Corporate Dysmorphia: Why “Business Needs Certainty” Is Destructive
If you read the business and even the political press, you’ve doubtless encountered the claim that the economy is a mess because the threat to reregulate in the wake of a global-economy-wrecking financial crisis is creating “uncertainty.” That is touted as the reason why corporations are sitting on their hands and not doing much in the way of hiring and investing.
This is propaganda that needs to be laughed out of the room.
I approach this issue as as a business practitioner. I have spent decades advising major financial institutions, private equity and hedge funds, and very wealthy individuals (Forbes 400 level) on enterprises they own. I’ve run a profit center in a major financial firm and have have also operated a consulting business for over 20 years. So I’ve had extensive exposure to the dysfunction I am about to describe.
Commerce is all about making decisions and committing resources with the hope of earning profit when the managers cannot know the future. “Uncertainty” is used casually by the media, but when trying to confront the vagaries of what might happen, analysts distinguish risk from “uncertainty”, which for them has a very specific meaning. “Risk” is what Donald Rumsfeld characterized as a known unknown. You can still estimate the range of likely outcomes and make a good stab at estimating probabilities within that range. For instance, if you open an ice cream store in a resort area, you can make a very good estimate of what the fixed costs and the margins on sales will be. It is much harder to predict how much ice cream you will actually sell. That is turn depends largely on foot traffic which in turn is largely a function of the weather (and you can look at past weather patterns to get a rough idea) and how many people visit that town (which is likely a function of the economy and how that particular resort area does in a weak economy).
Uncertainty, by contrast, is unknown unknowns. It is the sort of risk you can’t estimate in advance. So businesses also have to be good at adapting when Shit Happens. Sometimes that Shit Happening can be favorable, but they still need to be able to exploit opportunities (like an exceptionally hot summer producing off the charts demand for ice cream) or disaster (like the Fukushima meltdown disrupting global supply chains). That implies having some slack or extra resources at your disposal, or being able to get ready access to them at not too catastrophic a cost.
So why aren’t businesses investing or hiring? “Uncertainty” as far as regulations are concerned is not a major driver. Surveys show that the “uncertainty” bandied about in the press really translates into “the economy stinks, I’m not in a business that benefits from a bad economy, and I’m not going to take a chance when I have no idea when things might turn around.”
The “certainty” they are looking for is concrete evidence that prevailing conditions have really turned. But with so many people unemployed, growth flagging in advanced economies, China and other emerging economies putting on the brake as their inflation rates become too high, and a very real risk of another financial crisis kicking off in the Eurozone, there isn’t any reason to hope for things to magically get better on their own any time soon. In fact, if you look at the discussion above, we actually have a very high degree of certainty, just of the wrong sort, namely that growth will low to negative for easily the next two years, and quite possibly for a Japan-style extended period.
So why this finger pointing at intrusive regulations, particularly since they are mysteriously absent? For instance, Dodd Frank is being water down in the process of detailed rulemaking, and the famed Obamacare actually enriches Big Pharma and the health insurers.
The problem with the “blame the government” canard is that it does not stand up to scrutiny. The pattern businesses are trying to blame on the authorities, that they aren’t hiring and investing due to intrusive interference, was in fact deeply entrenched before the crisis and was rampant during the corporate friendly Bush era. I wrote about it back in 2005 for the Conference Board’s magazine.
In simple form, this pattern resulted from the toxic combination of short-termism among investors and an irrational focus on unaudited corporate quarterly earnings announcements and stock-price-related executive pay, which became a fixture in the early 1990s. I called the pattern “corporate dysmorphia”, since like body builders preparing for contests, major corporations go to unnatural extremes to make themselves look good for their quarterly announcements.
An extract from the article:
Corporations deeply and sincerely embrace practices that, like the use of steroids, pump up their performance at the expense of their well-being…
Despite the cliché “employees are our most important asset,” many companies are doing everything in their power to live without them, and to pay the ones they have minimally. This practice may sound like prudent business, but in fact it is a reversal of the insight by Henry Ford that built the middle class and set the foundation for America’s prosperity in the twentieth century: that by paying workers well, companies created a virtuous circle, since better-paid staff would consume more goods, enabling companies to hire yet more worker/consumers.
Instead, the Wal-Mart logic increasingly prevails: Pay workers as little as they will accept, skimp on benefits, and wring as much production out of them as possible (sometimes illegally, such as having them clock out and work unpaid hours). The argument is that this pattern is good for the laboring classes, since Wal-Mart can sell goods at lower prices, providing savings to lower-income consumers like, for instance, its employees. The logic is specious: Wal-Mart’s workers spend most of their income on goods and services they can’t buy at Wal-Mart, such as housing, health care, transportation, and gas, so whatever gains they recoup from Wal-Mart’s low prices are more than offset by the rock-bottom pay.
