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The IRS Decided to Get Tough Against Microsoft. Microsoft Got Tougher.

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Paul Kiel reports in ProPublica how the US government has become an accomplice if not an errand boy for big business::

Eight years ago, the IRS, tired of seeing the country’s largest corporations fearlessly stash billions in tax havens, decided to take a stand. The agency challenged what it saw as an epic case of tax dodging by one of the largest companies in the world, Microsoft. It was the biggest audit by dollar amount in the history of the agency.

Microsoft had shifted at least $39 billion in U.S. profits to Puerto Rico, where the company’s tax consultants, KPMG, had persuaded the territory’s government to give Microsoft a tax rate of nearly 0%. Microsoft had justified this transfer with a ludicrous-sounding deal: It had sold its most valuable possession — its intellectual property — to an 85-person factory it owned in a small Puerto Rican city.

Over years of work, the IRS uncovered evidence that it believed laid the scheme bare. In one document, a Microsoft senior executive celebrated the company’s “pure tax play.” In another, KPMG plotted how to make the company Microsoft created to own the Puerto Rico factory — and a portion of Microsoft’s profits — seem “real.”

Meanwhile, the numbers Microsoft had used to craft its deal were laughable, the agency concluded. In one instance, Microsoft had told investors its revenues would grow 10% to 12% but told the IRS the figure was 4%. In another, the IRS found Microsoft had understated revenues by $15 billion.

Determined to seize every advantage against a giant foe, the small team at the helm of the audit decided to be aggressive. It used special powers that the agency had shied away from using in the past. It took unprecedented steps like hiring an elite law firm to join the government’s side.

To Microsoft and its corporate allies, the nature of the audit posed a dire threat. This was not the IRS they knew. This was an agency suddenly committed to fighting and winning. If the aggression went unchecked, it would only encourage the IRS to try these tactics on other corporations.

“Most people, the 99%, they’re afraid of the IRS,” said an attorney who works on large corporate audits. “The other 1%, they’re not afraid. They make the IRS afraid of them.”

Microsoft fought back with every tool it could muster. Business organizations, ranging from the U.S. Chamber of Commerce to tech trade groups, rallied, hiring attorneys to jump into the fray on Microsoft’s side in court and making their case to IRS leadership and lawmakers on Capitol Hill. Soon, members of Congress, both Republicans and Democrats, were decrying the IRS’ tactics and introducing legislation to stop the IRS from ever taking similar steps again.

The outcome of the audit remains to be seen — the Microsoft case grinds on — but the blowback was effective. Last year, the company’s allies succeeded in changing the law, removing or limiting tools the IRS team had used against the company. The IRS, meanwhile, has become notably less bold. Drained of resources by years of punishing budget cuts, the agency has largely retreated from challenging the largest corporations. The IRS declined to comment for this article.

Recent years have been a golden age for corporate tax avoidance, with massive companies awash in profits routinely paying tax rates in the single digits, or even nothing at all. But how corporations manage to do this and keep the IRS at bay is mostly shrouded in secrecy. The audit process is confidential, and the IRS, for all its flaws, simply doesn’t leak. Microsoft’s war with the IRS offers a rare view into how a giant company maneuvers to avoid taxes — and how it responds when the government tries to crack down. ProPublica has reconstructed the fight from thousands of pages of court documents, information obtained through public records requests and accounts from current and former IRS employees.

Microsoft declined to discuss its taxes in any detail. In response to extensive questions provided in writing, the company said it “follows the law and has always fully paid the taxes it owes.”

In 2010, the IRS announced that it was creating a new unit to audit international, intra-company deals. Tech, pharmaceutical and other giants had figured out how to use these dubious deals to avoid taxes on a colossal scale. It was hardly a secret: News articles had detailed how GooglePfizer and others saved billions. Senate hearings ensued.

Despite the publicity, nothing changed. The trend, which had taken off in the 2000s, intensified. The losses to the U.S. Treasury in uncollected taxes ran well into the hundreds of billions of dollars. In 2016 alone, according to an estimate by economists including Gabriel Zucman of the University of California, Berkeley, U.S. corporations avoided $61 billion in taxes by sending profits to tax havens.

The concept was simple. A U.S. company sold its most valuable asset — for a tech company, its intellectual property — to a subsidiary in a place (Ireland, Singapore, Puerto Rico, etc.) where the tax rate was extremely low.

The details of these deals were monstrously complex, making it difficult for the IRS to prove they were done solely to dodge taxes. Essentially, the IRS had to argue that the company had set the wrong price for its intellectual property. And to do that, the agency had to understand the company, its markets and its prospects top to bottom. It was a near-impossible task, and the IRS suffered some key losses in court, which only emboldened companies to stake out even more aggressive positions.

In 2011, the IRS picked Samuel Maruca to lead the new unit. A partner at the prominent law firm Covington & Burling, Maruca had spent decades advising corporations on “transfer pricing,” as this area of tax is called, and facing off against the agency on audits. He came to the job, he said, to help fix a broken system.

Maruca is the picture of a tax lawyer (thinning hair, glasses). But unlike many of his colleagues, he expresses himself clearly, sometimes in moral terms. He told peers at industry conferences that the nation’s corporations had grown excessively bold. “We would all benefit,” he said, “from a resurgence of moderation and heightened regard for principle.”

To restore balance, the IRS “must produce some winners,” he said. “I really want to make a difference.”

Maruca built a team of about 60 — agents, attorneys and economists — with half recruited from outside the agency. For the IRS, this was a notable influx of talent. But it was still modest when compared with the scale of the challenge.

