The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (6 page)

Four decades ago the Powder River Basin was insignificant; today every fifth lightbulb, computer screen and factory stamping tool is powered with the residue of the plants and animals that thrived in the lush valley in northeastern Wyoming. Starting our journey in the Powder River Basin provides a clear vector to follow in order to see how our economy got off track.

At its core, this is a story of well-established principles being replaced with radical and untested theories that, more than three decades of experience now reveal, are destructive. We built lofty economic superstructures not on foundations of granite but of sand. And when economic storms came, as they always do, giant waves of red ink eroded those
foundations, leading to the subsidence of all that was built upon them. The problems with the theories and the practices that grew from them are reflected in the bills you get in the mail every month, and help explain how the prices you pay are subtly, and artificially, inflated while the quality of goods and, especially, the quality of services are cut.

What the record shows is the creation, by our elected leaders and their appointees, of a multitude of privatized systems designed to redistribute wealth and income upward. These systems destroy the benefits of capitalism by replacing the rigors of market competition with what I call
corporate socialism
. But let’s start with one of the basic drivers of modern life, carbon energy in the form of coal, precisely that black stone found in the Powder River Basin.

A century ago, coal bins were common features of residential and commercial basements. Although hardly anyone has coal delivered to their home or store anymore, Americans today consume a per capita average of nineteen pounds of coal a day. That’s three and a half tons of coal per person every year, consumed in ways as distant from our direct experience as Wyoming is from crocodiles.

Just four decades ago the Wyoming coal industry hardly existed. Coal had been mined there since the 1800s, but for local use. American power plants mostly burned coal from other ancient swamps more than a thousand miles to the east because these were closer to big cities and industrial centers. Appalachian coal also contained more energy—two tons of West Virginia or Pennsylvania coal generated the same heat as three tons of coal from the remote Powder River Basin. The much older Appalachian coal was bone dry and more compressed while Wyoming coal, though dry to the touch, still held trapped molecules of water from its fetid past.

Then in 1970 Congress changed the market for coal in a decision that touches your pocketbook every day. We use Wyoming coal now because the ancient western swamp contained freshwater while the eastern swamps were salty. As the eastern coal dried, as much as 5 percent of the anthracite became sulfur. When burned, the sulfur mixed with sunlight and other molecules, then fell back to earth as acid rain. This rendered the soil and water in the Adirondack and Catskill mountains toxic, poisoning maple, hemlock and spruce seedlings and trout eggs. Acid rain was even said to have discolored or “etched” paint on some cars.

When President Richard Nixon signed the Clean Air Act in 1970, he took a step toward making northeast forests and waterways healthier. But by igniting demand for sulfur-free Wyoming coal, Nixon also set in
motion major changes that are central to how big business is using government to remake the American economy.

Today, every seven seconds a railroad car is filled with more than a hundred tons of Powder River Basin coal. Every twelve minutes a train linking at least a hundred cars heads west or east or south. After the cargo is dumped at power plants, it is crushed and ground until it is finer than face powder. Pressurized air blows this explosive dust into huge furnaces, and the heat from the furnaces boils water, which turns huge turbines that spin giant copper ropes looped around powerful magnets, creating every fifth watt of electricity in America. Coal stands at the center of this transformation because electricity is the defining technology of the modern world. From the radio that awakens us to the automatic door opener that lets our car into the garage at night, electricity makes modern life possible.

Visit the ruins at Pompeii and Herculaneum and you will see that these ancient Roman resorts bear a resemblance to the modern world. Their streets were lined with barbershops, restaurants, bars and laundries laid out much as those shops are today. What’s different is the scale. Ancient towns were built to suit humans, with streets about as wide as the promenades in today’s shopping malls because everyone walked.

Without this electricity, there would be no internal combustion gasoline engines, which rely on an electric spark to ignite the fuel. There would be none of the elevators that make high-rise buildings feasible, no automated traffic lights, no pumps to move water uphill. Without electricity, bauxite could not be melted to make aluminum, so jetliners, unimaginable to the ancients, would still be impossible.

