The Middle Class, What Might Be Done to Stem its Demise?

Within the context of globalization and minimal disruption to the Free Market, what can be done to restore a situation where a significant portion of the population of the US is able to live well and follow the “American Dream”? Contrary to popular Right Wing opinion, there is a role for Government in the solution. We have plenty of capital in this country though it has dramatically shifted from the middle to the high end and at the moment, much of it lies dormant. We can continue paying a decent wage to people who do not compete globally. The question is what can we do for the merchants, and workers who are displaced by the Free Market? Currently, the farmers are subsidized though as the Right is pushing to reduce the benefits to workers the Left will, if it hasn’t already push to reduce the subsidies to “small farmers”.

Throughout recent history, as the markets churn, creating and destroying, one role of governments has been to see to the people who are disadvantaged in the process. If people are allowed to broadly suffer from market changes, the populous will not cooperate with the changes, the number of consumers will diminish and the markets will implode. There is also talk that industry will no longer need hard working, strong backed individuals but will primarily employ a creative workforce and one with analytical or “people” skills. When more and more of the strong-backed individuals start sinking into poverty, not only will there not be cooperation, there will be social unrest of epic proportions.

We as a nation could decide not to bust unions and continue paying good wages and benefits to the public service sectors and increase the wages paid to others in the “local” economy and allow jobs subject to globalization where we are not competitive to go elsewhere as they will anyway.

If we look around there are many things we can see, changes to which could improve the quality of life for all of our citizens, rich and poor. We can invest in initiatives that will improve everyone’s quality of life such as:
Eliminating slums
Improving facilities and activities that keep our young people off the streets and out of gangs.
Change the economic conditions so that infants can be allowed to more properly develop in a stress free, loving home.
Improve dilapidated neighborhood and public areas
Improve basic education
Increase access to education beyond the three Rs such as music, art and sports
Eliminate poverty
Improve our infrastructure
Once I heard it said that a society is judged by the magnificence of its architecture and I believe there is some merit to that observation. The bleak public building erected in the last century in the Soviet Block is a testament to this. (I was in the former East Germany a few years ago and saw buildings of that era that were nothing but huge “boxes”, very strong and functional but with no esthetic appeal whatsoever.) The general architecture in the post-industrialized era in the west is not far removed. The reasoning for this was that when life is very hard, there is no energy, resource or time for niceties.

Making these improvements in our overall quality of life can give meaningful employment to those that are displaced by the market churn. Improve labor laws, eliminating some of the excesses of labor unions and not only allow, but encourage collective bargaining to keep wages at a decent level. None of this will impact our ability to compete globally. In fact it should continue and increase our attraction to talent from across the world. Our industrialists and financiers are not negatively impacted by the flow of jobs out of the country and the shrinking of the consumer base here will be offset by the rise elsewhere. Their wealth will increase through all these shifts. We have the resources, though in the hands of a very few to do this. We now need the political will to channel these resources more for the benefit of society as a whole. We can increase taxes, particularly on the most affluent. The fear is that they will flee and take their riches with them. If we believe that we are truly “exceptional”, they will not. Eliminate duel citizenship (I have a hard time understanding how one can swear allegiance to two different countries, each with its own interests) and if they leave and want to come back impose a very high price for reentry.

The Middle Class, its Makeup and Decline

Today there is much talk about the shrinking of the middle class and the growth in income inequality. I believe both are not only true but an existential problem. Here is my take on what may be some underlying causes. First I am not sure there is anything close to a common definition of what is the “middle class”. I’ve heard the term “middle income” used interchangeably with “middle class but it does not have the same meaning. It is strictly a mathematical definition as either the median or average income with the median being closer. For the sake of this discussion I will define the middle class as follows: People who derive their income either from wages working for others or from wages/profits working for themselves who can afford to own a modest house or rent a modest apartment, send their kids to college, retire without sinking into poverty and if they forgo many extravagances, have a small vacation home to retire in. At the height of our middle class, this could be achieved with only one member of the family working. Today it takes two incomes. In general I think that it takes income between $50K and $150K, depending on where one lives. (It may be much to low an estimate. It is only my guess based on nothing.)
The problem started decades ago but was not obvious for reasons described by Robert Reich in the December 6th Huffington Post.
“For many years, credit cards and home equity loans papered over the harsh realities of this new economy. But in 2008, the house of cards collapsed. Exactly. But the first papering over was when large numbers of women went into paid work, starting the in the late 1970s and 1980s, in order to prop up family incomes that were stagnating or dropping because male wages were under siege -- from globalization, technological change, and the decline of unions. Only when this coping mechanism was exhausted, and when housing prices started to climb, did Americans shift to credit cards and home equity loans as a means of papering over the new harsh reality of an economy that was working for a minority at the top but not for most of the middle class.
We all know the story by now: Mortgages sold to people who couldn't afford them, or sometimes even understand them. Banks and investors allowed to keep packaging the risk and selling it off. Huge bets -- and huge bonuses -- made with other people's money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn't have the authority to look at all.
It was wrong. It combined the breathtaking greed of a few with irresponsibility across the system. And it plunged our economy and the world into a crisis from which we are still fighting to recover. It claimed the jobs, homes, and the basic security of millions -- innocent, hard-working Americans who had met their responsibilities, but were still left holding the bag.”
What is the makeup of this “middle class”? Following are a few examples.
People working for others
Local, state and federal government workers represented by unions such as janitors, teachers, firemen, policemen, garbage men, etc.
Production workers in low to moderate skill level jobs in manufacturing in unionized shops.
Medium to high skilled technicians working in technology companies
Mid grade management staff in manufacturing
Unionized construction workers
Mid grade engineers and scientists
Nurses and medical technicians in not-for-profit medical facilities
Upper management in the restaurant and tourist trade
Lower management in industry
People working for themselves
“Mom & Pop” shops & gas stations
Restaurant owners
Beauticians
Building sub-contractors
Small “Family” farmers
Very small factory operators

Reich pointed out in his post that the decline in the “middle class” and the resulting income inequality (he is talking about the US) is attributable to globalization, technology and decline in unions. The first two are natural consequences of Free Market activities. As I have mentioned in numerous posts, the market knows no boundaries, has no conscience and its benefit to society, which indeed exists, is strictly coincidental. This is not a criticism but a statement of fact. Indeed, over time, the quest for profits has created products and services that make life easier and more interesting for an ever-increasing segment of the population. In a free market, enterprises seek the highest profits. They achieve this through lower costs and the ability to differentiate. Since labor represents much of the cost in manufacturing, enterprises seek locations with the lowest labor costs. Within the United states, companies migrate from Northern high wage regions with strong union representation and strict regulations to poor Southern States with cheap labor and lax regulation. The same thing happens on a global scale. In the fifties much of manufacturing went from the industrialized West to Japan which in turn lost it to Singapore and Malaysia who are now struggling to hold on to as much as they can with China’s ascendance as the new manufacturing juggernaut with India on its heals. All this is good for the poorer regions and bad for the richer. Years ago a colleague told me about a mural of a swamp in the cafeteria at Colby College entitle “alligator heaven, frog hell”. When viewed from a global perspective, the middle class has been and continues to grow. Worldwide more and more “poor” people are moving into the middle class and are better off today. In the Industrialized West, however, that is not the case. Some, though by no means all of the improvements seen in the “Third World” come at the cost of conditions in the industrialized countries.

This flow of jobs that once allowed for a middle class standard of living here in the US will not be able to be stemmed without disrupting the Free Market significantly. It is a natural and for the most part a desirable consequence of Free Market activities. This disruption would be ultimately to the detriment of everyone. Representing those earning wages from their labor/profits and business in general, the Right wants to move retreat back to the golden era of the twenties. To try to stay competitive, there is a strong effort on the Right to bust unions to drive down wages and benefits of workers make it easier to compete (ironically while at the same time increasing wages and benefits for upper management). The same people are also trying to undo health and safety regulations to bring down costs. It is interesting that the strategy a couple of decades ago was to “level the playing field” by forcing Third World countries to raise their standards up to our level. Now, in a panic, we are even talking about possible repealing child labor laws. (Although I don’t believe Newt’s comments are taken seriously) This is a poor strategy. Maybe in the very short term effective but in the long term as the middle class in the developing world grow the same regulations that were imposed in the West will, for the same reasons be imposed elsewhere and in the process we may have gone back in time so far, creating social turmoil that we may not be able to recover from and in the process get left in the dust.

Another thing leading to the decline in the middle class, also a natural outcome of a free market has nothing to do with globalization. Driven by the quest for profits, in an attempt to bring an ever-wider range of commodities at lower prices to a broader segment of the population, mega retailers such as Wall-Mart are making it difficult if not impossible for the “Mom & Pop” shops to compete. Haircuts that cost $50 in a beauty parlor can now be had in places like Super Cuts for $12 or $8 with a coupon. While the broader society benefits from lower costs, like the workers in the manufacturing sector, the small shopkeepers and businesses suffer.

Technological advances, also a natural consequence of free market activities, driven by the quest for profits leading to a need to differentiate, have changed the workplace. Information technology has eliminated many administrative jobs and ready availability of information eliminates much of the middle management responsibility.