Among the key advisers on the new team was Eli Hoory, an attorney who had worked under Maruca at Covington and followed him over to the IRS a few months later. Hoory, then in his mid-30s, had a shaved head and prominent nose that gave him an angular appearance. Known for being extremely bright, he was also frank and outspoken, sometimes to a fault. A graduate of the U.S. Coast Guard Academy, he’d served as a reservist during law school and studied at the London School of Economics before landing at Covington.

Maruca and his team set about canvassing the IRS’ inventory to find good targets for producing “some winners,” as he’d put it.

Microsoft’s Puerto Rico deal almost slipped by. The week before Maruca started at the IRS in May 2011, the agency, which had already been auditing the transaction for four years, completed its work and sent Microsoft its findings.

That 2011 assessment by the IRS isn’t public, but it’s clear Maruca and Hoory were unimpressed. The IRS, they thought, had been credulous, accepting too many of Microsoft’s numbers. They also thought the IRS was set up for failure. The agency had been able to retain only one outside expert, an economist. If the case went to court, Microsoft would surely summon a cast of varied experts to undermine the IRS’ position.

It seems likely, given the size of Microsoft’s Puerto Rico transaction, that the IRS in May 2011 had hit the company with a tax bill in the billions. But Maruca and Hoory thought the agency was thinking small.

Maruca told Microsoft the IRS needed more time, and in early 2012, the IRS withdrew its findings. By then, Hoory had taken leadership of the audit. He began sending new document requests to Microsoft, asking for more interviews and considering what other experts the IRS needed to round out its case. Over the next three years, he and his team amassed tens of thousands of pages and conducted dozens of interviews with Microsoft personnel. (Hoory, who still works at the IRS, declined to comment.)

The evidence they assembled told a story. It revealed how Microsoft had . . .

Continue reading. There’s much more.

Written by LeisureGuy

22 January 2020 at 12:17 pm

Dark Clouds Over Facebook: The $5 Billion Settlement Isn’t Finalized

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“It’s a long road that has no turning.” “The bigger they are, the harder they fall.” “Pride goeth before a fall.” And so on. Facebook is riding high now, but drawing ire and making enemies. (Much the same is true of Amazon, Apple, Twitter, Google, and the US.) Matt Stoller writes in Big:

Today I’m going to discuss some quiet but potentially significant problems hanging over Facebook and the big tech ecosystem in general. The big tech story has cooled a bit as reporters increasingly focus on the Presidential race, but it will come back. I’m going to stay on it. I also have a short blurb on the cheerleading story at the end of this newsletter, I’m going to stay on that too.

Goliath-Slaying Congressman David Cicilline

Yesterday Nancy Scola at Politico wrote a piece profiling Antitrust Subcommittee Chairman David Cicilline, who is conducting an investigation into big tech corporations. It is, as Institute for Local Self-Reliance director Stacy Mitchell notes, one of the important Congressional investigations in the last forty years. Last Friday, his subcommittee held a hearing in Colorado about how Google, Amazon, Facebook, and Apple bully entrepreneurs, with witnesses from PopSockets, Sonos, Tile, and Basecamp. All of us will recognize in their stories the basic bullying at the heart of the economy right now, and the courage these entrepreneurs showed in speaking out.

This bullying is pervasive. Yesterday, I spoke before the American Booksellers Association, book store owners who have been in Amazon’s crosshairs for two decades. Book sellers are exhausted keeping their stores going in the face of Amazon’s power, but also see the political argument shifting. Cicilline is one of the key reasons why.

I talked to these small business owners about the historical analogue to today, the anti-chain store fight in the 1920s and 1930s against the A&P, which was the Amazon of its day. A&P, like Amazon, was able to use its access to capital to sell popular products below cost, and thus kill its competitors. Today, a small book store has to make a profit and sell books at the list price, whereas Amazon doesn’t have to make money and can sell that book below cost. So Amazon wins, not because its technology is good, but because it can get access to cheap money to drive its competitors out of business.

Our local stores are dying, and so are our communities. One quote, from Supreme Court Justice Louis Brandeis, captures the political problem this caused, and it has eery resonance today. Corporate monopolies, in particular chain stores, he argued, were “converting independent tradesmen into clerks” and “sapping the resources, the vigor and the hope of the smaller cities and towns.”

Cicilline is bringing back this understanding of the moral power of free commerce, and the threat concentrated finance poses. Scola’s profile of Cicilline is worth reading, but what I found fascinating (if a bit self-serving) was Cicilline’s view of the importance of history. Here here is discussing my book, Goliath: The Hundred Year War Between Monopoly and Democracy.

Giving speeches alongside Cicilline at the event were Faiz Shakir, Bernie Sanders’ presidential campaign manager; and Rohit Chopra, a Democratic Federal Trade Commission commissioner who has strongly criticized his own agency for what he sees as its inadequate approach to Silicon Valley. Cicilline called Stoller, a staunch proponent of more stringent antitrust enforcement, “an inspiration,” and thanked him for telling such an “important story.”

The fight Cicilline is helping to lead is a political struggle over what commerce means in America. In his nomination speech for the 1936 Democratic convention, Franklin Delano Roosevelt framed the politics of commerce clearly, “If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the marketplace.”

The debate is raging, and some of it is happening over the historical narrative I wrote about in Goliath. Institutional Investor magazine had a very positive review of Goliath, basically making the argument that Republicans and Democrats are beginning to see the problem of monopoly. Meanwhile, a Marxist historian writing in the pages of the left-wing magazine The Nation said I got the history all wrong, and that we need a socialist revolution.

And there we go. The history is echoing today, as it always does.