Today coal is crucial to the generation of electricity. With such a huge demand for coal you might expect that there would be heavy competition to mine, move and burn the black rocks. After all, competition is what America is known for; it’s the fuel that powered the nation’s economic engine, raising living standards further and faster than anyone dreamed possible before we broke free from British rule more than 230 years ago.

Millions of people have come to the United States believing that anyone with a dream, a commitment to hard work and a bit of luck can reap the economic rewards of their endeavors. Yet today the potential to compete and achieve is leeching out of the American economy; in place of strivers, America is witnessing the rapid rise of monopolists and their close cousins, oligopolists.

The rigor of competition, which forces businesses to be efficient or
fail, is being weakened bit by bit: a law here, a regulation there, a court ruling over there. These events tend to be reported as discrete events or even to go unnoticed. Because these changes take place over time, sometimes over a span of more than a decade, only rarely are the dots connected in political debate or in the news, revealing the larger outline.

The markets are supposed to be policed, but, posing as friends of the taxpayer, politicians from both parties have increasingly handcuffed the white-collar detectives at the federal agencies. Price fixing, price gouging, price manipulating and other anticompetitive practices have become more common, becoming the norm—and sometimes the standard—of conduct. Meanwhile, leaders chosen from the industries they are supposed to regulate are named to the regulatory boards. Compromising relationships are formed—but seldom observed—as journalists, aware that the public’s attention is more easily drawn to the sensational than the substantive, focus more frequently on cheap news, like whom the Kardashians are dating this week.

Complicating all of this are corporate teams armed with spreadsheets and databases that make instant calculations. When one airline changes its prices, every other airline adjusts the prices for countless seats on thousands of flights in a matter of minutes. This ability to match almost instantly any competitor’s price poses fundamental challenges to the idea of price competition.

In order to penetrate the strata of obfuscating language and seemingly disconnected laws and regulations of the marketplace, with its fluidity and its boundless opportunities, let’s mine one story to see why prosperity is eluding more and more people.

In 2009, financier Warren Buffett decided to buy out shareholders in the BNSF Railroad. BNSF had been formed by the mergers of many railroads, the last two giants supplying the name: the Burlington Northern and Santa Fe. The BNSF was a consequence of a massive consolidation of railroads that began after a major change in federal law in 1980 that its sponsor, Representative Harley Staggers, a West Virginia Democrat, said would ensure robust railroad competition. Remember that name.

Buffett paid a stiff premium for the BNSF railroad shares he did not own, but told the world he did so gladly. “It’s an all-in wager on the economic future of the United States,” Buffett announced—a line that appealed to the patriotic instincts of broadcasters, print reporters and politicians. He got ample press coverage, but few questions were asked about the deal. Buffett sealed his message with a promise that he would
make the economy better. “Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” Buffett said.

The facts of the deal were clear enough: Buffett’s Berkshire Hathaway holding company paid $100 per share for the 77 percent of the company it did not own, offered in cash or in shares of Berkshire. Add in the piece of the company Berkshire already owned and $10 billion of debt the railroad owed, and the deal established a value for BNSF of $44 billion.

One question nobody asked at the time was just what attracted Buffett to the railroad in the first place. Nor was there much analysis by financial journalists of how the railroad and its competitors were performing as investments. Business writers, like those they cover, tend to look forward rather than back. And they have a soft spot for positive news—a subtle but powerful bias.

Had you put a dollar into an index mutual fund comprised of the entire American stock market at its peak on March 23, 2000, just before the Internet bubble collapsed, you would soon have lost more than a third of your money, including reinvested dividends, after taking inflation into account. Your investment would be down to less than sixty-seven cents by the day Buffett announced his deal in 2009. Had you put a dollar into BNSF, however, your dollar would have grown to $3.75.

How did BNSF stock do so much better than the market?