The reasons for the decline described above are unavoidable. Some of the pain, however is self-inflicted. There are well paying jobs in the public sector and some in the private that cannot be exported and are of no significance in international competition. Teachers, firemen, police officers etc have to remain near the public they serve and cannot be exported. The Right is working hard to bring down their wages and benefits. Maybe it is because they feel that it makes it easier to bring down the wages of industrial workers if the public sector worker’s wages and benefits are reduced. Unlike manufacturing, here there is no economic necessity to do this. Relatively small increases in taxes on people who benefit most from globalization can easily allow this group to again live a “middle class” life.

In the next post I will discuss my thoughts of what can be done to maintain a decent standard of living for a large portion of the US population.

Job Creators; More Thoughts

I subscribe to the Liberal notion that the term “Job Creators” as used by Conservatives is code for wealthy individuals. I don’t believe there is a direct correlation between wealth and creation of jobs.
The legitimate quest of business, particularly manufacturing, is to do as much as one can at as low a cost as possible. So there is always a search for ways to reduce, not increase, jobs since much of the cost is in labor. Though much of the shrinkage in jobs, particularly higher paying jobs, in recent years is attributable to technological advances, during an economic downturn falling profits amplify the need to reduce labor and workers are pushed to increase their individual efficiency. With workers fearing for their jobs, the task is easier. Corporations have been extremely effective in reducing jobs during this recession as is evidenced by record profits. There is nothing wrong with this. That is how the system is supposed to work. So, in this sense, the people running business are not focused on “job creation” and should not be considered “job creators”. However, their attempt to increase the value of the enterprise is often accomplished through growth and growth can create jobs so if they create more through growth than eliminate through efficiency, they may be “Job Creators” coincidentally but certainly not by intent.
Much of the wealth today, however, is derived from investment and speculation in the stock markets. Are these investors also “Job Creators”? The fact that most laymen overlook is that when one buys shares in the stock market, with few exceptions, one is buying them not from the corporation but from another individual who owns shares in the company. The corporation is not at all involved in the transaction and the benefit to the corporation is only tangential at best. If many people buy shares it may increase the paper value of the corporation, which may make it easier for it to borrow money or issue more shares. But unless it does either of those, my buying the shares puts no money into the corporation and is inconsequential from the standpoint of creating jobs. So unless I am buying shares from a corporation directly, either through an IPO or new issue, I am not adding capitol to their coffers and even with a stretch cannot be considered a “Job Creator”
What about private equity firms? Are they “Job Creators”? Private equity firms gather money from large investors and operate somewhat like investors in the stock markets except having large amounts of capital they generally take controlling positions in corporations but are not subject to regulations imposed on the public markets. Bain Capital, a private equity firm headed by Mit Romney is used by Liberals to argue against Mit’s claim to being a “job Creator”. They purchased select companies that were flush with assets and unprofitable, convert the assets to cash for the investors, streamlined the operation by eliminating jobs and either took them into bankruptcy or sold them. Their gain comes from stripping assets and/or improving efficiency (by cutting labor) thus increasing profits and the value to the investors. Here again one cannot considering them “job creators”.
Governments, federal, state and local also employ labor, in administrators, teachers and public service and safety personnel. Though they provide jobs, they do not create jobs with the exception of the military and foreign policy activities. Unfortunately this job creation occurs during times of war and global stress. During war the federal government not only hires soldiers, but increases their purchase of weapons. Many foreign policy activities involve providing aid in the form of weapons to countries like Pakistan and Israel or allowing sale of weapons to Saudi Arabia and Taiwan to mention a few. These activities do create jobs but not necessarily the kind of jobs we want to strive to create.
So who are the real “Job Creators”? Venture capitol firms raise money from large investors and invest it in new enterprises or new projects in existing ones. They take on much greater risk than private equity firms and their successes do indeed result in new jobs. They and individuals invested in venture capital firms are truly “Job Creators”.
A very large portion of our GDP comes from consumption and ultimately the behavior of the consumer in the marketplace destroys, maintains or creates jobs. But, since we are embroiled in a global marketplace, we need to think of consumers and the jobs they create on a global scale. Much that is consumed in the US is mined, farmed or manufactured elsewhere and a portion of what we take from the earth, grow and build here is consumed elsewhere. However, regardless of where something is made, it is marketed and transported locally. So increases in demand for even product manufactured in China, as is the case with most of what is sold in Wall Mart for example, creates sales clerk, administrative and transportation jobs. Though the “middle class” has been shrinking in the US it is growing dramatically in “third world” countries and their consumption will have a strong impact on our jobs. The nature of the impact will be determined by how we navigate through the dynamics we are in the midst of throughout the world. Unfortunately on the right there is a simplistic view pushing for less government and lauding unsupported “exceptionalism”. Progress in an ever-shrinking world is a complex undertaking and will not only require government involvement but a “nuanced” one at that.

Uncertainty

I really hate political “one liners”. “job destroying”, “job creators”, Medicare killing” etc. My current least favorite is “uncertainty”. All economic woes, particularly unemployment, are attributed to the “uncertainty” faced by the “job creators”. Republicans have been using the term and more and more businessmen are jumping on board. We would hire people but for the regulatory and tax uncertainty.
During one of his early speeches Rick Perry talked about the great job he did in Texas creating an environment where businessmen could “risk their capital” to create wealth. (The Right attributes nobility to risk in business but never to sweat in labor. But that’s another topic) Getting back to risk of capitol and uncertainty. I particularly get riled when businessmen start whining about uncertainty. After all, a major justification for profit in business is the risk; the greater the risk the higher the potential for greater profit. A characteristic of a good businessman is the ability to manage risk.
Without uncertainty, where is the risk? What will be the price of tin? Will it be a rainy season or will we be faced with a major drought. What will the dollar trade for in Europe? There is always regulatory uncertainty. Stores selling wine worry about the impending lifting of restrictions that exist in some states on shipping wine by mail thus reducing their monopoly. Funeral parlors worry about removing restrictions on transporting corpses across state lines. My Father in Law passed away in Massachusetts and was to be buried in NY. A New York undertaker could not pick up his remains from his residence. By law, we had to get a local undertaker to take the body to the Connecticut border, transfer it to a hearse that took it to the NY border where finally a New York undertaker moved him to the place where he was to be prepared for the burial. (A secondary point I am trying to make is that not all regulation is anti business. Many, if not most, regulations are lobbied for by business trying to limit competition, the greatest detriment to profits.)
Anyway, risk, and by implication uncertainty, whatever its nature, is an inherent part of business and one of the factors that conservatives point to that distinguish business from labor. I don’t mean to suggest that risk is not a strong consideration in business decisions. The greatest is the risks of making a profit and since income taxes are a tax on profits they do not affect amount of profit but what portion of it will remain with the organization or individual to do with whatever. Though regulations do affect the cost and availability of supplies and labor, they are with some exception minor. Some notable exceptions are tighter immigration regulations will restrict the availability of cheap labor and there is indeed a cost for limiting pollution and increasing safety in the work place. I don’t believe there is any movement to increase regulation in the pollution or safety areas so the uncertainty may be in whether and to what degree the regulations will be eased not increased. That uncertainty, were it a real reason for economic slowdown, certainly could not be laid at the feet of liberals. There is always risk and there is always uncertainty in business but the emphasis of regulatory and tax uncertainty’s affect on employment is greatly overstated strictly for political reasons. The real uncertainty is when will the consumer get enough disposable income to start spending wildly again?

Society’s Impact on Good Parenting (Correction)

I previousloy duplicated the last post under this heading. Here is the correct one.

I have a fundamental belief that children are the most important asset to the future success of our nation. I further believe that there is a normal distribution of reasoning ability that is a genetic part of the individual and to maximize the probability of success we must allow them to rise to their maximum potential. I read and hear more and more that the jobs or the future depend on three attributes; analytical thinking, creativity and social skills. The first two of these, though they may be able to be enhanced by education, for all intents and purposes cannot be taught. As I discussed in a previous post on education, universities, though they do not create analytical thinkers or creative individuals, do “brand” them. The higher the degree, the greater the probability that they have these thought-after characteristics. With rare exception, individuals without degrees may not be recognized as being analytical or creative. So I am interested in expanding education to certify as many of the talented as possible. The more we get into our mainstream the better for our future.
As I have followed debates on education, I hear much about the importance of good parenting. The debate regarding the impact of parenting is not whether good parenting has an impact or not but is it a 50% or a 95% issue. That being the case the question boils down to how can parenting be improved?
May 5th I watched a special on Democracy Now, a very liberal broadcast, which featured a composite of three different interviews of Dr. Gabor Mata, a Canadian physician who studied and wrote about addiction, autism and attention deficit disorder. Gabor Mata, a Jew, born in Hungary during the Nazi regime and brought up in a home where the family was in work camps and in general, given the Nazi attitude toward Jews, under tremendous stress. As he discusses various studies he also often cites himself as an example of behavior consequential to his early upbringing. (I also find some relevance to my own symptoms though I am sure my formidable years were not nearly as terrible as his.)
He started by pointing out that unlike most mammals, the humans, because of the size of our brain need to enter the world before the brain is fully developed and spend the first two years of our lives continuing the development of the neural connections and whatever else goes on in the brain. During this period, for proper development, it is crucial to be in the presence of a calm loving person. He attributes the bulk of the above ills and their increase to improper development brought about by parents living under more and more stress and thus depriving the child of the environment needed to properly finish the development started in the womb. His conclusion is that whereas these diseases are considered and treated as medical or psychological maladies, they really are societal ills. He cites the increased stress brought on by deteriorating economic conditions requiring mothers in two parent households to work and the revision of the welfare system forcing single mothers to go into the workplace as conditions that remove the loving hand and their ability to comfort.
If there is merit to his argument, (I believe he has hit the nail on the head) what can we as a society do to improve the development of the infants and thereby improve our future society? In the LA area there are “Mother’s Clubs” which provide a setting where mothers from impoverished families can go and spend some time with their children in a calm atmosphere while learning to read and write and basic parenting skills. Though I think, such are very worthy efforts, they reach a very small number of people and don’t get to the root cause. The answer need to come in the form of policies that reduce the stress on families and allow for more parental contact during the time the brain is developing. The zeal with which the Conservatives want to punish “free riders” and thus improve our Nation may back fire. It may result in a society with ever increasing dysfunction which hurts them as much as the people they insist on not helping. To succeed in an ever competitive global economy we must deploy the best talent we can and not allow a significant segment to fail because of improper development. I can’t imagine a two year old being branded a worthless “free rider”, even by the staunchest Libertarian.
It would be interesting to compare the level of addiction, ADD and autism in various countries against the policies they deploy affecting early childhood development. All advanced industrialized nations are in essence Free Market Capitalist Welfare States though they vary with the level of “safely net”. The US has one of the lowest and along with the very low minimum wage and strong advantage of business over labor, makes it both easy and necessary for mothers to work. In countries like Germany and Italy with Christian Democratic governments, it is very difficult to fire a worker and minimum wages are high. High minimum wages make it harder to get childcare there than in the US and the increased job security for the man of the house makes it both difficult and less necessary for the mother to work. I am not suggesting that that is what we want to do but only giving an example of policies that may have a positive effect on early childhood development. In the former Soviet Union where everyone worked and there was extensive government supported child care, I suspect, along with the very high rate of alcohol addiction, there probably is also a high rate of ADD and autism, though they may lag substantially in diagnosing these.