A Long Lit Fuse Under Facebook

Last July, the Federal Trade Commission and Facebook agreed on a high-profile $5 billion for various privacy violations. While that amount of money seems like a lot, the actual settlement was underwhelming. $5 billion is a parking ticket for Facebook, and the corporation got a lot in return. First, Facebook made sure that in return for the money, the FTC wouldn’t investigate Mark Zuckerberg’s emails or do an interview with him. Second, Facebook got a total release from pretty much all potential violations of the FTC’s consumer protection law, a kind of retroactive get out of jail free card.

It’s a sweet deal, and Facebook’s stock price skyrocketed when the corporation told Wall Street about it. It was a thorough embarrassment for the FTC; not a single Senator or House member praised the commission in the days after the settlement, which is a bit unusual for such a high profile case.

Now normally this would be old news, a judge usually rubber stamps these kinds of agreements and lets them go through. It’s true that a nonprofit protested; the nonprofit Electronic Privacy Information Center (EPIC) sued to stop the settlement. EPIC’s argument was that the settlement didn’t fix the problem with Facebook, and that liability release was so vague as to be against the public interest and procedurally unfair. Judges however often ignore such pleadings. But in an unusual legal scenario, the Judge who is supposed to approve the settlement hasn’t done so, and asked the government to respond by this Friday to EPIC’s arguments.

And here’s where it gets interesting. This settlement seems like it . . .

Continue reading.

Written by LeisureGuy

22 January 2020 at 11:35 am

What Impeachment Is Revealing About the Republican Party

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Benjamin Wittes, editor-in-chief of Lawfare, and Quinta Jurecic, managing editor of Lawfare, wrote in the Atlantic in November 2019:

The House Intelligence Committee brought impeachment onto the public stage over the past two weeks. But now Congress has scattered for Thanksgiving, cable news is picking over the remnants of the hearings in search of content, the president is fuming, and impeachment has moved into a murky new phase, the parameters of which are not entirely clear.

So what happens next?

The public hearings lurched from physical comedy to riveting seriousness to bleak warnings about the corrosive effects of conspiracy theories on American democracy. The hearings provided new information—including the extent to which the Ukrainian government suspected a possible extortion attempt by the United States early on in President Donald Trump’s pressure campaign, along with the phone call between Trump and Ambassador Gordon Sondland in which Trump personally asked whether he was going to get his “investigations.”

But the public proceedings largely dramatized the story that we already knew about Trump’s coercive efforts with respect to Ukraine. Witness after witness made it obvious: The president was attempting to force Ukraine to announce sham investigations that would benefit Trump politically, in exchange for a White House visit and hundreds of millions of dollars of military aid. There were a lot of witnesses. They were credible. And they were, individually and collectively, damning.

There are more key witnesses, those who didn’t show up: former National Security Adviser John Bolton and Acting White House Chief of Staff Mick Mulvaney, for example, both of whom would seem to have a great deal to say about the effort to shake down the Ukrainians but who have so far refused to play ball with House investigators. Mulvaney has defied a House subpoena; Bolton, after some hemming and hawing, seems to have settled on a strategy of coyly hinting at the damaging stories he has to tell while promoting his upcoming book on Twitter. Assuming these witnesses don’t roll out of bed next week and decide to testify after all, we are probably nearly done with the House’s evidence-gathering phase of the impeachment inquiry and moving into a more evaluative phase.

What can we expect that to look like?

The first step is for Intelligence Committee Chairman Adam Schiff to figure out how he wants to refer the impressive quantity of testimony he has amassed to the Judiciary Committee, which is responsible for writing any articles of impeachment.

Under the resolution on impeachment passed by the House of Representatives in late October, the Intelligence Committee takes the lead on the investigative stage of the impeachment proceedings—which is why the hearings so far have taken place under Schiff’s lead. It’s now Schiff’s job to “set … forth [the committee’s] findings and any recommendations and appending any information and materials,” which he must prepare alongside the chairs of the House Committee on Foreign Affairs and the Committee on Oversight and Reform. (These other committees have played a less public role in the inquiry so far, but have participated in the closed depositions of witnesses and the issuing of subpoenas.) That report will then go to the House Judiciary Committee, which has the task of drafting articles of impeachment to submit to the full House for a vote.

The work of producing this report could be as crude as schlepping a pile of transcripts from the office of one committee to that of another, supplementing it with minimal commentary. But Schiff will likely want to do some kind of shaping of the record before putting it in the hands of Judiciary Committee Chairman Jerry Nadler. Just as Independent Counsel Ken Starr crafted the Starr Report, documenting President Bill Clinton’s misconduct, Schiff would be well advised to distill out of the material he has amassed some kind of narrative account of what happened and what it all means.

Controversial though it is, the narrative section of the Starr Report is actually not a bad model; it is both readable and rigorous. While Starr’s report received a great deal of criticism for being salacious and overly detailed, and many people believed the offenses it described did not amount to impeachment-worthy material, nobody has ever made a serious argument that the facts Starr recounted in it were untrue. It’s also a bit of a page-turner. Schiff does not have a lot of time, but creating a compelling referral to the Judiciary Committee that tells the story in a rigorous way is the first key step.

Once the Judiciary Committee has what we might call the Schiff Report, however, it is by no means limited to that material in shaping articles of impeachment. The House resolution specifically provides for the Judiciary Committee to undertake its own investigative work, conducting hearings and issuing subpoenas as needed. So the next big questions will be how much Nadler wants to stick to the Ukraine scandal—which, presumably, Schiff’s production will focus on—and how much he wants to branch out into other areas.

The obvious candidate here is Trump’s conduct as described in Special Counsel Robert Mueller’s report: In fact, House General Counsel Douglas Letter indicated to a federal court just last week that, as part of its impeachment probe, the House is investigating whether Trump lied to Mueller. And a federal district judge has said that she will rule today on whether the Judiciary Committee will be able to compel testimony from former White House Counsel Don McGahn regarding events set out in Mueller’s report.

