And Then There Were None

AMR, the parent company of American Airlines, filed for Chapter 11 bankruptcy reorganization yesterday. I’m pretty sure AA was the last major air carrier to do so, having been proceeded in bankruptcy court by Continental, USAir, United, Northwest, and Delta, along with lots of smaller airlines.

Interestingly, AMR still had billions of dollars left in the bank. Looking into the future, the management of the company felt that they were better served by filing now, rather than waiting another couple of years and filing for reorganization after running out of cash. This was a preemptive strike.

Although the shareholders got wiped out, they didn’t lose much, since the stock price is down about 90% in the last year. Management’s stock options are worthless, but they’ll be issued a bunch of new shares when the company emerges from the bankruptcy process. Passengers are okay, since the company has already announced they will continue to honor prepaid tickets and frequent flyer miles. The big loser in this process is going to be the employees.

When a company goes through Chapter 11 reorganization, contracts, particularly union contracts, can be renegotiated. And by renegotiated, I mean that the company can dump the pension plan, drop healthcare for retirees, and cut wages and benefits unilaterally, shoving the changes down their unions’ collective throats. We know that the company can do this, because that is pretty much what every other airline has done in bankruptcy.

After all their major competitors went through bankruptcy, American Airlines was stuck in the unenviable position as the airline with the highest costs. And since prices in a market are determined by the producer with the lowest costs, that explains why American lost money in 15 of the last 16 quarters.

American has been trying to wring concessions from their unions to avoid the step they took yesterday, but without much success. You cannot really blame the unions for being intransigent. Having to accept permanent downward mobility is a bitter pill to swallow. Now the concessions they would not agree to will be imposed on them, and maybe more to boot. After all, management will want to emerge from bankruptcy court as the new low cost provider.

Meanwhile, low cost carriers Jet Blue and Southwest continue to expand and prosper.

Penn State: What would you do?

I've been following the unfolding mess at Penn State for the last couple of weeks. For anyone who hasn't watched the news, a grad jury investigation has handed down indictments after investigations that went on for months. A retired defensive coach, who was still active on the Penn State campus, was charged with 40 counts (40!) of child molestation, over a period going back at least 12 years. Also indicted were the school's athletic director and the VP for Finance and Administration, charged with lying to the grand jury about an incident that occurred in 2002.

In the second act of the drama, Penn State's legendary football coach, Joe Paterno, as well as the university president, were both fired. The trustees felt they had not done enough to push the investigation of the retired coach, Jerry Sandusky. In 2002 they were given specific and credible allegations that Sandusky had been caught having sex with a minor on campus. They called him in and told Sandusky that he was not to bring any more children onto the campus. That was it. No police investigation, no attempt to identify the minor.

The third act of the drama has just begun. Lawyers have been parachuting into Pennsylvania, ringing doorbells in the search for more victims. The taxpayers of Pennsylvania are going to be on the hook for a big settlement by the time this is all through.

One of the more inexplicable aspects of the story was that not once, but twice, individuals walked in on a middle aged man clearly having sex with a young boy. In both cases, they did nothing to intervene, but merely turned around and walked out.

In watercooler conversations about this situation, the conventional wisdom is "I would have done something. I would have gone in there and torn that guy off the kid." I'm guessing that most of us would do no such thing. Why do we think we would behave in a more heroically active fashion than the 28 year old grad student who walked in on Sandusky and his victim in 2002.

History is full of examples of people not taking an active stand on behalf of their morals. In 1964 Kitty Genovese was knifed to death on a public street. At least a dozen people heard her cries for help, and no one intervened. In the sixties, sociologist Stanley Milgram conducted a series of studies where subjects administered what they thought were serious electrical shocks to others, solely because a man in a lab coat told them to. Recently, in China, a small child was struck by a car on a busy street. A number of people passed by in vehicles and on foot without stopping to help.

We all like to think we would act to help others, step in to right a wrong, even if there was some risk to ourselves. Sadly, the evidence indicates otherwise.

Another Inspirational Story from Occupy Wall Street

Really, you can't make this stuff up.

This is the lead of an article in The Nation, about an artist participating in the Occupy Wall Street protest in New York:

A few years ago, Joe Therrien, a graduate of the NYC Teaching Fellows
program, was working as a full-time drama teacher at a public elementary school
in New York City. Frustrated by huge class sizes, sparse resources and a
disorganized bureaucracy, he set off to the University of Connecticut to get an
MFA in his passion—puppetry. Three years and $35,000 in student loans later, he
emerged with degree in hand, and because puppeteers aren’t exactly in high
demand, he went looking for work at his old school.

One scarsely knows where to begin. What kind of elementary school has full time drama teachers? What exactly do they do? Put on the school pagent? I think this was the plot of an episode of Modern Family last year.

Apparently UConn offers a Master's program in puppetry. Who knew? Maybe the program was endowed by Jim Henson: the Kermit the Frog chair in puppetry studies, with the Miss Piggy fellowship available to selected students.

"puppeteers aren't exactly in high demand" Nah, really? Ya think?

But here's the $64 question: What kind of person borrows $35 grand to get an advanced degree in puppetry? I can understand having a passion for puppets. People have passions for all kinds of things. It's part of what makes the world such a varied and interesting place. I can even understand the impulse to try and make a living at it. The idea of making your avocation your vocation is deeply appealing.

But this guy quit a full time job in order to invest three years and $35,000 of somebody else's money in a pursuit so ludicris that it reads like the punchline to a joke. And now he is protesting because "the system" is unfair. It's guys like Joe who give the Occupy movement the high standing it currently enjoys among the employed.

The Christmas Economic Stimulus

Keynesian economists argue that when the economy is not providing enough jobs, the problem is a lack of demand. If more consumers were clamoring for additional goods and services, businesses would hire workers to provide them. If borrowers are tapped out, either overloaded with debt or saving more because of uncertainty, they cannot increase spending.

Governments, however, can usually continue borrowing even if individuals cannot. When the economy is in recession, the government can run a deficit, and spend the money to pump up demand. Once demand is higher, businesses will hire more workers. With more money in their pockets, workers will spend more, creating even more demand. Once the consumer demand recovers, government can then drop the deficit spending, as aggregate demand will have recovered. Keynes likened it to priming a pump.

This is the economic theory behind the various government stimulus packages that we have seen in the last few years. President Obama’s job program proposal was another along these same lines. It did not get off the ground, due both to partisan politics and a legitimate concern that the Federal government is already carrying too much debt.

It occurs to me, however, that the private sector is about to undergo a burst of increased demand. It’s called the Christmas selling season.

Goods are moving from the warehouses onto store shelves in anticipation of Black Friday. Retailers are hiring additional staff to handle the expected surge in buyers. And the increase in demand is not just limited to presents. At my employer, we are already making deposits for the caterer and DJ at our annual Christmas party. Folks are booking airline flights as they plan their holiday travel.

Viewed as a temporary increase in demand, the holiday season fulfills the same function of a government stimulus package. But we all know what happens after the first of the year. Seasonal workers get laid off. The inevitable credit card bills arrive, causing December’s free spending consumers to retrench in January. Economic activity drops back down again as people tighten their belts.

So when the private sector does a stimulus package, the effects are short term in nature. I wonder why we think it will be longer lasting when the government does it?