New Geography

Author: Matthew Stevenson

  • Memo To Obama: Banks Are Beautiful

    In his search for what Theodore Roosevelt called “a good, safe menace,” President Barack Obama has settled on the nation’s largest commercial banks, which as late as last year’s bailouts were still considered the best hope for economic salvation.

    At first Obama was content to rail about the filthy lucre of banker bonuses. Then he got the idea of maybe hitting the bonus babies with special taxes. But the reason that the Secretary of the Treasury is often the former chairman of Goldman Sachs is because the bank is one of the instruments that keeps the government afloat.

    Maybe President Obama didn’t get that memo, but he’s paying the banks’ bonuses, and they are paying his. The President needs the American banking system much in the way that the banking system needs the government as its biggest client.

    In his best imitation of William Jennings Bryant, who didn’t want the American experiment to be crucified on a “cross of gold,” the President has proposed a populist uprising against the bankers, not to mention a restoration of the Glass-Steagall Act and a tax on bank assets to recoup the taxpayer money lost in the crash.

    In attacking the money changers Obama would seem to be on safe ground. Who doesn’t despise an industry that got fat on mortgages and home equity, went bust, found redemption with easy government bailout money, and then celebrated by paying out bonuses from taxpayer contributions?

    It’s easy to imagine the President leading a Million Man March into the temples of Citibank or Bank of America to demand penance for the wages of so many sins. The Democrats may have gotten Massachusetts all wrong, but how can they not benefit from igniting a few bonfires against the vanities of Wall Street?

    The problem with a Banker Crusade is that once the ramparts are breached at castles like that of Goldman Sachs, what will become evident is that the entire American government can be understood as a failed S & L — those savings banks of shame that in the 1980s found their vaults filling up with suspect asset pools, if not whitewater.

    Like the government today, S & Ls lived beyond their means on other-people’s money, invested in bad assets, and resorted to phony accounting to cover up the losses… until the taxpayers were sent the bill for the overdrafts.

    The root cause of the S & L crisis in the 1980s was the decision of the Reagan administration to deregulate savings banks (they were no longer limited to plain vanilla mortgages), but still allow them to keep their federal insurance for deposits up to $100,000.

    Under this no-lose formula, banks could borrow nearly unlimited amounts of money in federally-insured deposits, and then lend out the funds to themselves, their cronies, or any get-rich-quick scheme that happened to send a prospectus to the bank’s board. S & Ls threw money at race horses, private planes, wine cellars, and even a few Senators, including John McCain.

    When the borrowers went broke and the banks failed, the government bailed out the depositors, and the grubstakers moved on down the trail. As Warren Buffett quipped, “In the 1980s, it was the bankers who were wearing the ski masks.”

    In the end, the government paid out something like $500 billion to cover the depositors with federal insurance.

    Fast forward to the U.S. government balance sheet in 2010, over which President Obama presides as the chief credit officer. As I read the annual report, the government is losing about $1.6 trillion a year, liabilities are $14 trillion and growing, and some of the nervous depositors are thinking of lining up at the front doors (or voting Republican).

    The deposits funding the American dream come from government bonds and securities, some of which have been sold to overseas investors. Of the $14 trillion in liabilities on the balance sheet, more than $3 trillion is held abroad, much of it in Asia and especially China.

    More troubling for the country’s Banker-in-Chief is that the government-as-bank — instead of lending its borrowed money against hard assets such as railroads, schools, wharves, hospitals — has put out the money to fund what the brochures might call Lifestyle Loans (“At American Security, you can live like there is no tomorrow”).

    At least 1980s S & Ls had a few houses and planes to repossess. All the U.S. government now shows in its loan bags is a trillion-dollar budget deficit, off balance sheet liabilities (another $1 trillion) to pay for the wars in Iraq and Afghanistan, multi-trillion dollar obligations to the depositors of Fannie Mae and Freddie Mac, and the coupons (with a present value of about $41 trillion) awarded to its citizens for Medicaid, Medicare, and Social Security redemptions.

    As a pyramid scheme, those numbers are hard to beat. The public debt is already equal to the gross domestic product, and government borrowings are projected by 2015 to rise to $20 trillion.

    Lost in the presidential outrage against the commercial lenders is one reason why so many of them are flush with money, even in bad times: banks, notably investment banks, earn huge spreads brokering debt for the American government.

    What put the government into the savings-bank business?

    After 2001, when the economy stalled, the strategy to keep the good times rolling was to encourage lower margin requirements for investment banks, home mortgages, and consumers, who were patriotically encouraged to spend the equity in their homes at places like Wal-Mart. (“When the going gets tough, the tough go shopping.”)

    To fund this asset bonanza (although it was based on dubious collateral), the government turned to the investment banks, which packaged, securitized, swapped, stripped, and laundered mortgage-backed securities until stock and real estate markets had doubled in value.

    The bubble burst not just because of rapacious bankers, but in part because the government’s voracious need for funding dried up liquidity for the leveraged banks. To be sure, the likes of Lehman and A.I.G. had bad loans galore, but the financial crisis is also about an electronic run at banks competing with the government to find funding.

    Ironically, banker greed pales in comparison to that of the U.S. Congress, which through the last decade pushed home ownership (thanks to the subprimers at Fannie and Freddie) as a way to spread the word of electoral happiness. Bad debtors got jumbo mortgages, and members of Congress got re-elected.

    In the current market, Obama manages a balance sheet that looks a lot like Citibank’s: it limps along, based on federal guarantees, and most of the collateral (consisting of subprime mortgages and used B-52 bombers) has little resale value on eBay.

    What bank would not want as its best customer a major industrial country that needs $14 trillion every year to balance its books?

    One percent of $14 trillion is $140 billion, a figure that roughly equates to the annual income of the banks that President Obama is now threatening to penalize. Would he prefer that they stop rolling over government debt?

    Listening to Obama rail against the banking fraternity, I can’t help but recall the high moral tone that starts the movie, Butch Cassidy and the Sundance Kid, which can be viewed as a cautionary tale on the moral hazards of (unauthorized) bank bonuses.

    In the opening scene, Butch is casing out a bank that he is thinking about robbing. The guard signals to him that it’s closing time. Before leaving, Butch asks, “What happened to the old bank? It was beautiful.”

    The guard answers: “People kept robbing it.”

    To which Butch responds: “Small price to pay for beauty.”

    In time, that may become the President’s reconsidered view of the banker bonuses.

    Matthew Stevenson is author of Remembering the Twentieth Century Limited and An April Across America.

  • Airline Security: The War on Service

    Who hasn’t daydreamed about taking revenge on an industry that has managed to parlay the horrors of modern air travel into a multi-billion dollar federal bailout? Although in most cases, I would guess, the fantasy involves the ticket agent’s undies, not our own, going up in smoke.

    As everyone knows, in response to the Northwest flameout, the Obama administration has adopted policies that are almost exactly the same as those of the Bush administration, turning the flying experience into a political advertisement for all the wonderful things that the president is doing to fight the war on terror.

    Karl Rove’s great contribution to the political landscape was to remind travelers, at every security checkpoint, that unknown aliens were threatening the American way of life, and that the only way to keep jihadists off the USS Dreamliner was to vote Republican.

    That re-election strategy clearly now appeals to the Obama administration, which decided, among other tactics, that an effective weapon in the war on terror is to keep Americans out of mile-high toilets in the last hour of flights.

    The general assumption about the Northwest Airlines Underwear Bomber is that he sought to bring down the airliner in the name of Allah, those seventy-two virgins, and Osama bin Laden.

    But is it possible that he was just another over-wrought airline passenger who has had it with strip searches by airport security agents, surcharges to take a bag on a trip, meal service that consists of peanuts and instant coffee, seats that feel like electric chairs, and those walks through arrival halls that feel like Mao’s Long March?