The challenge for Nadler will be to prevent mission creep. Trump’s behavior over the course of his presidency is such that there is actually no shortage of impeachable offenses from which Nadler can choose. What about Trump’s alleged repeated offers of pardons to border officials in exchange for breaking immigration and asylum law—behavior that, if confirmed, would almost certainly violate the president’s constitutional obligation to “take care that the laws be faithfully executed”? What about the thousands of young children separated from their parents at the border? What about emoluments? What about the illicit payments to the adult-film star Stormy Daniels—which resulted in a guilty plea by Trump’s former lawyer Michael Cohen—and, for that matter, what about the allegations of sexual harassment and rape against the president?

The contours of what fulfills the constitutional definition of “high crimes and misdemeanors” for which a president can be impeached are open to argument. Time also presents a pressing question. How quickly does the Judiciary Committee want to move, and how narrowly does it want to focus in order to keep things speeding forward? How much does it want to expose itself to charges of making impeachable offenses out of policy differences or out of relatively small matters?

Once the articles of impeachment are drafted, it’s time to vote—first in the Judiciary Committee and then on the House floor. These votes may play a key role in the process of winnowing the articles. If Nadler successfully does the winnowing himself and persuades Democrats to keep the articles narrowly focused on the Ukraine matter, perhaps with some material from the Mueller investigation included as well, we could be looking at a small number of party-line votes, in which Democrats pass and Republicans object to just two or three articles of impeachment.

The other possibility is that Nadler could use this process as his means of establishing the limiting principles. During the Clinton impeachment, the House actually voted on four articles, passing only two. Allowing a relatively open article-drafting process has the dual benefits of letting Democrats submit to judgment a wider range of Trump’s misdeeds and also potentially reducing the partisanship of the affair. If some members want to vote on articles of impeachment on payments to Daniels, a few Democrats might team up with the Republicans to kill them, either in committee or on the floor—thereby establishing that the House majority isn’t hell-bent on impeaching Trump for anything and everything.

But this strategy also has a big risk—that of letting impeachment spin out of control. What if Democrats end up finding it hard to vote against articles and thus end up sending a raft of them over to the Senate? The task of the House, which has to present its case against Trump before the senators, becomes substantially more difficult if the articles involve diverse charges, arguable facts, or matters the president’s defenders can reasonably cast as legitimate exercises of the presidency’s broad powers.

Things get even murkier when the articles—whatever they end up including—land in the Senate chamber. The Senate’s rules for impeachment trials are an odd combination of the highly specific and the maddeningly vague. On the one hand, they specify the precise time of day the impeachment trial shall go into session the day after the House members appointed to manage the trial march into the Senate chamber and present the articles the House has passed (1:00 pm, in case you were wondering—unless it’s a Sunday). On the other hand, they don’t specify rules of evidence, leaving almost everything of substance initially to the judgment of Chief Justice John Roberts and ultimately to the judgment of 51 members of the body, the vote required to overrule Roberts on a wide variety of motions.

In other words, the course of the Senate trial will ultimately depend on two variables that are, at this stage, mysterious. The first is how Roberts understands his own role as the trial’s presiding officer. The rules permit the chief justice to be—if he chooses—quite activist in ruling on evidentiary motions and the like, subject to being overturned by a vote of the Senate itself. The rules also permit him to be—if he chooses—quite passive; he’s entitled simply to submit such matters to the vote of the body itself in the first instance. So one key question is what role Roberts himself thinks he should play.

The other question is whether . . .

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Written by LeisureGuy

18 January 2020 at 8:29 pm

Trump Says U.S. Is Ready for War. Not All His Troops Are So Sure.

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T. Christian Miller, Megan Rose, and Robert Faturechi report in ProPublica:

Between the killing of Iran’s most important general and Iran’s missiles hurtling toward American troops in Iraq, President Donald Trump took time to discuss America’s military prowess.

“The United States just spent Two Trillion Dollars on Military Equipment,” he tweeted on Jan. 5. “If Iran attacks an American Base, or any American, we will be sending some of that brand new beautiful equipment their way.”

Besides being wrong (the military has not spent that much), he repeated a mistake that military leaders have made for years: emphasizing weapons over the fitness of the men and women charged with firing them.

Over the past 18 months, ProPublica has dug into military accidents in recent years that, all told, call into question just how prepared the American military is to fight America’s battles.

If forced to fight in the Persian Gulf or the Korean Peninsula, the Navy and Marine Corps are likely to play crucial roles in holding strategic command of the sea and defending against ballistic missiles.

Those branches, though, do not need billions of dollars of new weapons, our examination revealed. They need to focus on the basics: its service members, their training and their equipment.

The Government Accountability Office, Congress’ watchdog, has been sounding the alarm for years, to little effect. In 2016, the GAO found that years of warfare in Iraq and Afghanistan had taken their toll: “The military services have reported persistently low readiness levels.”

In 2018, the agency focused on the Navy and Marine Corps. All seven types of aircraft it tracked, from cargo planes to fighters like the F/A-18D, had repeatedly missed goals for being prepared for missions. “Aviation readiness will take many years to recover,” the GAO said.

In a report last month, the GAO found that only about 25% of Navy shipyard repairs were completed on time. “The Navy continues to face persistent and substantial maintenance delays that affect the majority of its maintenance efforts and hinder its attempts to restore readiness,” it said.

The services’ problems with readiness burst into public view in the summer of 2017, when two American destroyers collided with two commercial ships in separate incidents that left 17 sailors dead and scores injured. They were the Navy’s worst accidents at sea since the 1970s.

Both the USS Fitzgerald and the USS John S. McCain were deployed to the 7th Fleet, based in Yokosuka, Japan. What both ships needed, ProPublica found, was more time to train and more sailors.