Republicans Ideologically Opposed to Job Creation

I saw a segment on the tube featuring Marco Rubio, a potential Vice Presidential candidate and most likely a Presidential candidate in 2016, elected to Congress from Florida with strong Tea Party support. He was featured at a Ragan Library function escorting Nancy Ragan down the aisle. I suspect the honor of escorting the former First Lady could mean that he may be picking up Ronald Ragan’s mantle. At the podium he talked about government’s proper role and admitted there is one and clearly building infrastructure certainly is a valid government function. He quickly added the caveat however, that funding infrastructure is OK in and of itself but not if the purpose is to create jobs. I am surprised that this was not immediately picked up by the media or at least the progressives.
The statement chrystalizes the conservative position regarding jobs and workers and it confirming the conservative belief that any government attempt to interfere with the workings of a liaises-faire market with the aim of improving the prosperity of the general population is anti-American. An action that is very appropriate by any measure is wrong if the purpose of the action is to improve the conditions of wage earners. The benefit to society should never be a goal but a byproduct of commercial enterprise. Seeing Nancy Ragan on his arm confirms, to my satisfaction anyway, that Rubio is speaking for the Republicans. If this is their ideological position, what happens to the Republican promise made at the last election to put jobs at the top of their list of priorities? They can’t! This explains why all of the Republican focus has been on social issues, nothing to do with jobs and spending cuts, counter to job creation.
So expect a lot of noise and opposition from the right when President Obama unveils his “jobs agenda” whatever it is. The only way he stands a “snowballs chance in hell” of getting anything passed is to come up with initiatives that have another purpose, like improving infrastructure, with job creation as a silent byproduct and totally downplay the job benefit. Also their benefit needs to be so clear that it will be politically impossible to go against it. Otherwise whatever the policy proposed, the cry will be that the initiative, will impact the “job creators” ability to create jobs or that it somehow “punishes “job creators”.
The thing that continues to astound me is how many working people who suffer from this conservative position so vehemently support policies and ideologies that really destroy their chance for prosperity. Talk about “cutting off your nose to spite your face”.

Debt Ain't so Bad

Today one sees many comments in the popular medium comparing government finances to household or corporate finances. I won’t go into a detailed discussion on the differences between household’s, business’s and government’s finances and focus on some similarities between them relating to debt.
The first thing to acknowledge is that there are different kinds of expenditures in each that have similarities. In the household there are expenditures for subsistence, convenience and entertainment. These are current expenses, though necessary or at least desirable, their benefits do not accumulate. There are other expenditures such as dinnerware, furniture, household appliances, education, cars and houses whose benefit is felt over a long period of time. These can be considered investments. Current expenses need to be at least matched by income or the household puts itself at great financial risk. Investments, on the other hand, the benefit of which is realized over a period of time can also be paid for over time. Few households are in a position to pay for the larger of these out of current income or savings. And even fewer of us pay for a house or for that matter a car out of savings and borrow money which we pay back to the lender over time, 20 or 30 years for houses and 2 to 5 years for cars and maybe less for furniture and appliances. People who had mortgages or car loans were not looked down on as reckless or irresponsible. It is the normal way to live in modern times. In fact, being credit worthy was a source of pride.
60% to 70% of our GDP consists of consumption and is facilitated to a great extent by credit. The GDP is an indicator of prosperity in a society, and the lot of wage earners, improves as a society prospers with growing demand creating jobs. Until recently, when loans made by one lender began to be bundled with others and sold and re-bundled and sold, the lender had an interest in ensuring that the borrower had the wherewithal to make payments on the schedule agreed to. With the selling and bundling of mortgages, the lender no longer cared about the borrower’s ability to repay since they made their money from the sale of the loan. Requirements for creditworthiness and collateral were all but eliminated and high pressure salesmen, using what could be argued were underhanded tactics, convinced households to assume debt they had no way of repaying. Furthermore, household incomes have been stagnating while costs were going up so beside the poor loans taken out for investments, they started to use debt to pay for current expenses. Debt got a bad name.
Business debt is somewhat different than household debt. Whereas in a household, in most cases the income lags the labor by about a week or in some instance two, in businesses, particularly manufacturing, payment for an item produced can come in one, two, three or more months after it is purchased and the item may have been in manufacturing for weeks or months where it had been collecting costs. It is a common practice for businesses to borrow money to cover the lag between when they start spending and when they receive payment. These expenses, whether financed with debt or not, are part of the cost of a product or service. This is considered a legitimate reason for borrowing even though it is to cover current expenses. Plant and equipment, on the other hand fall into category of investment. From an accounting standpoint, whereas direct costs, (costs that go directly into a specific product or service), indirect cost, (costs that go into things like rent, maintenance of equipment), administrative costs and R&D reduce the profit, (price-cost=profit), investment (and income taxes) comes out of profit and as in the case of the household are paid for over a long term with debt because most businesses do not have enough cash flow. Businesses borrow money for their investments. The ability for a business to borrow money is an asset and is not a sign of weakness.
When it comes to the government, things become somewhat nonsensical. Whereas in households and businesses, investments are considered and treated differently than current expenses, in government accounting all expenses are considered current. Though a bridge, an aircraft carrier or a hospital will be used for decades, all the money spent is treated as a current cost and not differentiated from other costs. So when criticizing government spending, one should really consider whether the expenses and debt are investments or current expenses, even though the accounting doesn’t. Another difference between the government and households or businesses is its ability to print more money and raise revenues. Households and businesses can theoretically increase income as well but it is easier said than done. Governments can do it with a stroke of the pen.
As with households and businesses, there is a level of debt that is perfectly appropriate and works to the benefit of a society. I think that true “current” costs should be paid from revenues, either increasing or decreasing one or the other as appropriate. Investments should be financed with debt to the extent that money can be borrowed. Currently lenders are lending money to us at ridiculously low rates indicating that from their perspective the loans are reasonable with probability of repayment very high. Unfortunately the extreme Right has taken a position that all government expenditures, except defense, are bad and are trying to inhibit the borrowing of money or raising revenues.
There is another “proper” accumulation of debt that is the same for households, businesses and governments. In a period of temporary crisis, all may find themselves in a situation where the current expenses exceed income and need to borrow anticipating a return to normalcy at some point in the future. Our government has done this several times and there is a sharp peak in spending and debt followed by a rapid decline. During bad times lenders will lend but getting a loan becomes more difficult. In the case of households and businesses, there is a stronger demand for collateral, and their interest rates, along with those of governments are higher. There is an old saying that everyone is willing to lend you money when you don’t need it but very few when you do.
As to running the country like a business, a successful business’s credit is one of its major assets. The notion that it would be restricted by arbitrary limits or ratios would greatly inhibit a business’s ability to weather periods of turmoil or maximize potentials during periods of opportunity. I certainly would not want to run a business so constrained. In this respect government is very similar to business. In times of economic crisis that we are struggling to get behind us, increasing competition brought on by globalization and potential shifts in the balance of power throughout the world, we need to be careful of zealotry arbitrarily restricting our investments and debt. Reckless spending without accountability is bad but the notion that any spending and borrowing is bad and should be severely limited is naïve and can destroy a business as well as a country.

The Debt Ceiling Debate

The total distraction of the last several weeks in Washington makes me think of a time before I retired. Back at the beginning of the century, as the dot.com bubble burst our business was collapsing. We laid-off half of our staff, froze pay for the entire company, cut pay for the senior management, delayed paying bills, and met with the bank almost weekly. It was a very difficult time and we were struggling to stay alive. Everyone was under more stress than usual and on edge. There was a young woman who was accused of not pulling her weight and getting away with it because she was romantically involved with one of the managers. With all that was going on I wanted to stay focused on staying alive and did not want to deal with issues unrelated to survival.