    Wait until bin Laden hears that we’re coming at him with bladder-busting planes. That measure ought to turn the tide, since clearly banning economy-sized toothpaste tubes from the skies didn’t do the trick.

    While the government uses the flying experience to broadcast political messages, the airlines see the war on terror as a chance to re-price a product that has consistently gone bankrupt, often thanks to corporate mismanagement.

    Most businesses start from the assumption that it is a good idea to try to attract customers with good service and quality products. That is the logic behind the business strategy of a department store or a restaurant.

    The airline business model, however, is based solely on being able to advertise low fares. Once the promotions are in place, the airlines take to the skies with cramped seats, mysterious food, nickel-and-dime charges, surly staff, un-hedged oil contracts, and furious customers, with the hope that the government, if need be, will bail out the industry in the name of national security.

    As the government turns airports into prison lockdowns, the airlines’ response has been to convert their pricing policies into a shell game of bait-and-switch, insuring that travelers get it coming and going.

    Airlines and governments alike conspire to use air tickets to bury all sorts of taxes, oil surcharges, fees, levies, new airport subsidies, and old-fashioned handouts under the banner of “passenger safety,” which has become a variation on a protection racket. Station a few x-ray machines in the nation’s airports, and then charge and tax anything you like for a “war on terror;” by my estimates, it’s a “war” that has taken, on average since 2001, less than 1500 American lives annually, and has cost approximately $500 billion a year in new federal agencies, programs, weapons, and appropriations.

    Am I too cynical? Isn’t the goal safety for the traveling public? In the president’s primetime proclamations, that might seem to be the case, but then what explains the national indifference to the some 40,000 annual deaths, and millions of injuries, on the nation’s highways? Where is the war on automobilism? If the goal is to save American lives, Interstate 80 strikes me as a more accessible target than Yemen.

    The problem with highway safety, as opposed to homeland security, is that it’s a financial and, more important, a political loser. Making car passengers wear crash helmets or body armor, logical as it would appear from the risks of the road, does not lead to as many rewards from the electorate as the specter of al Qaeda crouched in an Afghan cave. And which political party wants to run for re-election on the slogan: “Your Taurus: More Dangerous Than The Taliban.”

    Left to their own devices and customer service, and without government handouts, most large airlines would go out of business. Take the decision on the part of most airlines (Southwest excepted, and bravo to them) to charge passengers for having the audacity to take luggage on a trip.

    Airline bag policies tend to be more complicated than the Da Vinci code, and involve arcane formulas about weight, size, and contents that few travelers can understand. The goal is to lure passengers to an airport, read them obscure airline policies, and demand extortionate payments (“If you wanna see your bags again…”).

    My own bag horror story began when, for an internship in Dubai, my daughter booked onto British Airways, which allows one bag on international flights and charges $50 for a second, which she had.

    Her BA flight was cancelled due to snow in London, and the airline rerouted her on Air France, after an assurance that she could travel to Dubai with two bags. Instead, when she checked in with Air France, that airline demanded $320 to take her second bag (normal size and weight) to Dubai.

    After Air France finished treating her like a shoe bomber, it took an hour for their staff and that of British Airways to arbitrate the second-bag crisis, while my daughter, having been subject to a twelve-hour delay, stood by in tears. I imagine that such unhappy scenes play out thousands of times every day in airports around the world. What other business alienates its customer base for $50?

    Beyond bag hustles, what keeps many airlines in business today is that they have become accomplices in the National Security State, part of a daily pantomime to terrify the traveling public into subsidizing all sorts of undeclared wars, drone missile appropriations, and endless sweetheart contracts to the likes of Blackwater.

    Under this Faustian bargain, the airlines get to charge $50 (if not $320) for extra bags, or $200 to change a reservation, and the government gets to charge $500 billion for homeland security.

    Having tried and failed with Big Brother airlines and airports, why don’t we give the market a chance to sort out the security problem? How much worse could it be?

    Leave it to each private company to decide whether they want to frisk their passengers or not (“Fly Freedom Airways, and Leave the Cavity Searches to Us!”), or charge for luggage, drinks, peanuts, or meals.

    Let each airline decide if they want to take off with armed guards or not. Maybe one of the airlines could dress up its pilots to look like the Lone Ranger and Tonto.

    Finally, let the passengers handle in-flight security. After all, they put out the fires of the Underwear Bomber.

    Matthew Stevenson is author of Remembering the Twentieth Century Limited and An April Across America.

  • The Football Franchise Hustle: Financing the NFL

    The economics of professional football bring more than a few words to mind: scam, hoax, boondoggle, rip-off, racket, con, scheme, fix, subsidy, loophole, ruse, handout, set up, monopoly, and — well, why not — Jimmy Hoffa who, according to urban legend, was interred in the end zone in Giants Stadium.

    An insider trading scheme dressed up as a professional sport, pro football finance incorporates everything fishy in the worlds of municipal finance, urban planning, government subsidies, cable television, and, even sometimes, sports.

    Let’s move past the idea that professional football is a game played between rival clubs, to test which team is the best over the course of a season. Football may have been that in the 1930s when the Decatur Staleys (later known as the Chicago Bears) were playing the Dayton Triangles. But more recently it has become a hostage to the fortunes of the advertising and investment banking industries, a spectacle put together to sell beer on television or to justify bogus adventures in the bond business.

    The evolution from sandlot sport to price-rigged contracts began roughly when its team owners figured out that they all had shares in what Theodore Roosevelt would have called “the football trust.”

    Under this cozy arrangement, and with a 1960s anti-trust exemption from the Congress (as if football were as vital to the national interest as bomber production), football owners have parlayed collective television contracts into billions. The next goal was to dress up their new stadiums, largely paid for with public money, as civic virtues.

    For a league that prides itself on competition, there is little rivalry tolerated when it comes passing around the money, which amounts to about $8 billion in annual sales. About seventy percent of the television revenue, which amounts to about $4 billion annually, is doled out equally among the thirty-two professional teams, which are best understood as a medieval guild.

    In theory, revenue sharing allows the NFL to maintain its competitive balance, so that “on any given Sunday,” one team is capable of beating any other.

    Yes, occasionally the Raiders beat the Patriots, but the real advantage of revenue sharing is that it funds an oligopoly of like-minded and greedy owners, who would become small-time operators “on any given Sunday,” were there free enterprise.

    If football games were really a sport, and thus closer to a news event, any network with a camera would be allowed to cover any game. The government would be out of the business of regulating sports broadcasts, where permission to broadcast has become simply one more license to be auctioned to congressional and state legislature cronies.

    Television revenue also allows team owners to borrow money to build Nuremberg-like stadiums, which can now be seen looming over the warehouse districts in many cities, gothic reminders that team owners are not like you and me.

    The boondoggle begins when the franchise owner, protected by his anti-trust herald, says to the city where the team plays that unless he gets a new stadium, the franchise will move elsewhere. Terrified about losing a team more popular than any mayor or council member, the city then condemns prime land for the new construction and authorizes the team’s owner to issue municipal bonds to pay for the new arena.

    Many new stadiums, like the retractable-roof mausoleum built near Dallas, cost more than $1 billion, figures that equate professional football economics to the oil depletion allowance, if not the Texas Railroad Commission. On average, taxpayers fund 60 percent of new stadium costs. In the last twenty years, the NFL’s take of taxpayer subsidies has amounted to $17 billion.

    Bonds for new stadiums are given tax-exempt status, a folly based on the false premise that these new ballparks are “good for local business.” In truth, they bring in little more than sweetheart construction contracts and the revenue from nearby parking lots. Have a look at what Detroit got for the Silverdome. Hint: it was sold at auction for $583,000, after Detroit dropped in about $200 million in present-value dollars.) The real money goes to the team owner, that beacon of urban renewal.