Neither ship was fully qualified for its battle missions; neither ship had a full crew; both ships had patched together navigation systems that failed to work at times.

Sailors on both ships described being shortchanged in training and exhausted by the pace of operations. One-hundred-hour work weeks were not uncommon.

On the Fitzgerald, for instance, a sailor had to manually press a button more than 1,000 times to refresh a radar screen tracking nearby traffic. On the evening of the collision on June 17, the Fitzgerald was under the control of a relatively inexperienced officer who ordered the destroyer to turn directly into the path of a cargo carrier.

On the McCain, the Navy had installed a touch-screen navigation system as a cheaper alternative to traditional steering wheels and throttles. The design of the new system was so confusing that the sailors using it accidentally guided the McCain into an oil tanker in the Singapore Strait on Aug. 21.

Dakota Bordeaux, the young sailor steering the ship, said of the new navigation system, “There was actually a lot of functions on there that I had no clue what on earth they did.”

It was not that the Navy was unaware of the problems. Top commanders had simply ignored urgent messages for help. Military leaders wanted missions completed. They cared less about whether the men and women on duty were forced to cut corners to do them.

In January 2013, Vice Adm. Thomas Copeman issued a warning at the Surface Navy Association Symposium, one of the premier gatherings of Navy officers in charge of warships. Readiness, he said, was headed toward a “downward spiral.”

“It’s getting harder and harder I think for us to look the troops in the eye,” Copeman told the audience.

“If you’re an admiral in the Navy,” he later told ProPublica, “you may have to make that decision to send people into combat, and you better not have blood on your hands the rest of your life because you didn’t do everything you could in peacetime to make them ready.”

The Navy’s surface forces needed $3.5 billion, he said, just to fix what was wrong with training alone. Copeman raised the specter of a “hollow” Navy without those additional funds.

Three years later Janine Davidson, the undersecretary of the Navy, sounded the alarm again. The Navy remained short of adequately trained sailors and reliable ships.

“It’s sleepwalking into a level of risk you don’t realize you have,” she said to ProPublica.

The 7th Fleet, the largest of the Navy’s forward-deployed fleets, was perhaps most vulnerable. In 2017, top officers laid out the armada’s dire conditions for its senior commander, Vice Adm. Joseph Aucoin.

Training was down. Certifications, which crews received after proving they were prepared to handle crucial war-fighting duties, had dropped from 93% completed in 2014 to 62% in 2016. That year, only two of the fleet’s 11 destroyers and cruisers received all recommended maintenance. One ship got only a quarter of its scheduled upkeep.

Aucoin sent the assessment to the top brass. But the portrait of crisis got him nothing.

Low-level officers on the decks of ships and high-ranking leaders up the chain of command said they made similar warnings and were shut down. Scores of sailors reached out to us and testified to some combination of fear, lack of training and an absence of confidence in the Navy’s leadership.

“If the Navy paid more attention to the job satisfaction and intrinsic motivation of sailors, then a lot of these other systemic issues will fix themselves,” one sailor wrote.

We examined other Navy episodes directly relevant to today’s situation with Iran. In 2016, the . . .

Continue reading.

Written by LeisureGuy

17 January 2020 at 1:22 pm

Cheerleading as a model of American monopoly

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Matt Stoller at Big has two connected articles taking a look at the monopoly on cheerleading. The first begins:

Today I’m going to write about Varsity Brands, the Bain Capital-owned corporation which controls the sport of cheerleading. I love this monopoly because it’s so easy to explain, and also because the tactics Varsity Brands uses are the same that every monopolist uses, only with more glitter. But first, two pieces of good news.

One, the Federal Trade Commission blocked a merger! The FTC threatened to file suit against a merger of two companies – TreeHouse Foods and Post Holdings – in the private label cereal market. So the companies abandoned the deal. Stopping mergers like this sends a message that there are cops on the beat. The popular interest in monopoly is working. Absent a more highly charged political atmosphere, the FTC would almost certainly have let this one go through.

Two, the Federal Trade Commission and Department of Justice withdrew their 1984 non-horizontal merger guidelines. Basically they are admitting that the way they looked at mergers for forty years is dumb. It’s good but not great news. The FTC/DOJ are trying to replace those guidelines with new rules so silly they don’t even mention ‘data.’ But at least we’re out of the Reagan era hellscape.

And now…

Bring It On

One of the most fascinating parts of studying monopolies is how most of them use very similar tactics in different industries, like Bill Gates and John D. Rockefeller, or A&P supermarket in the 1920s vs Amazon. What I also love is finding weird areas of monopolization, and there are so many, because concentration is a systemic feature of the American political economy. This monopoly combines both aspects.

Two days ago, a colleague of mine, Sarah Miller, told me, ‘hey did you know there’s a cheerleading monopoly?’ I looked, and sure enough, there is! And it’s owned by Bain Capital. Sometimes the universe aligns and gives me the perfect monopoly to write about.

Cheerlebrities and Dollars

Cheerleading is a huge part of American culture, evolving from a male oriented sideline spectacle in the 1940s to a serious female-dominated sport that sits between dance and gymnastics. There were many later famous men who were cheerleaders, everyone from FDR to Jimmy Stewart to George W. Bush. Here’s a picture of cheerleader Ronald Reagan.

Today most cheerleaders are girls and young women, with one estimate of 400,000 in public high schools alone. But cheer goes way beyond high schools, there are now thousands of competitive dance teams, with members ages 7-17, who enter competitions, with something like 3.3 million who cheer in any given year, and 1.3 million cheerleaders across American who cheer for more than 60 days a year.

