Foxconn International Holdings, the world’s largest contract manufacturer of electronic components, made notorious last year by a rash of employee suicides at its Chinese factories, recently published its half-yearly financial results, which showed that its annual labor costs per employee have risen by a third over the past year, to $2,900.

Foxconn, 71% owned by Hon Hai Precision Industry of Taipei, and which also assembles products for Sony, Dell, and Hewlett Packard, employs an estimated 400,000 people at its two factories in Shenzhen (Hon Hai, with 800,000 employees, is the 10th-largest employer in the world). These people, most of them young, many of them women, work 11-hour shifts, seven days a week. According to the New York Times, Mr. Ma Xiangqiang, a 19-year-old Foxconn employee who jumped to his death from a Foxconn dormitory in January 2010, had worked 286 hours in the month prior to his suicide, including 112 hours of overtime, more than three times the legal limit. By all accounts, Foxconn is not a fun place to work, combining some of the worst features of military service, summer camp, and prison, but the problems facing Foxconn are far from unique. [click to continue…]


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Let me admit my bias right here: I don’t “get” Twitter. This isn’t just because I’m too old. My teenage daughter, Isabel, tells me she thinks it’s pointless and that none of her friends use it. I also don’t see how Twitter will ever make money, though it’s certain that some of the best minds in Silicon Valley are already working on that problem. But this article isn’t about any of that.

Echoing Goldman Sachs’s investment in Facebook in January, which gave that company a notional value of $50 billion (which has subsequently risen to $70 billion in the secondary market), it was announced today that J.P. Morgan’s Digital Growth Fund is in negotiations to buy a 10% stake in Twitter for $450 million. The J.P. Morgan fund, which has raised $1.22 billion of a planned $1.3 billion, also has its eyes on potential investments in Skype, the telephony provider, and in Zygna, a games maker. Any or all of these investments could lead a few years hence either to outsize profits or to people scratching their heads and muttering, “What were they thinking?”

None of this should normally be of any concern to anyone but the shareholders and investors in the target companies and in the banks and funds buying the shares, but there is something not quite normal going on here. In both the Goldman/Facebook and the anticipated J.P. Morgan/Twitter transactions, the purchased shares will be made available only to a tiny handful of very wealthy investors. The J.P. Morgan fund, for example, will have a maximum of 480 investors, which works out to an average investment of $2.7 million each. Although an initial public offering (IPO) for both companies is planned, with Goldman Sachs and J.P. Morgan having the inside track to manage the IPOs and reap the enormous advisory fees and commissions, there is no certainty as to what percentage of these companies will actually be floated, and what proportion will remain in the hands of the banks and their wealthy fund investors. It is possible – even probable –  that a majority of the ownership of these companies will remain vested with a very small group of people. Though a secondary market will certainly develop to allow these initial investors to dispose of their shares, it is also likely that activity in this market will consist primarily of private sales to other wealthy insiders.

Let’s not be naïve; wealthy and well-connected investors have always had access to investment opportunities the rest of us don’t even know about, and nothing will change that. But if Twitter- and Facebook-style investment arrangements become more widespread, it could undermine American capitalism, which for  the past hundred years has been based on the modern public corporation in which no individual or institution owns more than a few percent of the whole.  It’s common nowadays for institutional investors to own well over 50% of big U.S. corporations, but even among these investors ownership is highly diversified. In very few Fortune 500 companies does a single institution or family group own more than five per cent of the outstanding shares or exercise control via a special class of shares (Ford Motor Company, in which the Ford family owns just 6% of the company but controls 40% of the voting shares is one of a very few exceptions). Even Bill Gates owns only seven percent of Microsoft. This model is now under threat.

As regular readers of this blog know, I am a capitalist. Capitalism, especially when it is based on widespread ownership and freely traded shares and debt instruments of large public companies, is the best way mankind has yet found to allocate capital to its most productive use. Anyone who doubts this can look at the legion of countries in which some form of central planning – Marxist, fascist, Peronist, or just plain old dictators and their cronies – has prevailed.