We had been having monthly meeting of the entire staff for some time where I presented the financials and talked about where we are and what we are doing to try to weather the storm. At a meeting during the height of the clamor I broached the subject of the young woman with a metaphor.

Imagine I am driving a bus with you as a passenger and we are traveling down a steep, curvy road on a stormy night. There is an annoying person in the back of the bus and people are yelling for me to do something about them. Now, if the yelling continues I will get progressively more distracted and will need to do something. However, if I were a passenger on this bus, given the circumstances, I would want the driver to absolutely focus on the road and would put up with the annoying passenger until we got down to the bottom of the mountain. The yelling stopped and the issue resolved itself before the bus reached the bottom. We survived.

I think the above analogy may hold true today. Our country, and the world for that matter, is in the throws of recovering from a deep recession with a number of world events slowing the recovery. Third word countries are advancing faster than the western countries potentially changing the balance of power and whenever there is a threat to the balance the world is in a precarious position. With this critical phase we find ourselves in, the right wing decided to raise a ruckus in the form of a balanced budget debate and held the debt-ceiling hostage. Unfortunately, unlike the annoying passenger on my bus, the debt ceiling could run us off the cliff. The issue of the debt ceiling has resolved itself. However we are left with potentially negative consequences and much valuable time, energy and credibility has been lost in the process. The scary thing is that we are not down from the mountain yet.

Uninformed and Misinformed Revisited

Talking points are simple phrases that PR people develop for an organization to forward their agenda. The “communications” specialist study what combination of words will have a desired affect on the chosen audience, massage and polish them and then issue them to the members of the organization. Thus are born phrases like “job killing health care”, Medicare killing proposal”, etc. The idea is to inject them into the conversation whenever possible whether totally appropriate or not. So following an event, all of a sudden one hears the exact same phrase coming out of the mouths of many. Some politicians use talking points sparingly and only if they fit very well into the discussion. Others just throw them around without regard for fact or context.

Today I heard an interview of Eric Cantor (I am only 90% sure it was him since I didn’t hear the introduction but heard him referred to as the Republican Whip) in which he made a couple statements that vividly illustrate the idiotic use of “talking points”. In reference to something Harry Reed voted against, he said that the reason Harry voted against it was because the “people wanted” it. The talking point he was injecting was “the people want” which is something often used by Republicans since the 2010 elections. If you stop and think about it, this is totally ridiculous. To think that any politician would go against something that the “people” want just because they want it is ludicrous. There is no benefit whatsoever to them in doing so. They want to be reelected. Cantor could have accused him of voting against something because he didn’t understand what people want (not hearing or understanding what the people want is a common accusation of Democrats) or that it was ideologically inconsistent or that it would offend his contributors or he thought wrongly that it is not good for the country or that he was ignorant or any number of other reasons, though one may disagree with them, that could make sense. But to say that he voted against or, for that matter, for something, just to go against what the “people wanted”, is plain dumb.

In the same interview Eric also said that he has been a businessman since he was twenty and unlike people who sell labor, businessmen try to create jobs. Here the talking point is “businessmen create jobs”. This also is ludicrous. Had he left out the word “try”, though I would disagree with him, it is a point we could debate. Success in business is making a profit. One can increase profit by cutting costs through improvements in efficiency. (read eliminate jobs) or by eliminating competition (also read eliminate jobs). That is what they “try” to do. There is nothing wrong with this. That is how the system works. Jobs are an unintended byproduct of businesses as a whole trying to maximize their individual profits. There is nothing in any business metric that treats increased number of jobs as a positive. Jobs are coincidental. So when Eric Cantor (or whoever) says businessmen try to create jobs he either doesn’t understand or just sees an opportunity to inject the talking point with impunity.

I think in both instances the truth probably is that he is just spouting “talking points” without really thinking about them because his followers on the extreme right will like the sound of these words and really not even consider their merits and as to the others, he just plain doesn’t care. Unfortunately this is the way many, if not most, on both sides of the isle operate. With ‘talking points’ used as broadly as they are today, it is very difficult to hear an intelligent conversation in the popular media. To make matters worse the talking points are picked up by the media favoring one or the other side to support their cause or by neutral media to increase ratings. As a result we the people really don’t get to hear many legitimate discussions and therefore are misinformed or at best uninformed. However, ultimately, in the case of politicians, the blame is with us. We allow, if not encourage, our politicians to continue this nonsense by reelecting them.

Comments on Adam Smith’s Opinion on Policies Supported by “Merchants and Manufacturers”

Adam Smith (1723-1790) oft cited writer on Free Markets, in the Wealth of Nations (the quotes come from the conclusion of the last chapter of Book I) breaks society into three primary “orders” and discusses their relationship with the prosperity of a society. “…the whole price of the annual produce, naturally divides itself, it has already been observed, into three parts; the rent of land, the wages of labor, and the profit of stock; and constitutes a revenue to three different orders of people;…” To put it more into the context of our time, I would add to the renters of land those that earn their keep through interest and dividends. Investors and traders easily fall into the definition of those earning their keep from profits.

The point Smith makes is that the well being of the first order, those living from rent, rises and falls with the prosperity of the society as a whole. “The interest of the first of those three great orders, it appears from what has just been said, is strictly and inseparably connected with the general interest of the society.” Therefore policies they sponsor to benefit themselves invariably also benefit society.

“The interest of the second order, that of those who live by wages, is as strictly connected with the interest of the society as that of the first.” The wages rise as a society advances and fall as it stagnates, with catastrophic results when it declines. “The order of proprietors may, perhaps, gain more by prosperity of the society, than that of labourers: but there is no order that suffers so cruelly from its decline.” Smith states that because of their condition and education they tend to either not have access to information or the ability to analyze it and “In deliberation, therefore, his voice is little heard and less regarded, except upon some particular occasion, when his clamor is animated, set on, and supported by his employers, not for his, but for their own particular purpose.” Today the “order” may be better educated and informed but still have relatively little clout with only unions arguing for policies that improve their lot.

Smith devotes a larger portion of this discussion to the ‘order” that lives on profits. Whereas the well being of the first two “orders” is directly tied into the success of a society, that is not the case with the third. “But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension, of the society.” (We saw this during this last recession where the income of the wealthy rose by 20%, while a large segment of wage earners lost jobs) “Merchants and master manufacturers are, in this order, therefore, the two classes of people who commonly employ the largest capital, and who by their wealth draw to themselves the greatest share of the public consideration.” “The interest of the dealers, however, in any particular branch of trade or manufacturers, is always in some respect different from, and even opposite to, that of the public.” “As their thoughts, however, are commonly exercised about the interest of their own particular branch of business, than about that of society, their judgment, even when given with great candor (which it has not been upon every occasion), is much more to be depended on with regards to the former of the two objects, than with regard to the latter,” (This was part of my argument discussed in another post, for why businessmen should not be politicians.)

He concludes Book I saying: “The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

This is not a condemnation of free markets but simply a reiteration that the benefit derived by society from market activities is coincidental. The role of a good government is to ensure that all three “orders” are considered, and not yield to the most powerful voice but to hear them all and be suspicious of the voice of the “order” driven by profit. Having heard all the voices set policy and regulate markets to insure that their activities lead to the prosperity of the entire society.

Undoing 80 years of Liberal Policies

Yesterday I heard a comment made by Newt Gingrich that precipitated an “aha moment”. He said something to the effect that this upcoming election was an opportunity for America to undo all the Left’s social policies of the last 80 years. Newt openly and loudly said something that has been talked about in conservative circles for decades. So if indeed that is the Republican, or at least their extreme end’s strategy, then in that context, many of the tactics employed today make sense.

· Holding steadfast to the notion of “no tax increases” forces the government to cut spending and not allowing those cuts to occur in areas like defense and business subsidies, forces cuts of social services.
· The zeal for balancing the budget I believe, is also in reality a move to reduce spending on social services. This is demonstrated by the fact that the Republicans are allowing no revenue increases and are willing to chance a deep recession here and global economic turmoil
· The movement to make impotent or eliminate public service unions, the last bastions of organizations representing labor. (I wonder to what extent the labor disputes initiated by owners of the NFL and NBA teams are influenced by this broad agenda?)
· Eliminating public education by privatizing it under the guise of education reform. I believe that the movement, Students First, initiated by Michelle Rhee, may be more about ideology than education.
· The recent proposal to privatizing Medicare
· Past attempts to privatize Social Security
· Constant attempts to prevent the formation of, undermine or eliminate regulatory agencies focused on protecting the consumer or labor.

The Republican’s intransigence, in this context makes total sense. The cry for job creation is only a ruse to placate the public. Their real aim is to rid the country of as much “socialist” programs now, just in case they cannot win the next election or better yet to destroy Obama’s chances for reelection by whatever means and short term consequences be damned.

The Right tends to be more xenophobic and often speaks of our exceptionalism. Over the last eighty years we have become the strongest economy with the strongest military, have sent a man to the moon, bankrupted the Soviet Union, and developed a standard of living that continues to attract many to our shores. Though not perfect, our government must have done something right over those 80 years. I wonder what we would look like were it not for the “social” programs Newt rails against?

