discourse. In truth, the fact that something is not unlawful does not justify it, make it right, or make it moral. When the accounting standards boards adopt rules establishing specific standards for reporting and disclosure, the mere fact that a company is not in technical violation of those rules does not mean that the company is doing the right thing: it merely means that the company may not be committing a felony.  When a private group exercises its right of association to bar blacks, Jews, women, etc. from its facilities, the fact that its conduct is not unlawful does not make it any less morally reprehensible.

Although morality is personal, it is also shared. In fact, the word "conscience" is rooted in the notion of group consensus. When we see wrongs and injustice, it is our duty as good citizens and moral individuals to do something. If our actions help to change the group conscience, the shared morality, then we have achieved something important. The civil rights movement was founded on this notion. The labor movement began with this notion over a hundred years ago, although over the last fifty years it has strayed, choosing to rely upon legislated solutions and the force of law, rather than seeking to move the public conscience.

All of us, including Tiger Woods, could take a lesson from the leaders of the civil rights movement who sought to bring about social change through the force of public persuasion. Those individuals exercised courage and leadership in their fight against injustice. Many of the golf courses where Tiger swings his clubs would not have permitted him membership just a few years ago were it not for the courageous acts of a few who succeeded in shaping public opinion and brought to bear the force of the public’s outrage. Tiger, by contrast, is in such a strong position that he could have taken a position of principle at little personal risk. Instead, he demurred.

Whether the issue is racial or gender discrimination, human exploitation or corporate responsibility and accountability, the message is the same. Hiding behind technicalities and protected rights avoids the real question that each of us should face on a daily basis as we live our lives: what is right and what is wrong?

Social Security, Medicare and Salad Dressing

Over the past few years, there has been a lot of attention paid to fixing the Social Security system. We have all been warned that the system is in disastrous shape and that it will become insolvent if immediate remedial action is not taken. Some of the proposed solutions make sense, while others are complete non sequiturs. The viable solutions generally fall along the same lines: since the system is projected to run out of money, put more money into the system now so that it has time to build up. Whether that additional money is in the form of direct federal subsidies, increased social security taxes, increasing the yield on the U.S. Treasury securities in which the Social Security Trust Fund is invested, or some combination thereof, these proposals all would increase the funding of the system, resolving the projected deficit.

Among the more ludicrous proposals are the ones that would allow people to divert a portion of their contributions out of the system, and place them individual investment accounts. In other words, say the luminaries promoting these privatization schemes, the solution to the systems’ insufficient income is to further reduce that income by taking money out of the system.

Why is so much attention being paid to the problem of Social Security? Even more curiously, why do we tolerate talk of "solutions" that are ridiculous on their face? The answer is actually pretty clear: the problems with Social Security are actually not all that severe. The reality is that the problem is soluble, and soluble in a way that is not overly painful. According to the Social Security Administration, the Social Security Trust Fund will not run out of reserves until approximately 2041. Even in that case, it will still have income from ongoing payroll deductions. With any possible insolvency so far in the future, it does not take very much to prevent that collapse, as long as action is taken now. Consequently, politicians can gleefully seize on this issue, even proposing their inane solutions, because they know that the problem can actually be solved, while at the same time they can promote their own ideologically-driven solutions.

The related program that we have heard very little about lately, however, is Medicare. Unfortunately, since the financial crisis that Medicare will eventually face is of such enormous proportion, it cannot be easily be solved. According to the official annual report of the Medicare system, the Medicare Hospital Insurance Trust (Medicare Part A) is expected to run out of money by 2030. The expenses of the Supplemental Medical Insurance Trust (Medicare Part B) will actually increase faster, but because they are funded in part from the federal treasury, the Part B Trust will not run out of money. Nevertheless, the report measures the share of the total U.S. economy ( the "Gross Domestic Product" or "GDP") to show the magnitude of the increase in Medicare expenditures. According to these projections, the Medicare system’s total expenditures as a percentage of the GDP will more than double from the current 2.45% to 5% by 2030. This is an enormous increase.

During the heady Reagan era of the 1980s, it became very popular among certain politicians to characterize the entire Medicare system as a failure. Nothing could be farther from the truth. Along with Social Security, Medicare is one of the most effective and successful social programs in the history of the country. It is hard to think of a single program that has had more of an impact on the lives and health of the Americans eligible for this program. To the extent there is a "problem" with Medicare, the "problem" is not with the program itself, but with the cost of the program.

It is no wonder that few politicians are willing to directly face the impending crisis in the Medicare system. At best, to face this issue directly is to risk failure. Moreover, the heavy-handed assaults on the program in the past resulted in a general mobilization of a very active and vociferous elderly population, willing to punish politicians who threaten this necessary and popular program. Nevertheless, something must be done.

The increase in the cost of the Medicare program is primarily driven by two factors. First, there is the fact that the post-World War II demographic bulge known as the "baby boom" generation is aging, and will soon become eligible for Medicare. Not much can be done to "fix" this problem. The second factor is that overall U.S. expenditures for health care continue to increase at a troubling rate. This is a problem that has not been seriously addressed since the early days of the Clinton administration.

What have we heard instead? There has been a major demand for plugging the great hole in the Medicare system: providing prescription drug coverage. While certainly laudable, this does nothing for improving the overall financial condition of the Medicare system, except perhaps indirectly.

What few ideas we have heard as purported solutions to the problems with the Medicare system are even more ludicrous than the ones targeted at Social Security. Some "free marketers" propose Medicare HMOs and Medicare+Choice PPOs. Despite the fact that these have been utter failures, they continue to be promoted as solutions. I even once heard an expert on managed care testify, under oath, how a health plan could save 99% of its costs by contracting with Medicare+Choice PPOs to provide benefits, instead of providing benefits directly. The fact that no Medicare+Choice PPOs existed, and that any that did exist would lose money because the fees that they would receive would not cover the cost of benefits, was beside the point. According to this so-called "expert," PPOs would be attracted to the market because of the sheer numbers of elderly who could be covered, notwithstanding the fact that the PPO would lose money on each participant. This explanation, which was given with a straight face in open court, is reminiscent of the "I Love Lucy" episode, where someone calculated that the salad dressing that Lucy was producing cost 25¢ more per bottle to produce than it was being sold for. Lucy’s explanation was that, even though they lost 25¢ per bottle, they made it up in volume.

It is clear that "salad dressing" solutions to Medicare and to Social Security will not solve the problem. Moreover, the problem with Medicare cannot be solved in isolation. The only way to address the ever-increasing cost of Medicare is to resolve the problem of increasing medical expenditures overall. Until the larger problem is solved, no solution to the Medicare problem can be achieved.

Solving the problem of increasing medical costs requires big ideas. We seem, however, to have chosen a crop of small men with small ideas as our leaders. Unless we are prepared to expand our ideas and our vision, and to require that our politicians do the same, we will not see the change that we need. In the mean time, we will continue to be have our problems doused with salad dressing solutions.

Lies, Drugs, and Greed: It is Not a Good Thing

It is not every day that a single story incorporates so many of the themes that we have discussed on these pages. We have stumbled across a tale of greed, corruption, drugs, incompetence and Martha Stewart. What more could anyone want in a story?

In the wake of FDA deregulation that accompanied the Reagan Revolution in the ‘80s, the dynamic of drug research changed dramatically. Government funding began to dry up, replaced with corporate-funded research.  As the result, nearly all of the money going into drug research is targeted toward producing the next blockbuster, regardless of whether that makes sense from the point of view of the public’s health.

Into the middle of this mess is the case of ImClone and its wannabe blockbuster cancer drug Erbitux. We recently reported on the obscene amount of money paid by Bristol-Myers to ImClone for this cancer drug, the first of what was hoped to be the new generation of drugs created through genetic manipulation. That’s where the next thread of this story starts.

In late December, 2001, the FDA decided that it would not even consider ImClone’s application for approval of this new drug because the testing studies had been so badly botched, both in their design and their implementation. Who performed these tests? It turns out that one of the institutions performing the tests–the M.D. Anderson Cancer Center in Houston, Texas–happens to be headed by a man named John Mendelsohn. It turns out that Dr. Mendelsohn has a strong ImClone connection, including a direct financial interest in the success of Erbitux.

In other words, the guy running the medical center responsible for a large portion of these necessary tests of Erbitux had a direct financial interest in their outcome. If the tests showed that Erbitux lived up to its promise, Dr. Mendelsohn would become a very, very rich man (well, O.K., a very much richer man). Did this direct financial interest affect the conduct of the testing? It is impossible to say. However, in the words of a physician who used to work at M.D. Anderson, "You need a promotion. You need a salary increase. You need another lab. It distorts the normal conduct of things, because you go all the way to try to please the boss."

Were the test subjects informed of this conflict of interest? Of course not. Although some of the patients undoubtedly knew that Dr. Mendelsohn was involved with Erbitux and ImClone, it is likely true that few, if any, of the test subjects understood just how this involvement might distort the medical judgments from their physicians approving them for participation in the study and monitoring the results. Is this an ethical violation? It sure sounds like one to me.

Just where does Martha Stewart fit into all of this? This former model and stock broker, and current entrepreneur, media mogul and lifestyle guru, is at the center of a scandal involving insider trading and obstruction of justice. As the story goes, in late 2001, the FDA gave ImClone’s president, Samuel Waksal, the heads-up that the FDA was about to reject ImClone’s application for approval of Erbitux. Waksal, knowing that the value of ImClone’s shares would drop like a rock once the news became public, proceeded to unload a large number of shares of his stock. So too did members of his family.  Waksal is also suspected of passing the news off to his stock broker. The Martha, it seems, was a pal of Waksal and shared the same stockbroker.

What happened next is a matter of some controversy. We know that Ms. Stewart dumped her ImClone stock the day before the news from the FDA became public. If she did so based upon her use of insider information (i.e., if she sold her shares because she knew about the FDA’s imminent disapproval of Erbitux), that would be a crime. The published evidence suggests, however, that "The Martha" had no such explicit knowledge, and that, even if she was tipped-off by her broker, she likely did not know that the tip-off was based upon insider information.

What could result in Ms. Stewart’s indictment is what she did when she was questioned about her conduct by the authorities. She told a little story that has not stood up to scrutiny. Had she told the truth, it is likely that the worst that would have happened is that she would have had to forfeit the amount that she saved with her fortuitous sale of stock. If the facts turn out to be as reported by the media, and she lied, she may well be guilty of obstruction of justice.

It is no small irony that Martha Stewart is now sailing in the same boat as Arthur Andersen. After all, Andersen’s criminal conduct was not the fact that it blessed Enron’s phony books and fraudulent accounting practices. It’s that it shredded the evidence after the fact–also a case of obstruction of justice.

What can we learn from this long and twisted tale? First, we learn once again the very simple fact that it is always better to tell the truth. Whether you are a big corporation, an accounting firm or Martha Stewart, lying will only get you into trouble. Lying by such corporate giants as WorldCom, Xerox, Enron, Arthur Andersen and all too many others have shaken consumer and investor confidence. Now, even Martha Stewart is tarnished. We also learn that leaving medical research to the corporate behemoths only means that the same people whom we no longer trust with our money are also now in charge of protecting our health. Clearly, this not a good thing.

Where do we go from here? Reform is needed on many levels. We need reform in medical research; reform in the accounting profession; reform in corporate reporting and disclosure standards; and maybe even reform in our own personal moral and ethical codes. Will we get that reform? If we do, we’ll let you know.

Health Care at the Cross-Roads

Two separate health care trends have hit the news lately. The first is, of course, the rising cost of health care. The temporary stabilization of health care costs that was the principal effect of the Clinton administration’s health care initiative has now completely vanished, replaced by double-digit annual increases. The second trend comes from the latest U.S. Census statistics showing that the number of uninsured people has grown in the U.S. over the last few years. Not surprisingly, these two trends are closely linked.

A recent study by the consulting firm Towers, Perin estimates that the cost to employers of providing health care to their employees will increase by 15% next year, compared to 13% this year. For retirees, the rate of increase is even higher: 17% for Medicare-eligible retirees (compared to 19% this year), and 19% for retirees not yet eligible for Medicare (compared to 13% this year). When you consider that the same study finds that actual medical inflation is only estimated to be 5% this year, it is clear that the increase in medical costs is not coming from inflation.

One clue to the cause of the increase comes from another statistic. According to the federal government, the average number of days that a heart attack patient remained in the hospital dropped over the seven year period from 1993 to 2000 by more than a quarter—from 7.4 days to 5.5 days. Clearly, at least in part, this reduction in the number of days per hospital stay is driven by the success of managed care. By now, pretty much everyone should be familiar with the degree to which insurance companies and managed care organizations regulate the length of hospital stays. Unfortunately, however, despite the decrease in the amount of time spent in the hospital, the actual cost of treatment rose from $20,578 in 1993 to $28,663 in 2000, nearly a 40% increase. This result is not restricted to treatment for heart attacks. Nearly the identical trend could be found in treatment for such matters as diverse as blood poisoning (septicemia), heart rhythm disturbances (cardiac dysrhythmias), stroke (acute cerebral vascular disease), diabetes, pneumonia, congestive heart failure, and "nonspecific chest pain." In a time when medical inflation was relatively low and the application of managed care successfully reduced days in the hospital, why were these increases so great? The two most cited causes are the application of new technology and the increasing cost of prescription medications.

As if to further emphasize the limitations of managed care, as great as these increases in the cost of health coverage are expected to be, the costs for HMO coverage are expected to increase even more. For the current year, HMO premiums are projected to rise by 2% more than the cost of coverage overall, with the exception of the cost of coverage for retirees who are eligible for Medicare. For Medicare-eligible retirees, the cost of HMO coverage is expected to increase by a staggering 44%.

What is the relationship between the rising cost of health coverage and the increase in the numbers of the uninsured? That becomes clear with a little analysis. To make sense of the bare statistics, we should look at which populations have lost coverage, and which have not. The elderly, for example, have not lost health coverage. Although supplemental health coverage is getting harder to find, particularly coverage for prescription drugs, basic coverage is provided by Medicare–perhaps the single most successful social program in U.S. history (with Social Security as the only possible competitor for the title).  Next are the poor. Although states are in the worst budget crunch they have seen since the last Bush-family recession, states have not translated their budget troubles into significant reductions in their Medicaid programs–not yet, anyway. Consequently, the poor continue to receive Medicaid coverage at fairly consistent levels, with approximately 30% going without coverage.

So where has this growth in the uninsured come from? Largely, it comes from lower-income workers whose employers can no longer afford to pay the rising cost of health coverage. It is the growth in this category of uninsured that is responsible for the overall increase in the uninsured. Of course, the increase in the cost of health insurance is driven in large part by the increase in medical costs. Unfortunately, this trend only stands to get worse. As the population ages, the cost of medical care can only rise. Moreover, the same trends driving up medical costs over the past ten years–new technologies and new and expensive prescription medicines–are only going to continue. Additionally, whatever the past successes of managed care, it is clearly approaching the limits of its usefulness.

As a society, we will have to come to grips with these trends. Alone among major Western democracies, the United States does not have a system of universal health coverage. As a result, millions of Americans lack basic medical care. Moreover, what these statistics do not reveal is the number of "under-insured." By "under-insured," I refer to those people who, while they have some level of medical coverage, have significant gaps in that coverage. For example, this coverage may have very low maximum limitations, or omit benefits entirely in certain areas–such as for prescription drugs. With little to prevent the costs of medical care from continuing to escalate, not only will the numbers of uninsured continue to grow, so too will the disparity in medical treatment provided to the "haves" (those with comprehensive medical coverage) and the "have-nots" (those who lack comprehensive coverage).