Stock markets – though we now recognize that markets are not perfectly efficient – have been a vital way for companies to raise capital. The link between the stock market and the real economy, in which companies and people produce and sell goods and services, has traditionally been strong. This is vital, since financial markets rest on an uneasy compromise: corporations and their financial advisors can make as much money as they want as long as everyone else has the opportunity to share in that wealth. The public shares in the wealth in a variety of ways, the most important of which is employment income and associated benefits. The public also shares in the wealth by having the opportunity to invest its savings in those same corporations. If this link is broken, public support for capitalism will wane, and the United States could go the way of Argentina.

Already, the signs are ominous. In 1961, individual investors accounted for 62% of the total value traded on the NYSE. By 2009, this had fallen to two per cent. Block trades of 10,000 or more shares in a single transaction accounted for only three per cent of the NYSE trading volume in 1961; today they account for around 25% of total U.S. market volume. By itself, this evolution is hardly worrisome; much of it can be attributed to the rise of mutual funds and similar vehicles, which have become the preferred investments of many individual investors and which can offer better risk-adjusted returns than those less sophisticated investors could produce on their own. But accompanying this trend is the rise of high frequency trading, which now accounts for over 70% of all U.S. equity trades. High frequency trading, based on sophisticated computer algorithms, involves holding large positions for a very short time – often fractions of a second – to generate huge returns. Their practitioners argue that they provide liquidity and reduce bid-ask price spreads, which may be true, but the banks and hedge funds employing such strategies are playing with their own capital and that of wealthy investors. Your average individual investor, who may have a portfolio of a couple hundred thousand dollars or less, does not play in this sandbox.

The stock market, which has forever been likened to a casino, has truly come to resemble one, and I am not referring to the two-dollar blackjack tables in Reno. It has become much more like the exclusive, velvet-roped areas where the likes of James Bond and Asian billionaires play baccarat or high stakes poker for millions of dollars.

Felix Salmon, the Reuters financial blogger, writes in an excellent op-ed piece in the New York Times, “The stock market is becoming increasingly irrelevant — a trend that threatens the core principles of American capitalism. These days a healthy stock market doesn’t mean a healthy economy, as a glance at the high unemployment rate or the low labor-market participation rate will show… What’s good for Wall Street isn’t necessarily good for Main Street… the glory days of publicly traded companies dominating the American business landscape may be over. The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It’s now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink… Put another way, as the number of initial public offerings steadily declines, the stock market is becoming little more than a place for speculators and algorithms to compete over who can trade his way to the most money.”

Even the NYSE, the one-time flagship of the American capitalist system, is becoming marginalized, as its recent acquisition by Deutsche Börse indicates.  According to John Gapper of the Financial Times,  in 2005 79 per cent of the volume in NYSE-listed shares was traded on the exchange itself. By March 2010, that figure had fallen to 23 per cent. Gapper writes, “The NYSE has been squeezed out not only by upstart exchanges such as BATS (an electronic trading platform, established in 2005, which now ranks as the third-largest exchange in the United States) but by ‘dark pools’  – private exchanges on which institutions trade with each other in large blocks – and by banks making transactions internally. The two now account for about a third of US equity trading.”

As long as individual investors can invest in the markets and feel that everyone, big or small, is playing by more or less the same rules and that the markets are essential to the income and jobs on which we depend, capitalism will thrive. When that connection is broken, and people come to believe that capitalism is a game rigged in favor of a small elite, it won’t. The alternatives to capitalism, for the most part, are too awful to contemplate, so  the markets have to be reformed – soon –  for the system to survive.



Sometimes I wake up in the middle of the night thinking about the strangest things. I should be like Dagwood and go down to the kitchen to make myself a sandwich, but instead I fire up my computer and start Googling. It’s less fattening, I guess.

I awoke last night wondering whether, in the wake of the Federal Government takeover of GM and Chrysler, the Feds were favoring their new subsidiaries when it came to buying government cars. Instead of returning to my vivid dream of being stranded on a desert island with a bevy of Singapore Airlines stewardesses, I decided to look it up. I couldn’t find any conclusive evidence one way or another, but I did learn a few interesting things.