Punishing Job Creators

Among my least favorite things are the term “job creators” used by conservatives when talking about the wealthy and the notion that taxes are a punishment. From the right you often hear increasing taxes on the rich is punishing the job creators. Though I personally feel the job creators are buyers of stuff and therefore anyone with money in their pockets prepared to spend it (even unemployment insurance recipients) create or maintain jobs.

Setting all that aside, to not “punish the job creators” I propose the following compromise. Not all wealthy people create jobs. Actors, athletes, traders, writers, hedge fund managers etc. probably do not except perhaps in a very obtuse way if one wants to really argue the point. My suggestion is that we raise taxes on anyone earning over some amount. If they can demonstrate that within the tax period they have indeed created jobs, their taxes will be refunded to the extent of the salaries for the newly employed. (Loopholes such as hiring a family member as administrative assistants need to be studied and eliminated.) This will separate the “job creators” from just ordinary wealthy people and allow us to raise some revenues without “punishing” them if indeed that is what we do. Taxes, in this case may, not only not inhibit job growth, but actually accelerate it.

Civil Unions

There is much debate on gay marriage these days. The other day I saw a clip from the Republican Presidential debate from New Hampshire. Ron Paul, when asked about gay marriage, responded by saying that marriage is a religious and cultural custom and of no concern of government. I tend to agree with this position.

Where it becomes a government issue is when there are certain rights granted to married individuals by virtue of the fact they are married. I believe these issues can be and are addressed in civil unions. The argument I have heard are not about these rights but about the morality of homosexuality. In insisting on the right to marry, I believe the gay community is looking for the government to resolve the moral issue that it cannot. Morality is very subjective and not a purview of government. Civil union, on the other hand is a legal matter in which government has a very legitimate role.

I would like to propose the following. Extricate the term “marriage” from legal documents and cede it to religious organizations, allowing them to assign whatever definitions and moral judgments they want as long as they do so within the discrimination statutes. Expand the civil union concept and benefits to include mating couples (current married couples) and gay couples along with arrangements beyond two individuals living as lovers. We had friends where a mother shared a home with her daughter and a son’s son. There are other cases where older brothers or sisters live together or for that matter, just friends who are not sexually involved. They share chores and expenses. There could be identified a “sharing arrangement” (or a family, though that term so broadly applied, will ruffle lots of feathers) whereby consenting adults sign a document agreeing to share their assets and costs and through this agreement legally gain the advantages of a family. Part of the agreement would also be the disposition of assets upon termination of such an arrangement. Children could not enter into such arrangements. However, they could participate as long as their legal guardians have entered into the arrangement. There could be a limit set on the number of participants. This would also address some issues of polygamy facing some Mormon sects.

Such an act gets the government completely out of the bedroom and morality. (In an interview Ahmedinajad, the president of Iran, responded when his statement that there are no homosexuals in Iran was questioned, that since he doesn’t go into people’s bedrooms, as far as he knows there is no homosexual activity.) All the arrangements described above now exist and are expanding. I believe people living in families by whatever name or legal definition benefit society. This should be encouraged. There are others to share the burdens and responsibilities when there is illness or in the case of rearing a child. These burdens might otherwise fall on societies shoulders. We should recognize these benefits by bestowing some advantages to all families as we do now to the so-called “traditional” family.

Pakistanis Arrested for Aiding US

Last week there was a lot of news about the arrest of Pakistanis working for the US and assisting with the location of Osama Bin Laden. Many in Congress were questioning Pakistan as a friend and ally because of the arrests. Counties, friends and enemies alike, spy on each other all the time. When the espionage is uncovered, if the spies are from a foreign government, they get deported. If the spies are citizens of the country being spied upon, they are arrested and charged with espionage. Case in point, a number of years ago Jonathan Pollard, a US citizen, was tried and sentenced for spying for Israel, our special friend and ally. His arrest was proper and did not impact the relationship.

The arrested Pakistanis were on the CIA’s payroll. They were working under the direction of foreign agent handlers and if they were doing so without the blessing of Pakistan they were spies and therefore properly arrested. (Though their arrest may be for local consumption, a way of covering up for the fact that their government collaborated with us, a very unpopular thing.) One can argue whether and what kind of an ally Pakistan is but this arrest really should not sway the argument one way or the other.

Rapid Rise of Healthcare Costs

Rapid Rise of Healthcare Costs

I just returned to the Boston area from a couple of weeks in South Carolina and was amazed by how much advertising for medical services there was on TV. I happen to hook up with a local lawyer on the golf course and he suggested that the costs started rising disproportionately (labor rates in higher end healthcare grew much faster than others) in the 60s and 70s when privatization of healthcare started. Though it sounds reasonable, I wonder if is not related to the issue discussed in a previous post “Exorbitant Salaries Revisited”.
“ Gladwell pointed out that there was a surge in the salaries of athletes, entertainers, lawyers and CEOs starting in the 70s. He correlates this with availability of capital. Prior to that time capital was scarce, but in the 70s there started to develop an overabundance. With a shortage of capital, when it came to bargaining for wages with talent, capital had the upper hand. The balance of power shifted in the 70s and instead of talent competing for capital, now capital was competing for talent and gave in to the demands for higher wages.”

Over the last several decades there has been a rise in average wages in the US. But when one looks at the numbers, the middle and lower wages have stagnated while the upper range has increased dramatically. (Doctors wages went up by a factor of two to three) though the argument for increase in availability of capital is plausible, I wonder if there are not other factors and explanations and how they relate to the widening gap between the very rich and the “not so rich”. Certainly different rates of change in wages explain the widening of the gap. But what are the underlying causes? If it is access of capital, then what brought about the access? Is the underlying cause related to government policies and if so, which? Or is it globalization where wages for the high-end skills are competing on a global scale where there is a strong demand and not much availability?

I will give this topic more thought, both as it relates to healthcare and in general and would appreciate hearing others. It would still be interesting to see statistics on increase in healthcare cost vs. degree of privatization in the industry over the last 40 or 50 years. Navigio, you are very good with facts and statistics. Maybe you can find some time to explore this. (I have the time but not the skill)

Free Market Forces as a Part of Nature

I saw an interview of a group of young men from North Africa who had entered Italy illegally and were now on their way to Northern Europe in search of work. This got me thinking about the free market forces at work drawing labor from lower paying to higher paying locations and how these forces are not dissimilar to forces in nature.

There is a scene in an old movie “Network” that supports this notion. The story line is as follows: A TV newscaster goes off the deep end and starts ranting and raving against the corporate establishment and as a result gains a large following. (There is a scene that is often repeated where his audience is asked to open their windows and shout ,“I’m mad as hell and I am not going to take it any more”). The ratings are skyrocketing and the network management is delighted but the company that owns the network is displeased with the attack on corporations. The chairman of the board calls the newscaster into a meeting, sits him down at the end of a long table in a darkened board room and after a few polite exchanges, assumes a very loud and angry “preachers” tone and scolds him. The chairman’s point is that economics follows the laws of nature, which the corporations adhere to and how dare he interfere with nature. The newscaster is convinced and tones down the rhetoric and starts arguing the corporate case. His rating plummet and the network management wants to take him off the air but corporate refuses. At a network meeting the management was beside themselves searching for a solution when someone in passing suggest killing him. The suggestion gains traction and they arrange to have the newscaster shot on air by a radical.

As forces in nature seek equilibrium so do market forces. The entire system is based on the premise that like liquids and gasses that are drawn toward regions of lower pressure until equilibrium is achieved so are labor and capital. Capital seeks the greatest potential for profit and as more is drawn in competition rises, profits decrease and capital looks for better opportunity. The same can be said for labor. In a particular region or industry where labor is scarce, prices are high and people are drawn into them. The young North Africans demonstrated an expression of true free market capitalism. They were drawn from poor areas into wealthier ones. The problem for the wealthier areas is that this influx can bring down demand and subsequently wages. The exodus of labor from an area reduces the supply and given there is a demand, causes an increase in wages. Left undisrupted, there is an equilibrium reached unless there is a growth in demand in the rich areas not sufficiently satisfied by the influx.

Man can and does intervene both in the case of “nature” and markets. Dams are built to constrain the natural flow of water. The larger the difference in the levels of water on either side of the dam, the greater the pressure differential and the larger needs be the dam. As in the case of water where larger differences in levels require larger dams, greater differential in standards of living require higher fences and greater number of border guards. As the gap grows, eventually the force becomes so strong that there are no fences high enough to stem the flow and as in ancient history, the hoards from the north attack Rome. Outside martial conflict or very high fences, the options are to either improve the lot of the poorer areas or lower the standard in the wealthier ones.

The free market unconstrained, knows no boundaries, ethnicities or religions. Governments in their role as custodians of the “well being” of their societies, much as they construct dams for their constituencies benefit so they enact policies restricting the flow of labor. I find it interesting that the conservatives, with the exception of Libertarians, supposedly the guardians of free markets, are the biggest proponents of tough immigration laws. This certainly is a call for more government intervention. Ultimately the difference between liberals and conservatives is not more or less government but the “sacred cows” the different constituencies want government to enhance, protect or eliminate. A good government is one that institutes policies that benefit its society as a whole while doing so within the guidelines set forth by its constitution and not sub-optimize the whim of a segment even if it is a majority.