    In some cases, local sales taxes are increased so that stadiums can be financed. But that doesn’t mean consumers get to share in skybox revenues, which the owner keeps for himself and his uptown pals.

    Skyboxes, which can cost up to $500,000 per season, are rented to corporations, who use them for tax-deductible wining and dining. “Lucky” fans get to subscribe to “personal seat licenses,” which cost anywhere from $4,000 to $30,000 per seat so that fans then have the “right” to buy season tickets, which might cost another $500 a game.

    Given all the money washing around the closed-shop of the NFL, it is little wonder that the value of most franchises is approaching $1 billion, even for hopeless teams like the Tampa Bay Buccaneers. Forbes estimates their worth at $1.1 billion, about four times their revenue, and a nearly infinite multiple of their recent wins.

    What do the players get from these financial bubbles? To be sure, some of the stars get millions in guaranteed money on multi-year contracts. The rest can be cut at the whim of the owners (“to clear cap space”), with little to show for their prime-time performances except crippling injuries, addiction to pain killers, and very possibly early dementia.

    Thanks to a $127 million salary cap (dressed up to trumpet “fair competition”), player salaries will never be more than shared TV revenues. This arrangement makes the league immune from team failures and gives teams like the Buffalo Bills an incentive to lose gracefully and cheaply.

    In 2008, Buffalo earned $40 million, while the Dallas Cowboys reported only $9 million. Average team revenue in the league was $237 million, and average net profit was $32 million per team.

    Will professional football’s wheel of fortune spin forever? Will someday soon every team have a billion dollar stadium, upholstered skyboxes, fat television revenue sharing, tax-exempt debt, and fixed costs for its players, who stay on the job for less time than migrant workers?

    Maybe, but here’s how I think the free market will take “the football trust” to the house, if not the cleaners.

    One of these days television revenue will decline, when networks can no longer afford the billion dollar contracts; their advertisers will have departed to other fields of plenty. Would you want CBS and NBC as your biggest source of revenue? At the same time, voters will wake up to find that their municipalities have gone broke and that much local interest is due on behalf of behemoth stadiums — often named after get-out-of-town-quick companies, like Enron — that most voters cannot afford to visit.

    Like a number of monopolies, the NFL might find itself under pressure in the courts, and the league could lose some of the pricing power that comes from the protectionism that is courtesy of the cable owners, the municipal bond fixers, and the Congress.

    If any city in the country could field a professional team, and if any broadcaster was free to show the games, would cities be building new stadiums that cost $1 billion and would the woeful Washington Redskins be worth $1.5 billion? I don’t think so. But right now the NFL is the only game in town.

    Matthew Stevenson is author of An April Across America and the soon to be published Remembering the Twentieth Century Limited.

  • NFL Rules: Game Plan for America?

    In 1905, after he had taken on the trusts, President Theodore Roosevelt turned his attention to more serious matters and convened a White House summit on the vital of issue of…well yes…um…football.

    That season had seen the death of eighteen players, and Teddy knew that it was time to act decisively.

    He and his peace council, which included a number of college presidents, decided that America could not face the political future unless a first down was ten, not five yards and the forward pass was given a presidential blessing. Until that time, most of the game was on the ground.

    In the years after the football summit, women were given the vote, prosperity reigned for much of the century, and neither fascists, communists, nor even radical Muslims have ever challenged the inalienable American right to the forward pass.

    In trade terms, this is known as a competitive advantage, one of the few we have over the Chinese, so now might be the time to take another look at the winter game. (Hey, Hu Jintao, you want the NFL? Go to the NFL.)

    In the wake of renewed violence in Iraq, escalation in Afghanistan, potential failure in Copenhagen, and the costs of health care reform, I did what I always do in moments of national crisis, and watched another football game, although to be clear it was with the idea that with a few Rooseveltian rule changes America might yet move up in world standings.

    I probably spend a little more time than I should thinking about and watching professional football, but it’s only because my devotion to the New York Jets is in the national interest. (What’s your excuse on Sunday afternoons?)

    Leaving aside that the Jets are in the fortieth year of their rebuilding program, I can’t escape the feeling that making professional football more freewheeling would make America a little more confident and spontaneous.

    Take the decision on Afghanistan. If the Afghan policy had been made by Marshall, Randy, Brent, Coach Cowher, Deion, John, Steve, Dan, Shannon, Herm, Phil, or Jaws, at least we would have some good diagrams, lots of reruns, and maybe even a booth review. Instead we ended up with a game plan that feels like a Hail Mary dreamed up by the offensive coordinator of the Detroit Lions.

    As an adjunct to the advertising industry, professional football is a wonderful product. It can build excitement for just about any game. (“Stay tuned. Can Kansas City turn its season around with a win in Tampa Bay?”) It has figured out how to stretch the last two minutes of each half into a long weekend, and it has elevated instant replay to an instrument worthy of the Supreme Court.

    But as a sport, let’s face it, and as much as I love it, football is more and more coming to resemble professional wrestling. The sack dance after a simple tackle? Those burlesque 400-pounders taking it to the house? The obsession with brooding dandies like T.O and Ochocinco? Is it any wonder that the Muslim world talks a lot of trash?

    Are politics much better? We have trillion dollar deficits, undeclared wars, a Congress that more and more resembles the Raider Nation, and no proof that our children is learning. (And don’t get me started on why the Jets drafted Vernon Gholston.)

    Much as I am willing to cede national affairs to the National Football League, I still think that the sport needs a few presidential reforms. As my friend Charles Harris likes to say, there are too many “dead spots” in the average football game, which is played in fits and starts between the Viagra ads and the trailers for yet another prime time autopsy.

    To save football, if not America, from turning into a televised side show, here are a few modest proposals, suitable for the next White House beer summit:

    • Get rid of the fair catch on punts and, as in Canada, mandate a safe zone around the return man, who is otherwise obligated to make a run for it;
    • Reward kicking teams by getting rid of the touchback and require that all kicks (except those that roll out of the end zone) be returned;
    • Think about weight limits for players (who now look like animated cattle) to restore to the game its fast pace and the improvisation of scat backs. Why should size largely determine who can play the game?
    • Reform the extra point, one of the deadest moments in any game. It’s just there to stop the clock for more ads. Bring back the drop kick, spot the ball on the 30 yard line, or make teams line it up where they crossed the end zone, as is the case with rugby. But try anything to give the moment the excitement of a soccer penalty kick;
    • Eliminate the need for six down offensive linemen (a bad Roosevelt reform), and let teams spread the field with offensive players, as happens now in some college programs. Who would not love seeing eight men out for a pass?
    • Award four points for a field goal over fifty yards. My friend Charles thinks this is a stunt, like basketball’s three-point play, but I am for anything that allows a losing team to make the game close in the fourth quarter;
    • End the artificial distinction by which running backs just have to “cross the plane” of the end zone, but then in order to score receivers have to have “two feet in bounds.” In the interest of higher scoring games, let any touch of the end zone, by a receiver or ball carrier, count for a touchdown.
    • Don’t stop the clock when the ball is carried out of bounds, except in the last two minutes of each half. European soccer doesn’t ever stop its clock, and that game has a delightful flow. It’s one thing America can safely import from Europe.

    Will it take a constitutional convention to get my ideas approved? It might, given that most Americans would rather change the Constitution than mess with the rules of football. But returning speed and spontaneity to the game might also have the same effect on the country’s politics, which in the age of Roosevelt were not subject to “further review” or endless “challenges.” And it was an era of sustained peace.

    Consider this: When Roosevelt was president, more Americans died on the gridiron than fell on foreign fields. And he found even those deaths unacceptable. When Teddy went to West Point, it was to strut around in a raccoon coat, not to send college seniors into dubious battle.