Obviously, our current system has significant failures. Not only does it result in a substantial number of people receiving inadequate health care, it also means that the cost to the rest of us will only continue to grow at an unacceptable rate. This means that a greater and greater share of our productive capability will have to be directed toward paying for our medical care. It is also obvious that, just as the problems are linked, so too are the solutions. Only by addressing the problem of inadequate and incomplete health care can we address the problem of rising health care costs, and visa versa.

What is the solution? Ten years ago, the United States was on the hunt for a solution. Unfortunately, the defenders of the status quo were able to discredit and defeat that effort. The time has come to resume that search.

Spoiling for a Spoils System (Updated November 21, 2002)

For the first 85 years of its history, the government of the United States was very small, with little to do.  Most of the important functions of government were handled at the state, rather than the federal, level.  Consequently, the efficient functioning of the federal government's administrative bureaucracy was not of great importance.  Thus, when Andrew Jackson became President in 1829, he did what other Presidents had done before him. He fired large numbers of federal employees, and replaced them with his supporters, friends and cronies. Jackson defended this practice as preventing the growth of an entrenched bureaucracy, and ensuring that the government was populated with reliable people who believed in the policies that they were called upon to administer. Although Jackson characterized this practice as "rotation in office," one of his supporters defended it by stating "to the victor goes the spoils." As a result, this system of cronyism has been known as the "spoils system" ever since.

Jackson was a popular President, and little that the federal government did was of much importance.  Consequently, although Jackson's unabashed use of the spoils system created a minor scandal, nothing happened, and Jackson went on to serve two terms. All this changed with the Civil War.

The Civil War resulted in the fundamental conversion of the United States from a loose federation of sovereign states into a single nation, governed by a national government in Washington, D.C. The Civil War also brought with it the opportunity for rampant corruption, creating scandal upon scandal. The American People got fed up, and demanded change.

Although it took some time, on January 16, 1883, that change took place with the enactment of the Civil Service Act (also known as the Pendleton Act). This first Civil Service Act brought wholesale change to the federal government. For the first time, jobs in the administrative branch of the federal government became career positions that were filled by merit, rather than as political favors.

The next great milestone for federal employees came in 1912, with the passage of the Lloyd-La Follette Act. This landmark legislation guaranteed to federal employees the right to join labor unions and engage in collective bargaining. This fundamental right of association was not guaranteed to private sector employees for another twenty years, with the passage of the Wagner Act.

It appears that we have now come full circle.  A sitting President of the United States has declared that the national security of the United States is threatened by these protections against cronyism and corruption that have developed over more than 100 years of American history.  Unless Congress agreed to strip away these fundamental civil service protections from the 170,000 employees of the proposed Department of Homeland Security, the President promised to veto any legislation passed by Congress establishing such a Department.

It is incomprehensible to me that there has not been more of a public outcry about the President’s efforts. Although the former Senate Leadership fought to protect the rights of federal workers, and although the AFL-CIO and the unions representing government employees spoke out in opposition, the public never seemed to figured out what was really going.

In the words of the President, "[t]he Department of Homeland Security must be able to move people and resources quickly, without being forced to comply with a thick book of bureaucratic rules. . . .  Even worse, the Senate bill would weaken the President's well-established authority to prohibit collective bargaining when a national security interest demands it."  What does this mean?   It means that the President has declared war on over a century of "good government" reforms.  Somehow, unless he is authorized to fill this new agency with his political kindred, friends and supporters, unless the employees of this new agency are stripped of their protections against politically-motivated job actions, and unless the hundred-plus year effort toward maintaining the administrate branch of the federal government as a meritocracy is abandoned, the enemies of the United States (whether it’s Al-Qaida, Iraq, organized labor or the Democratic party) will win.

Although this was a fight over workers' rights, it was also much more.  The passage of the Homeland Security Bill has ushered in a new stage in the administration's attacks, not only on organized labor, but on the whole concept of a professional, non-political civil service.  With its sweeping victory, and with the seeming lack of concern of the American people, the administration will be emboldened to step up its efforts.  At the very least, it will have the opportunity to "salt" the government with tens of thousands of its supporters and cronies.  Under the existing system, the government is required to demonstrate that its job actions are based upon merit and ability.  That the President has successfully cloaked in a haze of national security his desire to hire and fire based upon whim and politics, rather than merit and ability, is both despicable and a sign of things to come.  With his overwhelming success in this effort, what's next?

Eagles Soar

Recently, while driving down an expressway near my home outside of Washington, D.C., I saw a banner hanging from an overpass. On it was scrawled the words "Eagles Soar". As I read it, I felt a sense of relief and satisfaction as its significance became clear. For a year now, every banner hanging from a highway overpass was either an American flag or a statement of support for our nation or our troops overseas. Here, however, was a banner supporting a high school football team, the same sort of banner that has been hung from highway overpasses as long as there have been overpasses and high school football teams.

On this first anniversary of the horrific events of last September 11, we are engaged in a nation-wide commemoration and memorial. Those terrible events led to the creation of a great number of heroes and victims, each of whom should be remembered, celebrated and honored. But is that really enough? How best should we honor their memories?

As I write this piece, the city of Washington, D.C. is surrounded by mobile anti-aircraft missiles, and military helicopters and jets fly overhead. Although, unlike the period immediately following September 11, there are no troops in the streets, I know that they are nearby, ready to be called into action if the need arises. Clearly, we are at war with somebody. Unfortunately, it is not always clear who that is. Who is the enemy, and how can that enemy be vanquished?

The current administration in Washington believes that the only way to effectively combat this unseen enemy is to strike out at targets it can find. Consequently, it beats the drum of war against Iraq, although it does not even attempt to connect Iraq to the attacks against the United States. More subtle, but no less perilous, are the enemies that the administration has targeted at home. Thus, we hear threats to use military troops, not to seek out and destroy terrorists, but to seize U.S. ports on the West Coast so that American troops can scab in the event that the dockworkers strike or are locked-out. (See On the Waterfront.)  It cynically claims that civil service and union protections for federal workers represent a threat to national security. (See Spoiling for a Spoils System.)  It keeps an unknown number of people interred in a state of legal limbo, neither affording them the rights of prisoners of war, of criminals, or even of illegal immigrants.

There can be no doubt that the enemies of the United States seek to destroy us. But is it really necessary for us to help them by destroying ourselves and the things that we stand for? Are not these ideals the basis of our strength? America was founded on principles of justice, equality and opportunity. While those ideals have often been compromised, they nevertheless have remained as our goal, a goal toward which we continually strive. It is this struggle toward our shared ideals that distinguishes our American democracy, and that has formed the basis for our nation’s enormous wealth and power. If we sacrifice these ideals, do we not risk the loss of their fruits?

We have been hurt, and we are angry. We have been energized, but in a diffuse and undirected way. So far, our response to those events has been destructive. We have destroyed the regime that harbored the terrorists in Afghanistan, undoubtedly for the better, and are now considering where to attack next. It is not enough, however, to destroy. We must also build. It is in the act of creation that we construct our future.

This anniversary is appropriately a time of reflection. While we reflect, we should consider how we can use these events to make the world a better place for ourselves and our children. We owe nothing less to the heroes and victims of September 11, as we honor their memories. And while we reflect, and while we remember those terrible events of last year, we should also remember: "Eagles Soar."

Labor Day Reflections–2002

Labor Day polls have become an annual tradition. As the occasion suggests, these polls attempt to measure America’s attitude toward organized labor and other workplace issues. This year, however, this annual tradition has revealed some interesting results. According to the poll commissioned by the AFL-CIO, a majority of Americans do not trust their corporate leaders. A full 58% of Americans hold a negative view of corporate CEOs, while a mere 13% view them positively. To emphasize the point, in a sharp reversal from a year ago, 39% of Americans view large corporations in a negative light, while only 30% view them in a positive light. In 2001, by contrast, 42% of Americans held a positive view of large corporations, while only 25% viewed them in a negative light.

Not greatly changed from last year, only 31% of Americans trust their employers to treat their employees fairly (down from 36% last year), while fully 66% of Americans do not trust their employers. A majority of Americans (53%) believe that corporations sacrifice loyalty to their employees for profits.

None of this comes as a shock. On the heels of the many corporate scandals that have become almost too numerous to count, and the clear and rampant greed even where there has not (yet) been a scandal, this is a predictable result. Nevertheless, what does this really mean for workers and for the labor movement?

Last year, we reported on another poll released by the AFL-CIO that also showed widespread worker dissatisfaction. (See American Attitudes on Labor.) However, that same poll demonstrated that most people preferred to rely upon the power of the government to protect their interests, rather than using their own collective power. What makes this poll remarkable is that it shows that maybe this vain reliance upon the power of government may finally be beginning to erode.

Consistently since the poll was initiated in 1984, a clear majority of Americans have indicated that they would not support a union in their workplace.  In 1984, Americans indicated that they would oppose a union by a margin of 2 to 1.  As late as last year, a clear majority (51%) would oppose a union, and only 43% would support it.  While that ratio has dropped over the years, this year, for the very first time, more Americans would support a union in their workplace than would oppose it, with 50% in support and only 43% in opposition. 

What makes this result even more remarkable is that it is largely confirmed by a second poll, commissioned by the Employment Law Alliance.  According to this poll, a full 58 percent of those polled supported increased unionization in more companies to increase worker protection. Interestingly, an overwhelming 84 percent favored the use of employee pension plan assets to force greater corporate accountability. (See Corporate Governance and the Labor Movement.)

What has caused this turnaround? Last year’s poll revealed that a majority of Americans were willing to rely upon a government they did not trust to protect their rights. Maybe, just maybe, people are beginning to figure out that the government will do nothing to help workers until workers are willing to take charge of their own fates and destinies. Representative government responds to power, whether it is the power of the ballot box or the power of money. The forces of the corporate status quo already control the money and, as they showed in the last Presidential election, the ballot box. Only when workers arise and take charge of their own fates will they gain their rightful voice in government.

Labor unions were created as a means for individual workers, small and weak on their own, to band together to into a powerful force. Using this collective power, workers can level the field in their fight for workplace (and social) justice. Early in the last century, Americans figured this out, and helped lead the nation into an era of unprecedented prosperity. Over the last forty years, Americans have forgotten this important lesson. Have we relearned what we once knew? For the sake of our futures and our children, let's hope so.

July 4 and September 11

Photograph by Earl Dotter

It has been several months since we have stopped to consider how we have been changed by the events of September 11 and their aftermath. This is the first July 4 holiday since those terrible events, and it is time to pause and reflect.

I do not believe that most Americans outside of New York and Washington fully appreciate the impact of these catastrophes on the psyches of those of us who live in these areas. Undoubtedly, the effect has been greatest on New Yorkers. How can any resident of that city, which for the last two centuries has stood at pinnacle of American culture and economic power, not have been changed by the sight of two of its most recognizable symbols crashing to the ground like they were made of sand and straw. The combination of that great horror and the equally great acts of heroism that followed have forever changed the way New Yorkers think and feel about themselves and about the world.

Here in Washington, the effect has been somewhat less extreme, although no less deep. As difficult as it was to see the Pentagon in flames, for myself at least, that was not the greatest trauma. I was downtown when the plane hit the Pentagon, and when a second plane was reported to be headed toward the city. That second plane, which, it is now reported may have been headed toward the White House, crashed in a field in Pennsylvania as the result of the heroic acts of its passengers. Had those passengers not acted as they did, would I still be alive? Would my office, only a few blocks from the intended target, have been spared? Had the plane continued on toward its intended target, would it have been shot down? Where would it have fallen?

Photograph by Earl Dotter

On that day, all was confusion. The local media reported, erroneously, that the subway system had been closed–for security reasons–leaving me and tens of thousands of other commuters with no way out of the city. The roads were gridlocked, and it turned out that this grand city, our Nation’s capital, had no plans for handling such an emergency. Despite repeated warnings of terrorist attacks against our country, and the obvious likelihood that Washington, D.C. would be a target, there was no security plan, no plan for the evacuation of the city, no plan for how to handle the disruption and damage that a terrorist attack would cause, no plan for coordinating emergency services between the multiple governments and jurisdictions constituting the national capital’s metropolitan area, not even a plan for handling the flow of traffic on our already congested roads.

The weeks that followed were, in their own way, as traumatic and as terrifying. Traveling to work, I would pass by uniformed troops on street corners carrying their automatic rifles, with gun mounts on their HumVees. Looking out my office window, I could see these armed troops in the streets. What is most frightening is that, rather than feeling disquiet about the sight of troops in the streets, I felt comforted.

Photograph by Earl Dotter

And at the heart of this disquiet was the sense that the acts of September 11 were only the beginning of a new wave of terrorist attacks. Every car and truck on the street was a potential bomb. Any individual on the sidewalk, in a shop or at a lunch stand could be a suicide bomber. Every piece of mail could potentially carry Anthrax or contain a letter bomb.

What has happened since September 11? How have we reacted? How have we changed? Unfortunately, the answer may be not enough.

We have received very mixed signals from our government. The people who were asleep at the switch when the attacks occurred continue to hold the same positions they held before. Anyone who questions their conduct, or suggests that there may have been negligence, is accused of unpatriotism, damaging the war effort, or rank partisanship. Our Attorney General, perhaps to compensate for his lack of interest prior to September 11, regularly issues vague, unsubstantiated and unsupported warnings about imminent attacks on our country. We are suffering from imminent terror overload.

We are told that we are at war. Most Americans would gladly sacrifice in a time of war, as we (or our parents or grandparents) did during World War II. But really, the only thing we have been asked to sacrifice is our sense of safety and security. Instead, our government talks not of sacrifice, but of tax cuts.

Our greatest sacrifice has been in convenience and our sense of invulnerability. Flying is a chore. Flying into National Airport in particular is, for me anyway, a terrifying experience. While I appreciate the additional safety afforded by the increased security, my emotional response is one of fear and disquiet.

Big business has not changed. Home Depot, during this time of war and crisis, feels no compunction about ordering its stores not to sell to the U.S. Government and, in particular, not to sell anything to the military. Drug companies continue to push their latest and most expensive (and not terribly useful) drugs, helping to accelerate the upward spiral of health care costs. Does this help the troops in the field? No. Does it advance the cause of public health? Not really.

Scions of corporate America, after spending a decade telling us what good jobs they have been doing (and compensating themselves accordingly) are now discovered–surprise, surprise–to be liars, cheats and thieves.

Where is the wave of public service and self-sacrifice we anticipated after September 11? Perhaps because we have not been asked for it, it has not appeared. Or is there a deeper problem? Are we so fat and selfish that we are no longer capable of rising to meet the challenges of these trying times? What passes for patriotism is frequently nothing more than flag waiving. Are we not capable of better?

On this, the 226^th anniversary of the founding of our great nation, in the wake of our national tragedy, we need to reflect on where we should go, what we should be. How do we achieve the promises of justice, fairness and universal prosperity that are the ideal of America? I have no answers today. However, I do know that we will find no answers until we are willing to seriously consider the questions.

Big Box Bullies - Home Despot and the American Way

The anti-worker, anti-union attitudes of the so-called "big box" retailers, like Wal-mart, Best Buy and Home Depot, have been well documented. These mega-marts are also notorious for the effect they have had on manufacturing in the U.S. and around the world, insisting on buying cheap imported goods from third-world sweatshops, where slave labor is not uncommon, and eschewing goods produced in the U.S. or anywhere else that practices fair labor standards. There has also been no lack of reporting on the devastating effect these big box bad boys have had on small businesses and small towns around the country, decimating central business districts from coast to coast and driving thousands of family-run enterprises out of existence. Lately, there has even been attention paid to the blight on the landscape when one of these big box retailers decides to close-up a store. Left behind is an enormous custom-built box that is unsuitable for any other purpose. Communities around the country are being littered with these derelict monstrosities. With all of this attention paid to these greedy giants, you might guess that nothing these behemoths do could be a surprise. Well, guess again.

