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
“Day Of Prayer And Fasting”: Rick Perry’s Houston Dog Whistle
The definition of a political “dog whistle” is a communication (or series of communications) that convey to key members of an interest or constituency group gratifying but potentially controversial affirmations of their views without the mainstream media or the broader electorate catching on. By that standard, Rick Perry’s big “day of prayer and fasting” in Houston over the weekend was a very successful dog whistle.
Mainstream and secular-conservative media coverage of the event (dubbed “The Response,” itself a dog whistle reference to an ongoing series of dominionist events operating under the brand of “The Call” aimed at mobilizing conservative evangelicals to assume leadership of secular society) generally concluded that it was a largely “non-political” gathering–just some Christians upset about the bad economy and their own moral failings who got together to pray over it.
A few reporters who watched and listened more carefully, and had a Christian Right decoder ring on hand, had a very different take. Religion Dispatches’ Sarah Posner, who knows the ins and outs of dominionist thinking exceptionally well, and who attended the Houston event, explained its intent as an act of political mobilization:
“[C]ommand” and “obedience” were the day’s chief buzzwords for many speakers, as repentance was required on behalf of yourself, your church, and your country for having failed to commit yourself to Jesus, for having permitted abortion and “sexual immorality,” for failing to cleanse yourself of “filthiness,” and to repent for having “touched what is unclean….”
The people who gathered at Reliant Stadium are not just Rick Perry’s spiritual army, raised up, as Perry and others imagine it, in the spirit of Joel 2, to sound an alarm and prepare the people for Judgment Day. They are the ground troops the religious right set out four decades ago to create, and duplicate over generations, for the ongoing culture wars. One part of that army is people like Perry himself, supported by religious right political elites who aimed to cultivate candidates, advocates, and political strategists committed to putting God before government.
That a sitting governor would laugh off charges that his “instigation” of an exclusively Christian–and, more specifically, a certain kind of Christian–event is proof of the success of the cultural and spiritual warriors, who believe they are commanded to “take dominion” over government and other spheres of influence. Perry is their man in a high place, in this case an especially courageous one, willing to rebuff charges from the “radical secularists” that he’s crossed the line between church and state. That makes him something much more than just a political or spiritual hero; he is an exemplar.
Slate’s Dave Weigel was also in Houston, and his report debunks the talk of the event being “nonpolitical” by understanding, like Posner, the political freight of the particular strain of evangelical Christianity mostly represented there:
[According to] Pete Ortega, one of dozens of people who’s come up from San Antonio on buses from John Hagee’s church…there is nothing political about the event, he says. He just wants to praise Perry.
“If this is successful here,” he says, “I think other governors, or other politicians, will come out of the closet. Christianity is under attack, and we don’t speak out about it.”
That’s the brilliance of what Perry has done here: These ideas don’t contradict each other at all. He doesn’t need to talk about politics, or do anything besides be here and understand this event. The religion is the politics. These worshippers understand that if they can bring “the kingdom of God” to Earth, economic problems, even macroeconomic problems, will sort themselves out….
The soon-to-be Republican presidential frontrunner, who is best known among liberal voters for raising the prospect of secession and for presiding over hundreds of executions, has just presented himself as a humble messenger of obvious biblical truth. “Our heart breaks for America,” he says. “We see discord at home.
We see fear in the marketplace. We see anger in the halls of government.” It’s one day since S&P downgraded America’s bond rating, in part because the agency worried that conservative Republicans had proved that they would never agree to a debt-reducing bargain that included tax increases. Perry was pulling off an impressive act of transference.
Observers who don’t get any of what Posner and Weigel are talking about are in effect assisting him in the effort to execute his dog whistle appeal to activists whose world-view is entirely alien to nearly all secular Americans and most mainstream Christians. But just because much of the country can’t hear it doesn’t mean it cannot serve as a powerful inducement to political activity in a presidential nominating process where small determined groups of people can have a big impact.
By: Ed Kilgore, The Democratic Strategist, August 8, 2011
The Tea Fragger Party: Remember Their Names
Fragging: “To intentionally kill or wound (one’s superior officer, etc.), esp. with a hand grenade.”