    Matthew Stevenson is author of An April Across America and the soon to be published Remembering the Twentieth Century Limited. In a subsequent article he will write about how the game of professional football became hostage to monopoly money.

  • Bangor or Bust: Navigating To Thanksgiving At Grandma’s

    Everything that is the matter with America’s transportation and energy policies can be understood by attempting to travel with a family from New York City to Bangor, Maine.

    I use Bangor for my example — although places like Louisville, Columbus, Lynchburg, and Wheeling would work just as well because — for better and for worse — I, (a New Yorker) married into a Maine family in the early 1980s. For the last twenty-five years I have devoted countless waking hours to plotting connections to family reunions, as I have once again done for this Thanksgiving.

    For a brief period in the 1980s, People Express flew from Newark to Portland, and for less than $50 my wife and I could fly there in an hour, and then cajole a relative to drive us the rest of the way. You paid for the ticket on board by handing the stewardess a wad of small bills.

    Since that happy interlude, Bangor has remained as inaccessible as parts of Albania, a place of stark beauty, served only by the automobile, a few buses, and expensive planes. From New York, the journey involves a nine-hour drive (without stops), a bus odyssey, or a bank-busting flight. With children in tow (and we have four), Bangor is best understood as a luxury destination, at least as far as the cost of admission is concerned.

    Herewith are the unhappy options to take a family of six from New York City to Bangor for five days during the Thanksgiving holiday:

    It’s Better On The Train (sort of): Not since Amtrak was conjured from bankrupt railways in 1971 has there been direct rail service from New York to Maine, a popular tourist destination. (It still has that super-sized statue of Paul Bunyon holding a huge axe, even though Bunyon was from Bear Lake, Michigan. I guess he couldn’t get home.)

    For most of Amtrak’s history, there were no trains at all in Maine. In 2001, thanks to state subsidies in Massachusetts and Maine, service was started between Boston’s North Station and what is called the Portland Transportation Center (read: “huge parking lot that is a long way from downtown”).

    To get from New York to Portland, however, means first a train to South Station in Boston, and then a cross-town taxi to North Station for the connection to Portland, which is, alas, 166 miles from Bangor. The one-way fare on the Wednesday before Thanksgiving, for a family of six, is $775. The trip starts at 8:30 AM and ends in Portland at 4:10 PM.

    The fare is the same for the return journey on the Sunday after Thanksgiving, and then the cost of renting a car, for five days in Maine, is about $80 a day. But here’s another catch: There are no car rental companies that I can find that have locations at the Transportation Center. So throw in a cab ride to Portland’s Jetport, add about an hour to the trip, and figure you will get to Bangor at 7:30 PM in time to miss dinner (which in Maine is earlier than in New York City).

    Total cost of the journey, without the tolls: $1,940. One reason Amtrak’s fares are so high is that the company fears being swamped with travelers if it encourages rail travel with family-friendly pricing. Its expensive fares are actually calculated to discourage travelers, as many routes lack sufficient rolling stock for more passengers.

    Go Greyhound, Or At Least Try To Take A Bus: For reasons my father attributes to the failure of Trailways some years ago and monopolistic bus practices (at 90 he worries about these things), there is no direct bus service between New York City and the state of Maine. All the bus trips involve a change at South Station in Boston.

    To get to Maine for Thanksgiving, it would be possible to load the family onto a Bolt Bus, the new low-cost carrier (owned by Greyhound) that connects West 34th Street in New York with Boston. The one-way fare is $22 per person or $132 for all, and Bolt has wifi. It’s a real bus and not the spiritual heir of the Gray Rabbit.

    From Boston, we would switch to Concord Coach Lines (one-way fare for six, $246) and take a 2:15 PM bus that gets to Bangor at 6:30 PM. Total bus fare for the round-trip adventure is $756, and each trip (safe, dependable, reliable, and very cramped) can be done in about ten hours.

    I am not even sure Clark Griswald would take his family to Maine on the bus, although I have done it many times, at least from Boston. Advantages? Concord has movies. Disadvantages? Most star Adam Sandler.

    Fly Me (remember the ad campaign of the racy Braniff Airlines?): There is direct air service from New York City to Bangor on U.S. Airways (well, okay, a turboprop operated by Piedmont Airlines), and it lumbers up the coast in two hours. But for a family of six, the roundtrip airfare is $1,998, although I am sure with advance booking, and changes in Cincinnati, that amount could be shaved to $1,700. Jet Blue ($1,488) does go to Portland, but then you need a $500 car. In winter months, if changing planes in Boston (to save money), expect delays and cancellations, and think about traveling with a sleeping bag.

    Try Less Hard And Rent A Car: Here we get to the essence of America’s mass transportation failures. By far the cheapest way to take a family from New York to Maine is to rent a car. Listings at Enterprise and Budget start around $270 a week for a full-size car. To be sure, there is insurance, those hidden travel taxes, tolls, and gas, so figure the cost of driving to Maine at about $500. Mapquest estimates the journey at 7 hours 33 minutes, as it never gets stuck on Interstate 495 going around Boston or stops at Denny’s.

    So the car is faster, door-to-door, than the train, the bus, and probably a plane (when airport strip searches are factored into the pleasures of traveling). But not calculated into the drive is the odd war in the Middle East, melting ice caps, road accidents, and the effects of listening to AM radio. And who wants to spend two Thanksgiving days “merging left” to “avoid congestion ahead?”

    How Do I Want To Get To Maine? In my mind, the journey should take place on a State of Maine Express (fine, call it the Paul Bunyon), which would miss Boston and track northeast through Hartford, Worcester, Portland, Brunswick, and get to Bangor in about six hours. (Average speed of 72 m.p.h.)

    For the trip, I would reserve, at a reasonable price, places in the restaurant observation car, and we would read and drink good coffee before sitting down for lunch. We would also talk, look out the window, play cards, and dally on our computers.

    Ideally the train would leave Grand Central at 9:40 AM, serve lunch after Worcester (where the fresh fish would be taken on board), and arrive in Bangor at 3:40 PM. Alternatively, we would watch a Broadway show, and then board a sleeper train that would leave Penn Station at 11:30 PM and arrive after the crew had served waffles, eggs, bacon, and coffee for breakfast.

    A Romantic Daydream? Perhaps, at least given America’s atrocious record with mass transportation in the last fifty years. It has killed off most passenger trains, subsidized air travel and then made it miserable, forced travelers into cars for all sorts of journeys, strip-mauled the suburbs, destroyed city neighborhoods with interstate highways, and even eviscerated bus service to many smaller towns. Other than that, it’s the greatest system in the world.

    But here is a list of countries where the journey that I am proposing — to a smaller regional city in an elegant dining car — would not be more complicated than buying tickets down at the station: England, France, Switzerland, Romania, Spain, China, Russia, Germany, Czech Republic, Italy, Hungary, Scotland, and Malaysia. Is not the United States at least as enlightened or wealthy as some of these nations? I know about these possibilities because in recent years I have taken excellent trains — and have eaten well en route — in each and every one of these countries.

    This does not mean that I only agree with Paul Theroux, author of The Great Railway Bazaar, who wrote that “it is better to go first class than to arrive.” But why have a public transportation system that costs a fortune…and goes nowhere?

    Matthew Stevenson was born in New York, but has lived in Switzerland since 1991. He is the author of, among other books, Letters of Transit: Essays on Travel, History, Politics, and Family Life Abroad. His most recent book is An April Across America. In addition to their availability on Amazon, they can be ordered at Odysseus Books, or located toll-free at 1-800-345-6665. He may be contacted at matthewstevenson@sunrise.ch

  • Obama in China: Walking the Great Mall

    Ever since Richard Nixon visited China in winter 1972—an event timed to play into that year’s presidential elections—American presidents have made the pilgrimage to the modern version of the Forbidden City.