It has recently come to light that Home Depot’s corporate headquarters has instructed its stores not to sell to the U.S. government. Stores are prohibited from accepting U.S. government credit cards, purchase orders, or even cash. When such orders are received, the stores are specifically instructed to leave them unfilled. As an example actually cited in the Home Depot directive, if a customer orders 3,000 light bulbs and asks that they be delivered to a U.S. military base, "That transaction should not be processed." (The directive does not explain what to do if the delivery were to, for example, an Iraqi military base.) In a time of war, why would a potential supplier take such an unpatriotic position? More curiously, why would any retailer cut itself off from such a significant source of revenue?

Home Depot’s directive includes the answer to this question. By refusing to sell to the government of the United States, Home Depot seeks to avoid any requirement that it comply with the following laws and executive orders:

Each of these three laws apply only to contractors doing business with the U.S. Government. By its refusal to sell to the U.S. Government, Home Depot hopes to avoid any requirement that it promote the advancement of women, minorities, the disabled or veterans who risked their lives serving our country.

After the first news reports of this directive appeared, Home Depot clarified its position, noting that this was not a new policy. Rather, explained the press release, the directive merely restates a policy that has been in place for years. We must thank Home Depot for this helpful clarification.

These big box retailers have literally changed the face of America. They have forced hundreds of thousands of people out of well paying retail and manufacturing jobs into sales jobs with low pay, minimal benefits, questionable working conditions and, for most of the workers, little chance of advancement. They have repeatedly demonstrated their hostility to their own workers. Now, in its arrogance, Home Depot has once again exposed its real self.

This episode raises a question that has long troubled those of us living in societies with market economies. Should we permit corporations to be amoral? Should we spend our money at establishments that deny people their basic dignity and rights? Maybe its time we answered these questions.

Epilogue.  On July 1, having suffered significant damage from the public revelation of its unpatriotic and discriminatory policy, Home Depot announced that it would reverse its position and that it would now accept the U.S. government's money.

On The Front Lines in The Drug Wars

There is an intense struggle going on over the pills that we pop, the elixirs we imbibe and the serums we shoot. This struggle is not between the forces of law and some Columbian drug cartel. Rather, it is between the manufacturers of major brand name prescription drugs and the growing pressures from medical care payers to manage health care costs.

We have reported in the past about the efforts of the drug companies to maintain their enormous profits by using various tactics to prevent the introduction of generic versions of their blockbuster drugs and by their profligate marketing efforts designed to sell their latest and priciest drugs to physicians and consumers.  (See Drug Makers' Patently Outrageous Conduct, Pharmaceutical Association Issues Guidelines for Bribing Physicians, and A Prescription for Disaster.)  While these efforts have enabled the drug companies to continue to expropriate an excessive share of our gross domestic product, there is trouble on the horizon as the result of a number of converging trends.

Drug companies have always defended the enormous profits they reap from their patent drugs as being the force driving their huge expenditures on research and development of innovative new drugs intended to relieve suffering and to generally improve the human condition. Besides the fact that the drug companies’ R&D budgets are dwarfed by their marketing expenditures, the results of this R&D have been hardly as innovative as the drug companies would like us to believe.

According to a recent study by the National Institute for Health Care Management, from 1989 through 2001, only 15% of all new drug approvals have been for genuinely innovative medications. The rest have been either for old drugs with slight tweaks (such as changed dosages, modified forms, etc.) or for medications without any demonstrably different or superior therapeutic effect as compared to drugs already on the market. Moreover, the trend towards tweaking old drugs, rather than producing innovative new ones, increased toward the end of the period studied.

What is the cause of this lack of innovation? In this brave new world of biotechnological breakthroughs, in which the human genome was mapped years ahead of schedule and new genomes are mapped on a regular basis, where are all the new drugs and drug therapies that we were promised? More importantly, why are the drug makers focusing on squeezing profitability out of their older drugs, instead of breaking forward with revolutionary new ones?

There are a variety of factors at work. First and foremost, it is a whole lot cheaper and quicker to tweak an old drug than to develop a totally new drug. Moreover, as we have previously discussed, "tweaking" an existing drug is often an effective way to keep generic competitors off the market. Even if that effort fails, and the generic equivalent of the old drug does hit the streets, the original drug companies’ massive marketing machines are well equipped to convince everyone why the newly "tweaked" version of the drug is vastly superior to the crummy ol’ generic. Just look at all the TV advertising on Clarinex, which is nothing more than a tweaked version of Claritan, upon which the patent only recently expired.

Another possible cause of this lack of innovation, and one that has been the subject of much speculation, relates to the nature of the research that the drug companies are equipped to engage in. For the last thirty or more years, the drug companies have focused their research efforts on enzyme-based drugs. Typically, these drugs affect the way the body deals with specific enzymes, either enhancing or inhibiting the absorption of particular substances. As a result, the bulk of the existing "blockbuster" drugs on the market fall into this category. Although this area of research was fabulously successful for a very long time, producing amazing innovations in medical treatment and equally amazing profits for the drug manufacturers, there is a good deal of speculation that it has now been largely been tapped out, and that few major discoveries are left to be made. If this speculation is true, it means that the drug companies are far less likely to succeed in developing new blockbuster drugs now than they have been in the past.

According to this line of speculation, future breakthroughs are more likely to come at the genetic level. Unfortunately for the drug companies, not only is the bulk of this research being conducted by the small, independent biotech firms, but the prospect for the development of substantial numbers of new drug therapies based upon this research is believed to be years off. This means that the drug companies are in a dry period, where the best they can hope to do is to tweak their existing drugs, hope to hit it lucky with their current lines of research, and wait for future developments.

Whether or not this line of speculation is true, the desperation of the drug companies for new blockbuster drugs, and the increasing leverage of the biotech companies, is demonstrated by the following example. Ten years ago, Bristol-Myers was able to license the breakthrough cancer drug Taxol for a royalty of 0.5%. Last year, Bristol-Myers paid $2 billion plus a 60% royalty to license the new cancer drug Erbitux. Unfortunately for Bristol-Myers, Erbitux has failed to live up to its promise, and is not likely to gain FDA approval in the near future, if ever.

Moreover, the drug companies’ efforts to promote their "tweaked" and derivative drugs over the generic competition is running into a new road block imposed by the forces of managed care. With more and more prescription drugs being paid for by insured prescription cards, the leverage of the prescription benefit managers ("PBMs") who administer those drug cards has increased dramatically. Within the past few years, more and more of these managers have imposed mandatory "formulary drug" programs. Under these formulary programs, if a physician wants to prescribe a drug with a particular therapeutic effect, he must choose one off of the PBM’s "formulary" list.  If the physician prescribes a non-formulary, brand-named drug, the patient must pay an additional fee, which may be as high as the full cost of the non-formulary drug. When these formulary programs are working at their best, it means that there is tremendous financial pressure on both physicians and patients to use older, cheaper generic drugs, rather than a "tweaked" brand name version that may cost five or ten times as much.

Another successful tactic used by some PBMs and health plans is what is sometimes referred to as "counter-detailing." We have previously reported on the drug companies’ practice of "drug detailing." Often, the information provided by the drug company marketing machines has been the only information easily available to the physicians, who would then go on to prescribe the more costly, and more heavily promoted, drug. With counter-detailing, physicians can be informed of the facts, which often show that an expensive patent drug has little or no additional benefit over its older generic competition.

Unfortunately, the drug companies retain the advantage in some important ways. For example, the drug companies have the budgets to pay for the research and marketing of new patent drugs, as well as to find new applications for their existing patent drugs. However, because of the thin profit margins on generic drugs, it is not economically feasible for generic manufacturers to invest in research for new applications for existing generic drugs. A case in point involves sepsis, one of the banes of modern medicine. This infection has reached nearly epidemic proportions, largely as the result of unsanitary conditions in hospitals, killing approximately 215,000 people in this country each year. In the mid-1980s, as the result of a fortunate accident, it was discovered that common steroids may be an effective, safe (and very inexpensive) treatment for this dangerous malady. By contrast, Eli Lilly produces a patent drug, Xigris, for treatment of the same infection. While a course of steroid treatment for sepsis runs about $50, Xigris costs about $7,000 a dose. Since Xigris is under patent, it was subjected to large scale studies, was able to gain FDA approval, and was heavily marketed. By contrast, nobody was around to pay for large-scale studies of the efficacy of using steroids as a treatment for sepsis. Without such studies, there is no way to know whether steroids are an appropriate treatment. Until those studies are performed, Xigris--despite (or, really because of) its high cost--will remain the only proven treatment.

This unfortunate example illustrates several important points. It demonstrates that a disproportionate share of resources go into developing patent drugs with blockbuster potential, instead of into producing treatments with the greatest medical benefit. It also shows the overwhelming advantage that the drug companies’ money has given them over their potential competition.

We have previously reported that rising drug costs are responsible for the greatest share of our nation’s increasing expenditures for medical care. We need to figure out how to get these costs under control without stifling the development of new treatments and therapies. We also need to find a way to rationalize expenditures on medical research. While sophisticated managed care may provide a means of ameliorating some aspects of the problem, it does not provide a long-term solution. Until we can find that solution, we will continue to remain caught in an upward cost spiral, with an increasing share of our health care dollars siphoned off in inefficient and non-productive directions.

Gambling on Health Care in Gomorrah

The rising cost of health care is insinuating itself into the public consciousness in a way in which it has not been since the early 1990s. One more example of this trend is the recent vote of the members of Culinary Workers Union Local 226 and Bartender's Local 165, both affiliated with HERE, to authorize a Las Vegas city-wide strike against, the major casinos.  With 95% of the ballots cast in support of a walkout, these unions received a strong vote of confidence from their members to proceed aggressively to protect their rights. What caused this overwhelming show of support? Two issues are at the fore of these negotiations. First, management has demanded sharp increases in the amount that employees pay for health care, the same issue that drove the Chocolate Workers' strike against Hershey. The second issue involves improving the abysmal working conditions of hotel cleaning staffs, particularly their peak workloads.

In a related story, Amalgamated Transit Union Local 1637, representing city bus drivers and mechanics, called a surprise strike virtually shutting down the Las Vegas municipal bus system. The actual employer is ATC, a contractor that operates the Citizens Area Transit (CAT) system for the Regional Transportation Commission. Although the dispute covers the full range of employment issues, one of the principal areas of contention is management’s proposal to transfer a substantially larger share of the cost of health care to the employees. The drivers and mechanics have been working without a contract since last year, and the negotiations have dragged on for over eight months. When the members first authorized a strike (two weeks prior to their actual walk-out), ATC pronounced that it was lining up scabs to keep the buses running.  In order to make sure that ATC was caught unprepared, the union did not inform ATC in advance when the walk-out would occur. The unfortunate result was that a lot of Las Vegas residents were caught by surprise and left stranded when the strike occurred.

Fortunately, the Culinary and Bartenders Locals reached a settlement with the largest of the casino operators, including Park Place Entertainment, Harrah's Entertainment, Aztar Corp, Mandalay Resort Group, MGM Mirage, and the Tropicana, well in advance of the strike deadline.  These agreements include an unusual formula in which the employers will provide an additional $3.235 per hour over the term of the contract (with 60¢ to 65¢ per hour added in each year of the five-year agreement).  The bulk of this money would be allocated to health care and other benefits as needed, with any remaining amounts paid into increased wages.  As a result, there will be no wage increase in the first year.  In addition, peak workloads of the housecleaning staffs have been reduced, and special measures have been adopted to improve working conditions.  On June 6, 2002, these agreements were overwhelmingly ratified by a vote of 2003 to 35.  In the weeks leading up to the strike deadline, the unions were able to strike deals with the five remaining unionized hotels on the strip. 

In a flurry of last-minute negotiations taking place in the hours leading up to and following the the July 1 strike deadline, the unions reached tentative agreements with all but two of the unionized downtown hotels.  These contracts, including the contracts with the five strip casinos and the downtown casinos, were put to a membership vote on Tuesday, July 2, and were ratified by a vote of 808 to 3.

At 6 p.m. on July 1, notwithstanding an 18-hour extension of the strike deadline while marathon negotiations continued, workers went out on strike against the Golden Gate casino, the oldest (and smallest) in town.  Not surprisingly, the principal unresolved issue is management's proposal to radically alter the workers' health care benefits.  Negotiations with the Western were initially suspended when its management announced that it would close September 1.  Despite the timing, management insisted that the planned closure was not related to the current labor dispute.  Nevertheless, the owner's son intervened, seeking to find a way to keep the casino open.  Negotiations resumed, and an agreement was quickly reached.  

Complicating negations with the Golden Gate was the employer's unilateral decision to violate the terms of the prior contract, when it refused to implement a 40¢ pay increase that became effective last December.  On July 9, following intensive negotiations, the 8-day strike against the Golden Gate was settled.  In general, the deal reached was the same as that reached with the other downtown hotels.  With regard to the 40¢ pay increase under the prior contract, the parties compromised, and agreed that the arrearages will be paid in a lump sum at the end of 2004.  The agreement was quickly ratified by a membership vote of 118 to 0.  The employees are expected to return to work on Thursday, July 11.  Therefore, what could have been a crippling strike for the city of Las Vegas was limited to a single casino, and is now settled.

At each of these casinos, especially the downtown operations, the bulk of the money going into the new contracts is being spent on maintaining health care benefits at their current levels.  In fact, many employees will see no wage increase, and some new employees will actually see lower wages.  Several things make this remarkable.  First, it is clear that rising health care costs have made it necessary to sacrifice wages in order to maintain the same standard of health care.  Second, the overwhelming approval of these contracts demonstrates that the workers themselves clearly understand this new economic reality, and are willing to sacrifice their wages in favor of the protection for themselves and their families afforded by maintaining their comprehensive health care benefits.

For the striking transit workers, the news was beginning to appear pretty bleak.  It seems that it is a crime in Nevada to engage in traditional labor picketing. The bus company had indicated that it would refuse to rehire anyone who had done anything "illegal," including peaceful picketing, and made making video tapes to see whom it could safely fire. Whether this was just a bargaining tactic or a genuine effort to bust the union, we may never know.  On May 28, following extensive negotiations under the guidance of a federal mediator, the bus company made what it characterized as its final offer, providing for modest wage increases and the implementation of employee wage deductions for health care.  The net effect of these two elements of the company's proposal would be a wage reduction over the course of the agreement.  Moreover, the proposal did not resolve the issue of whether members accused of having committed the "crime" of picketing would be permitted to return to work.  The same day, following the recommendation of the Union's leadership, the membership overwhelmingly rejected the proposal by a vote of 492 to 39.  With the assistance of local government officials, the parties resumed negotiations, leading to a new proposal from management.  As with the earlier offer, the new proposal did not contain any provision for amnesty for the striking workers.  On June 15, the striking transit workers voted down management's revised proposal by a margin of 353 to 41.  At that point, the company announced that it had replaced virtually all of the striking drivers.  Moreover, the company indicated that any striking drivers who failed to return to work by Tuesday June 25, would have to reapply for their old jobs, would only be considered for rehire as positions came open, after the company had exhausted its pool of scabs, and would be treated as new hires, forfeiting all of their seniority and longevity pay.  Of course, strikers who committed "illegal" acts (such as peaceful picketing) would not be rehired.  Furthermore, according to some published reports, the strike benefits that had supported the striking workers were soon due to expire.  On the flip side, the strike had resulted in a significant loss of ridership (and revenue) for the bus company, and was causing increased political pressure.  Under these circumstances, the union and the bus operator were able to reach a new tentative agreement, providing for a signing bonus and (according to press reports) complete amnesty for the striking drivers.  The proposed settlement was put to a membership vote on June 27.  Although the membership had overwhelmingly rejected the two prior proposals, and despite some complaints that the short time between reaching settlement and the ratification vote had not permitted publication of the full text of the agreement, the striking drivers ratified the proposed agreement by a vote of 264-117, more than a two-to-one margin. The drivers returned to work Monday, July 1.