Defenders may argue that in a global economy, Americans must accept competitive (read: lower) wages. But critics such as William Greider and Thomas Frank argue that America has become hostage to a free-trade ideology, while its trading partners have chosen to operate under systems of managed trade. There’s little question that other advanced economies do a better job of both protecting their labor markets and producing a better balance of trade—in most cases, a surplus.
The dangers of the U.S. approach are systemic. Real wages have been stagnant since the mid-1970s, but consumer spending keeps climbing. As of June, household savings were .02 percent of income (note the placement of the decimal point), and Americans are carrying historically high levels of debt. According to the Federal Reserve, consumer debt service is 13 percent of income. The Economist noted, “Household savings have dwindled to negligible levels as Americans have run down assets and taken on debt to keep the spending binge going.” As with their employers, consumers are keeping up the appearance of wealth while their personal financial health decays.
Part of the problem is that companies have not recycled the fruits of their growth back to their workers as they did in the past. In all previous postwar economic recoveries, the lion’s share of the increase in national income went to labor compensation (meaning increases in hiring, wages, and benefits) rather than corporate profits, according to the National Bureau of Economic Analysis. In the current upturn, not only is the proportion going to workers far lower than ever before—it is the first time that the share of GDP growth going to corporate coffers has exceeded the labor share.
And businesses weren’t using their high profits to invest either:
Companies typically invest in times like these, when profits are high and interest rates low. Yet a recent JP Morgan report notes that, since 2002, American companies have incurred an average net financial surplus of 1.7 percent of GDP, which contrasts with an average deficit of 1.2 percent of GDP for the preceding forty years. While firms in aggregate have occasionally run a surplus, “. . . the recent level of saving by corporates is unprecedented. . . .It is important to stress that the present situation is in some sense unnatural. A more normal situation would be for the global corporate sector—in both the G6 and emerging economies—to be borrowing, and for households in the G6 economies to be saving more, ahead of the deterioration in demographics.”
The problem is that the “certainty” language reveals what the real game is, which is certainty in top executive pay at the expense of the health of the enterprise, and ultimately, the economy as a whole. Cutting costs is as easy way to produce profits, since the certainty of a good return on your “investment” is high. By contrast, doing what capitalists of legend are supposed to do, find ways to serve customer better by producing better or novel products, is much harder and involves taking real chances and dealing with very real odds of disappointing results. Even though we like to celebrate Apple, all too many companies have shunned that path of finding other easier ways to burnish their bottom lines. and it has become even more extreme. Companies have managed to achieve record profits in a verging-on-recession setting.
Indeed, the bigger problem they face is that they have played their cost-focused business paradigm out. You can’t grow an economy on cost cutting unless you have offsetting factors in play, such as an export led growth strategy, or an ever rising fiscal deficit, or a falling household saving rate that has not yet reached zero, or some basis for an investment spending boom. But if you go down the list, and check off each item for the US, you will see they have exhausted the possibilities. The only one that could in theory operate is having consumers go back on a borrowing spree. But with unemployment as high as it is and many families desperately trying to recover from losses in the biggest item on their personal balance sheet, their home, that seems highly unlikely. Game over for the cost cutting strategy.
And contrary to their assertions, just as they’ve managed to pursue self-limiting, risk avoidant corporate strategies on a large scale, so too have they sought to use government and regulation to shield themselves from risk.
Businesses have had at least 25 to 30 years near complete certainty — certainty that they will pay lower and lower taxes, that they’ will face less and less regulation, that they can outsource to their hearts’ content (which when it does produce savings, comes at a loss of control, increased business system rigidity, and loss of critical know how). They have also been certain that unions will be weak to powerless, that states and municipalities will give them huge subsidies to relocate, that boards of directors will put top executives on the up escalator for more and more compensation because director pay benefits from this cozy collusion, that the financial markets will always look to short term earnings no matter how dodgy the accounting, that the accounting firms will provide plenty of cover, that the SEC will never investigate anything more serious than insider trading (Enron being the exception that proved the rule).
So this haranguing about certainty simply reveals how warped big commerce has become in the US. Top management of supposedly capitalist enterprises want a high degree of certainty in their own profits and pay. Rather than earn their returns the old fashioned way, by serving customers well, by innovating, by expanding into new markets, their ‘certainty’ amounts to being paid handsomely for doing things that carry no risk. But since risk and uncertainty are inherent to the human condition, what they instead have engaged in is a massive scheme of risk transfer, of increasing rewards to themselves to the long term detriment of their enterprises and ultimately society as a whole.