High school and college age athletes participate in high profile competitions, get sponsorships, endure immense amounts of pain, and show off in contests and on social media. Cheerleaders are disciplined and often fanatical. The sport causes more than half the catastrophic injuries for female athletes in America, including skull fractures. And yet thousands of young girls wear cheer leggings and t-shirts, practice arm motions and cartwheels nonstop, and obsess over Instagram star “cheerlebrities.”

It’s an expensive sport, especially at the top, with top athletes spending $15,000 or more a year for competition uniforms, practice clothes, jackets, personalized bags, summer camps, tumbling classes, squad practices with professional cheerleading programs, and choreography fees. Families involved in cheerleading are above average in terms of affluence, and even non-top athletes spend between $2,500 to $10,000 a year.

And that’s where the monopoly comes in. The key player in the cheerleading world is Varsity Brands, which makes its money from cheerleading apparel, camps and competitions. The founder, Jeff Webb, started Varsity in the 1970s to offer high school training camps and clinics, eventually creating competitions for cheerleaders.

It’s with equipment and apparel where Varsity makes its money, “everything from the sequined uniforms on cheerleaders’ backs to the big bows in their poofed-up hair.” The key to Varsity’s monopoly is its chokepoint control of major cheerleading competitions. In the early 1980s, ESPN began showcasing the new sport, giving it wide distribution. In 2004, Varsity bought the National Cheerleaders Association, and has rolled up a dozen more, including its main competitor in 2015, Jam Brands. Today, competing means entering Varsity’s world.

While Webb is an aggressive businessman, Varsity had help from private equity; Charlesbank Capital Partners bought the company in 2014. Charlesbank organized a roll-up of the industry, in its public case study noting that it helped orchestrate the Jam Brands purchase, as well as a series of “highly strategic acquisitions.” These new private equity owners had Varsity buy up sports equipment distributors and enter the marching band space. Charlesbank sold it to fellow private equity firm Bain Capital in 2018.

Varsity’s market power over the business of cheerleading is entrenched. Participating in cheerleading competitions is expensive. If you want to see a bunch of cynical cheerleaders and cheerleading families angry about monopoly power, check out the discussion on Fierceboard about the acquisition and what it meant for what they would have to pay. It’s also costly to be a spectator. Here’s a sycophantic interviewer interviewing Webb about how much it costs as a parent spectator to watch one of these events, congratulating the CEO on his pricing power. This market power extends to media. Not only does Varsity own magazines, but on Netflix’s Cheer, cheerleaders complain that they can’t watch cheerleading on TV anymore, because Varsity streams its competitions over its for-pay app Varsity TV, moving ESPN out of the picture.

In 2018, when speaking to Chief Executive magazine, Webb made it clear that monopolization was the strategy.

We were really creating an industry as we went along and it became an ecosystem in that we were creating the concept, we were creating the industry, and then we were positioning ourselves to provide all the products and services that that affinity group utilized.

Webb’s strategy worked. In 2016, competitors estimated that Varsity had 80% of the market for apparel, and 90% of the market for competitions.

Rebates, Gyms and Vertical Integration

Varsity uses tactics reminiscent of a glittery John D. Rockefeller. According to Leigh Buchanan in Inc., “Teams appearing in Varsity competitions can wear whatever uniforms they want. But rival apparel makers can’t show their wares at those events, which are important showrooms for cheer merchandise.” That is in antitrust parlance a form of ‘vertical foreclosure,’ or using your control of one part in the supply chain, in this case competitions, to block rivals who compete with you in another area, apparel. This became quite obvious when Jam Brands, which ran most non-Varsity competitions, merged with Varsity, immediately ending marketing agreements with Varsity apparel competitors.

There’s more than blocking advertising and distribution at these competitions. Webb admitted that in at least one contest, cheerleaders got more points if they used more Varsity equipment as props. In other words, it’s not just a rigged game as some sort of metaphor, Varsity actually rigged the rules of its cheerleading competition to coerce purchases of Varsity products. Indeed, Webb has testified in court that the competitions exist solely for the “promotion of his cheerleading supply business.”

This level of control hasn’t gone unnoticed. As one person in the cheerleading world sarcastically put it in 2014:  . . .

Continue reading. There’s more.

And the second picks up:

A week ago I would not have predicted that I would be studying cheerleading. I study monopolies, big tech, and politics. But after writing that story a few days ago and seeing the reaction, I think the story on cheerleading is important, because it says something about our larger political economy.

Every corporate monopoly, in every sector and across history, uses similar power arrangements: coercive contracts, secret rebates, retaliation, buying up competitors, political corruption, etc. All of these are present in the Varsity brands story. Since publishing the story, I have heard from cheer coaches, international cheer officials, parents, and one Harvard Law professor of antitrust.

Here are a few observations.

  • I missed out on two anti-competitive practices in the industry. The first is called “Stay to Play.” For many cheerleading competitions, though not all, out-of-town contestants are required to stay at a specific area hotel or set of hotels, or they cannot enter the contest. This is yet another way to raise prices on cheerleaders, and parents hate it. The second is that Varsity tends to be very aggressive about takedown notices for cheer contest video. If you film your kid at an event and put it up on Facebook or YouTube, Varsity is likely to ask you to take it down because it’s competitive with their VarsityTV streaming app. As one parent told me, it’s basically Varsity preventing you from sharing your memories publicly with your family or friends.
  • Cheerleading is more dangerous to monopolize because it involves children. There’s a whole tangled legal fight between the NCAA, the Department of Education Office of Civil Rights, and Varsity over the definition of sport. This is one area where policymakers at the Education Department, and not just at the antitrust agencies, have some authority. The bottom line is children are doing dangerous gymnastics and tumbling on surfaces like grass and rubber tracks that have not been proven safe, and one result is more catastrophic injuries than might otherwise happen. (I also heard rumblings about other safety concerns that go beyond physical injuries endured during contests.)There is an alternative to the existing Varsity model of cheerleading. Roughly ten years ago, some college coaches basically took competitive cheerleading and turned it into a safer and regulated sport. After a series of bitter fights over branding, they eventually had to name it Acrobatics and Tumbling instead of Competitive Cheer. Now there’s a battle about cheer internationally, with questions about whether and how it can become an Olympic. To give you a sense of the stylistic differences, here’s a picture of Acrobatics and Tumbling.

