A coming storm for trucking?

Braun Consulting:FedEx ground vs. UPS: Two Worldviews

Legally, independent contractors can't be directly supervised, supplied with workspace or tools, or otherwise treated like employees. FedEx Ground has successfully defended its contractor system from several legal challenges, but in July a California judge ruled that certain contract workers should be treated as employees.

Filed as a state wage and hour violation case by three contract drivers in California, the suit was expanded to a state class-action suit.

In the California case L.A. County Superior Court Judge Howard J. Schwab issued a 23-page ruling on July 26th, 2004. He ruled that those contractors with multiple routes were legitimate contractors who operate more like businesses than employees. But he decided that single-route contractors should be classified as employees.

The judge termed a single-route contract as a "Single Work Area".

He noted that the contractors have only one client, FedEx Ground. They must drive trucks with company logos, wear uniforms with company logos, and report daily to company distribution hubs. They attend regular briefings on safety and company issues and their contracts can be terminated for any number of infractions. This means that in effect they can be fired for failing to follow company policies.

Some of the more interesting aspects of the judges ruling follow:

"A close reading of the Operating Agreement, which all SWAs (Single Work Area, or Single-route contractors) must sign in order to be able to work for FedEx Ground, is comprised primarily of platitudes and guidelines."

"For all practical purposes, by the nature of their work, the SWAs are engaged in the exclusive and full-time pickup and delivery service for FedEx Ground and are identified as such. FedEx Ground also provides business cards for the SWAs with its logo."

"Of importance to the court is the clear evidence that SWAs are totally integrated into the FedEx Ground operation...The SWAs wear required uniforms and drive specifically mandated FedEx Ground logo-laden trucks. The SWAs are long term in years of service..."

"Most important of all, the court finds that the work of the SWAs is essential for FedEx Ground's core operation, the pickup and delivery of packages. If lightning were to strike so that there were to be no FedEx Ground, there would in fact be nothing left for the SWAs to do and they suddenly would be bereft of business."

"The court finds that in entering the relationship, FedEx Ground purposely created controls of an employment nature, hoping that in spite of those strictures, the status would still be seen and considered to be that of an independent contractor."

FedEx "respectfully disagreed" with the ruling. If the ruling holds up they will either have to convert single-route contractors into California employees or change the relationship to comply with the less restrictive control associated with an independent contractor.

This is most directly applicable to independent contractors in the courier industry, but there have been efforts to have port truck drivers considered employees. In OTR trucking there are three basic categories of driver. A company driver operates a company supplied truck pulling loads as directed by the company. He is not responsible for the operations costs of the truck. Some company drivers may have leeway as to what routes to run or even to choose which of the company's loads they will haul but the company has the prerogative to totally control the truck and driver. An independent contractor provides a tractor but operates exclusively for one employer. They will usually have a company truck number and the employer name and logo on their truck. By law, liability insurance is provided by the carrier (at leas Generally they are paid a certain per mile or percentage rate "to the truck" out of which they pay operating expenses and whatever is left over is their earnings. They have more control usually over the operation of the truck, but can still be fairly tightly supervised by the company. In theory though, the independent contractor can choose to quit his current company, take his tractor, and go to work for a different company so he has some leverage if the company makes onerous demands . An owner operator owns their own unit, generally both the tractor and trailer. They contract directly with shippers to haul freight, usually for a fixed dollar amount per load. They may haul loads for other motor carriers on an occasional basis. They run their own independent business, billing customers and providing their own operating authority and insurance.
The lines between the different categories get blurred sometimes. An individual may own multiple trucks which are leased to a carrier, in effect an independent contractor who is also an employer. Lease purchase plans may result in an independent contractor with very little freedom.
Many carriers use independent contractors to cut costs or to fill driving slots they cannot fill with company drivers. Independent contractors often operate trucks that are more expensive and less fuel efficient than fleet trucks (though much more attractive and comfortable).
So if independent contractors must be recategorized as employees then carriers will have to either accept the new status quo, only deal with owner operators, or only deal with company drivers. If the carriers have to pay wages plus operating costs they would be more inclined to restrict what types of tractors independent contractors may purchase as well as operational details such as how fast the truck is governed at, how many out of route miles, and out of route miles the truck runs.

Past returns do not guarantee future results

Stephen Roach:The Symbiosis Trap

The broad consensus of financial market participants has come to the conclusion that there is a new symbiosis between America’s record-setting external deficit and those willing to fund it. China is typically singled out as the most willing participant in the “symbiosis trade” — the arrangement whereby the US buys goods made in China in exchange for China’s willingness to buy bonds printed in Washington. On the surface, this seems like a terrific deal for both — providing American consumers with the interest rate subsidy needed to sustain wealth- and debt-dependent spending and helping China limit an appreciation in its currency that might otherwise hamper its export prowess. Because this implicit contract has enabled China to keep its currency tightly aligned with the US dollar, many have also referred to the new symbiosis as a “Bretton Woods II” regime — the modern-day sequel to the dollar-based international financial architecture that was adopted in the aftermath of World War II. Advocates of this view conclude that since it is in both parties’ best interests to perpetuate the symbiosis, there is no reason why it should change. With net foreign purchases of long-term US securities averaging $114 billion in September and October 2005, the latest facts are certainly not getting in the way of that logic.