What is common to both of these disputes is that the driving issue in each is the rising cost of health care. In both cases, the employers are weary of paying for ever-increasing health care costs, and want their employees to pay a larger share. The employees, by contrast, are looking to avoid what amounts to a significant decrease in their compensation, along with the added medical and financial risk associated with reduced health coverage. Unfortunately, as long as the cost of health care continues to rise at such a dramatic rate, we will only see more of these same types of disputes. We will continue to post news as it occurs.  Should you find yourself in Las Vegas, be sure to show your support.

Drug Makers' Patently Outrageous Conduct

We have reported at length on a number of issues surrounding the rising cost of health care and, in particular the increasing expenditures for prescription medications.  One of the major factors driving the increase is the introduction of new "patent" medications, for which the drug maker can charge whatever the market will bear, protected by a government-enforced monopoly. Once a patent expires, the drug enters the public domain so that, at least in theory, generic manufacturers can produce chemically identical drugs. These generic drugs are sold for only a small fraction of the cost of the original patent-protected version.

While the legal monopoly provided by patents encourages the development of new drugs, the current system in the U.S. is subject to numerous abuses. For example, the drug companies have been working overtime seeking to convince both physicians and patients that they should always try the latest patent drug, rather than an older generic drug, even if the older drug is likely to be just as effective (and loads cheaper) than the patent drug. We have previously described a few of the techniques used by the drug companies to push their latest patent drugs. (See, Pharmaceutical Association Issues Guidelines for Bribing Physicians and A Prescription for Disaster.)

As drug patents approach expiration, their manufacturers face an enormous loss of revenue. The introduction of generic competition may result in as much as a 90% loss of revenues from a given drug. Not surprisingly, therefore, the drug makers have developed some very clever ways of extending their patent monopolies.

First, under the recently-enacted Best Pharmaceuticals for Children Act (which became law earlier this year), drug patents are automatically extended for an additional six months if the drug maker tests a patent drug on children. It is estimated that the cost of testing a drug on children is about $4 million.  For a manufacturer like Bayer, recently faced with an expiring patent for Cipro, the now famous antibiotic that is used in treating anthrax, the decision to engage in pediatric testing was an easy one. The additional revenues that Bayer will receive as the result of its decision to take advantage of this patent extension is estimated to be $358 million. That’s quite a return on its $4 million investment.

Second, drug companies have been very creative in filing for subsidiary patents long after their initial patents have been filed. For example, a drug maker may patent a medicine for some additive that supposedly improves the dissolving characteristics of a pill. When the initial drug patent is set to expire and generic makers begin to prepare their own chemically-identical knockoffs, the original patent-holder sues to enforce its later, subsidiary patent. Even if the law suit is entirely frivolous, the potential damages that the generic maker may be required to pay if it is held liable for patent infringement may be so enormous that it will delay introduction of the generic drug until the law suit is finally resolved, which may be several years. Moreover, as long as a law suit is still pending, the FDA is prohibited by federal law from approving the release of the targeted generic drug for a minimum of 30 months. In the mean time, the drug maker retains its monopoly–and its monopoly pricing–on the drug. What this means is that, whatever the merits, the original patent holder has nothing to lose by filing a law suit. Even if the drug maker spends millions of dollars on a frivolous law suit against its wannabe generic competition, the additional revenues it will earn by maintaining its patent during the pendency of the suit may result in hundreds of millions of additional dollars of revenues.

Third, drug makers have been creative in developing "enhanced" versions of their older patent drugs. This way, once the patent has expired, the drug maker introduces the new and improved version of the drug that has a valid patent. Thus, for example, with the expiration of Eli Lilly's patent on Prozac, Lilly developed and patented a timed release version of the drug in order to maintain its patent protection. Even though the "new" Prozac is no more effective than the old, it needs only be taken every three days, instead of every day. For this, Lilly charges a substantial premium over generic Prozac.

Fourth, under federal law, the first generic maker to gain FDA approval for a particular drug gets a six-month head start before any other generic versions will be approved. What some drug companies have done is to pay-off the generic drug maker to keep its version off the market for the six month period. Thus, for a few million dollars a month, a drug maker can extend a patent worth fifty or more times that amount. Although a clear violation of the antitrust laws, drug companies are rarely caught and, even when they are, virtually never punished.

Fifth, applications by generic drug makers for approval of their knock-off drugs by the FDA are subject to public comment. Using a time-honored scam, drug makers trying to protect their expiring patents will set up phony "public interest" groups to file "citizen petitions" with the FDA.  These petitions may claim that there are safety concerns with the generic drug, that the drug requires additional tests, or pretty much anything else the drug company can think of to delay the approval of the generic drug.  The result is a de facto extension of the original drug maker’s monopoly.

Recently, a number of large employers have sought to fight back by forming a coalition called "Business for Affordable Medicine." Among other things, this coalition has sought legislative reform to promote the introduction of generic medicines. The drug companies, however, have worked overtime pressuring the members of this coalition to drop out, and have had some success. A number of the members of the coalition have in fact dropped out.

Nevertheless, despite the drug companies’ best efforts, there is mounting public pressure to halt the amazing rise in expenditures for prescription drugs. Whether we will see real change, or whether prescription drug reform will meet the same fate as the larger effort to reform the delivery of health care, remains to be seen.

Just Sue It – Nike Accountable for Sweatshop Lies

Nike has long sought to promote itself as an American producer of high-end (meaning expensive) athletic shoes. The truth is really quite different. Nike is nothing more than a marketing and distribution company that contracts all of its shoe production to Asian producers, who work their employees anywhere from 60 to 90 hours per week, paying them a dollar or two a day (if they’re lucky). The result is that those shoes you paid $150 to buy probably cost Nike less than $2 per pair. Where does the other $148 go? Mostly to fatten the wallets of Nike’s executives and spokespeople.

About ten years ago, Nike, which portrays itself as a sponsor of college sports programs and promoter of individual achievement, started to become more sensitive to these reports that what it really sponsors is sweatshops and what it actually promotes is exploitation of workers on a massive scale. Faced with a choice between adopting programs to ensure a living wage and a safe and dignified workplace for those who produce all of that heavily promoted footwear, or conducting a massive PR campaign to muddy the waters and hide the truth, Nike showed its true colors. It is, after all, a marketing machine, so that it should have come as no surprise that it chose to fight the perception of the truth, rather than address the underlying issues.

Many of us will recall when local basketball star Michael Jordan went on his P.R. tour to promote Nike’s humane labor practices. Other luminaries, such as former U.N. Ambassador Andrew Young, were also co-opted into this effort. A recent summary described Nike's efforts as follows:

Specifically, Nike . . . said that workers who make Nike products are protected from physical and sexual abuse, that they are paid in accordance with applicable local laws and regulations governing wages and hours, that they are paid on average double the applicable local minimum wage, that they receive a "living wage," that they receive free meals and health care, and that their working conditions are in compliance with applicable local laws and regulations governing occupational health and safety. Nike and the individual defendants made these statements in press releases, in letters to newspapers, in a letter to university presidents and athletic directors, and in other documents distributed for public relations purposes. Nike also bought full-page advertisements in leading newspapers to publicize a report that GoodWorks International, LLC., had prepared under a contract with Nike. 

Kasky v. Nike, slip op., Ca. Sup. Ct. No. S087859 (May 2, 2002).

Nike's critics refused to let these statements stand unchallenged, and sued Nike in California state court for false advertising. The trial court and the intermediate appellate court each dismissed the case, claiming that Nike had a constitutional right of free speech to say pretty much anything it wanted. The California Supreme Court, however, disagreed.

A sharply divided court (4 to 3) ruled that Nike’s statements were commercial speech, which is entitled to lesser protection under the constitution than ordinary speech. As commercial speech, the Court ruled that Nike’s statements were subject to regulation, and could be suppressed if false or misleading. Consequently, the case was sent back to the lower court to determine if it should be set for trial.  If a trial takes place, Nike will have to defend the employment practices of its overseas contractors in court and under oath. This, of course, is exactly what Nike’s critics wanted in the first place.

The issue of overseas production raises profound and disturbing questions. The case of Nike is easy to condemn, because the facts are so egregious, and the amount of money going into the wrong pockets is so enormous. The issue would be more difficult if in fact Nike’s advertising were true, and it actually did pay a "living wage" and provided a decent and safe work environment. After all, a living wage in Viet Nam is a whole lot less than it is North Carolina. Is it fair for U.S. workers to have to compete with workers who are willing to make do with a fraction of what a worker needs to live in the U.S.? On the other hand, is it fair for a Vietnamese worker to be unemployed in order to keep U.S. workers on the job, when a job in a shoe factory may be her only way out of poverty and starvation?

This, of course, is the central issue in the ongoing controversy over globalization. It is easy to avoid the issue by focusing on the abusive cases, like Nike.  This question is also related to the issues we raised in our recent article A Study in Contrasts—Reflections on the Holiday Season, in which we noted that the gap between the people who produce the goods we use and the people who consume them continues to grow.  This growing disparity, in turn, produces social discontentment and political instability.  Unless we can figure out ways to address and resolve these issues in a satisfactory and just manner, the universal prosperity that is the key to our future will continue to evade us.

Pharmaceutical Association Issues Guidelines for Bribing Physicians

In our earlier article Prescription for Disaster, we reported that one of the reasons for today's skyrocketing drug costs is that the drug manufactures have been very effective in promoting their newest (and costliest) drugs to the medical providers (the physicians) who write the prescriptions. The amount spent by the drug companies marketing to physicians has been estimated to exceed $16 billion per year (compared to a "mere" $2.5 billion spent marketing directly to consumers).

Up to now, this "marketing" has included everything from so-called "drug detailing," to ads in professional medical publications, free samples, promotional golf balls and medical conferences sponsored by the drug companies (where the principal topics for discussion are the newest high-priced drugs, the next tee-time, and answering the question when’s cocktail hour). Even direct cash bribes have not been unheard of.

In response to growing criticism of these outrageous practices, the drug manufacturers’ industry association, the Pharmaceutical Research and Manufacturers of America (PhRMA), has issued a new set of voluntary standards to provide guidance as to what sorts of bribes are no longer acceptable. For example, it will no longer be permissible for a drug manufacturer to take a physician and his or her hungry spouse out to dinner, nor can that drug rep send out for take-out, unless the rep sticks around while the food is eaten. Physicians can all thank their lucky stars that the drug companies may still finance "educational" conferences in very nice places. However, under the guidelines, the drug companies may not subsidize the individual physician’s travel expenses. Grab those bargain fares, Doctors.

Additionally, while "consultancy" arrangements (i.e., the practice of retaining doctors around the country as "consultants") are not barred, the new guidelines require that these arrangements actually entail some real consulting. Token arrangements that are intended only to put money in physicians’ pocket are prohibited.

As for the grab-bags of gewgaws meted out by the drug companies to the doctors, only trifles of "minimal" value that are in some way related to a doctor’s practice are permitted. Therefore, pens, pads and the occasional stethoscope are OK, but golf balls are a no-no. Drug samples, as well as educational materials valued at up to $100 are fine, but anything more is banned. And cold, hard cash is strictly verboten. Possibly worst of all, those trips to the ball game in the special box seats are now entirely prohibited. Even golf outings are banned. Almost takes all of the fun out of practicing medicine.

All joking aside, these guidelines are undoubtedly a positive step, even if they are strictly voluntary and include no enforcement or other policing mechanism. Unfortunately, their greatest effect may be to reduce the drug company’s "marketing" budgets, without actually reducing their effectiveness in marketing their latest and greatest new patent medications.

In a perfect world, doctors would be able to rely upon independent, objective information on the therapeutic effect of the various potential therapies for particular ailments and maladies. Unfortunately, less and less of that information is available. One of the principal initiatives of the Reagan Revolution of the 1980s was to starve government funding for basic medical research, while promoting private, profit-oriented financing to fill the void. The result is that much what passes for medical research today is directed by people with a strong profit interest in the result.

Moreover, even to the extent information is available, most doctors today lack the time and, in many cases, the inclination to keep up on the latest medical studies and trends. Therefore, when the drug companies spoon feed them their propaganda about how much better their newest patent drugs are than those crappy generics and other alternative (and cheaper) treatments, they have no effective way to evaluate that information. Combine that with a store-room full of free samples and stacks of pre-printed prescription pads, and you have the prescription for higher drug costs.

In order to get out of this box, several things will have to be done. First, the bulk of medical research will have to be placed back in the public domain. While this may be expensive, is it any more expensive than $10-a-pill allergy medicines? Secondly, we need to find a way to get to the doctors and educate them on the truth about the drugs they prescribe, and about alternative therapies. Finally, we must develop some creative means of suppressing the drug companies’ "monopoly" premium without also eliminating the development of new and beneficial drugs. Clearly, these tasks will not be easy. However, as long as the problem continues to be largely ignored, it will not be solved.

Golden Parachutes, Executive Retention Bonuses and Other Crimes

Has executive compensation gotten out of hand? According to Business Week, the average CEO made 42 times the average hourly worker's pay in 1980, 85 times in 1990 and 531 times in 2000. In other words, the answer is yes.

The real trend toward obscene executive compensation arrangements began during the "greed is good" ‘80s. Much to the amazement (and, undoubtedly, the admiration) of executives in the rest of the world, U.S. executives began to inflate their compensation beyond all reason back during that high-flying epoch of Ronald Reagan and Michael Milliken. At the time, the rationale was that companies had to offer outrageous levels of compensation because other companies were doing so. These apologists for avarice contended that with market rates for upper-level management so high, matching or beating those rates was the only way to get the "best" people. It is, after all, so hard to get good help.

During the 1990s, the economic boom of the Clinton era provided another rationale–obscene executive compensation packages were only fair in order to reward these marvelous managers for their good work in increasing shareholder value. Whether that increase in "shareholder value" reflected an actual increase in the basic value of the company, or whether it was little more than bookkeeping smoke and mirrors, was beside the point.

Now, during the first decade of the 21^st Century, the Bush Recession has provided a new rationale for the upward spiral of executive compensation: Only by providing huge retention bonuses can high-level managers be convinced to remain. After all, having led their companies to the brink of bankruptcy (and often beyond), these managers know more about their employers than anyone else, and the enormous costs of their compensation packages are necessary to keep these rats from abandoning their sinking ships.

Is there a pattern here?

Long, long ago, in ancient times (as late as the 1970s), the Internal Revenue Service would challenge executive compensation arrangements that it considered excessive. Although the IRS could not prohibit such arrangements altogether, it could disallow corporate tax deductions for compensation amounts it considered unreasonable. Although the IRS retains the statutory authority to take such actions today, it has rarely done so, and any restraining effect from the exercise of this power has dissipated.

The case of Enron provides a particularly blatant case of executive compensation abuse, both on the way up and on the way down. During its hey-day, Enron anointed its executives with opportunities for wealth that, in any rational world, would be considered criminal. In addition to their straight-up compensation, stock options, deferred compensation, etc., there were the phony partnerships that have garnered so much attention. Although part of the purpose of these partnerships was to use complex accounting rules to hide corporate liabilities, a major effect of these partnerships was to provide a convenient–and hidden–means to loot the corporate treasury and to place assets worth millions of dollars in the pockets of Enron’s executives.  Later, after Enron’s stock began to lose value as its "creative" accounting practices became more widely known, its executives began to dump their shares of stock, while at the same time they advised their employees to keep their retirement savings fully invested (and indeed to continue to buy more). Finally, having hit bottom and having laid off large numbers of employees whom Enron has stiffed by not paying promised severance benefits, Enron seeks to compound this insult by rewarding its executives with "retention bonuses." Presumably, the purpose for these retention bonuses is to keep the executives who were responsible for ruining Enron from leaving and ruining other companies. Truly a public service.