  • While the story I wrote was about cheerleading, it has broader implications for how we understand our political economy. For about thirty years, corporations in America have been getting bigger, and it’s harder and harder to start and run a small business. Some scholars, like Edward Lazear of Stanford University, Michael Strain of the American Enterprise Institute, and John Van Reenen of M.I.T. believe that this rise in concentration is happening for natural technical reasons. Their argument is that bigger corporations are just better at what they do because they have ‘economics of scale,’ aka it’s more efficient to produce more steel or more search queries if you’re making a lot of them. This argument comes from an intellectual movement started at the University of Chicago known as ‘the Chicago School.’Other scholars, like Columbia University’s Tim Wu, economist Luigi Zingales, and Northeastern University’s John Kwoka are making a more traditional American anti-monopoly argument that this increase in scale is a function of legal changes that make it easier to charge higher prices and exclude competitors. This would include pointing at practices like mergers, rebates, the ability to exclude competitors, and other things that, as it turns out, Varsity seems to be doing.

    This debate is more than academic. Right now, there’s a bipartisan investigation by the House Antitrust Subcommittee into large technology corporations, and it’s led by Democrat David Cicilline and Republican Doug Collins. They are wrestling with whether concentration is a function of power, not efficiency. How we resolve this debate is likely to have significant impacts on how we organize our markets and our corporations going forward.

    What’s useful about the story of cheerleading is that . . .

Continue reading.

Written by LeisureGuy

17 January 2020 at 12:34 pm

Six Children Died in Border Patrol Care. Democrats in Congress Want to Know Why.

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Presumably Republicans in Congress are not interested. Robert Moore reports in ProPublica:

After a ProPublica investigation into the death of a teenager in Border Patrol custody, House Democrats are ramping up pressure on the Trump administration to explain how six migrant children died after entering the U.S.

“I find it appalling that (Customs and Border Protection) has still not taken responsibility for the deaths of children in their care,” said Rep. Bennie Thompson, D-Miss., the chairman of the House Homeland Security Committee.

Thompson said that while some of the children’s deaths may not have been preventable, Customs and Border Protection, the federal agency that first deals with children who cross the border, seems “all too quick to pat themselves on the back for their handling of children last year. These deaths happened under their watch. I remain skeptical that real changes have been made.”

The Homeland Security border subcommittee will hold a hearing Tuesday to examine the administration’s efforts to treat sick migrant children. The six who died in government custody between September 2018 and May 2019 were the first such deaths in a decade.

ProPublica’s December investigation into the death of Carlos Gregorio Hernandez Vasquez, a 16-year-old Guatemalan boy who died in a South Texas Border Patrol cell, raised concerns about actions by Border Patrol agents and contract medical personnel and whether the agency was truthful about the circumstances of the teenager’s death. The boy died on the floor of his cell on May 20, and a surveillance video obtained by ProPublica showed he was left alone for hours as his illness worsened.

Carlos was the last of six children to die. Three children died from flu-related complications, one died of a massive bacterial infection and two died from chronic conditions they had before crossing the border, according to autopsies and other medical reports.

A spokesperson for CBP, the Border Patrol’s parent agency, said the department has made sweeping changes at the border in the past year. About 300 contract medical personnel work any given day at 40 border stations, up from 20 trained medical providers in December 2018, the spokesperson said.

The Department of Homeland Security Office of Inspector General in late December issued one-page findings on the December 2018 deaths of two Guatemalan children. Investigators “found no misconduct or malfeasance by DHS personnel” in the deaths of Jakelin Caal Maquin, 7, and Felipe Gomez Alonzo, 8.

“The inspector general’s one-page summaries on the investigation into the December 2018 deaths are clearly insufficient. Congress has yet to get a full accounting of how the investigation took place and how the inspector general came to its conclusions,” Thompson said.

The inspector general rejected Thompson’s criticism, saying the agency has fully briefed his staff on the investigations.

“We stand by our investigations. On Jan. 10, 2019, the Office of the Inspector General provided the Committee on Homeland Security staff a comprehensive briefing on both investigations and our conclusions. We have also provided the complete reports of investigation to the committee, per the chairman’s request,” inspector general spokeswoman Erica Paulson said. She said complete reports can’t be made public because of privacy laws.

A committee spokesman said the inspector general’s office has declined to testify at Tuesday’s hearing.

Jakelin died of streptococcal sepsis two days after she and her father crossed the border in remote southwest New Mexico. Felipe died of flu complications six days after he and his father crossed the border in El Paso, Texas.

The DHS inspector general continues to investigate Carlos’ death. . .

Continue reading.

Written by LeisureGuy

13 January 2020 at 12:51 pm

What Is the Point of Economics?

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Matt Stoller is always a good and provocative writer with insights aplenty. In his most recent column,  he writes:

This morning, on Bloomberg TV, Larry Summers said he was musing on how to deal with recessions, and felt that the government needs to spend more money to address the next downturn. “I was talking to Olivier Blanchard…” he said, Blanchard being his economist colleague for four decades. They came up with something called ‘semi-automatic stabilizers.’