One provision of last year’s Recovery Act (aka the “stimulus package”) was the Energy-Efficient Federal Motor Vehicle Fleet Procurement program, mandating the purchase of thousands of fuel-efficient cars from American car companies. I know, I missed it too the first time I read through the 1,400 page law. According to Edward Niedermeyer, writing on a blog called “The Truth About Cars,” a Freedom of Information Act inquiry to the General Services Administration revealed that as of June 2009 a total of 17,205 cars were purchased under the plan, of which 7,924 came from Ford, 6,348 from GM, and 2,933 from Chrysler. So there’s no indication the Feds bought more from government-owned GM and Chrysler than their relative market shares and/or production volumes would suggest. [click to continue…]



In the eyes of many Americans, “Sweden” is shorthand for everything we don’t want America to become. It’s a tradition that goes back some way. In the 1965 movie I’ll Take Sweden, Bob Hope is an executive whose company sends him to Sweden, and he takes his teenage daughter, played by Tuesday Weld, largely to get her out of the clutches of her dead-end, guitar-playing boyfriend, played by Frankie Avalon, whom she wants to marry. Long story short, Tuesday falls in love with a suave Swede, only to find he has some strange ideas about premarital sex. Enter Frankie, who has traveled across the sea to try to win his girl back. He breaks his guitar over the degenerate Scandinavian’s head, and takes Tuesday back to America and married life in a trailer park, with Dad beaming proudly.

Opponents of President Obama’s proposed health care reform, massive deficit spending, takeover of the banking and automotive industries, and other “statist” excesses defend their position by saying those things are fine if you want America to become like Sweden, but we don’t, thank you.

John Stewart’s Daily Show ran a series a few months ago reporting on the horror that is modern day Sweden. The show’s ace investigative reporter went around interviewing people of all walks of life, from former members of ABBA to business executives, doctors, government officials, and factory workers, all of whom professed satisfaction with their lives and with the way Swedish society is organized. The reporter concluded that there had to be some kind of Invasion of the Body Snatchers thing going on, with most Swedes’ brains having been taken over by an alien life form that made them unaware how miserable they really are.

The only thing wrong with this picture is that it’s not really true. It is true that Sweden was an early adopter of the sexual revolution, the Swedes enjoy mixed saunas and sensible cars, and Sweden has colonized much of the world with Ikea, which for all its commercial success looks like something a state bureaucrat with fascist leanings might have invented.

Oh, and it is a welfare state. Sweden does provide benefits to the unemployed and it gives all its citizens free health care and education, and taxes them pretty highly in return. The combined income and social security tax for high earners is over 48% (including mandatory pension contributions), but that is not too far from the U.S. where earners in the top 5% can pay as much as 40%, depending on income taxes in their home state. And Sweden’s corporate tax rate is only 28%, compared to the 35% U.S. corporate tax rate and average effective combined Federal and state rate of 39.3%.

Sweden is far from being the statist, socialist nightmare that many Americans imagine. The government last week announced deep cuts in personal income taxes “to stimulate the economy,” together with planned reforms to improve the business climate and create incentives to start companies.

It may be their Lutheran heritage that has imparted to the Swedes some common sense and a work ethic. The maximum $1,650 after-tax monthly employment benefit is hardly lavish, and in most cases it expires after 300 days. The government offers retraining, employment subsidies and reduced employer social contributions to encourage companies to hire the unemployed, with additional enticements such as lower minimum wages and flexible contracts for hiring people under 25. Similar youth employment incentives proposed two years ago in France, drew hundreds of thousands of students into the streets in protest.

On health care, Sweden’s single-payer system came under intolerable stress in the 1980s, with rising costs and growing waiting lists for medical procedures. The government devolved substantial power to county councils, and gave them freedom to introduce market-based reforms, which most have done. Hospitals have been privatized and the market share of private medical practitioners is on the rise. Many kinks still need to be worked out, but Stockholm, which has been most aggressive in introducing market-oriented reforms, has shown impressive results.

