September 19, 2012
Excerpts: An Excerpt from The Fine Print
The Fine Print: How Big Companies Use "Plain English" to Rob you Blind, released yesterday by Portfolio. (Fans of Retirement Heist, the excellent exposé from Wall Street Journal reporter Ellen Schultz on how corporations manipulate the retirement plans of their employees for their own profit, will find more excellent reporting along the same lines here.) Hopefully you've heard something about The Fine Print in the press and will continue to hear more, because it's a very timely, topical, and important book that's perfectly suited to the moment.
The Daily Beast ran an excerpt from the book at the beginning of the month about America’s Coming Infrastructure Disaster that is worth a read, and the good people at Portfolio have been kind enough to give us a second excerpt from the book to run here.
If you'd like a book in which "the corporate point of view is secondary to that of customers, workers and taxpayers," you'll find affinity with the point of view in The Fine Print. If you're interested in learning why your phone bill looks the way it does—why in spite of the fact that the FCC requires your phone bill be easy to understand, you may need a lawyer or an accountant to parse it for you—then this book is for you. If you'd like to know how, in spite of laws that ban government gifts to corporations or business entities, your state income taxes may be going directly into your boss's (or a foreign business owner's) pockets, then by all means... please read on.
The distribution of wealth is not determined by nature. It is determined by public policy.
—Eric Schneiderman, New York State attorney general
1. Friends and colleagues have always known that Adam Leipzig husbands his own money and reliably earns profits on funds others entrust to him. As a young executive at Disney, Leipzig oversaw Dead Poets Society; Good Morning, Vietnam; and Honey, I Shrunk the Kids. Later, as president of National Geographic Films, he was behind March of the Penguins. His films have brought in $2.1 billion, seven times what it cost to produce them. That makes him a Hollywood rarity—a reliable steward for investors in the risky business of moviemaking.
Because it was so small, the one thing Leipzig never gave much thought to was his monthly phone bill. When it came, Leipzig checked to see how many long-distance calls, if any, had been made and wrote a check. But his casual view changed one day near the turn of the century during a meeting at the AT&T offices in Los Angeles.
Leipzig had wrangled a meeting with AT&T marketing executives to propose a strategic alliance to help him start his own film production company. Leipzig left with everything he wanted, but a decade later the terms of his successful deal were mostly forgotten. What remained vivid in his memory was what the phone guys had said about the future of his and everyone else’s telephone bills. Their private comments differed dramatically from what everyone in America had been hearing for a quarter century about the costs of telephone calls and, for the previous fi ve or so years, about this wondrous new thing called the Internet. The promise of cheap and abundant telecommunications service, to be available almost anywhere, was becoming a major theme in telecommunications industry marketing.
But that was not at all what the telephone guys said in private while meeting with Leipzig.
“They said their corporate strategy was that, within a few years, AT&T wanted to draw at least $100 a month from each client household,” Leipzig recalled. “They would do this with phone service, and also things they were not offering at the time, or had not expanded as much—mobile, Internet and cable.”
As your monthly phone bill probably tells you, this is exactly what has happened. At the time, Adam Leipzig’s home phone bill ran $35 a month. A decade later, the total amount due AT&T every month was more than $200, even though he buys his cable television service from another company.
What the marketing executives had forecast had indeed come to pass.
THE RISE OF FALLING PRICES
Since 1974, politicians, pundits and professional economists all have said that, thanks to competition, the cost of telephone service would fall. The Justice Department sued that year to break up the American Telephone and Telegraph Company, saying Ma Bell’s monopoly hindered new technologies and shouldered aside competitors who wanted in on the lucrative business of long-distance calls. (Back then calls were so expensive that many people kept little sand dials by their telephones when calling loved ones long distance so as not to go a second too long saying good-bye and be charged for another full minute.) Eventually the antitrust case was settled by negotiation and, in 1984, Ma Bell spun off seven regional telephone monopolies known as the Baby Bells.
AT&T kept the lucrative long-distance business, but even before the breakup, another monopoly business, a railroad, found a way to compete in long-distance calling. Southern Pacific Railroad began offering limited long-distance service in 1972. SP microwave towers, which kept the trains running on time, sent signals along the narrow rights-of-way that the federal government had given the railroad in the nineteenth century. These towers had the capacity to handle calls, too, and by 1978 SP was providing a cheap long-distance system connecting business customers in Los Angeles, San Diego and Anaheim, California, with those in three East Coast cities, Boston, New York and Philadelphia.