Putting it all together, what this means is that, over the course of the last twenty years, executive compensation has steadily risen, without regard to the current economic climate or the performance of the corporate employer. In fact, the economic climate and corporate performance, whether favorable or lousy, have been used to rationalize the increases. Setting aside all of the self-serving rationalizations, what possible justification can there be for these increases? More importantly, how can we move to a system of executive compensation that actually has some relationship to reality and serves a useful purpose?

Unfortunately, there is no easy answer to these questions. In the short run, shareholders have to take charge and demand that this upward trend be reversed. Enough is enough, after all. If the boards of directors do not agree, they should be ousted and replaced. Answering these questions for the long term requires a deeper inquiry, beginning with an examination of the purposes to be served in setting executive compensation. Indeed, there are at least two separate, albeit related, purposes to be served by such compensation. First, every company needs to attract and retain the "best" people to run its operations. Second, it is logical to construct compensation packages that, in some way, align the interests of the executives with the long-term goals and interests of the company. How much does it take to keep good people? What are the long-term goals and interests of a company? How can the interests of executives be aligned with those long-term goals and interests? These are not easy questions, although they are precisely the questions that need to be hashed-out and explored. Until we are ready to conduct that inquiry, and to apply our conclusions to our investment policies and practices, we will continue to suffer more Enrons and other corporate abominations.

Desk Set Redux

The Future of the Railroad Engineer?

Those who remember the classic 1957 movie Desk Set will have a sense of deja vu over the story of the efforts of the U.S. railroads to automate the operation of their trains. Six of the nation's largest railroads, Burlington Northern Santa Fe, CSX Transportation, Norfolk Southern, Union Pacific, Conrail and Kansas City Southern, have begun to take engineers off of their trains and replace them with microprocessors controlled remotely by non-engineers. This story of science fiction come to life means that, in these remotely controlled trains, there is no one in the engine at the controls, a scary prospect.

Among other things, this drive to mechanization has led to a jurisdictional dispute between the Brotherhood of Locomotive Engineers (BLE) and the United Transportation Union (UTU). As we previously reported, the UTU purported to sign the major railroads to contracts essentially giving them a pass to implement installation of remote control technologies, provided that jurisdiction over the remote control operators went to the UTU. The BLE renounced these agreements as a violation of its contractual and jurisdictional rights.

In addition to the contractual and jurisdictional issues, the BLE contends that implementation of remote control technologies poses a threat to health and safety, both of workers and of the public at large.  Not surprisingly, the railroads assert that the remote control technologies will result in safer, less costly railroads. 

Late last year, the BLE sued the railroads to block implementation of the remote control technologies. The BLE contended that its dispute with the railroads constituted a "major dispute" under the Railway Labor Act, which would have permitted the BLE to block implementation and to strike, if necessary. Early this year, the court concluded that the dispute was "minor," and the BLE was barred from striking. Although the BLE would be permitted to arbitrate its dispute, nothing would prevent the railroads from implementing the remote control technologies in the mean time.

The BLE has now gone one step further. It has filed suit against the U.S. Government for permitting the railroads to implement these new technologies without any serious regulation or oversight. The BLE contends that the government has, in essence, abdicated its responsibilities to ensure the safe operation of the railroads.

The issue of the replacement of human workers with machines is as old as the industrial revolution. Often, the disruption caused by mechanization is an unavoidable byproduct of the increasing productivity that is essential to the spread of wealth and general prosperity. In other cases, however, the result of these "advances" is that health and safety are compromised.

Whoever is right about the effect of these new technologies, the railroads should abide by their statutory and contractual obligations and not implement these technologies in a manner that violates their agreements with the BLE. Moreover, the government needs to fulfill its responsibilities and ensure that the railroads are run in a way that is safe both for railroad workers and for the general public.

We will continue to follow this story, and to report as matters develop.

Flying the Surreal Skies

We previously reported on the resolution of the contract between United Airlines and its mechanics represented by the International Association of Machinists and Aerospace Workers (IAM). After having taken voluntary wage cuts in the mid-1990s, having had no wage increases since that time, and then having to work without a contract for two years, these IAM-represented mechanics won a significant wage increase (37%) over the five-year life of their new agreement. In a parallel story, the IAM and United Airlines have been attempting to reach a new contract for a 23,000 member non-mechanic unit, consisting of "ramp and stores, public contact, food service and security officers." These negotiations have stalled at least partly over compensation, and the IAM has asked the government to begin the clock on the 30-day "cooling off" period, following which it can strike.

According to published reports, the IAM does not expect a strike to actually occur. Indeed, the IAM has stated publicly that the two sides are close, but that after more than two years of negotiations without a deadline, the parties have been unable to close the gap. The IAM has stated that it believes that, under the pressure of a 30-day strike deadline, the parties would likely reach agreement.

It appears that the IAM's strategy worked.  On April 25, 2002, following four days of intensive negotiations, the parties reached a tentative agreement.  As with the earlier contract covering mechanics, this agreement includes significant increases in wages and pensions, including some increases that are retroactive to the expiration of the prior contract.  On May 10, 2002, the agreement was overwhelmingly ratified, with nearly 80% of the votes cast in favor of the proposed deal.

What is surreal about both the settled mechanics’ contract and the more recent tentative agreement is that nobody seems to believe that any of these agreements will remain in place unchanged for their terms. There is a sense that these labor agreements with United are nothing more than stop-gaps, and that in the very near future, United will serve up a "restructuring plan" in which it will ask for cuts and concessions from all of its workers, including those under contract. United lost $2.1 billion last year, and continues to hemorrhage money. Everyone seems to agree that United cannot continue to lose money at this rate and remain in business, and that something must be done.

As we reported about the mechanics' agreement, the final sticking point was over a requirement that the IAM automatically bind itself to the terms of United's as-yet unformulated restructuring plan. Refusing to agree to a pig-in-a-poke, the IAM insisted (and ultimately prevailed) that no restructuring plan could automatically amend its agreement with United, but that such amendments would be a matter for negotiation.

What is the point, then, of either the mechanics’ contract or the ongoing negations? Why worry so much about reaching an agreement everyone seems to agree will have to be renegotiated, most likely within the year? Without any insider knowledge, and relying upon nothing more than rank speculation, there are a couple of possible reasons. First, there is the haze of magical thinking. By reaching agreement now, the parties can pretend that the agreement has real meaning, that it will remain in place for its stated term; that the airline industry as a whole will recover in a miraculous economic rebound; and that United will restore itself to profitability without requiring a new round of sacrifices from its employees. A more realistic view is that reaching agreement now sets the base from which United’s employees will negotiate any cuts. The higher the base, the better off these employees will be after the next round of wage cuts.

Whatever the explanation, we will continue to follow this story and report events as they occur.

Auditors and Absolution

As we have previously discussed, an auditor’s principal job is to ensure that an audited organization presents its financial statements in a way that is meaningful and that can be compared to every other organization using the same accounting system. This is done in several ways. Initially, an auditor must review an organization’s financial statements as a whole to make sure that they make sense on their face and that they are internally consistent. Next, an auditor will apply statistical sampling techniques to the data underlying the reported figures to make sure that the data actually supports the reported figures.  If the sampling discloses discrepancies between the figures reported on the financial statements and the underlying data, the auditor will dig deeper. By digging deeper, the auditor attempts to determine whether the discrepancies are isolated errors, statistical anomalies, or whether they reflect deeper problems with the financial statements.

If errors are uncovered, the auditor has several choices. If the problems are not particularly serious, but seem to reflect isolated errors, the auditor may, in consultation with the organization being audited, fix the errors. Otherwise, the auditor can identify the irregularities to the organization and consult on how those irregularities can be remedied. In many cases, what appears to be an irregularity is perfectly justifiable.  In other cases, the organization can remedy the problem to the auditor’s satisfaction. Finally, if the organization cannot, or will not, remedy the problems, the auditor will issue a "qualified" or "adverse" opinion.

While we hope that the accounting profession’s response to the Enron scandal will be to focus on improving both the accounting standards themselves and the appropriate policing of those standards, it remains an unfortunate possibility that the actual response will be a massive case of auditor CYA. For those of us who represent organizations that are routinely audited, this could mean lots of fights with auditors to avoid being forced to choose between costly and unnecessary restatements of financial statements that are already accurate and receiving qualified or adverse audits.

Furthermore, one of the little tricks pulled by auditors is their required "representation letter." This letter, which is designed to be signed by an organization’s management, is supposed to state that, as far as management knows, all the books are in order and everything is shipshape. It is almost a certainty that, in the wake of Enron, auditors are going to fill these letters up with whatever promises, certifications, warranties and disclaimers of the auditor’s responsibility that they think they can get away with having management agree to. It is, therefore, important that anyone presented with one of these management letters by an auditor read it carefully to make sure that it is a meaningful statement, and not simply intended to absolve the auditor of all responsibility.

Finally, it seems a near certainty that routine audits will now cost a lot more. Whether warranted or not, it seems inevitable that auditors will start to look a lot deeper than they have before. While this might not make much of a difference to a huge company like IBM or Exxon, it means a lot to a small union or employee benefit plan that may already be strapped for cash.

Where does this leave us? Both Congress and the SEC are presently looking into the issue of accountants and accounting standards. So too are the Financial Accounting Standards Board and the American Institute of Certified Accountants. The rest of use are just going to have to keep paying attention to these issues to make sure that what we get is the real and necessary reform that we clearly need.

A Prescription for Disaster

Between 1960 and 1999, expenditures for medical care increased in the United States from $26.7 billion to $1.2 trillion. Over the same period, of course, the United States’ economy grew overall. Nevertheless, the share of the nation’s Gross Domestic Product (GDP) attributable to medical expenditures has increased by more than 2-1/2 times, from about 5% of GDP to just over 13%.  Although healthcare expenditures increased throughout the period, the rate and manner of those increases up through 1979 was very different from what came later.

In 1980, the dynamics of the medical care industry changed dramatically. During the period from 1980 to 1999, the percentage of GDP devoted to retail prescriptions increased by 150% (from 0.43% to 1.07%), while the percentage of GDP dedicated to health care overall only increased by 50% (from 8.8% to 13%).  From 1995 to 1999, this change in dynamic was even more pronounced, with the percentage of the GDP dedicated to retail prescriptions increasing by more than 30%, while the share devoted to health care expenditures overall actually declining by more than 2%.

What happened?

It seems too convenient to be a coincidence that 1980 was the start of the so-called "Reagan Revolution." One of the major casualties of this "revolution" was the progress of public science. In its place, the administration promoted privatization and profit. The result was that there was a significant withdrawal of federal money from basic pharmaceutical research. At the same time, there was a major push to enable drug companies to speed new medicines to market. In theory, this would promote drug development by permitting the drug companies to reap the fruits of their investment more quickly.

While this enhanced profit interest, coupled with major breakthroughs in biochemistry, has changed the landscape of the medical profession, not all of this change has been as anticipated, nor has all of the change been for the good. For example, once the patent has expired on a drug, so too has the incentive to pump money into research to find new and better uses for that drug. Indeed, the pharmaceutical industry has taken a page out of the Hollywood movie mogul book. If a drug lacks blockbuster potential, it is not worth developing.

It is not clear how much money is actually being put into the research and development of new drugs. The pharmaceutical industry claims that each drug that hits the market costs the industry somewhere from $500 million to over $800 million in research and development dollars. Public interest groups contest this figure, noting that it includes a lot of double-counting and non-research expenses. They put the figure at closer to $100 million. Whatever the real number, the remarkable fact is that the drug makers devote at least three times as much to marketing as to research and development in an industry that justifies its immense profits on the basis of its research expenditures.

Where does this leave us? Whatever the research and development costs actually are, they are enormous, and the marketing money is at least three times that much. The result is the introduction of a flurry of high priced, high profit drugs, which are heavily promoted, to cover those expenses, while still generating huge profits. For those of us with prescription drug cards, all we have to do is to plunk down our $10 or $15 copayment and we can get whatever is today’s drug de jour. What’s wrong with that? Plenty.

First, of course, if you don’t have a prescription drug card, the hundreds of dollars that these new drugs can cost make them entirely unaffordable. Second, for those of us with adequate insurance, we are paying for that insurance. How much more of our hard earned wages can continue go into health insurance to pay for these designer drugs? The most serious problem, however, is that instead of investing in the drugs that have the potential to save hundreds of thousands of lives both at home and abroad, the drug companies are pumping their research money into such potential money-makers as anti-impotency and anti-allergy drugs.

There was a time when government and academic moneys could be counted on to extend the necessary fields of research. In our current age of private initiative, we have been content to permit market forces to determine which diseases are worth investing development dollars in, and which are not. We need to figure out a way to redirect the huge sums that are spent on drug marketing and to break the stranglehold that potential blockbuster drugs have on research and development dollars. Otherwise, we will continue to see our health care dollars, and our hard-earned wages, frittered away, along with the lives that would be saved by a rational health care system.

Machinists Divided Over Lockheed Agreement

After having averted a potentially disastrous strike against United Airlines, the International Association of Machinists and Aerospace Workers (IAM) faces yet another tough struggle with defense giant Lockheed Martin. To complicate matters, the IAM is not of a single mind, with its Sunnyvale (Local Lodge 725) and Palmdale (Local Lodge 727-P), CA locals approving Lockheed’s latest proposal, but with Local Lodge 709 in Marietta, GA voting it down. The IAM members at the three local lodges had already rejected an earlier Lockheed proposal, with an overwhelming 95% voting to authorize a strike. The later proposal included significantly improved health care and pension provisions and higher wages. However, according to the officials of Local Lodge 709, it continued to permit Lockheed to contract-out their jobs. As stated by the Local Lodge leadership in their recommendation that their members reject the proposal:

Job Security/Outsourcing - Everything else revolves around it, if you don’t have job security it’s hard to be fighting for wages and benefits if you don’t have a job that provides these benefits.

The members of Local Lodge 709 listened, rejecting the latest proposal by a vote of 79%. An even larger majority–81%–voted to authorize a strike. As a result, the members of Local Lodge 709 went out on strike against Lockheed’s Marietta, GA plant on March 11, 2002 at 12:01 a.m.  After nearly a month with no talks or other progress toward resolution of this dispute, a federal mediator was appointed and, under the mediator's watchful eye, negotiations resumed on April 10.  During the course of twenty hours of meetings over a two-day period, Local 709 made a series of new proposals to attempt to resolve the outstanding issues.  The company, however, rejected all of these proposals out-of-hand, made no new proposals of its own, and refused to move on any of its previous take-away proposals.

Despite the lack of progress in the negotiations, the mediator invited the parties to resume negotiations on April 22 at the offices of the FMCS in Washington, D.C.  Following yet another marathon session of negotiations, on April 24 the parties reached a tentative agreement, which received the unanimous endorsement of the union's bargaining committee.  On Sunday, April 28, 2002, the agreement was ratified by nearly a two-to-one margin, and the striking employees returned to work the following day.

This strike raises an issue we have discussed before. How does a union redress its grievances against its employer in time of war, particularly when that employer is one of the Nation’s largest defense contractors? Is it the patriotic duty of workers to sacrifice their job security to an employer that is earning record profits? What of the employer’s patriotic duty?