    Landing in Shanghai on Sunday evening, President Obama has two days of meetings with the Chinese leadership, not to mention a town hall event with Chinese students (as if they were eligible to vote in a New Hampshire primary).

    As a stage-set for photo opportunities, China is hard to beat. American presidents can walk the Great Wall, toast a nation in the Great Hall of the People, tower over diminutive Chinese leaders dressed in gray Mao suits, and make sweeping statements about new world orders.

    For their part, the Chinese leadership loves nothing more than the chance to block traffic around Tiananmen Square, call out the drill corps, shoot off some fireworks, and release photographs of summit meetings, which then become the fodder of endless Sinologist conferences to try to figure out who has power in China and who is in line for a little “self-criticism.”

    When President Nixon went to China, his only political goal—other than to show up—was to reach agreement on a joint communiqué that was drafted to avoid all the contentious issues of U.S.-Chinese relations, such as the war in Vietnam or U.S. support for Taiwan.

    While aides haggled over the text of the equivocatory statement, Nixon and his National Security Advisor, Henry Kissinger, met with Mao, whose health was failing and who had to be propped up in a chair, as if part of a Disney World – Epcot diorama on the Long March.

    For reasons of domestic political consumption, Nixon and Kissinger needed Mao as much as he needed them to help fend off Russian threats along the Amur River and to nudge China into a broader world.

    They left the meeting and China gushing about how Mao had political magnetism, a great sense of humor, and the vision of a wise emperor, although he probably said little more than one of his gift pandas.

    That Mao’s Cultural Revolution had killed millions mattered little more than the American wars in Korea and Vietnam or that Nixon himself had devoted his political career to China’s political isolation.

    All that mattered was that the world would get the impression of Sino-American harmony—whatever the underlying reality—and that tea-like ceremony is how every subsequent summit meeting has been choreographed.

    For a while, after the Nixon visit, American presidents thought it was good politics to preface a China visit with strong words of U.S. support for Taiwan, which has always played well as a plucky anti-communist billboard.

    Even as the presidential administrations of Ford, Carter, Reagan, Bush, Clinton, and Bush II were turning toward the economic riches of the East, and Taiwan was relegated to a diplomatic sideshow, the warm-up footage to any Chinese summit had to include a few profiles of Chiang Kai-shek or Free Tibet as popular icons of freedom.

    After the 1989 massacres at Tiananmen Square, no American president could get close to Chinese airspace without finger waggling China for its abysmal record on human rights.

    So as not to be seen kissing the rings of communist autocrats, the American president would “bring up” the name of an imprisoned dissident, just so that it was clear that the United States did not place Wal-Mart’s inventory ahead of personal freedoms. Only later in the trips did anyone take out an order form.

    The problem for President Obama on this trip to China is that he arrives with the aura of someone late on his VISA card payments but still talking up his next trillion-dollar vacation.

    In this analogy, China’s leadership is best understood as a bunch of repo men nervous about the penalty interest, although, to be fair, in the last ten years, the economic miracles of both the United States and China have been founded on illusions.

    China accumulated its huge foreign trade surpluses based on an artificially low currency and the sweatshop wages paid to its workers. By contrast, the United States has thrived on debt funded from its reserve currency, and the cheap goods its can buy from overseas.

    In the middle of both pyramid schemes is the U.S. financial services industry that rolls over America’s $12 trillion debt, a large chunk of which is due to the Chinese and other Asian depositors.

    On most geopolitical issues, the United States and China have little in common. China props up the Stalinist regime of North Korea, abuses the human rights of its citizens, fires up a coal plant every month, buys spheres of influence in all sorts of rogue states like Iran and the D.R. Congo, and refuses to co-operate in international currency reforms.

    In turn, China has little time for American running-dog policies in Afghanistan and India, feels Taiwan is an internal matter, remains terrified of a re-armed Japan, and is fearful that its U.S. dollar-denominated financial assets are wasting away in Margaritaville.

    These differences of opinion ought to necessitate substantive diplomatic exchanges. In a positive sense, American consumers have fueled much of China’s economic growth and political confidence, and Chinese production can be an engine of increasing affluence in the developing world, interests that both countries should share.

    Instead, empty symbolism will likely reign for the remainder of President Obama’s package tour. Like President Nixon, he’ll leave behind an optimistic-sounding protocol (on global warming, nuclear disarmament, and the wealth of nations) and come home with swell pictures of the Great Wall.

    Someday the lack of a serious dialogue between the United States and China might be the subject of a show trial (in either country). After all, the question of “Who lost China?” has been a specter of American foreign policy since 1949. And even in the booming free-market China that Obama will no doubt admire, no one wants to be known as a “capitalist-roader.”

    Matthew Stevenson was born in New York, but has lived in Switzerland since 1991. He is the author of, among other books, Letters of Transit: Essays on Travel, History, Politics, and Family Life Abroad. His most recent book is An April Across America. In addition to their availability on Amazon, they can be ordered at Odysseus Books, or located toll-free at 1-800-345-6665. He may be contacted at matthewstevenson@sunrise.ch.

  • Executive Bonuses: The Junta In The Boardroom

    Public companies and their management boards are run with all the democratic coziness of banana republics. The object of the junta is to transfer the wealth of the shareholders into the bonuses and stock options of the management. As they used to say in China, “business is better than working.”

    Amidst the outcry over excessive executive pay, it is worth noting that, in the caudillo management culture of many public corporations, there is nothing more annoying than a shareholder with an interest in the company that he or she partly owns. The most dreaded corporate day of the year is that of the annual meeting, when outside consultants are hired to screen bothersome questions and choreograph the happy gathering.

    During the meeting itself the greatest scorn is reserved for nosy shareholder questions about executive compensation and board composition, neither of which is deemed to be in the sphere of shareholder influence.

    The annual meeting ends with the appointment of outside auditors, a few planted questions, and — for those meetings held at some remote subsidiary, to keep activist shareholders from showing up — a trip to a regional airport.

    Archaic company by-laws explain why it will be nearly impossible for various regulators to cap the amounts that companies pay to executives. In short, the shareholders work for the managers, not the other way around. (If Goldman Sachs has so much extra cash, why don’t they raise the dividend?)

    Start with board composition, which is usually the domain of one executive: the chairman and chief executive officer. In a functioning system of corporate governance, the jobs would be separate. Chief executives would not also be assigned the job of monitoring their own performance, which is now the case in most public U.S. companies. Good European companies have a supervisory board, which oversees the performance and pay of the senior management.

    In the U.S., not only do foxes run the chicken coops, they get to eat most of the eggs and then write off the meals on their expense accounts.

    Most chairmen/CEOs stack their board and compensation committees with party-line stalwarts, who vote in favor of excessive pay packages in the hope that the recipient or one of his friends will not forget the favor. To break such a back-scratching system should be relatively easy, especially in companies regulated by the Securities and Exchange Commission. Simply mandate that management cannot sit on its own board of directors.

    Cumulative voting or proportional representation of the shareholders is another way to start breaking the management oligopoly of board composition. Board seats could also be allocated to representatives of retired personnel (who built the company) and those who now work in the company.

    Another way to limit excessive pay packages is to impose a binding ratio that caps executive pay based on the compensation of the company’s lowest paid workers. At the moment, CEOs in big public companies have packages that pay them more than a thousand times that of their employees’ lowest wages.

    J.P. Morgan thought the boss should only be paid twenty times the salary of the average company employee. Such an idea might not cap fat cat bonuses, but it would certainly improve the minimum wage.

    How then to claw back executive pay when the big bosses bet the ranch on something like sub-prime mortgages and lose?

    For starters, boards independent of management self-interest will be less forgiving when executives ruin a company or even turn in mediocre results. That so few banking executives were fired after the Great Collapse of 2008 is testament to the lack of shareholder representation on most boards of directors. Who fires the CEO when he reports to himself?