Southern Pacific Communications would eventually evolve into today’s Sprint Nextel, but by the 1990s, a number of competing systems were being served by a growing network of glass fibers buried alongside the tracks. These braided glass strands, each thinner than a human hair, held vastly more capacity than the microwave system, which in turn was far more powerful than the old copper wires used to make the first commercial telephone call in 1878 and still in use today in most homes and small businesses. In the last decade of the twentieth century, the whole country buzzed with talk of a new Information Superhighway that would connect everyone in America; the oft-expressed expectation was that, thanks to competition, prices would fall lower and lower. Some published studies even showed that the cost of long-distance calling would fall more than 99 percent, which was not exactly good news for AT&T as a dedicated long-distance company, nor for its nascent competitors. In Washington, awestruck lawmakers marveled at the idea that every word and image in all 22 million books in the Library of Congress could be sent in the blink of an eye to any place connected by the new fiber-optic cables.
Across the country from our friend Adam Leipzig, Bruce Kushnick in Brooklyn, New York, had his own epiphany. Visiting an aging aunt, Kushnick discovered twenty years’ worth of monthly telephone bills. Kushnick worked as a telephone industry consultant, paid to extol the virtues of the coming new era of digital communications.
Kushnick knew a research gold mine when he saw one, and he set to work. When he cross-checked his aunt’s telephone bills over the years, he could hardly believe the numbers. His aunt paid $9.51 for her local phone service in 1984. By 2003 her bill had swollen fourfold to $38.90. In the two decades since the breakup of the AT&T monopoly, even after adjusting for inflation, his aunt’s telephone cost $2.30 for each dollar paid in 1984. And that was without any charges for long-distance calls.
His little history lesson prompted Kushnick to think about the telephone bill itself. Old telephone bills—from the era of the Great Depression of the 1930s, for example—often consisted of three lines. One was the monthly charge. The second was the cost of long-distance calls. The third was the total.
With the passing years, Kushnick noted, the bills had gotten more and more complicated. When AT&T started offering phones in colors, colored phones came with an extra charge. So did the immensely popular Princess telephone for the bedroom in 1959. In 1963 the first push-button phones were introduced (called Touch-Tone), and people paid extra to escape rotary dialing. Two years later came sleek Trimline phones with lighted dials—along with another extra charge.
The publicly switched telephone network, as it was known in the industry, was upgraded for emergency calls to 911. Then it was upgraded again with ANI (automatic number indicator) so that emergency dispatch centers would know the numbers of callers, and later with ALI, or automatic location indicator. The cost of ALI was justified, as it saved the lives of many people in the midst of medical emergencies or assaults, even if they were unable to say where they were. But the public paid both for its installation and for some other things, too, as some of the money collected was diverted to other uses, including new equipment the phone companies said was necessary to make ALI work.
Soon after the railroad rights-of-way microwave towers made possible the first sliver of long-distance calling competition, telephone bills became even more complicated. In the late 1970s, while the breakup of Ma Bell was under negotiation with the Justice Department, AT&T began seeking limits on free directory-assistance calls. It seemed a curious move—Ma Bell executives and spokesmen at the time told anyone who would listen that free directory-assistance calls encouraged more calling—but the AT&T shift away from free directory assistance was brilliant in the way that it quietly raised prices.
State utility regulators were told that telemarketing companies were taking advantage of free directory assistance, placing many thousands of calls to 411. That, in turn, was described as a hidden cost borne by residential and small-business customers. Thus, AT&T was able to argue that the consumer would pay a little bit less if fewer operators were employed looking up numbers for “junk calls.”
The state utility regulators might have just slapped a charge on any business that made large numbers of directory assistance calls. Or a rule could have been adopted that applied only to telemarketing firms and commercial customers. Instead, as the telephone company had requested, the state regulators limited how many free calls to directory assistance any customer could make.