Bookkeeping in Babylon

For the first time in living memory, the public’s attention has focused on the issue of auditors and accounting standards. Should we be grateful to those avaricious Enron executives and their seemingly unquenchable greed who have grabbed our attention and caused us to think about a topic most of us would prefer to ignore? Does the dry, arcane and notably unsexy subject of accounting standards really deserve more public scrutiny and attention than, say, O.J. or Monica? You bet.

What are accounting standards, and why are they so important? In a sense, accounting standards define the vocabulary of our economy. As with any form of communication, it is essential that everyone uses the same vocabulary, and that each word has a consistent meaning. If words lose their meaning so that each person uses a different vocabulary, communication becomes impossible just as it did in the biblical story of Babylon.

Even if accounting standards define the language of our economy, so what? How many of us are actually affected by these sorts of things? For better or worse, in the United States and in the emerging global market economy, all of us are directly and profoundly affected.

What makes an investor decide to put money in one company rather than in another?  The answer is pretty obvious. Investors will place their money where they believe they have the best chance of getting their money back, along with some level of profit.  How can anyone possibly know whether an investment in a company will eventually produce the desired return? This is where accounting standards come in. Although the past does not always predict the future, it does provide guidance. If a company has been making a profit, if its costs are low, if it has very little debt, it is more likely to provide the desired return to the investor than a company that has been losing money, is mired in debt and has high costs relative to its productive capability.

How can an investor know whether a company is profitable, what its costs are, how much debt it carries, what its sales are, etc.? There is only one place to look: the company’s financial statements. How can the investor know what the numbers mean? That is where accounting standards come in.

Accounting standards comprise the common language that publicly traded corporations, labor unions, public charities and other types of institutions must follow in reporting their finances. Primarily developed by a private organization (the Financial Accounting Standards Board or "FASB"), accounting standards are no less significant than regulations and laws adopted by government. Through the mechanism of the "independent audit," these rules are designed to be applied consistently, honestly and fairly through the nation.

The Enron case represents a failure of this financial reporting system. The real question, however, is whether this case is about a bunch of greedy bad guys who used the language of accounting to lie, cheat and steal, or whether that language is itself so subject to manipulation that it is essentially meaningless?

The executives at Andersen have stated that this case is an anomaly involving a bunch of liars, and that their own employees were either duped or complicit in the unlawful scheme.  The alternative possibility, however, is much more troubling. When the officers at Enron established their phony accounting schemes, Enron's accountants, lawyers and directors were willing to go along with them.  While they may have thought that Enron's accounting was aggressive and creative, it is unlikely that they actually believed that it was fraudulent.  Indeed, the lawyers and accountants were willing to offer their opinions that these schemes "complied with generally accepted accounting standards."  

The real danger here is not, therefore, that Enron’s executives and their crooked accountants and attorneys lied and defrauded their employees and the investing public. The real danger is that Enron’s executives and its hired professionals actually complied with accounting standards, but were able to exploit the weaknesses in those standards.  The possibility that there is a fundamental weakness in U.S. accounting standards is given considerable credence by the number of companies, including companies as diverse as Global Crossing, K-Mart and IBM, that have been forced to restate their financial statements.

Is our economy in serious trouble, not because of the Enron scandal itself, but because of the flaws in our economic system that have been exposed by the case of Enron?  Probably not, at least not yet. Instead, it may well be that we stand at the crossroads.  With the pressure of public attention that has resulted from the Enron debacle, we may well see the adoption of the genuine and necessary reforms to our system of financial reporting and disclosure that will prevent further scandals, and avoid serious and long-lasting disruptions to our economy.

Don't Forget to Rewind

Guest worker programs have garnered significant support in some quarters of the business community, particularly in agriculture. As usually touted, a guest worker program is a system where employees are recruited from outside the United States, ostensibly for jobs for which the employer is unable to find adequate numbers of workers already in the U.S. These foreign guest workers are then lawfully admitted to the U.S. to perform the work for which they were hired. Once the job is done, out they go. So where’s the problem?

Most obviously, this program enables employers to import low-wage foreign workers to displace higher-paid U.S. workers.  Moreover, it is a great way to ensure that the employer never has to worry about unions. After all, if a union shows up and starts recruiting any employees, those employees can be deported! Even without actual deportation, just the threat is enough. Besides, hiring guest workers ensures that the workforce is constantly changing, so that even if a union can get majority support one minute, that support is gone the next.

A recent case in Oklahoma highlights several of the key pitfalls of the guest worker program. In that case, an Oklahoma manufacturer of pressure valves for power plants and oil refineries contracted with an Indian company to provide workers for its factory. The Indian company would actually employ the workers, place them in the Oklahoma company’s factory for six months, and then either send them home or to another factory in Kuwait.

The Indian company then proceeded to lure workers from Bombay with promises of high-paying American jobs, plus permanent U.S. residency. When these workers arrived, they discovered that their pay was approximately $3 per hour, which is even below the minimum wage for Oklahoma. Moreover, the Indian workers were forced to work 12 to 18-hour days, fed barely edible food, locked in their dormitories when off duty, were not allowed to leave without escort, and had their passports confiscated. The company explained that it wasn’t so much that they were keeping the workers enslaved as the fact that they were contractually obligated to return the workers to the company that had recruited them in Bombay when they were done with them, sort of like returning video tapes to Blockbuster.

Expressing his righteous indignation, the president of the U.S. company stated:

“I feel like I went over backwards to help these people and I'm getting shot in the back. We have treated the trainees from India with courtesy and compassion while they are here learning skills of welding.”

The matter is being investigated by both the U.S. and Oklahoma Departments of Labor.

While this case may not be entirely typical of the guest worker program, it demonstrates the program at its worst.  The frightening aspect is not so much that this conduct could occur in this day and age, or even that it almost went undetected. Instead, the troubling part is how close this employer’s conduct came to not violating the law, but merely exploiting the promise of the guest worker program.

Can (Should) Andersen be Saved?

The U.S. Department of Justice has indicted Arthur Andersen LLP for obstruction of justice for its shredding of documents relating to its representation of corporate bad-boy Enron.  What does it mean to indict a business organization?  After all, it isn’t like you can throw a business in jail. While you can toss individuals in jail, you have to indict them first, and it does not appear that any individual has been indicted in this case. Part of the answer is that you can fine a business organization. However, the potential fine that could be imposed against Andersen is pretty paltry–$500,000–when you consider its revenues in 2001 were $9.3 billion, including the millions it made off of Enron alone. In the case of Andersen, the real punishment is that this indictment (and the surrounding scandal) has caused a substantial loss of business. Indeed, that loss of business may well result in Andersen’s demise.

Already, Andersen has lost the following major clients: Abbott Laboratories; Brunswick; Costco; Delta Air Lines; FedEx; Freddie Mac; Hard Rock Hotel; Household International; Introgen Therapeutics; Kerr-McGee; Kos Pharmaceuticals; Merck; Northeast Utilities; Riggs National Bank; Sara Lee; SunTrust Banks; and Valero Energy. In addition, the General Services Administration (GSA) has imposed a bar against Andersen, prohibiting it from receiving any new contracts from any agency of the United States government while the indictment remains pending. Even the Securities and Exchange Commission (SEC) has piled on. Entities required by the SEC to file an audit can only submit audits prepared by Andersen if they:

obtain from Andersen certain representations concerning audit quality controls, including representations regarding the continuity of Andersen personnel working on the audit, the availability of national office consultation, and the availability of personnel at foreign affiliates of Andersen to conduct relevant portions of the audit.

Furthermore, any entity that dumps Andersen will automatically receive an additional 60 days to complete and submit their audits.

Is it fair to take this sort of action against Andersen?

The issue of corporate responsibility is one that has been seriously considered for at least the last thirty years. On the one hand, should an entire organization be held responsible for the wrong-headed actions of a few individuals?  As an accounting firm, Andersen consists of hundreds or thousands of largely independent and autonomous professionals, most of whom go about their jobs without having had any connection to Enron.  In all, Andersen employs 85,000 people. Is it fair to put 84,980 people out of work for the actions of perhaps 20 people?

On the other hand, unless you are willing to impose corporate sanctions, how do you discourage corporate wrong-doing?  It is often difficult, if not impossible, to assign individual responsibility for the acts of a corporation.  Decision-making is often diffused and difficult to pin down.  Andersen is, after all, at least partly to blame for a lot of people having lost their life savings. Shouldn't it therefore be punished? 

The issue of corporate responsibility arises every day, in all sorts of fields. Usually, a corporation will commit some crime such as, for example, illegal dumping of toxic waste. What is the appropriate sanction in that case? When Browning Ferris Industries, a waste disposal company, pled guilty to such an action, it paid a fine. Did this affect its ability to survive as a business? It is not likely. In those sorts of cases, the fines paid by the corporation are little more than a cost of doing business. They provide little, if any, real deterrent effect. Indeed, because the individual executives actually responsible for the wrongdoing have usually insulated themselves pretty well from any sanctions, it has sometimes been proposed that the only really effective sanction for serious corporate transgressions is corporate capital punishment: the dissolution of the corporation. That may well be exactly what happens in the case of Andersen.

Does Andersen and its 85,000 employees deserve this level of sanction?  Maybe so. Perhaps there is something about Andersen’s "corporate culture" that is responsible for the troubles it now endures.  In addition to its role in the Enron scandal, Andersen recently paid $217 million to settle a series of lawsuits against it for its role in the Oklahoma "Ponzi" scheme known as the "Baptist Foundation." (Several Andersen partners also had their accounting licenses either revoked or suspended.)  A year earlier, Andersen had paid $110 million to settle claims relating to the misleading financial statements of Sunbeam.  Andersen is also under fire for its role as the auditor of Global Crossings.

Although the current indictment against Andersen is for obstruction of justice from its shredding of Enron documents, these actions are not what caused thousands of people to lose their life savings.  Instead, those losses were the result of the shoddy and misleading accounting practices blessed (and at least in part designed) by Andersen that served to hide the wholesale waste and theft of corporate assets by Enron's executives.  Moreover, far from being an "independent" auditor, Andersen was guilty of multiple serious conflicts of interest.  Nevertheless, these are the very same transgressions that have been committed by each of the big five accounting firms.  For example, the record for largest payment by an accounting firm as the result of its alleged wrong-doing is not held by Andersen.  That dubious distinction falls to big five rival Ernst & Young, which, in 1999, paid $335 million to settle lawsuits related to its work for Cendant Corp.  Furthermore, the "creative" accounting techniques employed by Enron and blessed by Andersen are the same techniques touted by all of the big five accounting firms.  Indeed, as we have previously reported, the conflicts of interest that plagued Andersen are far from unique to Andersen.  Despite the seemingly prescient attempts by former SEC commissioner Levitt to prevent the sorts of accounting abuses exposed by the Enron scandal, it was the concerted effort of the big five accounting firms that ended up defeating the push for reform.  If Andersen is destroyed, the major beneficiaries will be the remaining "big four" accounting firms that will sop up Andersen's work.

What makes the case of Andersen different from the run-of-the-mill accounting scandal, of course, is that it clearly involves the crime of obstruction of justice:  Andersen was caught red-handed shredding documents relating to its involvement with Enron.  There is no doubt that the individuals responsible for this action (who have not themselves been indicted) committed a crime.  How that individual culpability translates to the corporate level is the question that needs to be addressed.

Sanctions imposed by a criminal justice system have three separate and distinct goals:  deterrence, rehabilitation and to vindicate the laws and the public's sense of justice.  When an entire corporation such as Andersen (as opposed to the individual wrong-doers) is indicted for obstruction of justice, it is unclear what we are trying to accomplish. Where, as here, the result of the indictment may be the dissolution of the company, the question becomes even more complicated. On the one hand, such drastic consequences may serve as deterrence. On the other, without Andersen as an ongoing enterprise, Enron employees seeking restitution will have little chance of recovery.  As these questions demonstrate, the issue of corporate responsibility is one that will have to be faced-up again, both within the accounting profession and in the corporate community at large.

Out of GAAS?

The job of an auditor is premised on the auditor’s independence. Every publicly traded corporation, as well as most larger pension and benefit plans, labor unions and a large number of other organizations, are required to have their finances audited annually. This "independent audit" is supposed to provide an objective and unbiased review of the organization’s financial records in order to determine whether the its financial statements fairly and accurately present the organization’s financial condition.

If the auditor concludes that the financial statements fairly present the organization’s financial condition and conform to all "Generally Accepted Accounting Standards" (or "GAAS"), it issues what is known as an "unqualified" or "clean" opinion. Otherwise, the auditor has three separate and distinct options. First, the auditor can work with the organization’s management to correct any flaws in the financial statements. This may take the form of additional disclosures, correction or restatement of some of the numbers, or changes in the organization’s accounting practices. Therefore, even if the original financial statements are flawed, it is often possible to salvage an unqualified opinion.

The second and third options are dependent upon the nature and seriousness of the flaws in the organization’s reporting and/or accounting. If the financial statements fail to satisfy GAAS, because they omit specific required disclosures that do not implicate the accuracy of the statements overall, the auditor can issue a "qualified opinion."  On the other hand, if the flaws in the organization’s financial records are too serious, or if the disclosures in its financial statements are too inadequate, the auditor will issue an "adverse opinion." An adverse opinion is the auditor’s statement either that the financial statements do not fairly represent the organization’s financial condition, or that the records are in such bad order or the missing disclosures are so material that the auditor cannot determine whether the financial statements fairly represent the organization’s financial condition.

The issue of auditor independence is not one raised for the first time by the Enron scandal. Under the Clinton Administration, SEC Chairman Arthur Levitt initiated a wholesale review of the issue of auditor conflicts. 

PriceWaterhouseCoopers was found to have committed over 8,000 separate "independence" violations. The great majority of the violations consisted of partners or other employees who had a financial interest in the audit client.

Following on the heels of an earlier (but less well publicized) discreditation involving the ridiculously-named PriceWaterhouseCoopers, one of the "Big Five" accounting firms, the SEC pushed ahead with a series of regulatory and legislative proposals intended to address the issue. Among other things, the SEC proposed to prohibit accounting firms from providing consulting services to the same organizations that they audit. Under intense lobbying pressure from the accounting industry, Congress killed the proposed legislation. The SEC was,

In a remarkable display of Congressional humility, Sen. Torricelli actually apologized to former SEC Chairman Levitt for his role in killing the proposed legislation.

however, able to adopt some regulations, albeit not as far-reaching as originally intended. Probably the single most important reform was the new requirement that publicly-traded corporations disclose all non-audit fees paid to their auditors. Without this rule change, the public would have had no idea that Andersen had received over $20 million in non-audit fees from Enron during year 2000.

Before any serious effort can be made to regulate auditor conflicts, however, we need to know just what conflicts we are looking for, and whether they are truly harmful. Conflicts arise in any number of areas. The most obvious type of conflict is where the auditor, either as an entity or through one of the individuals involved with the audit, has a financial interest in the organization being audited. These sorts of conflicts have long been a violation of auditing standards.

Earlier this year, KPMG Peat Marwick, another of the "Big Five" accounting firms, was sanctioned by the SEC for auditing an organization in which it had a direct financial interest.

Another kind of conflict arises when an auditing firm provides non-auditing services to its auditing clients. This is what Andersen did, and it is what the SEC under Chairman Levitt unsuccessfully tried to prohibit. In theory, this situation can set up several different types of conflicts.  For example, it may place an auditor in the position of auditing an accounting system that the auditor’s consulting arm helped to design. This is apparently what Andersen did in the case of Enron. Not only is it reasonable to assume that an auditor would be inclined to look favorably upon a financial accounting scheme it helped design, but for the auditor to do otherwise could raise issues of malpractice, creating a direct financial conflict of interest. Additionally, providing a range of services in addition to audits creates ties, personal, professional and otherwise, between the auditing firm and the audited organization, which may affect the auditor’s judgment. Finally, an auditor may be influenced by the possibility that a troublesome audit may jeopardize its book of business with the audited organization. Of course, this last source of conflict may arise in any situation where the auditing firm derives significant revenues from an organization it audits, even if all of those revenues are derived from audit-related services.