    Next, mandate that incentive compensation like stock options only be paid into segregated retirement accounts, which ought to align performance with long-term success.

    In financial services, the reward for failure should be just that: failure. In the recent crisis, deposed chairmen and chief executives were marched into the sunset with multi-million dollar severance packages. Remember the $64 million sayonara given to Citigroup’s Charles Prince, about the time the company’s shares lost $275 billion in market capitalization?

    A side affect of the government bailouts was to comfort bad managers. But while these corporate executives were pinning medals on their own chests (very much in the tradition of Latin strongmen), the reason given for the sweetheart loans, especially to banks, was to protect depositors. Under this variation of mutual assured destruction, financial institutions with a large depositor base can never be put to the wall, which gives them an effective government guarantee.

    To replace this kind of dependence on bankers who can gamble with deposits without consequences, there needs to be a mechanism that will protect depositors while allowing the larger financial companies to fail.

    For example, depositors could be given the option of buying deposit insurance — privately funded insurance, unlike that offered by the Federal Deposit Insurance Corporation — much in the way that air travelers buy accident insurance. That the FDIC caps out at $100,000 is neither here nor there. Under this scheme, insurance would be available for all amounts, large and small. It would be paid for in the market, not given as a government gift.

    When customers deposited money somewhere, they would decide if they wanted to insure the deposit or not. Those that wanted coverage would pay for it. Those that wanted to reply on their bank’s full faith and credit would leave their money uninsured and hope they have not found the next Lehman Brothers.

    Publishing rates on deposit insurance, much like posted interest rates, would be yet another indicator of a company’s financial health, much like the credit default swaps that are traded in institutional markets.

    The goal is to alert customers to good banks and bad ones, and to make clear that the bad ones will be allowed to fail, which is nature’s way of telling executives that they are overpaid.

    My last modest proposal is to encourage reconstituted boards of directors to auction off the positions of senior management.

    At the moment, managers justify their self-worth with a lot of encomiums about how big salaries and bonuses are necessary to insure that “we get the best people.”

    From what I can see, all that the big salaries insure is that companies keep a lot of mediocre executives, many of whom, judging by recent performance, then spend their time buying wine and sprucing up their vacation homes. Remember what was said, in Henry Ehrlich’s book of business quotations, about the compensation policies of Harold Geneen at ITT: “He’s got them by their limousines.”

    Under my revised system, top executives would be required to show the board that they have, in writing, a comparable offer from a competing firm (baseball works like this). As well, under the auction system, boards could entertain bids by senior executives to fulfill the roles of senior management.

    Clearly, chief executives have a good time in their corporate jets and swank hotel suites, which might lower what other senior managers would need every month to handle the top jobs.

    My guess is that a number of competent executives could be found willing to do the jobs of Fortune 500 CEOs, and for a lot less than what the current occupants charge the companies for their services (the average is over $10 million). Something tells me that Citigroup could have found a CEO for less than the $38 million that it paid to Vikram Pandit in 2008. Maybe it should have looked on eBay?

    Matthew Stevenson was born in New York, but has lived in Switzerland since 1991. He is the author of, among other books, Letters of Transit: Essays on Travel, History, Politics, and Family Life Abroad. His most recent book is An April Across America. In addition to their availability on Amazon, they can be ordered at Odysseus Books, or located toll-free at 1-800-345-6665. He may be contacted at matthewstevenson@sunrise.ch.

  • Central Banking: Feds Rule The Game

    In mid-September President Barack Obama mounted Theodore Roosevelt’s bully pulpit and railed against market greed to an audience of corporate tycoons. The objects of his derision included, and were limited to, bankers, financiers, and speculators in the ‘private’ financial community. Notably absent from the enemy bankers list were quasi-government banking corporations and America’s central bankers.

    Needless to say, the Wall Streeters convened in New York’s Federal Hall sat on their hands, perhaps wondering what had happened to the options that they underwrote for the Obama presidency when they passed around his campaign contribution hat to chip in $700 million.

    To hear President Obama’s version of recent financial history — echoed both by demonstrators and summiteers at Pittsburgh’s G20 jamboree — rapacious speculators and freebooters hijacked otherwise innocent American investors, stuffed their portfolios with inflated or worthless mortgage-backed securities, paid themselves huge bonuses for the effort, and then left the mess to be cleaned up, to use a George Bushism, by “the good folks in Washington.”

    The September New York meeting should have made for a compelling prime-time encounter session: Progressive president takes on the robber barons. After all, voters are leery of health care reform partly because they feel that, despite good intentions, their government has already bet the ranch by bailing out the banks.

    Such are the mixed metaphors of the Obama presidency that there is a constituency that cannot tell if he is a creeping socialist (too many public options) or a Wall Street front man (making the world safe for Goldman Sachs). Nor is there much consensus around the proposals to cap the bonuses of corporate hierarchs, even those who bled their companies dry.

    Certainly it seems odd that, after a global collapse of so many markets, President Obama cannot ignite a bonfire of the vanities at the head of Wall Street. After the recent speech, the corporate Medicis dismissed the need for comprehensive financial regulations and justified their bonuses much the way Babe Ruth once explained why he was paid more than the President (“Well, I had a better year”).

    The reason the U.S. administration does not get more traction with the panegyric of financial outrage is that many Americans now see little difference between the speculators on Wall Street and those running the government in Washington.

    After all, the biggest bets on sub-prime were made at two quasi-government corporations, Fannie Mae and Freddie Mac, and many of the bailed-out corporations earn their daily bread floating and trading U.S. government securities. In that sense, Wall Street treats President Obama as a cranky client, someone who often complains about the fees and commissions, but who has few alternatives to discount his paper.

    Teddy Roosevelt was able to take on corporate interests because, during the early 20th century, the U.S. government wasn’t in the banking businesses. President Andrew Jackson had driven a stake through the heart of the Second Bank of the United States, and throughout the 19th century the economy was in private, non-governmental hands.

    That private oligopoly was broken with the Federal Reserve Act of 1913, which put the U.S. government in the money game of issuing and regulating the currency.

    After 1913, it wasn’t just railroad speculators like Daniel Drew who could water the stock. The regional branches of the Federal Reserve System were also in the business of manipulating prices and values in the American economy. But that does not mean that the regulators always got it right.

    One way to read the history of the Great Depression is as a cautionary tale on the fallibility of central banking and the risks of government intervention in a market economy.

    That is a thesis of Liaquat Ahamed’s Lords of Finance, an account of the European and American central banks that “regulated” their economies into the failures of the 1930s. He makes the compelling case that the central bankers of Britain, France, Germany, and the United States fiddled with exchange rates, gold parity, currency issuance, and interest rates until the market crash of 1929-30 became the Great Depression of the 1930s.

    Central banks are, he asserts, above all political and not economic machines, and that for much of the early twentieth century, the government bankers never had “much of a year.”

    Leading up to the Great Depression, Britain pegged its currency to gold at too high an exchange rate, which led to collapse as traders relentlessly exchanged weakening pounds for Bank of England gold. France (like China today) played the game of low exchange rates, and subsidized its exporters with a cheap French franc, which undercut the European competition and hampered Germany’s re-integration into Europe.

    For its part, the United States insisted that France and England repay its war loans, which, indirectly, kept the economic pressure on Germany, which owed billions in reparations to the former Allies. And the German central bank, at various moments, chose to lessen its debt load with runaway inflation, which wiped out not just interest payments, but savings accounts and democratic government.

    In many ways, in steering the U.S. economy away from Great Depression, Part II, the Obama administration is facing the same dilemmas that confronted the Bank of England, if not the German government, after the 1929 Crash. Although the U.S. dollar is not pegged to gold, it is fixed to an artificially high standard of American living, which is supported with massive debt at all government and household levels.