Inconsequential People

My Dad was born in 1904 in Belarus and lived through the Russian Revolution and several other wars working in a slave factory in Germany toward the end of WW2 and with his wife and little kids spent seven years as a refugee after the war. He was a gentle man which led to great difficulties working in factories here in the States. He was a hard worker and looked for every opportunity to work extra hours to better care for his family. This angered his coworkers and they created a hell for him at work, teasing him and sabotaging the machines he worked with. He wasn’t a complainer and when recalling the past, he would talk about the better experiences but sometimes he allowed himself to remember the painful parts.
There was one story he told often with more pain on his face than I saw with any of the other recollections. When he was a young man he worked as a clerk in the office of the President of Belarus. After the end of one of the wars, I think it was with Poland, the army was demobilized and men returned to peacetime jobs. Returning from the war were also political operatives, members of the NKVD (the Soviet equivalent of the CIA), who were getting jobs in the government. A senior NKVD officer took over as Chief of Staff and brought with him his cronies. One day my Dad found himself with an assignment to train one of them and it was obvious that this was an end to his job. Unlike him, he got very angry and refused to do this, the new Chief of Staff fired him (the only time he was ever fired) and in his document wrote “you are not a clerk, you are an inconsequential person”. Under the totalitarian Soviet Regime, documents were required for everything. You couldn’t move from one place to another or job to job without them. One of the things I love about our Country is that, unless you drive you can live your whole life without needing any kind of papers though today there are people trying to change this. I believe of all his great pains he suffered (some of which were caused by me) being designated an “inconsequential person” bothered him the most.
I don’t believe my father was unique in his feelings. Every day through our actions and words, intentionally or unintentionally, we make people feel inconsequential. We do this when people become instruments for our agenda. A cabby is indistinguishable from the cab and just a way to get to the airport instead of a person who is driving us there. Employees are just hands used to achieve the corporate goals. Apparently insignificant words or actions by a parent can make children feel inconsequential and it may take a lifetime, if ever to reverse this. I remember a number of years ago I toured the Astor Mansion in Newport RI where the guide explained that the Astor family had a large number of servants. The inside male servants wore the same uniforms and were all called Jives, while the outside servants were called James. The same held for the female staff. All inside maids were Mary and outside help were named something else. To the Asters, these people were inconsequential. How sad for the Astors.

Pakistan Hiding Osama Bin Laden?

The “Arab Spring” for all intents and purposes has totally de-legitimized al-Qaida. So I am not sure of the significance of the death of Osama Bin Laden in terms of terrorism and fundamentalist Islamist international aspirations. However the attack on his compound demonstrates our ability and willingness to conduct surgical strikes in questionable areas with great sophistication, minimum loss of life and success. (Remember our rescue, also using Seals, of the Captain from the Somali pirates?)

Since the killing of Osama Bin Laden, there has been much debate about the competence or complicity of Pakistan. The suspicion is that someone in their government must have known of Bin Laden’s whereabouts. I heard a commentator on BBC say that with the corruption in Pakistan, Bin Laden would have never trusted anyone in that government with his whereabouts. I tend to agree with this observation.

Back in the 70s, France sent a communiqué to our government complaining about our recruitment of their military officers stating that one half of the senior military staff was on the CIA’s payroll. I suspect that one half was a gross exaggeration but nevertheless, if a significant number of France’s senior military staff was working for the CIA, the portion of a third world country’s must be much larger. Surely Bin Laden was aware of this and would expect that the probability was very high that any information in the hands of any Pakistani official would get to the US. So in hiding from us, he would not dare enlist the aid of Pakistan. “Hiding in plain sight” is a risky but sound strategy.

As with a number of Pakistani officials working for us, I suspect that a number are also working for al-Qaida. Because of this, both sides are very cautious in their dealings with Pakistani officials. We demonstrated this clearly by not including Pakistan in the loop regarding this operation and Bin Laden would have by not allowing them to hide him.

Exorbitant Wages Revisited

Last Sunday I was listening to Fereed Zakharia’s GPS on CNN where he was discussing the rapid and dramatic rise in salaries with Malcolm Gladwell, writer of books like Blink, Turning point etc. Gladwell’s basic thesis in much of his writing is that, whereas common wisdom attributes great success and failure to mainly individual attributes, much of it is really influenced by circumstance along with familial and cultural factors. His classic example is one of the professional Canadian hockey players whose birthdays are almost exclusively in January, February and March. This is because, in Canada, at a very early age kids are grouped according to age with the cut-off being the end of the calendar year. So the kids born in January are almost a year older than those born in December and at the very early age there is a tremendous difference in their development. The more capable kids (read the older kids) are moved into an elite league the following season and get more than 5 times as much ice-time and better coaching than the kids left behind. Not having the time to develop their skills, the kids left behind never catch up. (But I digress)

In the discussion, Gladwell pointed out that there was a surge in the salaries of athletes, entertainers, lawyers and CEOs starting in the 70s. He correlates this with availability of capital. Prior to that time capital was scarce, but in the 70s there started to develop an overabundance. With a shortage of capital, when it came to bargaining for wages with talent, capital had the upper hand. The balance of power shifted in the 70s and instead of talent competing for capital, now capital was competing for talent and gave in to the demands for higher wages. In the case of CEO’s he also pointed out that added to this, institutional investors “rolled over” further tipping the playing field in favor of the CEOs.

I think the above is an interesting insight into why large salaries started to be paid but it does not address the issue raised in the previous posting on the topic. Why are these jobs deemed to be worth the exorbitant pay? How much one is paid depends on two things, the value and availability of the talent and the competition between the buyers. Gladwell’s argument addresses the specifics of why the change now. In “the Wealth of Nations”, Adam Smith addresses the underlying issues relating to both.

Maine’s Statehouse Paintings, Conclusion

Maine’s Statehouse Paintings, Conclusion

Entrepreneurship and individualism are ingrained in our culture but corporations are not entrepreneurial. They are bureaucracies managed by administrators. The real entrepreneurs, the small businesses are disappearing. Wal-Mart has displaced the “mom and pop” local shops and you can buy your cigarettes, wine (in some southern states) and milk in the local EXXON gas station. You can get a haircut in a chain barbershop and coffee at Starbucks. This is true capitalism and from the standpoint of the general population not altogether bad and as long as monopolies are prevented, prices will go down and we as consumers benefit. As a society grows and becomes more advanced and complex, the individualism that was a strong cultural asset during our early days may become a liability. With so much interdependence we have to be concerned not only with our selves and our immediate surroundings but with the broader society and environment.

Another problem was the Soviet propensity for central planning. The disadvantage of a planned economy over a free market one is that commercial interactions are too complicated to anticipate and plan. Whereas the free market uses a somewhat free form method devoid of planning and relies on the economy to be driven by “real-time” supply and demand, (though large corporations do utilize central planning) the Soviets established an intricate bureaucracy to create five-year plans. Within these plans was determined how much of what to make and where and for how much to sell it. As societies grow and technologies advance the complexity and number of commercial interactions grows, central planning became less and less effective. Going forward, however, there is no question but that computer science will be able to deal with this complexity. The only question is when? Years ago it was believed that a computer program will never be able to beat a world champ in chess. Well, it has. More recently, Watson, an IBM program, won on Jeopardy. We need to be alert and not fall victim to ideology. I suspect China, since it already has a culture of central planning, as its participation in free markets grows, will not given up on the notion of central planning and is pursuing technologies to improve it as we speak.

Being an optimist, I am confident that we will reform our political system allowing the voices of our citizens to continue to be heard and encourage dialog expressing divergent points of view that is not drowned out by special interest with very deep pockets. The free market will continue, though adjusted to reflect the times and government will be allowed, if not forced, to do its job in the ever more complex future. So if we are going to build statues, paint pictures and sing songs, I would like to see a scene with a group of people some of whom have calluses on their hands while others are working on something scientific and also someone at a financial chart on the wall. The paintings will be bright and the subjects will all be well fed, healthy and strong. The songs will showcase their kindness, courage, tolerance and generosity. As to the Maine statehouse painting, my advice to the governor comes in the form of an anecdote. Sigmund Freud, the father of psychotherapy, was on stage smoking a cigar while addressing a group of students at Clark University in Worcester, MA. He said to the audience, you are looking at me and thinking the cigar is a phallic symbol, but sometimes it is just a cigar. The painting of workers in the Main statehouse was just a painting, no more or less.

Maine’s Statehouse Paintings, Continued

Main’s Statehouse Paintings, Continued

My reaction to the painting and the reason it brought the Soviet Union to mind was that the painting was predominantly gray. Though the population was fed and everyone was employed, I always felt that from a distance at least, life in the Soviet Union looked gray, not bright, colorful and joyous. We need to be careful not to devolve into what on the outside appears to be a two party system but in fact there is only one. I already see some movement in this direction. Politicians are relying on more and more money for the privilege of representing us. There have been two activities in recent times that worry me. First is the all out attack from the right on public sector unions. Currently there are two major groups with divergent interests investing in politicians. They are unions and business. If unions lose their influence, there will only be one major force remaining. The second thing is that the influence of that force has been greatly increased by the Supreme Courts ruling on Citizens United v. F.E.C. which gives corporations the status of citizens, granting them the right to free speech and essentially removing any limits on the amounts they can spend to influence elections. For democracy to survive, the government must represent the interest of all its people and corporations, though owned and operated by people, are not people. Corporations are a means to that end and not an end onto themselves. If our two party system has two parties only nominally, we will not be unlike the former Soviet Union politically. The corporations, through their contributions to political campaigns, will select the politicians we will vote for. The “push and pull” of political dialog will disappear as will the systems ability to self-correct.