Despite the current calls for reform, it remains to be seen if there is a genuine consensus about whether an auditor’s ties to the organization it audits creates a genuine conflict. For example, two separate studies issued during January 2002 reached diametrically different conclusions. The first, Frankel, Johnson & Nelson, The Relationship Between Auditors’ Fees for Non-Audit Services and Earnings Quality, Stanford University Graduate School of Business, finds that, the greater the level of non-audit services provided by the audit firm, the more likely it is that the organization’s books will reflect just enough "discretionary" earnings to enable it to meet its earnings projections. This, contend the authors, is evidence of bias. By contrast, another study, DeFond, Raghunandan, & Subramanyam, Do Non-Audit Service Fees Impair Auditor Independence? Evidence from Going Concern Opinions, reaches a contrary conclusion. This study measures the willingness of audit firms to express doubt over an organization’s ability to continue as an ongoing concern. Unlike the Frankel study, this study found no relationship between consulting work and an auditor’s willingness to issue an "ongoing concern" letter. Indeed, it actually found that the larger the audit fees, the more likely the auditor was to issue an "ongoing concern" letter. The basic thesis of the DeFond study is that the more fees received by an auditing firm, the greater its interest in protecting its reputation and the greater its exposure to malpractice claims, all of which lead to more careful audits.

What is really going on here? Who is right? People like former SEC Chairman Levitt certainly believe that combining consulting services with audit services creates conflicts. Current SEC Chairman Harvey Pitt, on the other hand, has taken the opposite position. Before the breaking Enron scandal, he was on record with the view that combining consulting services with audit services enhances an auditor’s opportunity to understand the organization being audited, thereby increasing the accuracy of the audit.

Whatever the disagreements, however, it appears that the issues have begun to resolve themselves. The accounting industry has responded to the recent loss of public confidence by reversing field and supporting a separation of accounting and consulting services. Thus, the American Institute of Certified Public Accountants (AICPA), the nation's largest organization of CPAs, which had fought tooth-and-nail against SEC Chairman Levitt’s proposals, is now publicly supporting at least a limited prohibition on combining auditing with consulting services. Similarly, KPMG Peat Marwick, while maintaining that the conflicts issue is nothing more than a "red herring," has also signed onto the proposal. Deloitte & Touche and PriceWaterhouseCoopers, also "Big Five" accounting firms, have each decided to spin off their consulting arms.

Perhaps not surprisingly, the Financial Accounting Standards Board (FASB), the entity that has primary responsibility for developing accounting standards, has taken great umbrage at the AICPA’s suggestion that existing accounting standards--primarily embodied in GAAS--may be inadequate.

Will a separation of auditing from consulting resolve the problems that led to the Enron collapse? Nobody really seems to think so. Thus, although the AICPA now calls for restrictions on consulting services that auditors would be permitted to provide to their clients, it also makes two much more far-reaching proposals. First, it calls for a new semi-public national oversight board to review and enforce accounting standards. Second, it calls for a complete reexamination of "the current and outdated financial reporting model and the accounting principles that surround it." It is impossible to tell, of course, whether these changes of heart are the result of genuine reflection and self-examination in order to uncover the real causes of the Enron scandal, or whether they are a cynical effort to restore public confidence so that the accounting profession can continue to prosper. If the result is genuine accounting reform leading to complete and accurate financial disclosure of public corporations and other audited entities, then does it really matter?

Pension Reform--Does the Cure Address the Problem?

In an effort to deflect criticism over the administration's close connection with that corporate bad-boy, Enron, the President has proposed a series of measures intended to protect participants in pension plans like the one maintained by Enron for its now impoverished employees. The Democrats, not surprisingly, have responded that the President's plan does not go far enough. Before we jump willy-nilly into pension reform, however, it may be useful to back away from the sloganeering and to try to figure out whether the proposed measures can actually accomplish their objectives without causing yet more problems.

In order to understand the proposed remedies, we need to make sure we understand the true nature of the problems we are seeking to solve. In the case of Enron, the problem is that Enron’s rank and file employees’ retirement savings were heavily invested in Enron’s own stock. When that stock tanked, these employees lost their retirement savings.

Enron maintained what is called a "401(k) Plan." A 401(k) Plan  is so-called because it is maintained pursuant to Section 401(k) of the Internal Revenue Code. What complicates matters is that a 401(k) Plan is a hybrid entity, designed to meet three often conflicting objectives.

First, a 401(k) Plan is intended to provide retirement income. Just like any other pension plan, its object is to provide sufficient sums of money following retirement so that, when combined with other retirement income, savings and Social Security, the employee and his or her dependents can live in comfort and security.

Second, a 401(k) Plan is like an IRA in that it permits employees to make pre-tax contributions to the Plan. No tax is paid on these employee contributions or on the earnings until the moneys are eventually withdrawn. In other words, a 401(k) Plan is a tax deferred savings plan.

Finally, 401(k) Plans are defined under the Internal Revenue Code as "profit sharing plans." Traditionally, profit sharing plans were created by employers to give their employees a direct stake in the financial well-being of the company. As they were originally designed, under a profit sharing plan, if the company does well, the employees benefit. If the company does poorly, the employees suffer as well.  

In the case of Enron (and in the case of more and more employers these days), its 401(k) Plan was the only retirement plan it maintained for its employees. This meant that there was no other pension plan available to provide retirement income to Enron’s employees. Second, like all 401(k) Plans, it was intended to provide Enron’s employees with a vehicle for tax deferred savings. Finally, through Enron's matching of employee contributions with its own stock, the Plan also served as a traditional profit sharing plan. The unfortunate fact is that the Plan’s goal of profit sharing placed Enron’s employees’ retirement income at risk.

Contrast Enron with a company like, for example, GE. GE maintains two plans, a traditional "defined benefit" pension plan and a 401(k) Plan. Under the 401(k) Plan, GE provides a match (50¢ on the $1 up to 3.5% of income), and it offers GE stock as one of the investment options. Therefore, although GE’s 401(k) Plan still serves all three purposes of a 401(k) Plan, it only provides a supplement to the retirement income already guaranteed by GE’s defined benefit pension plan.

Because GE’s employees are not expected to rely solely upon the 401(k) Plan for their retirement savings, should its 401(k) Plan be treated the same way as Enron’s, where the 401(k) Plan was the only retirement plan? Moreover, isn’t it a good thing to give GE employees a significant stake in the company? In other words, if we adopt blanket restrictions on the amount of a 401(k) Plan’s assets that can be invested in company stock, do we not deprive some employees of the opportunity to share in their employers' successes?

The Enron debacle has also surfaced the issue of so-called "blackouts."  Typical of plans of its type, Enron's 401(k) Plan generally permitted employees to select their own investments from a range of pre-determined alternatives. During a blackout period, employees are unable to change the investment of their accounts. Blackouts are ordinarily imposed when there is a change of administrator. In theory, blackouts provide time for the transition, giving the new administrator an opportunity to make sure that all accounts are in order before new transactions are permitted. In reality, blackouts often seem to last far longer than they need to.

Enron’s executives are accused of timing the blackout to further their broader scheme to artificially support the price of Enron stock.  As part of the same scheme, these executives continued to tout the stock to their employees, as well as to the investing public.  At the same time, however, unwilling to place their own personal financial security at risk, Enron's executives sold huge amounts of their personal holdings in Enron stock.

Another problem with the case of Enron was that each employee was required to hold onto the shares of Enron stock that Enron used to match his or her employee contributions until the employee reached age 50. Thus, while employees could sell other shares of Enron stock in their accounts (except during the blackout period), they were stuck with the shares of Enron provided through the employer match until they turned 50.

President Bush proposes a number of measures, some of which have merit. First, he would prohibit corporate executives from selling their own company stock at the same time employees are prohibited from doing so as the result of a blackout. While not a cure-all, there is a certain fairness to this proposal. The President also proposes placing restrictions on an employer's ability to force employees to hold on to company stock. While this proposal certainly makes sense in a case like Enron's, it is not clear that it makes sense in all situations.

President Bush also proposes imposing "fiduciary responsibility" upon employers whose plans are blacked out for the investment choices that have been locked in during the blackout. In other words, if employees can show that they were harmed because they could not make prudent investment choices during the blackout, their employers could be held liable. Among other things, this would provide a strong incentive for employers to make sure that blackouts last for as short a time as possible. The problem with this approach is that, in most cases, employers are not responsible for blackouts. Most employers maintaining 401(k) plans are fairly small, and have little bargaining power with the large insurance companies, banks and brokerage houses that administer these plans. It is these administrators that control the imposition and duration of the blackouts, and yet the sanctions would appear to fall solely on the employers.

The President’s proposal would also require better notice of pending blackouts, as well as generally better reporting from 401(k) Plans to enable employees to make better investment choices. While these measures are designed to help employees with the sophistication to make intelligent investment choices, they do nothing for the great majority of employees who are content to trust their employers.

The greatest failure of the President’s proposal is that it does nothing to address the biggest problem revealed in the Enron debacle: the fact that the employees’ were forced to depend solely upon a 401(k) Plan for their retirement income. Perhaps the single greatest protection that employees can have is a real, defined benefit pension. Whatever happens to their 401(k) Plan, such employees are absolutely guaranteed, both by their employer and by the government of the United States, that they will receive their pensions when they retire. Enron’s employees had no such guarantees.

The beginning of the solution, therefore, is to promote the growth of traditional defined benefit pension plans. If 401(k) Plans were once again returned to the role that they serve best, as vehicles for supplemental retirement savings, the task of designing new legal protections would be much easier to accomplish. However, our government has largely discouraged the formation of these plans. They have become expensive and burdensome to administer, making it impractical for most American businesses to maintain them. Until we can restore these defined benefit plans to their intended roles as the primary source of retirement income, a "one size fits all" approach to pension reform cannot succeed.

Enron Examined

We like to believe that our advanced market system is free, open and transparent, and that a variety of safeguards are in place to protect us from the shenanigans that plague less developed economies.  Enron provides us with a case study of how all those safeguards can fail, and how our free and transparent markets can be pretty opaque and subject to manipulation.  In the case of Enron, there were a whole lot of safeguards that failed, with lots of blame available to spread around.  If nuclear power plants were regulated in the same way as Enron, we would all be glowing in the dark.  Let’s take a look at some of these failures.

First, there are Enron’s accountants.  As we have all heard by now, Enron carried a significant load of real and potential liabilities that did not show up on its books.  These “off-book” liabilities were sheltered in a series of partnerships, which were not reported in Enron’s public disclosures.  Nevertheless, Enron’s “independent” auditors, continued to give Enron’s financial statements a clean bill of health.  How and why did this happen?  Andersen, Enron’s auditor, alleges that Enron palmed the relevant documents.  This does not explain, however, why Andersen has been destroying its documents (presumably including its workpapers and correspondence) related to the audit.  It is much more likely that the audit was largely perfunctory.  Could Andersen’s failure be related to the fact it was not actually “independent,” but was receiving significant revenues from Enron, both for the audit itself and for services separate and apart from its role as independent auditor?

Second is the failure of the accounting profession over all.  If it were not so serious, the sanctimonious arrogance of the accounting profession would be laughable.  At the same time the American Institute of Certified Public Accountants (AICPA) was focused on forcing employee benefit plans to waste assets on generating unnecessary information that could otherwise have been spent on benefits, they had very little to say about the huge conflicts of interests of accounting firms that provided “independent” audits at the same time they were also providing a full range of consulting services to the very same clients.  Almost laughably, after the Enron horse had left the barn, AICPA issued some revised guidance on maintaining the “independence” of “independent” auditors.  These guidelines seek to instruct accounting/consulting firms that have huge conflicts of interest between their consulting operations and their audit operations how to live with those conflicts.  If a law firm were to try to do the same thing when it had a conflict, its lawyers would be disbarred.  At about the same time, AICPA issued a “toolkit” to assist auditors in reviewing interested-party corporate transactions, such as those at Enron.  Of course, it says nothing about the auditor’s own interested party transactions.

In an interesting coincidence, in the midst of one of the most notable auditing failures since the savings and loan debacle of the early 1980s, Andersen was able to announce that its practices and procedures had been subjected to “peer review” by competing accounting firm Deloitte & Touche and had passed with flying colors.  We can only conclude that Andersen’s conflicts and its failure to genuinely scrutinize Enron’s financial statements is in fact the standard for "independent auditing" today.

We are far from finished assigning blame here.  The third ball dropper was the bond ratings services.  As many of you may know, there are several well-known services, including Moodys and Standard and Poors that rate the credit risk of various bond instruments.  Apparently, unlike the typical investors, these services may have been aware of Enron’s off-book liabilities, and yet they issued nary a warning to the investing public.  In direct reliance upon the investment grade ratings issued by these services, pension plans and other investors around the country placed their money in Enron bonds that have since become nearly worthless.

Fourth are the industry and market analysts who continued to tout Enron’s stock long after it began to be clear that Enron was a big financial bubble waiting to burst.   These so-called experts got so used to being able to manipulate stock prices through their own pronouncements that they got caught flatfooted when cold, hard reality set in.

Fifth are the government regulators.  The Securities and Exchange Commission failed by not requiring fair and complete financial disclosure, subject to audit by a genuinely independent auditor.  The Department of Labor failed by permitting Enron to “black out” its employees’ Section 401(k) Plan, so that, at the same time the executives were dumping their stock, their employees could only watch helplessly as their shares plummeted in value.

Who have I left out?  Obviously the executives of the company deserve the bulk of the blame.  They took a profitable pipeline system, created an even more profitable energy trading company, and still managed to run it into the ground.  While they got rich, their employees and investors took a bath.

What about the role of our elected officials?  Clearly, a lot of lunches were bought, fund raisers attended, and cash and “in-kind” contributions changed hands.  What was the effect of this on Enron’s ultimate collapse?  At this stage, it is hard to measure.  What is easy to recognize is that any company that throws around enough money can get an audience with just about any government official it wants.  Want a $250 million tax break?  That’s what the President’s economic stimulus package would provide for Enron.  While the administration's economic and energy policies were clearly fashioned with political benefactors like Enron in mind, what role the administration had in the Enron's collapse is yet to be seen.

Could shareholder activism have prevented this mess?  It probably could have helped.  For example, one tenet of shareholder activism is that the so-called “outside directors” on a company’s board of directors must be genuinely involved in the corporation’s affairs.  Outside directors are supposed to be the corporation’s watchdogs.  Many outside directors, however, accumulate their directorships like squirrels accumulate acorns.  They do little more than show up at quarterly meetings, if that.  The people who were actually paying attention to Enron before the fall tell me that even then it was apparent that its outside directors provided little more than decoration.  Had they taken a more active role, could the collapse have been averted?  Perhaps.

There are lessons to draw from the Enron debacle.  First and foremost, the accounting profession needs to put its house in order.  They need to make some cold, hard choices, ones that will likely sacrifice revenues in order to ensure true independence.  Along  the same lines, the federal regulators will have to pay more attention to the issues that really matter and that genuinely affect investor and pension plan participant security.  Our politicians will also have to figure out how to finance their campaigns without having to sell themselves to the highest bidder.  Finally, investors (including pension plans) need to scrutinize the companies in which they invest more closely.  If a company's management and compensation structure seems to be more about enriching its executives than about improving the company, those investors need to act.  If the company's outside directors rarely attend meetings and have no real stake in the company, investors need to work to ditch those directors and replace them with ones who will do their jobs.  If the relationship between a company and its auditors appears too cozy, investors need to seek a new auditor.  Finally, if the expectations surrounding a company seem unrelated to its actual performance, investors need to take a close look at who it is who is selling those expectations.