    To pay off these obligations, the government can let the dollar sink, which will subsidize exporters, but infuriate foreign creditors, such as China. This route would also prime the pump of inflation, which is a tax on savings and a gift to debtors, such as the indebted U.S. government.

    Or Washington can push a strong dollar policy, which our allies and creditors would prefer. But that will make the United States a poorer nation, as national wealth and assets will need to be transferred to pay off the borrowing binge.

    Little did President Obama acknowledge, when he stood at Federal Hall in the shadow of George Washington’s first inaugural, that the speculator he should have been denouncing was none other than the government that he heads. This does not excuse the self-congratulatory bonuses of Wall Street punters or the failures that they engineered, and which President Obama papered over with bailout money and stimulus packages. But it does suggest why few in the crowd, or the electorate at large, cried “bully” when he was finished. They are in the same game.

    Matthew Stevenson was born in New York, but has lived in Switzerland since 1991. He is the author of, among other books, Letters of Transit: Essays on Travel, History, Politics, and Family Life Abroad. His most recent book is An April Across America. In addition to their availability on Amazon, they can be ordered at Odysseus Books, or located toll-free at 1-800-345-6665. He may be contacted at matthewstevenson@sunrise.ch.

  • Baseball Goes For Broke

    Other than the banking business, is there an industry more dependent on government handouts, sweetheart tax breaks, and accounting gimmicks than major league baseball?

    What other than a baseball depletion allowance explains the economics of a team like the New York Yankees, which is paying Alex Rodriguez $275 million over ten years while building a new $1.3 billion stadium and charging front row season tickets holders $800,000 for a box of four seats?

    If the rules of baseball included free enterprise, the Yankees would be playing on a diamond in Central Park, and skyboxes (which would not be deductible business expenses) would be limited to nearby apartment buildings.

    What accounts for all the growth in baseball economics — the salaries, the extortionate ticket prices, the new stadiums — is that the game varies little from some nineteenth century oligopoly trust, not unlike J.P. Morgan’s railroads or Andrew Carnegie’s steel mills.

    Let’s start with the basics: Since 1922, baseball has enjoyed anti-trust exemption, which means that league owners (best understood as robber barons) cannot move teams about willy-nilly. At the same time, the law makes it nearly impossible for competitors to establish rival competing franchises.

    The Yankees coughed up $1.3 billion for their new Yankee Stadium (of which local and state government are in for about $520 million) with the knowledge that neither the Royals nor the Pirates are allowed to move their home games to the Bronx or Brooklyn.

    The reason state and municipal governments — not just in New York, but all over the country — put taxpayer money into stadium white elephants is because voters identify more passionately with their professional teams than they do with their local politicians. Imagine the vote in New York if the choice was between Derek Jeter and Governor David Patterson?

    Just because modern baseball is fixed with more precision than the 1919 World Series was does not mean that the game (or at least a number of its teams) will not someday go bankrupt.

    Anti-trust exemptions, Tammany Hall municipal bond financings, and incestuous cable franchise awards may explain why teams like the New York Mets feel that they can spend $12 million a year on pitcher Oliver Perez. But it does not mean that they will be able to cover their obligations when the economy goes O-for-August (as once happened to Darryl Strawberry).

    To best understand baseball economics, think of the sport as similar to the investment banking business: a few large market firms (that have monopoly pricing power and cozy government relations) and then a lot of boutique establishments betting the franchise on some out-of-the-money option (Milton Bradley, Alfonso Soriano, and Alex Rios come to mind). The 2009 payroll for the Yankees is $201 million; for the Florida Marlins, it’s $36 million.

    To close the gap between rich and poor teams, municipalities from Philadelphia ($173 million) to Seattle ($392 million) have subsidized new stadiums, on the hope that sky-boxed, sellout crowds will allow team owners, usually mayoral pals, to pay for free agents. In turn, winning teams are to do for the local economy what the stimulus money may fail to achieve, namely, provide faith in the political system and interest cover for outstanding municipal bonds.

    Keep in mind that the baseball season is shorter than that for gladiolas. Many teams are out of the playoffs by July 4th, which means that the big, revenue-paying crowds must be attracted in the first three months of the season…when Kansas City fans still believe that they have a chance. Not long ago a double header between the Reds and Pirates started and ended with about seventy-five, yes that’s 75, fans in the stadium.

    Is it any wonder that the players union and many team managements, the Yankees included, turned a blind eye to steroids in order to pump up their products? In banking, executives went into sub-prime, hedge funds, and pyramid schemes to cover their bonuses. In baseball, the clear and the cream explain how the owners figured they would be able to afford the likes of Manny Ramirez.

    No one quite knows the precise debt figures of major league baseball, but the liability side of the balance sheet looks something like this: the league itself funds money-losing teams with a revolving line of credit, drawn against anticipated television rights. That’s like borrowing against next year’s equity in a house that has yet to be built.

    As for team debts, some franchises backload free agent contracts in order to defer liabilities until a new general manager may be on the job or the team has won a wild card game. Plus many teams have huge debts on new stadiums and skyrocketing payrolls. Even the Detroit Tigers, who play in a ghost town, run up $115 million per year.

    By my calculations, the Tigers would have to attract an average of about 40,000 fans per game, paying $35 a ticket, just to break even. In 2008, they averaged 25,000 fans a game, and I bet a lot of the unemployed autoworkers who attended didn’t pay $35 a ticket. Some of the debt service for the new Detroit stadium needs to be covered with casino money from an Indian reservation. (Pete Rose’s problem was that he played in casinos but did not own one.)

    To be sure, the plug figures in major league baseball’s finances are the local and national television contracts, not to mention the intramural luxury tax that has rich teams helping out the poor. National television revenue amounts to about $400 million per year, much of which is shared with the teams. That’s another attraction of anti-trust exemption; it limits supply. Why share the pie with, say, a hundred owners?

    Total revenue in the sport is about $6 billion, or an average of $200 million per major league team. Overall, baseball economics would work only if fans were prepared to spend $200 per game on warm beer and cold hot dogs, and renew cable television subscriptions to get games that have little meaning after July.

    The model is also predicated on the assumption that corporations can write off $800,000 in season ticket subscriptions, that the Internet does not blow away TV ads, and that Mariners fans will show up in September to watch their $99 million team wallow 10 games out of first place.

    If I had to bet on an MLB franchise going broke, my action would be on the Mets, who after all play in the House That Sub-prime Built, “Citi Field.”

    Not only did the owners, the Wilpon family, bet the ranch with Bernie Madoff, but they also spent $850 million on the new ballpark, and $25 million (over four years) on the likes of second baseman Luis Castillo. Attendance is down about 20 percent from 2008, and that’s before the team collapsed in the standings or bankrupt ex-Met Lenny Dykstra started sleeping in his car.

    Of course, baseball is no more exposed to the vagaries of the free market than is the banking business. Federally-funded banks, for example, can discount government-granted cable contracts, and pump money into the sport. Or a city like Washington can bailout another failing franchise, as it did with the Expos, and tax dollars can build a second $611 million stadium near the Potomac.

    Anti-trust exempted owners can even mothball a few teams (as they tried to do to the Twins a few years back), and boost the revenue share in that manner. Think of Commissioner Bud Selig’s office as a variant on the Texas Railroad Commission.

    Nevertheless, financial failure is nothing for baseball to dread. The only reason the Yankees could acquire Babe Ruth from the Red Sox in 1919 is because the Boston owner needed cash to invest in the Broadway show, “No, No, Nanette.” Maybe if they are squeezed, the Wilpons can swap Oliver Perez for some of their Madoff paper? At the very least they could get behind the sure hit, “Bye, Bye, Bernie.”