You probably have guessed that hauling coal from the Powder River Basin is big business for BNSF; certainly it’s profitable. But look a little deeper and you’ll find that Buffett’s railroad also ships grain. For many farmers, especially in the Dakotas and Montana, BNSF is often the only rail line farmers can use to send their wheat to buyers. So the railroad provides a necessary service, right?

A look at government data shows that BNSF routinely gouged farmers who had no alternative shipper, charging much more than what is known as its variable cost to ship their grain (variable cost acknowledges that a corporation’s expenses will vary with production volume). The Surface Transportation Board (STB), which regulates some railroad prices, allows the rails leeway, permitting charges up to 1.8 times its variable cost before asserting that the costs have become price gouging. But BNSF routinely charged farmers 2.5 to 4 times its variable cost in the decade before and after the turn of the millennium. According to government documents, BNSF jacked up some prices 40 percent faster than the economic data showed was warranted based on costs.

BNSF got away with this because, buried in the fine print, there are rules about who can file price-gouging complaints. Even though farmers
bear the cost of shipping their wheat to market, grain companies who buy from farmers contract for most shipping. Two of the biggest grain shippers are Cargill, the privately owned business that is the world’s largest grain dealer, and Archer Daniels Midland or ADM (a major beneficiary, by the way, of a long-running subsidy for ethanol that was also involved in the global price-fixing scandal for another product, lysine). Under rules of the Surface Transportation Board, Cargill, ADM and their like can file complaints, but typically farmers don’t have standing. They can’t sue.

Customers who have access to only one railroad are known as captive shippers. As in any business, captives are likely to be mistreated and, in one two-month period at fall harvest time, official data show, BNSF failed to provide more than twenty-two thousand grain-hauling cars when they were scheduled to be filled with wheat and other crops. More than 70 percent of these railcars that arrived late were in the Northern Plains—Montana, the Dakotas and Minnesota—where farmers were BNSF captives. Missed shipments can cost farmers a great deal (grain prices change from one day to the next) and that’s exactly what happened repeatedly: prices slipped during the time grain went unshipped.

Congress periodically holds hearings into how railroads are operating. A steady stream of complaints about railroad price gouging are heard, but few real changes are made. Congress was given clear evidence of price gouging in 2008 when a study by Escalation Consultants showed that, depending on the commodity being shipped, BNSF was the worst or second-worst offender. But nothing happened.

Wayne Hurst, past president of the Idaho Grain Producers Association, complained in 2007 that since that 1980 change in railroad law, “the degree of captivity in many wheat-growing regions has increased dramatically.” Farmers were getting hit with a double whammy of “unreliable service and higher” rates. Hurst traced the problem to a wave of consolidations in the railroad industry. Less competition meant railroads could lower the reliability of service, cutting where and how often they would pick up grain and other crops. Increasingly, they refused to pick up partially filled railcars, forcing farmers to truck wheat to central pickup points. The railroads “view efficiency as hauling larger and larger movements of a single crop from a single origin to a single destination,” Hurst said, rather than supporting a diversity of farmers and grain users, which would facilitate a competitive market.

All that means farmers have to spend more to haul grain by truck to a central pickup point, which also shrinks the number of buyers they have
bidding for their crop. That means less competition not just in rail services, but in the grain business too.

Ironically, railroading was the first industry subject to price regulation by Congress when it created the Interstate Commerce Commission (ICC) in 1887. While complaints by western farmers about price gouging and lousy service prompted the law, the railroads played a major role in shaping the legislation as it moved through Congress. Subsequently the STB replaced the ICC, but things haven’t changed a great deal.

In recent public talks, board members focused largely on the concerns of the railroads rather than their customers. In 2009, for example, the acting chairman of the STB, Francis P. Mulvey, told a conference that railroad profits were up, the numbers of rail workers slashed and the share of shipping on barges and trucks down. Still, he said, most railroads “are not revenue adequate on a system basis.”