Can we be sure there will never be another Enron?  It is not likely.  However, we can demand that the people who are in a position to do something actually make the difficult choices that will minimize the possibility that such a situation will recur.

September 11 and its Aftermath

Just as December 7 will be remembered as a date on which our nation was changed, so too will September 11. Just exactly how we were changed remains to be seen.

In 1941, the December 7 attack on Pearl Harbor galvanized support for war against Japan. It is often forgotten, however, that the initial declaration of war was only against Japan. Following that declaration, Nazi Germany declared war on the U.S., and it was only then that Congress returned the favor and declared war on Germany. Would we have even gone to war against Germany following Pearl Harbor had Hitler not declared war against us? The point of this story is that the confusion and ambiguity of the moment fades with the passage of time. While things are happening, they are far from clear. Can anyone predict how the events of September 11 will appear after sixty years?

At the moment, it is easy to see some of the impact. Most obviously, the military campaign against the Taliban and al-Qaeda in Afghanistan continues, although we remain hopeful that it is winding toward a conclusion. Apparently, the world-wide surge of anti-Americanism that this engagement was supposed to provoke has not occurred. Most likely, this is attributable to the old axiom that nothing succeeds like success. The people who hated us before still hate us, and the ones who didn’t presumably still don’t.

Domestically, our feelings are equally ambiguous. For example, there is a level of support for our military, police and fire departments not seen in many years.  However, the anticipated surge in recruitments has not occurred. This seems right in line with the admonitions of our political leadership that this is not the time for personal sacrifice, but that self-indulgence is our patriotic duty. Salvation through consumption is the theme of the day.

Unfortunately, however, we all have suffered, although some much more than others. The most obvious victims of the September 11 attack are the thousands who died, and the survivors they left behind. This includes over 400 firefighters and police officers who were killed attempting to rescue those caught in the World Trade Center complex at the time of the attack. Less obvious are the hundreds of thousands of people who have been caught up in the economic disruption that followed. With the country already headed into an economic downturn when the attack occurred, those events have only plunged us deeper into recession. According to statistics reported by the AFL-CIO, nearly 2 million jobs have vanished lost during the first eleven months of 2001, with nearly 750,000 of those lost in the few months following the attack.

Our government’s response has been mixed. One of the first actions taken by the government was to pump billions into the airlines, while at the same time ignoring the tens of thousands of airline workers already displaced. Along the same lines, the House of Representatives passed an economic stimulus package that provides enormous tax breaks—some retroactive—to large corporations, with nothing for displaced workers. Indeed, Enron alone would benefit by over $250 million from the "stimulus" package. That’s pretty stimulating.

I am, frankly, a little tired of receiving continual reassurance that our mails are safe, while at the same time, hearing that the authorities still have no idea where all the anthrax came from. Similarly, I am disturbed by hearing about vague, unspecific threats against our safety and security, while we are told to go on and to live our lives normally. How can we be expected to do this? Don’t they know there’s a war on?

What happens next? I am not sure anyone has a clear idea at this time. What is labor’s role in the events to come?  Only time will tell.

American Attitudes on Labor

The AFL-CIO recently released a survey of the attitudes of American workers, entitled "Workers' Rights in America:  What Workers Think About Their Jobs and Employers."  Some of the findings are not surprising.  For example, 98% of American workers agree that it is either essential or very important to protect employees' rights to a safe and healthy workplace.  What is more surprising--and what may lend some insight into why labor unions have been so ineffective in organizing new workers over the last thirty years--is how many U.S. workers think they have rights that simply do not exist.  For example, 80% of workers believe they have a right to be free from retaliation from their employers for expressing their political views.  After all, isn't that what the right to free speech is all about?  Fully two-thirds of Americans believe that their employers are legally prohibited from listening in on their phone calls.  Doesn't the Constitution protect the right to privacy?  Sixty percent of Americans believe their employers are legally required to provide them with paid sick leave.

As those of us in the business of defending workers' rights know, of course, most of us do not have these rights.  While the rights of free speech and privacy protect us from governmental intrusion, they do not protect us from our private-sector employers.  Anti-eavesdropping laws generally do not protect us from intrusions by our employers on work premises.  Finally, employers are generally not required to provide paid leave of any sort, let alone sick leave.  The survey also reveals that more than 90% of U.S. workers believe they should have these rights.

With this huge disparity between perception and reality, and the strong sense that workers need more protection, shouldn't the job of the union organizer be easy?  Isn't it all just a matter of worker education?  After all, unions were created in the first place to fight for workers' rights.  Doesn't logic dictate that once workers realize how many rights they don't have that they think they should have, it should be easy to get them to join unions?

I think the answer, unfortunately, is no.  The reality is reflected in some of the survey's other findings.  In particular, despite the nearly universal belief that workers have far more rights than they actually have, a full 56% of U.S. workers believe that we need more laws protecting workers' rights.  Informing people that they have fewer rights than they think they have is not going to cause them to join unions.  Instead, it will only cause the 56% figure to rise as more Americans come to believe that new laws are needed to protect workers.  This is ironic, since the survey also reveals that half of all Americans believe that the Bush administration favors the interests of business over workers, and nearly two-thirds do not fully trust the Bush administration to protect workers' rights.  The peculiar implication of these survey results is that most Americans are willing to rely upon a government they do not trust to pass new laws to protect their rights and interests.

The labor movement grew out of a desire of workers to exert collective pressure to achieve workplace justice directly from employers.  Unfortunately, Americans have gotten used to legislated solutions, rather than direct workplace action.  Unions are themselves at least partially responsible for this trend.  Over the last thirty years, the labor movement has been far more interested in its legislative agenda than in organizing workers.  Moreover, Labor's successes in Congress--with the many laws that have been adopted to protect workplace rights and safety, minimum wages, etc.--have only served to undermine organized labor's position in the workplace, feeding a public perception that labor unions are an anachronism.

How can labor break this cycle, convincing workers that they must depend upon their own collective power to achieve workplace justice, rather than on the power of government?  I do not have a clear answer.  Until we can answer this question, however, Labor will undoubtedly continue its steady decline.

A Study in Contrasts—Reflections on the Holiday Season

Having endured another holiday season, this seems like a good time to talk about contrasts—the contrast between those of us who live in comparative wealth in the United States and open our presents and those who toil around the world to fill those prettily-wrapped packages.  I was recently watching a few of those old classic Christmas movies—“It’s a Wonderful Life,” “Miracle on 34^th Street ” and “Miracle of the Bells.”  The people pictured in those movies lived difficult lives.  If they lost their jobs, there was no unemployment insurance, no welfare benefits, and no Medicaid.  If they got sick, their employers provided them with little or no sick leave, and no health insurance.  They were largely on their own.  On the other hand, when they opened their Christmas presents, those presents were manufactured and sold by fellow Americans who were very much like themselves, and who were most likely union members.  There is a line in Miracle on 34^th Street where a New York judge discusses with his political advisor that were the judge to rule that there is no Santa Claus, there would follow a drop in toy sales which, in turn, would cause the union members who make and sell those toys to lose their jobs.  This, predicted the adviser, would incur the wrath of the CIO and the AFL.

How long has it been since anyone either manufacturing or selling toys has belonged to a union?  Many unionized department stores are now defunct (in Washington, D.C., nothing has really replaced the old-style full-service Woodward & Lothrup, destroyed by 1980’s-style leveraged mismanagement), and the ones that remain generally do not sell toys (at least not around here).  Most toy sales seem to be through the “big box” retailers like Toys-R-Us and the notoriously anti-employee Wal-Mart.

As bad as the retail scene is, the situation with manufacturing--particularly toy manufacturing--is worse.  How many toys have you seen recently that were manufactured in the U.S., let alone by unionized workers?  Indeed, when was the last time you saw a toy that was made in Japan?  Japanese workers earn too much, so that toy manufacturers have long since abandoned that nation for cheaper locales.  Most likely, those toys are manufactured, under contract, in countries like China and Indonesia, where workers earn pennies a day and working conditions are appallingly bad.

This is where the issue of contrasts becomes apparent.  In the 1940’s, U.S. consumers, retail workers and manufacturing workers were much harder to tell apart.  The people who made and sold the toys were the same people who bought the toys.  Today, the gap between the primary consumers and the people who manufacture and sell the goods has grown to unprecedented proportions.

Our popular culture is complicit in this gap.  For example, compare the movie “Home Alone” (a modern Christmas movie) with one of the classics.  In Home Alone, what is clearly a wealthy family lives without any visible means of support in an idyllic suburb.  Nobody works, no one is hungry, and no attention is paid to the people who toil to produce the wealth that is so lavishly displayed.  In “It’s a Wonderful Life,” the circumstances are no less idealized, but the story nevertheless focuses on how people struggle to get by.

This is also not to say that the sort of hand-to-mouth existence found overseas and pictured in the old classic movies is gone from this country.  It seems we have had great success in creating a whole new category of underpaid, exploited workers who cannot afford to share in the American orgy of consumption.  Moreover, large numbers of these workers—the illegal aliens—are prohibited from sharing in any part of our social “safety-net.”  Even for the rest, that “safety net” has been eviscerated through so-called “welfare reform.”

The new attitude toward these marginal workers was best exemplified by a Republican legislator who explained why a tax rebate payable to lower income workers would result in economic stimulus.  To paraphrase this august legislator—only slightly—the stimulus would result because these hand-to-mouth workers would have no choice but to spend the money on food!  Now that’s showing the Christmas spirit!  Could Scrooge have said it any better?

In this holiday season, we should reflect upon these contrasts.  Only when we can figure out how to reduce these contrasts, letting the people who do the work and make the goods share in the consumption, will we see a just and stable society.  Universal prosperity is not just a noble goal; it is the key to our future.

IAM and United Airlines Reach Agreement

On March 5, 2002, the 13,000 mechanics and related employees represented by Local 141-M of the International Association of Machinists and Aerospace Workers (IAM) ratified the agreement reached with United Airlines, averting a strike against the world’s second largest air carrier. Reflecting the leadership's strong advocacy of the tentative pact, the five-year labor agreement (which is retroactive by nearly two years) was supported by 59% of the voting membership. 

It has been widely publicized that the basic dispute between IAM and United was over economics: the members of the IAM took a large pay cut in 1994 in order to help United survive, and have not had a raise since. Also well publicized is the fact that a Presidential Emergency Board (PEB) had concluded that the mechanics’ grievances were justified, and recommended that the parties agree to a 37% overall wage increase over the five-year life of the agreement. What is less well understood is why the IAM mechanics voted that proposal down this past February.

There were at least two problems with that original recommendation. First, it included language providing that if United were to need concessions in the future, the IAM mechanics’ wages would be automatically cut, as necessary. Not unreasonably, the IAM insisted that future economic "give-backs" are rightfully a matter for negotiation, and should not be imposed unilaterally. As an industry expert remarked, any provision requiring automatic wage cuts was a "non-starter."

The second issue involved the retroactivity of the contract. The prior agreement expired in year 2000, so that the newly-negotiated contract will have retroactive effect. Under the PEB’s proposal, the retroactive increases would only become payable over two years beginning in March 2003.

It was primarily because of these two features that the original PEB contract proposal was defeated by more than a two-to-one margin. The final agreement addresses both of these problems. First, the automatic cuts are out. Any future wage reductions will be a subject for negotiation and ratification by the IAM’s membership. Second, the retroactive pay will start in December 2002, and will be payable over the following two years. Nevertheless, the overall economics of the deal have not really changed. There are some pension increases and greater opportunities for individual mechanics to advance their pay scales, but nothing intended to break the bank.

Unfortunately, the airline biz is very cyclical, and is currently in a major downturn. In part, this is the result of the Bush recession that began early last year, and in part it is a result of the decline in air traffic following the terrorist attacks and the resulting air travel security measures. Ironically, in some ways, air travel has never been easier. Although gone are the days when a business traveler in downtown Washington could hop a cab 45 minutes before flight time, and still get to National Airport in time to make the plane, gone too are the interminable delays and flight cancellations that were a daily occurrence when passenger traffic was at its peak. With luck, the industry will find its equilibrium where the airlines can make money, airline employees no longer have to pay for their bosses inefficiencies, and passengers are not treated like cattle.

The new agreement is very good news for all involved. It means that United remains in the air, and its employees remain on the job.  Congratulations to everyone involved.  To read more about the agreement, as well as the nature of the underlying dispute, go to the website of IAM Local 141-M, or of the IAM itself.

AFL-CIO Holds its Biennial Convention

The Rev. Jesse Jackson addresses the convention--in person.

The leadership of most of America ’s major unions gathered recently in Las Vegas for the biennial meeting of the AFL-CIO.  This “stealth” meeting (so called because of how little interest and publicity it generated) took place against a backdrop of a faltering world economy, increasing unemployment at home, an ongoing war against terrorism, and a collapsing situation in the Middle East .  Historically, America’s political leaders (on the Democratic side, anyway) would have made their own biennial pilgrimages to this convention to express support (albeit more in word than deed) for America’s labor movement, all the while looking for support for their own individual political contests.  This year, however, such visitors were sparse.  For the most part (with a few notable exceptions), the pols stayed home, choosing to address the convention by video.  Undoubtedly, this is a reflection of the current world situation, the important legislation pending in Congress, the fact that this is not an election year, and the fact that air travel has become such a time-consuming chore.  Although organized labor’s penetration in the workplace is the lowest it has been in over 100 years (see The Challenge of the New Millennium on our archive page), the last national election demonstrated Labor’s strong influence in national politics.  This is a lesson that has not been lost on either major political party.  It is, therefore, highly unlikely that the lack of a physical presence represents any sort of deliberate slight.

This convention presented few surprises.  The leadership was all reelected, without opposition.  Although there had been rumors that the United Brotherhood of Carpenters might rejoin the Federation, any chance of that happening at this convention fell through well prior to its commencement.

Perhaps the most interesting occurrence was the action of the Convention to eliminate these biennial meetings in favor of only meeting once every four years.  This does not mean that the officers just doubled their terms—those terms were already four years.  The rationale for canceling the “off-year” conventions was that since there is nothing that an “off-year” convention is required to do, it is a waste of Union resources to require that it be held.  This is probably true.

Maybe of more real significance is the Resolution adopted by the Federation encouraging the building of coalitions and alliances with community organizations.  To the extent this works out in practice, it is a good idea.  Hard experience has shown that organized labor cannot succeed in isolation.  It is only by building these coalitions and alliances that organized labor has any chance of improving its position in the workplace.  All too often, labor has permitted itself to be divided from environmental, community and social justice organizations, so that we end up fighting among ourselves instead of addressing the needs of working people.

The one aspect of this convention that makes it unique is its accessibility over the Internet.  Not only are the texts of the various resolutions available, but the major speeches may be viewed as well.  If you have a high-speed connection, you might be surprised at the high quality of the sound and pictures of these speeches.  Take a look at the Federation’s Convention 2001 web site and find out.

Corporate Governance and the Labor Movement

Historically, labor unions in the United States have taken a fairly passive role in matters of corporate governance.  This reluctance to exert influence is the result of numerous disparate trends.  For instance, European unions are often affiliated with socialist political movements, which lend themselves to regulating corporate actions.  In the United States, by contrast, there is no powerful nation-wide socialist party, and most socialist influences were purged from the labor movement during the anti-communist days of the 1950s and early 1960s.&nb