By: Yves Smith, Salon, August 14, 2011
Protest Needed To Enforce Full Employment Laws
Marjorie Cohn, immediate past president of the National Lawyers Guild, has a post up at Op-Ed News, “Lost in the Debt Ceiling Debate: The Legal Duty to Create Jobs” addressing the federal government’s failure to comply with existing job-creation legislation.
Cohn focuses primarily on The Employment Act of 1946 and the Humphrey-Hawkins Act of 1978, noting also mandates for job-creation in 1977 reforms requiring the Federal Reserve to leverage monetary policy to promote maximum employment. She ads that the Universal Declaration of Human Rights sets a global standard of employment as an important right, which, not incidentally, some major industrialized nations have actually tried to honor.
Cohn’s review of the two jobs acts provides a timely reminder of the moral imperative that faces every great democracy, the responsibility to take action to help insure that every family has at least one breadwinner who earns a living wage:
The first full employment law in the United States was passed in 1946. It required the country to make its goal one of full employment…With the Keynesian consensus that government spending was necessary to stimulate the economy and the depression still fresh in the nation’s mind, this legislation contained a firm statement that full employment was the policy of the country.As originally written, the bill required the federal government do everything in its authority to achieve full employment, which was established as a right guaranteed to the American people. Pushback by conservative business interests, however, watered down the bill. While it created the Council of Economic Advisers to the President and the Joint Economic Committee as a Congressional standing committee to advise the government on economic policy, the guarantee of full employment was removed from the bill.
In the aftermath of the rise in unemployment which followed the “oil crisis” of 1975, Congress addressed the weaknesses of the 1946 act through the passage of the Humphrey-Hawkins Full Employment Act of 1978. The purpose of this bill as described in its title is:
“An Act to translate into practical reality the right of all Americans who are able, willing, and seeking to work to full opportunity for useful paid employment at fair rates of compensation; to assert the responsibility of the Federal Government to use all practicable programs and policies to promote full employment, production, and real income, balanced growth, adequate productivity growth, proper attention to national priorities.”
The Act sets goals for the President. By 1983, unemployment rates should be not more than 3% for persons age 20 or over and not more than 4% for persons age 16 or over, and inflation rates should not be over 4%. By 1988, inflation rates should be 0%. The Act allows Congress to revise these goals over time.
If private enterprise appears not to be meeting these goals, the Act expressly calls for the government to create a “reservoir of public employment.” These jobs are required to be in the lower ranges of skill and pay to minimize competition with the private sector.
The Act directly prohibits discrimination on account of gender, religion, race, age or national origin in any program created under the Act. Humphey-Hawkins has not been repealed. Both the language and the spirit of this law require the government to bring unemployment down to 3% from over 9%…
This legislation only requires the federal government to take action. The private sector, which employs 85+ percent of the labor force, would be indirectly influenced by monetary policy, but would not be required to do any hiring. Still, full enforcement of existing legislation could substantially reduce unemployment by putting millions of jobless Americans to work in public service projects rebuilding our tattered infrastructure.
The ’46 and ’78 full employment laws have been winked at and shrugged off by elected officials for decades as merely symbolic statutes, despite the fact that they actually do require the President, Congress and the Fed to do specific things to create jobs.
Cohn points out that Rep. John Conyers (D-MI) has introduced “The Humphrey-Hawkins 21st Century Full Employment and Training Act” (HR 870), to fund job-training and job-creation programs, funded by taxes on financial transactions. But the bill has no chance as long as Republicans control the House.
Cohn urges President Obama to demand that the Fed “…use all the tools relating to controlling the money supply…to create the funds called for by HR 870, and to start putting people back to work through direct funding of a reservoir of public jobs as Humphrey-Hawkins mandates.” Imagine the political donnybrook that would ensue following such action, legal though it apparently would be. It’s an interesting scenario that needs some fleshing out.
The best hope for full employment remains electing strong Democratic majorities to both houses of congress, while retaining the presidency. Under this scenario, full enforcement of the ’46 and ’78 employment acts is certainly doable. But it’s a very tough challenge, given the Republican edge in Senate races next year.
There are signs that the public is tiring of the tea party obstruction of government, and therefore hope that at least some Republicans may have to move toward the center to survive. It’s possible they could be influenced by energetic protest and lobbying campaigns by their constituents.