There are a many ways to talk about how to run a society, and economists have their own language. They talk about ‘monetary space’ when they mean printing money and ‘fiscal space’ when they mean the government spending money. Summers is trying to create a new word, in this case ‘semi-automatic stabilizers,’ which he describes as provisions in law that would induce immediate spending increases if unemployment went above a certain rate. By making this decision seemingly automatic in some sort of budgetary process, semi-automatic stabilizers would relieve the pressure on Congress to make the decision to increase spending in a recession.

Leaving aside whether this idea makes sense or whether it’s new, Summers is clearly burned from the financial crisis, when the administration had to get a stimulus through a hostile and skeptical Congress, and that stimulus was undersized relative to the economic hole needing to be filled. ‘Semi-automatic stabilizers’ solve a political problem Summers encountered.

What’s interesting, though, is what Summers doesn’t say. A semi-automatic stabilizer, whether good or bad policy, is also a provision that helps move authority from democratically elected legislators to economists about when to spend money. Summers doesn’t frame it this way. The use of the word automatic is a ruse, it’s economists doing the measurements and thus in some ways making the key judgment calls. Summers is open that he’s not trying to solve an economic problem, he’s just trying to get around Congress, which he thinks shouldn’t be making key decisions about resources in the economy.

And this brings me to the point of economics, which has taken me a long time to understand. There are many economists who focus on trying to uncover important truths about the world, and there are many economists who seek to serve concentrated capital. There are smart ones, and dumb ones. But truth or falsehood, or empirical rigor, is besides the point. The point of economics as a discipline is to create a language and methodology for governing that hides political assumptions from the public. Truly successful economists, like Summers, spend their time winning bureaucratic turf wars and placing checks on elected officials.

Chameleons in Economics

Let’s start with a basic question. Is it the job of economists to understand the world accurately? The answer is far from clear. As finance professor Paul Pfleiderer notes, many economists use models that are chameleons, designed to launder political assumptions about the world through such aesthetics as “mathematical elegance, subtlety, [and] references to assumptions being “standard in the literature.”

More broadly, prominent leading economists just get things wrong, big things, with no impact on their standing in the profession. This indifference to empirical results is mirrored in the indifference offered by economists to the claims and arguments of non-economists outside the profession, whose views are simply relevant.

I’ll bring you through a few examples.

(1) In 2004, Ben Bernanke gave a speech called the Great Moderation, in which he lauded the placid prosperity economists had brought forth since the 1980s. “One of the most striking features of the economic landscape over the past twenty years or so,” he argued, “has been a substantial decline in macroeconomic volatility.” As Bernanke was speaking, the FBI was warning of an “epidemic” of mortgage fraud. Needless to say a few years later there was the most gruesome financial crisis in 80 years.

(2) In 2017, antitrust economist and Google consultant Carl Shapiro described his tenure as the head economist at the DOJ antitrust division, and explained why the division had brought no monopolization claims in the period he was there.

First, I can say from personal experience that when I was the chief economist at the DOJ during 2009-2011, the Antitrust Division was genuinely interested in developing meritorious Section 2 cases, and we were prepared to devote the resources necessary to investigate complaints and other leads, but we found precious few cases that warranted an enforcement action based on the facts and the case law.

Is that right, that there were literally no cases of monopolization in the American economy from 2009-2011? It’s hard to imagine so. And yet, this is Shapiro’s claim.

(3) In the middle of the 2000s, millions of Americans were complaining that they were losing their jobs, which were being offshored to China. Economists largely rejected these complaints. For instance, in 2004, Bush official and economist Greg Mankiw argued offshoring was largely a good thing and anyone who said otherwise was a quack. In asserting this he was simply reflecting the economic consensus. Ten years later, several economists pulled apart this consensus coining the term “China shock” in 2016. In other words, it took ten years for those within the discipline of economics to even be able to hear the views of millions of normal Americans being injured, and their views had to be laundered through other economists.

(4) Today, many Obama era antitrust officials are discussing the need for more assertive antitrust enforcement, arguing they were hamstrung by limited legal tools while in power. That is not what they said at the time (much as Larry Summers today argues for more spending but in office sought different policy choices). In 2016, the consensus of antitrust economists and lawyers – as illustrated by the American Bar Association Antitrust Transition Report – was that competition law was quite robust.

Antitrust figured prominently in the 2016 Election: for the first time in recent memory, both major parties prominently featured their respective viewpoints on competition and consumer protection policy. Campaign commentary included sharp criticism of an alleged absence of vigor and overall ineffectiveness in current patterns of antitrust enforcement, with comments calling for sharp, even radical reorientation of enforcement policy, especially in the review of proposed mergers and treatment of large industrial firms. As will be seen in this Report, the Section does not share these views about the current state of antitrust enforcement policy. To the contrary, … the Section’s view is that the Nation’s system of competition enforcement has been in good hands, [and] that an arc of continuous improvement and advancement can be discerned that stretches back over many years and multiple administrations.

So there we go. If the goal of economics were to ascertain truthful views about the world, if economics were as its proponents offer, a ‘science,’ then one would remark on the lack of self-policing within the profession. Of course, given that there is limited self-policing at best and the top practitioners in the field are routinely wrong about fundamental questions, we can conclude that uncovering truth may be an incidental outcome of the practice of economics, but it is certainly not the goal of the discipline.

Methodological Biases in Economics

There are three main problems with economics as a ‘science’ that can guide public policy choices. The first is  . . .

Continue reading. There’s more.

Later in the article:

In 1938, Franklin Delano Roosevelt warned Americans of rising forces abroad. “History proves that dictatorships do not grow out of strong and successful governments,” he said, “but out of weak and helpless governments.”

Written by LeisureGuy

11 January 2020 at 11:32 am

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