I worry, however, that the sustainability of the symbiosis trade is predicated on a very dangerous ex post rationalization of global imbalances. As was the case in the midst of recent bubbles in equities, bonds, credit, and property, there are important kernels of truth to the notion of a new international symbiosis. The increased trade and capital flows that stem from the cross-border connectivity of globalization create a growing sense of co-dependence in the global economy. The US dollar’s role as a reserve currency adds confidence to the notion of an expanded dollar bloc. But at the end of the day, I do not believe that this arrangement is either desirable or sustainable from the perspective of either of the two main protagonists in the new symbiosis — China or the United States.
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The risks are equally disturbing from America’s point of view. To the extent that foreign purchases of dollar-denominated assets represent the functional equivalent of a subsidy to US interest rates, asset markets enjoy artificial valuation support. The result is a surge in housing values that many Americans now perceive to be a new and permanent source of saving. This, in turn, has had a profound impact in reshaping saving and spending strategies of US consumers. In essence, the income-based consumption models of yesteryear have been replaced by asset-driven frameworks. The repercussions of this transformation are profound: The income-based personal saving rate has plunged deeper into negative territory than at any point since 1933. At the same time, US consumers can only create newfound purchasing power by extracting equity from an ever-expanding housing stock. This is where debt enters the equation — in effect, the cost of equity extraction. The overall household sector debt ratio has been pushed up by 20 percentage points of GDP over the past five years — equal to the gain in the preceding 20 years; moreover, reflecting this overhang in the outstanding stock of indebtedness, US household sector debt-service burdens have risen to record highs — even in the context of an unusually low interest rate climate. The result is unprecedented consumer vulnerability on both the saving and debt fronts.

“So what!” retorts the symbiosis crowd. After all, these are precisely the excesses — both for China and the US — that we in the rebalancing crowd have been bemoaning for years. Fair point. Moreover, a year ago, when there were widespread concerns over global imbalances, the dollar rose instead of fell — and those concerns lost credibility. As long as the world is willing to finance America’s saving shortfall, goes the argument, there is no reason to worry about sustainability. This, in my view, is the essence of the “symbiosis trap.” The consensus has been lulled into a false sense of security — believing that imbalances will remain a non-issue for the global economy and world financial markets.
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The case for global rebalancing was dealt a tough blow in 2005. The dollar’s surprising appreciation led many to believe that financial markets are perfectly capable of coping with massive external imbalances. In my view, that coping mechanism has led to a false sense of complacency that could well be tested in 2006. In particular, a further deterioration of global imbalances — more likely than not over the next year — could well have adverse consequences for already-extended US and Chinese economies. The result could be a sharp decline in the dollar and related upward pressures on US real interest rates — developments that would take generally complacent investors by surprise. I have long been wary of new theories that spring up to explain away old problems. That was the problem with the so-called new paradigm thinking of the late 1990s. And it could well be the ultimate peril of the symbiosis trap.

To rip off the Matrix it will last as long as it can. Folks are spent out, real wages have been flat (and for many families have been falling) interest rates have already started to creep up. If the worst happens the folks with adjustable rate mortgages will face skyrocketing payments as well as being upside down on the note due to falling home prices. Families already living "the American dream" on borrowed money will be in the fight of their life and the folks speculating with borrowed money will loose their shirts. The bankruptcy exit is barred, lenders will not be in the mood to lend over 100% of value to refi on a fixed rate, and there will be more sellers than buyers. The coasts will be hardest hit but everyone will feel the drag on the economy. Such a recession may not have an identifiable trigger like a stock market crash rather a slowly rising flood of bankruptcy and foreclosure until a tipping point is reached and it becomes page one news.

In other news oil is lighter than water

The Big Picture: Laughing at Laffer

[quoting from the New York Times Dan Altman]
"The author of the analysis, Ben Page, estimates how an across-the-board cut in income tax rates could generate higher levels of economic activity, potentially replacing lost tax revenue. The theory behind these feedback effects is well worn: putting money back into taxpayers' pockets will let them spend more and save more, raising demand for goods and services and helping companies to invest for the future.

Mr. Page assumes that government spending will continue as planned for a decade after the tax cuts. He also creates different possibilities based on various assumptions about people's foresight, the mobility of capital and the ways in which the federal government might make up for the lost revenue when the decade is up - either by cutting spending or by raising taxes again. Finally, he compares the budget office's figures to those of two private forecasting firms, Global Insight and Macroeconomic Advisers.
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The recent analysis by Mr. Page at the Congressional Budget Office dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve.

Note this is more than mere theory. Looking at the most recent tax cuts and their impact on revenues, we learn that recent experience corroborates this prediction:

"In the second quarter of 2001, just before the first of President Bush's tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent - an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion)."

The bad news may be even worse. Once a shortfall begins, the government does what governments always do -- Borrow more:

"Shortfalls in revenue cause the government to borrow more, so money intended for other purposes must be paid as interest instead. Even in Mr. Page's most generous picture, the federal government would probably have to pay an extra $200 billion in interest over the decade covered by his analysis."

What is the exact nature of the trade off? Mr. Page estimates that gross national product gains about 1% in exchange for higher deficits.

In other words, Supply Side Tax Cuts "borrow" growth.

Of course the "starve the beast" folk would perhaps claim that the problem is that the theory is executed incorrectly since the assumption is that spending would remain constant for 10 years where in their perfect world spending would be cut in tandem with taxes. And in a "perfect" balanced budget world pols could choose to increase taxes and increase services, to hold the taxes and services steady, or to decrease both. Higher taxes make the folks that pay them unhappy with the pols and cutting spending makes the recipients or beneficiaries of said monies unhappy. So what's a pol to do? The folks who paid his way into office want less taxes and mo' money and the voters want the same. There's not enough to go around so the pol does the same thing the consumer has picked up in the last few years, he whips out the gold card and makes up the difference between his means and his wants.