The second problem was economic. In the Soviet Union, the government literally owned the means of production and the distribution of labor and with that, the role of government as a mediator between commercial and social interests is nonexistent. I am not sure to what extent the contribution of this absence to the dysfunction is recognized. In the free market systems used in the industrialized west there are three distinct entities. Two are the buyer and seller, at tension in every transaction and the third, a government whose role is to make sure that neither one is unfairly disadvantaged and the transactions, if not serving the common good, at least do not cause damage to the society. What happens in the socialist (by my accepted definition) economic case, with government owning the means of production and distribution, there is only one entity and this important mediator needs not exist. If our two parties dissolve into one listening only to the voice of corporations, the role mediator will also cease to exist and then who will remain to make sure that in the commercial transactions societies interests are advanced? Though in principle we will remain a capitalist state, but the boundaries between corporations and government will melt away and we will start to look and act more like a state whose means of production and distribution are under the control of one entity. We will not call it socialism and to placate the populous, statues will be built, pictures painted and songs sung glorifying individualism, entrepreneurship, and the accumulation of great wealth. Our paintings will look predominantly gray with isolated patches of garish color in the faces of a few. As the worker’s paradise was a myth, so will the entrepreneur’s become one if we continue on the path we have embarked on. It will be ironic if we are pushed into this position not by the left but by the right in their attempt to prevent socialism.

TO BE CONTINUED

Maine's Statehouse Paintings

Recently on the cable news there was a lot of discussion about the paintings that were taken down from one of the rooms in Maine’s statehouse. These were large drab looking murals of workers. At first blush it seemed like a pretty petty thing for the governor of Maine to do but on further reflection, though I disagree with his reasoning, I understood its source. The paintings in the Maine statehouse could well have hung in one of the halls of the Kremlin. The former Soviet Union proclaimed itself as the “workers paradise”. It put workers and peasant farmers on pedestals, glorifying them in statues, literature and paintings. Even the symbol of communism, the hammer and sickle, was deference to the working class. Most of us here do not understand the various economic systems and words or images like “workers”, “social”, “people’s”, “working class” or “welfare” are automatically associated with the now defunct Soviet Union, President Ragan’s “Evil Empire”, the “mother” of all socialist states.

Today the word socialism means many different things to different people as discussed in a previous post. Some believe providing a safety net in the form of welfare, healthcare, food stamps, education assistance etc. for those at the bottom is socialism. Others see in the competition between labor and business, anything favoring labor as socialism. Still others see any attempt by the government to improve the state of a society as socialism. Despite what they are called, these are things that exist to varying degrees in all modern advanced free market capitalist societies. I suspect that among the misinformed there are even more creative concepts that I am totally unaware of. The formal definition of socialism I adhere to is the one that defines it as the government owning the means of production and distribution of goods. That is the system that existed in the Soviet Union and still exists to a great extent in China. The problem with the Communist Party was not its claim to be the party of workers (I doubt whether the powers that be were any more interested in workers than most other governments) but fundamental flaws in Soviet economics and politics.

It had a one party system and though the population voted, they had only candidates put forth by the Communist Party to approve or not. In contrast, one of the strengths of western democratic systems is the fact that there are voices representing different points of view so that even with only two parties, as is the case in the US, the system self corrects making the pendulum swinging from left to right, generally brought back to somewhere around the center. The Soviet system lacked the “push and pull” of the populace and thus had no method of correcting and once on a path it plunged forward, however disastrous the end.

The idea that it was a “worker’s” state was propaganda employed by the bureaucrats in the government to placate the “working class”. So statues were built, pictures painted, songs sung and stories told glorifying the workers all in an attempt to make them feel like they were part of something they were in fact not. Members of the Politburo were selected by and from the ruling elite, with little, if any input from the population at large. This group made all decisions. Unfortunately the propaganda also infected the west and any leaning in favor of workers is connected to socialism. I believe the governor of Main, being old enough to remember the “cod war” and not really understanding socialism, wrongly saw the paintings of workers as an encouragement to socialism.

TO BE CONTINUED

Exorbitant Wages – A Justification

Adam Smith, the most highly respected spokesman for free market capitalism, in “The Wealth of Nations” written in the late 1700s, puts forth his rationale behind the variations in the price of labor. He breaks the causes for these variations into five major parts with each in turn having some detail and further explanations. The five major categories are:
1. “Agreeableness or disagreeableness of the employments”
a. “Ease or hardship”
b. “Cleanliness or dirtyness”
c. “Honourableness or dishonourableness”
i. “Honour makes a great part of the reward of all honouurable professions.”
1. “In point of pecuniary gain, they are generally under-recompensated.”
ii. “Disgrace has the contrary effect.”
1. “The most detestable of all employments, that of a public executioner, is, in proportion to the quantity of work done, better paid than any common trade whatever.”

2. “The easiness or cheapness, or the difficulty and expense of learning them”

3. “The constancy or inconstancy of employment”

4. “The small or great trust which must be reposed in those who exercise them”

a. “We trust our health to the physician; our fortunes and sometimes our life and reputation to the lawyer and attorney.”

5. “The probability or improbability of success in them”
a. In some professions there is a great probability that the training will lead to employment of that skill
b. In others, however, there is a low probability. Adam Smith cites the example where only one in twenty educated in the law wind up working as lawyers and feels that their wages would reflect not only their education, but the education of the twenty that did not make it.

I suspect there are many arguments for variations in wages based on free market principles. I would like to see if and how the principles laid out by Adam Smith can be applied to high pay of professional athletes, Wall Street traders and the huge increase in compensation for CEOs.

One can apply the 5th principal to professional athletes. The probability of making a living at a sport is in the thousands to one range, so the cost of preparing the 1,000 that don’t make it can be added to the salaries of the ones who do. That along with the 3rd principle, where a professional athlete has a limited time he/she can practice their trade, certainly supports a large wage.

How about Wall Street traders, let’s compare them to “rocket scientists”. They both need advanced degrees, the trader an MBA and the rocket scientist a PHD. The education of the scientist is more expensive. Though they may think so, I don’t believe the traders are any smarter. So what is the reason there is about a factor of ten between their wages? The job demands a lot of time and travel and thus a stress on family life but that may account for about a factor of two. Using Adam Smith’s analysis, could it be that the trader’s job lacks honor? The rocket scientist builds rockets and at the end of the day can have the satisfaction of looking up into the sky and seeing his work among the stars. What has the trader accomplished? He has convinced someone to sell something for less than it is worth and someone else to buy something for more than it is worth enriching himself in the process. The larger the spread in values, and the greater the number of transactions, the greater is their personal success reflected in their wages. This may be too harsh a commentary and I know the arguments that they are a critical cog in the free market engine and the creators of wealth etc. but if not training, intelligence or skill that justify the factor of ten difference, than what?

I would like to propose that the same argument applies to the great increase in compensation of CEOs in multinational public companies in recent times. With the increase in institutional investors, the role of the CEO has changed. An ever-growing portion of investors in businesses is comprised of mutual funds, pension funds and endowments. These institutional investors have no interest in anything but short-term gains in value. The enterprise is seen only as a number they want to see grow. They are in and out and look at an enterprise very one-dimensionally. (I heard today on CNBC that 70% of trades on the stock market involve the investor getting in and out in a few seconds. That doesn’t sound right to me but it was on TV so it must be factual. Hmmm!) Private investors, though also interested in the short-term gain, sometimes are willing to take a longer-term view and consider factors beyond just numbers. For example, many sports teams are owned for ego with no real intent on financial gain. The same can be said for investors in movie productions; they want their names to be affiliated with the publicity and to be able to rub elbows with celebrities. Large family holdings in public companies often have the family name tied to the long-term success of the enterprise and some relationships with the workers. Business ownership can also be used to express the political ideology of key investors.

A CEO in these circumstances needs to balance the drive for profit (or in the case of sports teams, minimize loss) with other factors important to the owners. Many of these have underlying noble aspects to them. Their skill often includes balancing the profit with the respectful treatment of employees, vendors and customers. With the short term, one-dimensional task of enriching the institutional stockholders and their traders, most of the noble aspects of the job go away. The main job of the CEO’s becomes their ability to demonstrate short-term gains often at the expense of long time employees, walking a fine ethical line and convincing the market of the great worth of the enterprise. The output of the enterprise becomes irrelevant except to the extent that it many affect the short-term value. They are applauded for being able to make “hard” decisions usually about other peoples lives. In that sense they could be compared somewhat to Adam Smith’s example of the executioner. (Jack Welsh, former CEO of GE was nicknamed Neutron Jack because of his reputation for going into a newly acquired enterprise and decimating their staff.) In this king of setting individuals like Dennis Kazlowsky of Tyco (now in jail) and Ken Lay of Enron become the stars.

The job of CEO requires intelligence and along with intelligence, given a level of experience, comes wisdom. The new CEOs need to leave wisdom at the doorsteps and rearrange their sense of values, and in the process lose much of the sense of “honor” that they might otherwise have gained. I don’t accept the argument that, with globalization and ever changing technologies, the job of the current CEO requires greater skill. Information and the ability to interpret and disseminate it is a key to leading an organization and with today’s computer systems, there is more and better information more readily available. I also have heard discussion that with companies primarily held by institutions, there is no entrepreneurial ownership and the large wages are an attempt to have the CEO “act” as if they were owners. I don’t buy that because they are administrators working on behalf of someone else no matter how much you pay them. The wages do not alter the relationship. I might accept the argument that the job now has taken on a theatrical element and as is the case of movie stars, this justifies a large compensation. Or it may just be the degradation of honor.