At first, the limit was ten calls. Over time, the limit was trimmed in stages to zero; by 2008, “free” had become a fee, with many customers paying $1.99 each time they called directory assistance, adding more lines of fine print to telephone bills. Verizon Wireless and some other companies did not list charges for calling directory assistance separately, but hid them in plain sight among the monthly list of calls made, a portion of the bill many people typically find tiresome to examine line by line.
Today it’s typical to be charged for not being listed in the telephone directory, and, by the way, it’s not a one-time fee to defray the cost of flipping an internal computer signal, but a monthly fee. Think of it as a charge for no service. Over the years the white pages, which used to be dropped free on every doorstep, became less common and less thorough; they no longer appear in some communities. That translates to an increased number of calls to directory assistance—for which a fee is collected. While various white-pages listings appeared on the Internet, the telephone companies spent little to keep them up to date, which of course drove more business to paid 411 services. When new services such as call waiting and three-party calling were introduced, they bore stiff additional charges, too.
With AT&T’s breakup into Ma and the seven Baby Bells, new charges were introduced for regional calls, those that were neither local nor long distance. Known as Local Access and Transport Area or LATA, the implementation of this system also meant that, in some metropolitan markets, the circle shrank within which unlimited calls could be made at no extra charge. In some cases a call to a neighbor went from free to dear because of illogical LATA boundaries.
New costs came at the consumer from all angles. Until the 1984 breakup, regulations required customers to use the telephone set installed by Ma Bell. After the breakup, customers were told they could either buy or rent their phone. At first, the rental seemed cheap, but gradually people learned how little a telephone costs to make and also realized how much an open-ended rental could cost.
And then there was the expense associated with making sure the phone line in your house actually worked. Ma Bell got state public utility commissions to transfer ownership of the telephone line at the point where it entered your home or office. Once that happened, customers had to pay to fix any wires inside their homes or businesses that, say, got wet or gnawed by a rodent. But there was an option, namely a monthly “wire maintenance” fee, which added yet another extra charge for what once had been included in the basic price.
Bit by bit, the line items grew, and others were added. It was easy to miss the escalating prices because they came separately over time—a nickel on one line of the bill, a quarter or two on another. With many small line items, people tended not to notice how the total was creeping upward much faster than the rate of inflation or the size of their income.
Kushnick found his aunt’s bills printed on multiple slips of paper, making it hard to spot everything at once. He noticed some charges were for services his aunt did not use; a few were for services she couldn’t possibly use because her telephone was too antiquated. And the monthly rental for the phone itself? Kushnick calculated that his aunt had paid more than twenty times the price of the instrument with that small monthly rental fee.
One of the fastest-growing items Kushnick found on his aunt’s bill was labeled “FCC Subscriber Line Charge.” Other phone companies call this “FCC Charge for Network Access” or “Federal Line Cost Charge” or “Interstate Access Charge.” Variations include “Federal Access Charge,” “Interstate Single Line Charge,” “Customer Line Charge,” “FCCApproved Customer Line Charge” and even “End User Fee.”
These may sound like government fees, or perhaps a disguised tax on telephone users that goes into federal coffers. Not so. Each of those labels identifies the charge for connection to the long-distance network. The government does not collect a penny from that charge. All the money goes to the phone companies.
According to Federal Communications Commission rules, phone bills are supposed to be easy to understand. The FCC truth-in-billing policy supposedly “improve[s] consumers’ understanding of their telephone bills.” According to the FCC:
Section 64.2401 of the rules requires that a telephone company’s bill must: (1) be accompanied by a brief, clear, non-misleading, plain language description of the service or services rendered; (2) identify the service provider associated with each charge; (3) clearly and conspicuously identify any change in service provider; (4) contain full and non-misleading descriptions of charges; (5) identify those charges. ...Despite the misleading labeling of the network “line charge,” the FCC has approved it for years, offi cially helping confuse consumers. Among the honest descriptions the FCC might have required would be “long-distance system access” and “telephone company network charge.”
Inspired by his study of the evolution of the phone bill, Bruce Kushnick decided to find out how many people were misled by terms like “FCC Subscriber Line Charge.” In a survey of one thousand Americans, he found three people who understood their phone bill, which means 99.7 percent did not. Round to the nearest whole number, and Kushnick’s finding was that 100 percent of those surveyed did not understand their phone bill. In effect, no one understands his or her telephone bill, which amounts to a powerful rebuke to FCC policies that clearly harm consumers and benefit the telephone companies. In the years since that survey, however, the FCC has made no meaningful changes to rules that allow phone companies to confuse people. Don’t blame the FCC staff for that. As with all government agencies, the bureaucrats do what the politicians tell them to do.
