January 2010


Using Unions as Weapons

The figures in Veronique de Rugy's chart ("Using Unions as Weapons," October) suggest that investors are much better off with UPS's 62 percent union work force than with FedEx, where a "small percentage" of workers (pilots) are union members.

The UPS return on sales was 7 percent, more than double the 2.9 percent at FedEx. This despite the fact that UPS, with 35 percent larger revenues, bears 3.7 times the compensation costs of FedEx. On average UPS pays its workers $74,400, versus $29,300 at FedEx.

Economic theory holds that higher wages can be used to attract and retain more productive workers. Economic theory also holds that bearing these higher labor costs would encourage more efficient and effective use of capital by UPS.

De Rugy's column sent me to the disclosure statements of both companies, which reveal that while UPS's shareowner equity is a scant 8 percent greater than FedEx, profits are more than 2.2 times as large. Last year UPS earned 23.2 percent on its equity, according to finance.yahoo.com, more than five times the 4.6 percent return at FedEx. UPS also has an operating margin double that of FedEx.

One-year comparisons can be misleading, but the data reason presented indicate that paying higher wages can help maximize profits.

David Cay Johnston
Rochester, NY

Inflation Returns!

In the "Inflation Returns!" forum (October), one possibility was conspicuously missing: that a powerful deflation is inevitable and has already begun. This minority opinion deserves a spot in the debate, if only for the reason that conventional economists never foresaw the asset collapse of 2008. We have already seen the havoc that attended just one wave of deflation: Debt values imploded, and financial markets—from stocks to commodities to property—were revalued dramatically downward. Trends never go in a straight line, so the current partial recovery is par for the course. But bank credit has begun contracting again, indicating that the next wave of deflation is imminent.

As for the Fed, it cannot monetize the entire overhanging supply of bad debt without self-destructing, which it is unwilling to do. The Fed has talked the federal government into guaranteeing some debts, but even that option will soon face limits due to political opposition. When markets turn back down and bank failures accelerate, the Fed's widely presumed ability to inflate the money-plus-credit supply at whim will be revealed as a chimera.

Robert Prechter
Gainesville, GA

Payday of Reckoning

Katherine Mangu-Ward's article on payday loans, "Payday of Reckoning," (October) states that Jews are associated with moneylending because Jewish law allows interest to be charged to non-Jews. While the reference to Jewish law (Deuteronomy 23:20) is correct, it should be noted that throughout the Middle Ages, the business of moneylending was one of the few not prohibited to Jews by most European countries.

David Altschul
Berkeley, CA

The Debtorship Society

In "The Debtorship Society" (October), Tim Cavanaugh reports that "owner's equity as a percentage of household real estate dropped" and argues that a "portion of this decline can be attributed to the steep drop in house prices." This does not seem reasonable.

For example, assume that someone bought a $200,000 house a decade or more ago with a 20 percent down payment ($40,000). After some years of payments let us assume the owner's current equity is now $45,000, but the market value of the house has dropped to $166,000. Hence, the owner actually owns 27 percent of the market value of the house rather than 22.5 percent of the original price. Thus one would expect that a decrease in market price would increase the owner's percentage equity ownership.

Frank Ditto
Charles Town, WV

Tim Cavanaugh responds: The amount of mortgage principal that you have retired is not your equity. Your equity is the value of the house minus the principal on the mortgage.

In the example, the person has retired $45,000 of a $200,000 debt. That leaves $155,000 of principal. So if the house currently appraises at $200,000, the equity stake is $200,000 minus $155,000: $45,000. That's a 22.5 percent stake, as Ditto notes. But if the house appraises at only $166,000, the equity stake is $166,000 minus $155,000: $11,000. That's a little less than 7 percent.

As the house value shrinks, your equity stake shrinks as well, but your mortgage is constant. So in a declining market your equity percentage will decline.