If it is honor, there may be some light at the end of the tunnel. I heard Jack Welsh on CNBC last year. He said that the MBA textbook may need to be revised and other stakeholders in an enterprise, the employees and customers may need to be considered not only as a means to maximizing returns to the stockholders but as beneficiaries of the enterprise in their own right. Also there is a new management “buzz word” emerging, “shared value”. Mark Kramer and Michael Porter wrote an article for the Harvard Business Review on the subject and are consulting major corporations on the concept. “Shared value” is a recognition that there are activities an organization can participate in that are not directly aimed at the bottom line but have as a primary focus some social good which actually result in financial advantage to the organization. An example they cite is that of a large candy company that relies heavily on cocoa grown in Africa. By helping the community where it is farmed and thus contributing to its stability, it is ensuring a continuing supply of a commodity that is not only rare, but crucial to their success.

I fundamentally have no issue with very high compensation. My interest in this topic stems from concern about the negative impact on our society of the widening gap between the rich and poor. Being an optimist, I am hopeful that going forward, in time a sense of honor will be restored to the position of CEO and other senior executives and its lack will not need to be compensated for by exorbitant salaries. As to the Wall Street traders, I don’t hold out as much optimism. (In “The Essays of Warren Buffett: Lessons for Corporate America”, Lawrence Cunningham writes that 20% of corporate annual earnings of $700 Billion, goes to various traders who “recently describe themselves variously as hedge fund and private equity firms”). That’s $140B! I don’t see where there ever has been nor can there be much satisfaction in a job of making someone else rich so these jobs will need to be paid well. In fact a primary attribute required of someone entering this profession is a strong drive to amass great personal wealth above all else. From the standpoint of reducing the gap, the answer probably is to take away the great tax advantage they have bought with effective lobbying.

Our Penal System

There is a misconception that the conservatives are pro free market and liberals anti. The reality is that it is not a question of pro or con free market but who should ensure that the market not only functions, but does so for the benefit of society as a whole. I believe both sides (possibly with the exclusion of Libertarians) believe that the market unconstrained will implode. Edmund Burke, an icon of conservatives writing in the 18th century, warns of the dangers of rampant innovation driven by misguided intellectuals and the “new moneyed”. He felt that it was the role of aristocracy and existing institutions to temper this innovation. In fact to this day one can still hear rants from the right about the “elite” intellectuals. Today, though there technically is no “aristocracy” in our country, there is their equivalent in the “old money”.

The conservatives, by definition, want to maintain, if not strengthen, the position of these institutions, businesses and the wealthy. The Republicans, driven by this ideology, are promoting policies that advantage their constituency and in fact have represented them interests effectively over the last several decades shifting an ever larger portion of the national wealth and thus power into the hands of the few wealthiest.

The liberals on the other hand, believe that the tempering of the innovation in the market is a key responsibility of government. And whereas the conservatives believe that the good of society will be served best by ensuring the well-being of the wealthy and institutions, the liberals, represented by Democrats, do not have an intermediary and look to directly serve the benefit of society and in so doing wind up speaking more loudly for the workers and disadvantaged who do not have a voice on the other side. With the added responsibility of ensuring that the markets serve society, the role of government and therefore its cost is greater and both from a liberal perspective are justified.

In the marketplace there is a healthy tension between business and labor with each looking to get the best deal in the transaction and thus the overall good generally is well served. There are occasions when segments of each, business and labor, benefit from the same policies. They lobby, if not together directly, in parallel. In recent years portions of our penal system have been privatized and private enterprises, driven by the profit motive want their businesses to grow. A way to do this is to increase the population of inmates. To that end they lobby for legislation to make imprisonment mandatory for as many crimes as they can, taking away discretionary power from our judiciary. More and more states now have the “three strikes and your out” laws, requiring mandatory long prison sentences for three time offenders for ever lesser crimes. I don’t know this to be a fact but I suspect the prison industry would lobby very hard against legislation decriminalizing drug offenses. In this case business and labor are on the same side. Like the private jails, strong unions representing the prison workers have an interest in not only keeping prison jobs, but increasing them. They lobby for many of the same policies as the penal corporations. Though there are still areas where they compete like wages and benefits, having heard about the contracts won by the California’s prison guards, I would not be surprised if there is, if not an outright deal, then at least an informal quid pro quo understanding between business and labor in this case.

In this type of situation where there is a common goal for competing entities, the probability of the general good being served is very slim. Such is the case with the current penal system in the United States. We rate number one in the world in the number of our people in prison with 753.2 per 100.000. That’s 0.75% of our population in jail. We are ahead of Russia who is second with 660.3, third is Rwanda with 593.4 followed by the Virgin Islands (US) with 593.4 and Cuba with 531.24. Jails harden criminals. Young people incarcerated for petty crimes come out not only more bitter, but more willing and able to commit more serious crimes. For those who may want to go straight, having a record makes it very difficult to get a job. Society is hit with a triple whammy. Not only the inmates but their families, particularly their children suffer. We spend a fortune incarcerating an ever-larger population and grow an ever-increasing number of unemployable individuals who instead of being productive members of our society become a drain.

I know; I know “if you do the crime, you do the time”. The question is how do we as society benefit from access incarcerations? Prisons don’t reduce crime. We are not keeping individuals who are a danger to society off the streets in very many cases. We are not reforming them. So what justifies the great expenditure? It must not be profits for the penal industry or jobs for prison guards. The price is too high not only in dollars but in damages to our society. But I digress. My main point is that in our system everyone is vying for a maximum advantage and competition on an even playing field generally serves society well. But when the field gets tilted the suffering on the part of one or another segment of society increases. As in the case of the penal system, when one of the few powerful lobbies on the left, labor, sides with business, there is not enough clout with the civil and human rights organizations to adequately impact government policy and we suffer a great disservice.

I Wonder Why?

Why do better living standards of one group of workers always need to be lowered instead of those of another raised?
Auto workers in Detroit were living better than auto workers in Tennessee. Why do their living standards need to be brought down to the level of the Southern workers instead of the Southern workers brought up to the Detroit level? An argument is that the Northern wages are too high to compete. Somehow good benefits such as paid health insurance, pensions, freedom from abuse by management and good wags have been painted as unpatriotic. Workers in the “real American” part of the country would not expect such unreasonable terms.

Why do worker’s wages and not executive’s need to be reduced to stay competitive?
I saw an interview a couple of years ago where the guy heading up new product development for GM was bragging about the fact that beside him having a helicopter, his wife has one also. And by the way, they have a jet (though I think it is one for the both of them). Why are the costs for the sake of competition not taken from the salaries of the top executives and why are good benefits for workers wrong and great benefits for executives not? (I am not begrudging them their wages or the ability to spend them as they will, I question squeezing those at the bottom when times get tough. When our company was on the brink of collapse as the “dot com bubble” was bursting, we froze wages for everyone and cut wages for the executives with those with the highest wages getting the largest percentage cuts. And by the way, the difference between the CEO and floor sweeper was no more than a factor of 10, not 500.) The argument is that they have these great skills and if not paid huge sums they will not work. GM did not do so great under their leadership. Many Wall Street bankers did an even worse job and not only have retained their wages but have received increases.

Why is only labor and not businesses and investors asked to contribute to reducing the deficit?
Conservative governors vilify the sellers of labor (in this case public workers, particularly teachers) but don’t ask the buyers of labor (businesses) or investors to do their share. Yes; deficits can be remedied by cutting costs but they can also be eliminated by raising revenues. The argument is that if taxes are raised on businesses, they will leave the states and investors will change their investing strategies, thus eliminating jobs. Almost a decade of tax cuts introduced under the previous administration did not create jobs so one might expect raising them to the level before the cuts might not reduce jobs. Certainly reduced estate and gift taxes can’t be argued on the basis of job creation and are essentially a means of further concentration of wealth in the hands of the already wealthy.

Why is a union threatening to strike any different than a business threatening to leave or an investor to not invest in a way that benefits society?
In the case of Wisconsin, not only did the unions not threaten to strike but agreed to reductions in compensation while businesses and investors were not even asked to do their share, but received tax breaks increasing the deficit. The excuse for this was that businesses would leave and thus a loss of jobs so they were not asked or expected to share the burden.

Why is distribution of wealth bad and consolidation good?
In the last several decades there has been a major redistribution of wealth from the working poor and middle class to the wealthy. The “supply side” argument is that wealth “trickles down” and the rich are the creators of wealth. That being the case we need to make sure they can stay wealthy for our own good and further more they are the hard workers building our great nation so they should get the greater piece of the pie. (2/3 of the US GDP is personal consumption with less than 1/5 government spending. Spending is what creates jobs. Factories are holding on to cash because they don’t see customers. Investors invest in businesses that can show them customers. Customers come first then investors. The recent boom was caused by the consumer borrowing and buying, encouraged by investors making money from each transaction). The irony is that a significant portion of people working for wages supports this notion. They have been convinced that entrepreneurship is noble and our American identity while working for wages is coarse and somewhat foreign. Wealth is accessible to everyone if only they make a strong effort. Though technically true (I am an example of this) there are only so many openings for pro athletes, inventors and CEOs. As more wealth is concentrated in the hands of a smaller portion of the population, their advantage grows and opportunities for others shrink.