Like other groups across the political spectrum, we progressives are very good at blaming elected officials when they don’t follow through on their reform promises. But too many progressive Dems fail to realize that finger-pointing, while necessary, is only part of our responsibility. If we really want to see significant progressive change, especially full employment, we simply must escalate our protest activities to compel our elected and government officials to act.
At a white house meeting, FDR reportedly told the great African American labor leader A. Philip Randolph “Make me do it” in response to Randolph’s appeal for racial justice and economic reform. Roosevelt was not being a smart ass; He was underscoring an important law of politics, that elected officials need protest to galvanize them to act, and progressive politicians welcome it because it provides cover, as well as encouragement.
Regarding protest leadership, we have a great role model, whose 30+ foot stone image will be unveiled not far from the Lincoln, Jefferson and FDR Memorials on the National Mall in the capitol August 28th. The Martin Luther King, Jr. Memorial will not only honor the historic contributions of a great African American leader; It will also inspire — and challenge — coming generations of all races to emulate his strategy of militant but dignified nonviolent protest to achieve social and economic justice.
Let’s not forget that the Great March on Washington MLK and Randolph lead in 1963 was not only about racial justice. The twin goals were “Jobs and Freedom,” a challenge that echoes with prophetic relevance for our times. It was FDR who said “make me do it,” and MLK showed us the way, not only with one demonstration, but with a sustained commitment to mass protest. Now let’s make them do it.
By: J. P. Green, The Democratic Strategist, August 13, 2011
A Public Awakening: Wisconsinites Should Be Proud Of What They Accomplished
The history of the American labor movement is crowded with losing battles and crushing disappointments. The men and women who have fought for workers’ rights, often against tremendously long odds, have all too often suffered defeat and humiliation, only finding consolation in the idea that their efforts perhaps succeed in awakening a bit of public sympathy for their plight, inching their larger cause forward in unseen ways.
Yesterday unions and Democrats fell just short of victory in Wisconsin, winning two of six races to recall GOP state senators, in a battle that had unexpectedly emerged as ground zero in a national class war, partly over the fate of organized labor. There’s no way to sugar-coat it: Unions and Dems failed in their objective as they defined it, which was to take back the state senate, put the brakes on Scott Walker’s agenda, and let the nation know that elected officials daring to roll back public employee bargaining rights would face dire electoral consequences.
But nonetheless, what they failed to accomplish does not diminish what they did successfully accomplish. The fact that all these recall elections happened at all was itself a genuine achievement. The sudden explosion of demonstrations in opposition to Walker’s proposals, followed by activists pulling off the collection of many thousands of recall signatures in record time, represented an undiluted organizing triumph. At a time of nonstop media doting over the Tea Party, it was a reminder that spontaneous grassroots eruptions of sympathy and support for a targeted constituency are still possible and can still be channeled effectively into a genuine populist movement on the left. At a time when organized labor is struggling badly and GOP governors earn national media adulation by talking “tough” about cracking down on greedy public employees, what happened in Wisconsin, as John Nichols put it, amounted to “one of the largest pro-labor demonstrations in American history,” one that carried echoes of the “era of Populist and Progressive reform in the late nineteenth and early twentieth centuries.”
What’s more, no matter how many times conservatives falsely assert that labor and Dems subverted the popular will by fighting Walker’s proposals, in reality precisely the opposite happened.
By staging a fight that drew national attention, labor and Wisconisn Dems revealed an unexpected level of national sympathy for public employees, and, yes, for unions and their basic right to exist. This alone was an important achievement, flummoxing pundits who had confidently predicted that public employeees would make easy public scapegoats for the national conservative movement in dire economic times.
Even if Dems fell short of their objective in Wisconsin, what happened was, in fact, a referendum on Walkerism — one that conservatives lost in the mind of the broader public. Nate Silver Tweeted last night: “Dems would be silly to not proceed with the Walker recall based on tonight. The results project to a toss-up if you extrapolate out statewide.” I don’t think Dems will go through with it, but Silver’s larger point is intact: Walkerism triggered a strong public backlash that can’t be dismissed and will remain a factor. As Markos Moulitsas noted, the Wisconsin battle enabled Dems to hone a class-based message about GOP overreach that is showing some success in winning back white working class voters, with potential ramifications for 2012. The national outpouring of financial support for the Dem recall candidates showed that there’s a national liberal/Dem constituency that can be activated by Dems who don’t flinch from taking the fight to opponents with unabashedly bare-knuckled populism.
Will the national support for public employees in polls slow the drive of conservatives and GOP governors to roll back bargaining rights nationally? Probably not. Conservatives will point to yesterday’s events, with some justification, as proof that governors might not suffer direct electoral consequences in response to radical union-busting policies. But what Wisconsin showed us is that the broader public simply isn’t on their side. Let’s hope national Dems take heart.