    Matthew Stevenson was born in New York, but has lived in Switzerland since 1991. He is the author of, among other books, Letters of Transit: Essays on Travel, History, Politics, and Family Life Abroad. His most recent book is An April Across America. In addition to their availability on Amazon, they can be ordered at Odysseus Books, or located toll-free at 1-800-345-6665. He may be contacted at matthewstevenson@sunrise.ch.

  • Amtrak Runs Off The Rails

    When the United States was in the money, the Congress grudgingly voted Amtrak a $1 billion subsidy every year, and then engaged in histrionics about how it might be cheaper to send most passengers to their destinations on private jets.

    Then oil went to $140 a barrel, the United States dropped into recession, and one of the answers was to vote $12.9 billion in stimulus money, over the next five years, to Amtrak, the railroads, and state-supported transportation agencies.

    Even though the American freight-train business has enjoyed a renaissance in the last twenty years — companies like the Burlington Northern Santa Fe and CSX are admirable for their competitive spirit and financial results — I am skeptical that Amtrak is the company that can lead the way to the re-birth of U.S. passenger service. Freight, let’s remember, only flourished when Conrail was privatized and the industry deregulated.

    To be clear, the $8 billion appropriated for high-speed corridor service has yet to be earmarked, and is best understood as discretionary funding that can be doled out to the states, if not to loyal unions. For his part, Senate majority leader Harry Reid hopes to open a drawbridge to fund high-speed rail service between Anaheim and Las Vegas.

    Somehow, it is hard to imagine that the U.S. can restore its economic prosperity by rushing heavy rollers to the blackjack tables in Vegas.

    Now in its thirty-ninth year of operations, the government-controlled Amtrak provides good service between Boston, New York and Washington, and Los Angeles and San Diego. Elsewhere, it’s a land cruise company.

    Beyond the corridors, Amtrak plies routes that were hastily drawn in 1971 to insure that they touch as many congressional interests as possible. That means meandering sleepers from New Orleans to Los Angeles, or Chicago to Seattle, which are a delight to vacationers (myself included), but inconsequential to the business of America, which drives or flies in order to get somewhere. Amtrak handles less than 1% of America’s intercity travel.

    To defend Amtrak for a moment, it has been chronically under-funded, owns little of the track on which it operates, defers its schedule to freight interests, and is hostage to union rules, Congress and microwavable food. European trains get more subsidies in a year than Amtrak has gotten in its lifetime.

    So will the $12.9 billion give the United States a passenger railroad network comparable to those that are now flourishing in Europe?

    Before answering the question, let’s take a very quick rolling stock of what European railroads have on offer:

    In Switzerland, where I live, the trains or a bus connect every village, town and city in the country. Geneva has more than 100 trains daily. Austin, Texas, a comparable city in terms of size, has two. But the railway is expensive for foreigners who visit the country. Round trip from Geneva to Zermatt for a family of four is about $600. Nonetheless, the rail network is a national asset.

    The German passenger railway, Deutsche Bahn, is incomparable. Nothing matches its speed, comfort, and service. Its Inter-City Express trains (ICEs) are the best in the world for the cost, not to mention the beer that’s served.

    The United Kingdom, which has privatized much of what was BritRail, is a mixed bag of flash roads. Private companies are now competing for passengers, which means lovely new carriages, and better pork pies on the tea trolleys. But neither the private companies nor the government is spending what is needed on Britain’s roadbed and infrastructure, which explains some of the horrible accidents in the system.

    France has its Train à Grande Vitesse (TGV), which operates on segregated, elevated high-speed track, and makes the runs from Lyon and Avignon to Paris not much longer than local commuter service. I find its seats cramped in second class (too airliner-ish), and French stations are dingy, but otherwise the TGV is a model train. A comparable system in the U.S. could reduce the trip from New York to Washington or Boston to less than two hours. But it would mean building a new interstate for trains.

    Italy has some excellent trains, and fast ones too. I know this, because I’ve seen them speed by as I have stood on platforms in Italy. But I never seem to catch any of them. The trains I ride have dirty seats, broken air conditioning, and inexplicable delays in places like Domodossola.

    Eastern European night trains — I am partial to these, I confess — include heavy sleepers that go from Ljubljana to Belgrade, or Iasi to Bucharest, with reasonable fares, starched sheets on the berths, brandy at breakfast, and the chance to visit such exotic places as Debrecen, Lviv, and Chisinau.

    The Russian Railways has, remarkably, become an excellent company, with improved passenger and freight services, including trans-Siberian container shipping that can get boxes from the Pacific to Berlin in less time than cargo ships.

    How does Amtrak compare, and how is it likely to improve with stimulus funds?

    Amtrak already looks good on one account: Europe’s international reservation system is medieval. Amtrak is miles ahead of Europe here. This summer I tried, in person and on the web, to book a sleeper from Geneva to Sevastopol, and failed.

    In Europe, international travel usually requires a trip to the ticket window at the station. Even simpler journeys, when they cross borders, are either prohibitively expensive or impossible to book. Geneva to London comes in at about $400; EasyJet does it in an hour for $50.

    While I am all for spending stimulus money, or any money, on American passenger service, I have yet to see anything remotely like a good strategic plan for its restoration. The glossy maps projecting new corridor services depend on the states, not Amtrak, to realize the dreams.

    Nor am I sure that throwing money at the Amtrak model will do much more than refurbish some Amfleet coaches and make congressmen look good in mid-term elections. The railroad, like many in American history, strikes me as better at delivering pork than passengers. The current chairman is a former small-town, Illinois mayor, and Joe Biden’s son was a board member until February 2009.

    Perhaps equally important, where is Amtrak’s passion for railroading? Why hasn’t the route map changed in forty years? Where are the car-carrying trains, the elegant stations, the sleepers that cater to business people with showers and wi-fi, or even the special tourist trains that would take travelers across America to Civil War battlefields, major league baseball games, rock concerts, or national parks?

    Why do cities like Phoenix or Louisville have no trains at all? Where are the creative railroad financiers, selling sleeping cars as timeshares or condos? If it’s truly a government-run corporation, why aren’t there more investment-grade Amtrak bonds in world markets?

    Here’s another irony of the railroad stimulus package: Freight companies are prospering with deregulation and private capital, but Amtrak is running late while on the dole.

    Right now we’re in a golden age of railroads, much of it funded with investor capital. The common stock of large American railroads is attracting serious money, including that of Warren Buffet.

    Around the world, private luxury trains are crossing Russia, India, China, Tibet, the Silk Road, the Alps, and the Andes. In Asia, investors are plotting to complete the line from Singapore over the Burma Road to China. A company in Africa charges about $30,000 — and gets it — for a deluxe train trip from Cape Town to Cairo. But bureaucratic protectionism keeps these dynamic groups from operating in the United States.

    After World War II, America traded in the greatest railroad system in the world for interstate highways, sleazy rest stops, and now-crowded airports. Today, GM is broke, gas is three dollars a gallon, and politicians have to kowtow to Saudi princes.

    I would love to think that for $8 billion, corridor service would flourish and that German-style trains would pop up around the country. Heck, I would love to ride a Romanian sleeper between New York and Bangor, Maine.

    Despite my hopes, my fear is that the transportation stimulus money is probably going to end up on a roulette wheel in Vegas.

    Amtrak Empire Builder at Marias Pass, Montana. Photograph by Alex Mayes.

    Matthew Stevenson was born in New York, but has lived in Switzerland since 1991. He is the author of, among other books, Letters of Transit: Essays on Travel, History, Politics, and Family Life Abroad. His most recent book is An April Across America. In addition to their availability on Amazon, they can be ordered at Odysseus Books, or located toll-free at 1-800-345-6665. He may be contacted at matthewstevenson@sunrise.ch.