PROMISES, PROMISES What Leipzig and Kushnick encountered were early signs that the lower prices made possible by competition and digital technology were just empty promises. This involved more than money, since the telephone industry, together with the cable television industry, quietly saw to it that written into the fine print were laws and regulations that made it easier for them to minimize their investments in new technology and to serve only the customers the companies wanted.
Since 1913 Americans had enjoyed a legal right to a landline telephone at any address, but by 2012 that right had been legislated away so quietly that my Reuters columns were the first to report this trend. The right to a landline was taken away without any news coverage in Alabama, Florida, North Carolina, Texas and Wisconsin. In Kentucky and New Jersey enough attention was aroused that consumer groups fought the changes, but they faced powerful obstacles. AT&T hired thirty-six lobbyists to work the Kentucky state legislature. In California the consumer group The Utility Rate Network (TURN) counted 120 AT&T lobbyists, one for each member of the Golden State legislature.
The telecommunications companies wanted to build the most profitable electronic toll road possible. Their aim was, first, to spend as little as possible on technology, which ultimately meant slow Internet service for many customers. Second, they wanted to serve areas where lots of customers could and would buy a monthly pass to get on this electronic highway; potential customers in sparsely populated areas were at best incidental to such plans. Third, they wanted to set prices as high as the market would bear, even if it meant many people could never afford to access this electronic roadway.
Lost in the rush to profitability was the crucial fact that the federal government had established an underlying policy to make telecommunications services available to all at reasonable prices. Compared to the rest of the modern world, American phone companies, along with cable television companies, have done a spectacular job of building only what and where they wanted while shoving the cost on to their captive customers.
Instead of increased competition between the telephone and cable companies, a new cartel emerged in the first decade of the twenty-first century. While telephone and cable companies posed in public as rivals, Verizon made a deal to sell its branded services over cable company Comcast’s lines, and vice versa. The only risk of real competition arose when some local governments favored the idea of building a municipal telephone, cable television and Internet access system that would be faster and cheaper. The industry responded like sharks, determined to do in the opposition and protect their predatory position. [In The Fine Print, you’ll] see how those and other efforts to kill competition fared (see chapter 5, “In Twenty-ninth Place and Fading Fast,” page 50).
READING BETWEEN THE LINES
How the promise of cheap, competitive and unlimited telecommunications service has been turned into a reality of expensive, monopolistic and limited service is just one part of the larger transformation in the American economy since the late 1970s. A host of large industries, including banks, credit card lenders, electric utilities, health care, oil pipelines, Hollywood studios, property insurance, railroads and water companies, all have worked quietly to rewrite America’s economic playbook in their favor.
In The Fine Print, we’ll look at how legislatures have rewritten basic business laws, some whose principles date back thousands of years. Too often the goal has been to thwart competition, artificially inflate prices, hold down wages by decimating unions, reduce worker benefits and then restrict or bar access to the courts by those aggrieved. Businesses have gotten policies adopted that have allowed some managers to run corporations as, effectively, criminal enterprises, something modern management and economic theory regard as outside their fields of expertise (and at best implausible) but that criminologists have a name for: control fraud. That means, in short, that those in control run the fraud, as we shall see.
While schoolchildren are taught about heroic figures who raised the capital to build new factories and fill offices, these days large companies rely on taxpayers for that money. Almost every brand-name company is in on these deals; state and local governments alone spend at least $70 billion a year of taxpayers’ money to subsidize factories, office buildings and the like, according to Professor Kenneth Thomas, a University of Missouri–St. Louis political scientist. That burden comes to $900 per year for a family of four. My only criticism of Thomas’s work is that I believe he understates the cost by an unknown but considerable sum.