The events in Wisconsin were a blow to organized labor. But the simple fact is that labor and Dems came within a hair of realizing an objective that was dismissed at the outset of this fight as a delusional lefty pipe dream. Wisconsin won’t chasten the left; Wisconsin will embolden it. And those who poured untold amounts of time and energy into the Wisconsin effort shouldn’t regret their efforts for a second.
By: Greg Sargent, The Plum Line-The Washington Post, August 10, 2011
The FAA Shutdown And The New Rules Of Washington
Congressman John Mica, the Florida Republican blamed for single-handedlyshutting down the Federal Aviation Administration, sounded like a beaten man when he called me Thursday evening.
The usually biting chairman of the House transportation committee spoke with remorse about the standoff, which put 74,000 people on furlough or out of work, delayed airport-safety projects and cost hundreds of millions of taxpayer dollars.
“I’ve had a brutal week, getting beat up by everybody,” Mica told me, minutes after Senate Majority Leader Harry Reid announced a deal that would end the shutdown and avoid the cuts to regional air service that Mica wanted.
“I didn’t know it would cause this much consternation,” Mica said. “Now I’ve just got to get the broom and the shovel and clean up the mess.” Switching metaphors, he said he wanted “to unclog the toilet, but it backed up. So I don’t know what to do, what to say.”
One thing he’s going to do is make amends. He said he would introduce legislation Friday to pay FAA workers for their furlough days. “We just want to cheer all those workers who have been left out on a limb by this,” he explained.
Mica’s experience shows the high-risk nature of business in the new Washington, where even routine issues like FAA funding can become conflagrations. With no goodwill between the two parties, or the two chambers, ordinary disagreements mushroom into governing crises, with unpredictable results.
In the debt-limit standoff, Democrats capitulated to most Republican demands to avoid a default. In the FAA confrontation, Republicans pursued similar brinkmanship — but this time Democrats resisted, let the shutdown happen and, at least in Mica’s view, won the fight.
Mica started out with a sensible aim: He wanted to clean up years of messy funding for the FAA. Lawmakers hadn’t been able to agree on issues such as rural-airport subsidies and landing slots at Reagan National, so they kept the agency going with 20 stop-gap funding bills since 2007.
But Mica overreached. Letting his anti-labor ideology take over, he tried to use the FAA bill to overturn a decision by the National Mediation Board to rescind an old rule that had made it unusually difficult for airline workers to organize. Delta Air Lines furiously lobbied Congress to intervene.
Mica knew Senate Democrats would resist, so he tried to create a bargaining chit: He drafted plans to cut funds for small airports in the home states of Reid (Nev.) and Jay Rockefeller (W.Va.), chairman of the Senate transportation panel.
The Floridian publicly admitted his ruse. “It’s just a tool to try to motivate some action” on the labor rule, he told a group of airport executives last month, according to Aviation Daily. “I didn’t plan it to be this national issue,” he told me.
Senate Democrats, seizing on Mica’s admission that the bill was a “tool,” refused to deal. They let the shutdown happen and railed against Mica after lawmakers left for recess.
Reid accused him of taking “hostages.” House Minority Whip Steny Hoyer pointed out that the shutdown cost taxpayers more than the program Mica tried to cut. Privately, Mica’s GOP colleagues harshly criticized him.
The Orlando Sentinel, near Mica’s district, took the congressman to task and said it was “pathetic” that “members of Congress now are enjoying their summer vacations, while some essential FAA inspectors are working without pay.”
On Thursday, Democrats announced a plan to reopen the FAA and said they would use waivers from Transportation Secretary Ray LaHood to avoid Mica’s rural airport cuts. Mica, pronouncing himself thwarted, said he was stunned that Democrats took Republicans “by the short hairs,” as he put it. “Quite honestly we did not expect that.”
They should have. The 10-term lawmaker was operating under archaic rules. “In our business, you use your legislative tools . . . and put a little leverage on it,” he said. “How else do I do it? Am I going to send them a bouquet?”
But Mica, as much as anybody, created a culture of distrust, where staking out bargaining positions leads not to compromise but to warfare. And now he’s surprised?
“People don’t have to get so personal,” he said with a sigh. “A lot of people hate me now and think I’m the worst thing in the world for what I did.” It’s “this sort of gotcha,” he said, “that’s changed the dynamics of people working more effectively together.”
Hopefully he’ll remember that the next time he sticks it to the other side.
By: Dana Milbank, Opinion Writer, The Washington Post, August 4, 2011
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