Still and all, Sweden is socialist, isn’t it? And that has to be a bad thing, right?

In a word, no. Sweden is a leader in privatizing public pensions. Though mainly state-owned corporations historically accounted for about one fourth of the market capitalization of the Stockholm Stock Exchange, the government has privatized or plans to privatize most of its crown jewels, including the stock exchange itself, the Apoteket pharmaceutical distribution monopoly, the former alcohol manufacturing and distribution monopoly Vin & Sprit, and major state-owned telecoms, real estate, and financial firms. Industry itself has always been overwhelmingly in private hands, and Sweden has a lot of world-renowned companies for a country of only nine million people, including Volvo, SKF, Ericsson, Skanska, Electrolux, Sandvik, Atlas Copco, Ikea, and H&M.

In the 1990s Saab and Volvo sold their passenger car divisions to General Motors and Ford, respectively, while holding on to their lucrative truck, heavy equipment, and aerospace operations. This past spring, as GM teetered on the edge of bankruptcy, and the U.S. government started crafting its takeover of GM and Chrysler, the Swedish government firmly rejected the idea of a Saab bailout. “The Swedish state is not prepared to own car factories,” said Maud Olofsson, the Minister of Enterprise. The World Economic Forum ranks Sweden the fourth most competitive economy in the world, just behind Switzerland, the United States, and Singapore.

Sweden went through its own financial and banking crisis in the early 1990s when a real estate bubble collapsed, GDP dropped by 5%, total employment fell 10%, and the central bank briefly jacked up interest rates to 500% to prevent a run on the krona. The state took over a fourth of the country’s banking assets to save the banking system, at a cost of 4% of GDP. In 1994 the budget deficit stood at 15% of GDP. The government quickly restored the banks to private ownership, cut government spending, and introduced liberal economic reforms that enabled the economy to rebound quickly and to capitalize on the emerging IT and telecoms boom. From a 2008 budget surplus of 2.5% of GDP, this year’s expected budget deficit is 2.2% of GDP, and is forecast to widen to 3.4% in 2010 before returning to balance. Not bad for the worst global financial and economic crisis since the Great Depression, and an awful lot better than America’s projected deficit of 13.1% of GDP this year and 9.6% next year, not to mention the boom years of 2001 to 2008, when the Bush Administration ran average annual deficits of more than 4% of GDP.

Sweden is not perfect. The nanny state sticks its nose into too many corners of personal life. An eight-year-old boy in Lund had his birthday party invitations confiscated at school when he failed to invite two of his classmates. This violated rules on “inclusion.” Government has launched an investigation of parents who use the family computer to access porn sites, which their kids might then be able to access. In the 1970s Sweden, the home of former heavyweight champion Ingemar Johanssen, banned boxing as too violent for the pacific society it had become. TV advertising is banned from programs targeting under-12s, while movies with even a hint of violence get a rating that bans under-12s from watching, even if accompanied by their parents. Toy guns –even water pistols – were outlawed. Alcohol taxes are among the highest in the world, and you can see the unhealthy consequences on the overnight duty-free “booze cruises” from Stockholm to Helsinki, which end with bleary-eyed Swedes (and Finns), still drunk, stumbling onto the pier, their shoes encrusted with vomit. But e-commerce, home DVD players,  the end of internal border controls in the EU, and a general feeling that things had gone too far have started to win some battles with the nanny state. You can buy toy tanks and bazookas now, and in 2007 the ban on boxing was repealed.

As the U.S. government, first under George W. Bush and now under Barack Obama, becomes ever more statist, and as Americans accept eavesdropping on telephone conversations, bans on trans fats ,and proposals to tax soft drinks as something governments have every right to do, Sweden – never anywhere near as socialist as popular imagination would have it – has steadily moved in the opposite direction. Our paths will cross, if they haven’t already done so. One can only be grateful that when Americans realize the limits of state intervention in our personal and economic affairs we will have the Swedish model as a guide to start putting ourselves back on the right track.


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