The worst of these are laws in nineteen states that let companies pocket the state income taxes withheld from their workers’ paychecks for up to twenty-five years. Hard as it is to believe such laws exist, they do, and they are spreading fast. General Electric, Goldman Sachs, Procter & Gamble and more than 2,700 other big companies have these deals. It is not just American companies, either. Siemens, the big German computer maker, the Swedish appliance maker Electrolux and a host of Japanese, Canadian and European banks have similar arrangements with states from New Jersey to Oregon. In many of these subsidy programs, no jobs are created. Instead the state income taxes are given to companies that agree to move jobs from one state across the border to another, as AMC Theatres agreed to do in moving its headquarters from Kansas City, Missouri, to Leawood, Kansas, just ten miles away. AMC will get to pocket $47 million withheld from its workers, a boon to its major owners: J. P. Morgan, Apollo Management, the Carlyle Group and the firm Mitt Romney cofounded in 1984, Bain Capital Management.
From the corporations’ point of view, the best part is that the workers are left in the dark. None of these states requires that workers be told that their state income taxes go to their employers—that they are in effect being taxed by their bosses. GE says that it did tell its Ohio workers about how it updated its operations there, investing $126 million and pocketing $115.3 million of tax monies. GE shareholders paid just eight cents on the dollar for the investment.
Legislatures passed these laws, presidents and governors signed them and the courts have endorsed them. In many cases they effectively gut state constitutional provisions and laws banning gifts to business.
In New York, lawyer James Ostrowskifi led a lawsuit on behalf of more than fifty citizens, ranging from serious libertarians to liberal Democrats, challenging a gift of at least $1.4 billion of state taxpayer funds to a company controlled by Abu Dhabi’s hereditary ruler, Sheikh Khalifa bin Zayed Al Nahyan, one of the wealthiest people in the world. The sheikh’s company, GlobalFoundries, is building a microchip factory in the Hudson River Valley near Albany. Back in 1846, the New York State constitution banned gifts to corporations or other business entities, a provision that the voters reaffirmed in 1874, 1938 and again in 1967. In each case the vote was by a margin of two to one, which would seem to make the desires of voters clear.
In deciding Ostrowski’s suit, two justices said such gifts were plainly illegal. But the court majority found a way around this. They reasoned that while the state government could not make such gifts, the legislature could create an economic development agency, give it the money and, in turn, the agency could give it away to the sheikh and any other business owner. If parallel reasoning were applied to drug deals, the kingpins who finance the drug trade could never be convicted of a crime as long as they do not touch the drugs.
The court also showed its contempt for those who challenge giveaways in its final order in the case, which ordered Ostrowski to pay $100 because he asked for a rehearing to show the factual errors in the court ruling.
You’ll learn in The Fine Print how other courts, including the United States Supreme Court, have diminished the rights of consumers, voters and workers while enhancing corporate power. One instance was the Lilly Ledbetter case, which demonstrated the willingness of the court majority to favor corporations over people. Ledbetter retired in 1998 after almost two decades at a Goodyear Tire & Rubber plant in Gadsden, Alabama. Only when she was leaving did she learn that the men holding the same job she had held all earned significantly more—as much as $18,000 a year more. Paying men 40 percent more than women for the same work looks like an easy case of discrimination. But the Supreme Court said that Ledbetter’s legal right to sue ended 180 days after the discrimination first took place, which was so many years earlier that the court ruled she had lost her right to sue. But how would Ledbetter have known she was being discriminated against? Only by a tortured reading of the statute could the majority rule against Ledbetter.
Bits and pieces of the complex story of business gaming government and gaining unfair advantage over consumers have been reported in the press, most often on the business pages. That coverage, however, tends to be narrow, typically portraying what are fundamental issues as disputes between competing industries, say, telephone companies versus cable companies or truckers versus railroads. Looked at from a larger perspective, these disputes were really about how to raise prices, limit competition, and diminish consumer protections. But the forest was often lost in the trees.
Similarly, banking gets lots of news coverage, but usually from the point of view of the bankers or bank investors, not customers. This seems odd for mass media given that bank owners are few and bank customers abound. An exception to this focus on bank owners came in the intense coverage in 2011 of Bank of America’s plan to impose a $5 monthly fee on some debit card users, a plan it withdrew in the face of popular criticism. To corporate publicists this fiasco was a reminder of why they are employed—to make sure the news media stays focused on what the companies want, not on customers, lest they demand reforms.
That meant you didn’t read how Bank of America treated customers who deposited a check that bounced. BofA hits customers with a $12 “chargeback” fee for each bounced deposit. Suppose you waited for your bank to advise that the deposit had cleared and only then wrote checks. In New York the courts say the bank can still unclear the deposit and hit you with overdrafts fees, which at BofA are $35 per check.
What does it cost banks to deal with a bounced check? Back in the late 1970s, when checks were still processed by a person and a machine rather than digitally, Crocker Bank (now part of Wells Fargo) was forced to reveal in a California court case that its cost was thirty cents. At that time, the bank was charging customers $6 for bounced checks, a markup of 2,000 percent. The California Supreme Court held that charging twenty times cost was not necessarily unconscionable. Adjusted for inflation, that $6 fee would now be $21, less than half what BofA charges.
What are today’s bank costs for processing a bounced check? BofA won’t tell customers, but research papers on costs in the digital era suggest it could be less than a penny, making the markup by BofA in the neighborhood of 470,000 percent. But corporate values now so infuse our society that price gouging is easily brushed off as a function of competition, regardless of whether that’s the truth or an ideological fantasy.
No other modern country gives corporations the unfettered power found in America to gouge customers, shortchange workers and erect barriers to fair play. A big reason is that so little of the news, which informs us about the world around us, addresses the private, government-approved mechanisms by which price gouging is employed to redistribute income upward. When news breaks about one company buying another, the focus is almost always on the bottom line and how shareholders will benefit from higher prices and less competition; much less is said about added costs for customers as competition wanes. This powerful yet subtle bias appeals to advertisers such as mutual funds and other financial services companies who wish to address investors.
On arrival at the Philadelphia Inquirer in 1988, I sought to chronicle the coming spread of gambling. Part of the job was to report the monthly results from Atlantic City. Most papers reported how much the casinos won, but on the theory that there was just a handful of casino owners and millions of players, I looked at the story from the players’ point of view, reporting the sum of all player losses at the slots and table games.
That first month, I wrote that Atlantic City gamblers lost a record amount of money in the seaside temples of chance. When I left Philadelphia for The New York Times, however, the Inquirer went back to reporting the casino winnings, just like every other news organization, once again seeing the story from the corporate point of view.
I believe people want news about the issues that concern them, but the slant, whether it’s on corporate takeovers, consumer price levels or gambling outcomes, is typically reported in ways that address the interests of investors, not customers. Such investor-oriented reporting is one reason why fewer people pay to have a newspaper delivered at home.
In The Fine Print, the corporate point of view is secondary to that of customers, workers and taxpayers. Much of what is reported in these pages will be new to you; even specialty industry publications don’t cover this ground. You will read about the machinations used to inflate profits through a regulation that imposes a tax that does not exist and how, in one case, I got this legalized theft stopped, a result that demonstrates that foul practices can be ended if readers simply act on what they learn and speak up at public hearings.
You will read about why your retirement funds are not safe and why you and your children are endangered because of little-known government rules that give safety waivers to deadly industrial facilities underneath schools and playgrounds whose locations are kept secret by the federal Department of Transportation.
You will even read about an insurance company owned by one of America’s most admired billionaires that asked a paralyzed man to die because the cost of keeping him alive was cutting into the insurer’s profits.
I invite you to read, to see these and other awful stories in context, and to learn how business has been regulated throughout history. I will try to offer a sense of how, in the past four decades, we have forgotten the tried and tested (and therefore profoundly conservative) principles of business developed over thousands of years. Allowing corporate values to overwhelm us is not necessary—I will close with some suggestions and solutions—but, in the meantime, our wealth, our well-being and our freedom are being diminished daily.
Excerpted from The Fine Print: How Big Companies use “Plain English” to Rob You Blind
Copyright © David Cay Johnston, 2012.
All rights reserved Reprinted by arrangement with Portfolio/Penguin, a member of Penguin Group (USA), Inc.
ABOUT THE AUTHOR
David Cay Johnston is a Pulitzer Prize-winning reporter who has been called the "de facto chief tax enforcer of the United States." His most recent books, Perfectly Legal and Free Lunch, were New York Times bestsellers. he was a reporter for The New York Times for thirteen years and now writes a column for Reuters. He also teaches at Syracuse University College of Law and the Whitman School of Management, and he was recently elected board president of Investigative Reporters and Editors, Inc. He live is Rochester, New York.