Take names. Remember them. The behavior of certain Republicans who call themselves Tea Party conservatives makes them the most destructive posse of misguided “patriots” we’ve seen in recent memory.
If the nation defaults on its financial obligations, the blame belongs to the Tea Party Republicans who fragged their own leader, John Boehner. They had victory in their hands and couldn’t bring themselves to support his debt-ceiling plan, which, if not perfect, was more than anyone could have imagined just a few months ago. No new taxes, significant spending cuts, a temporary debt-ceiling solution with the possibility of more spending cuts down the line as well as action on their beloved balanced-budget amendment to the Constitution.
These people wouldn’t recognize a hot fudge sundae if the cherry started talking to them.
The tick-tock of the debt-ceiling debate is too long for this space, but the bottom line is that the Tea Party got too full of itself with help from certain characters whose names you’ll want to remember when things go south. They include, among others, media personalities who need no further recognition; a handful of media-created “leaders,” including Tea Party Nation founder Judson Phillips and Tea Party Patriots co-founders Jenny Beth Martin and Mark Meckler (both Phillips and Martin declared bankruptcy, yet they’re advising Tea Party Republicans on debt?); a handful of outside groups that love to hurl ad hominems such as “elite” and “inside the Beltway” when talking about people like Boehner when they are, in fact, the elite (FreedomWorks, Heritage Action, Club for Growth, National Taxpayers Union, Americans for Prosperity); and elected leaders such as Minnesota Rep. Michele Bachmann, Ohio Rep. Jim Jordan, head of the Republican Study Committee, and South Carolina Sen. Jim DeMint, who grandstand and make political assertions and promises that are sheer fantasy.
Meanwhile, freshman House members were targeted and pressured by some of the aforementioned groups to vote against Boehner’s plan. South Carolina’s contingent was so troubled that members repaired to the chapel Thursday to pray and emerged promising to vote no. Why? Not because Jesus told them to but because they’re scared to death that DeMint will “primary” them — find someone in their own party to challenge them.
Where did they get an idea like that? Look no further than Sarah Palin’s Facebook page, where she warned freshmen about contested primaries and urged them to “remember us ‘little people’ who believed in them, donated to their campaigns, spent hours tirelessly volunteering for them, and trusted them with our votes.” Her close: “P.S. Everyone I talk to still believes in contested primaries.” While they’re at it, they also should remember that Palin came to the Tea Party long after the invitations went out. The woman knows where to hitch a wagon.
Unfortunately for the country, which is poised to lose its place as the world’s most-trusted treasury and suffer economic repercussions we can ill afford, the stakes in this political game are too high to be in the hands of Tea Partyers who mistakenly think they have a mandate. Their sweep in the 2010 election was the exclusive result of anti-Obama sentiment and the sense that the president, in creating a health-care plan instead of focusing on jobs, had overplayed his hand. Invariably, as political pendulums swing, the victors become the very thing they sought to defeat.
Who’s overplaying their hand now?
It must be said that the Tea Party has not been monolithic — and the true grass-roots shouldn’t be conflated with leaders who disastrously signed on to the so-called “Cut, Cap and Balance” pledge. What is it with Republicans and their silly pledges? Didn’t they get enough Scouting? This pledge now has them hog-tied to a promise they can’t keep — the balanced-budget amendment. As many as a third desperately want a pardon from that commitment, according to sources close to the action.
Hubris is no one’s friend, and irony is a nag. The Tea Partyers who wanted to oust Barack Obama have greatly enhanced his chances for reelection by undermining their own leader and damaging the country in the process. The debt ceiling may have been raised and the crisis averted by the time this column appears, but that event should not erase the memory of what transpired. The Tea Party was a movement that changed the conversation in Washington, but it has steeped too long and has become toxic.
It’s time to toss it out.
By: Kathleen Parker, Opinion Writer, The Washington Post, July 29, 2011
Strangling Our Nation: ‘A Self-Inflicted Wound Of Monumental Stupidity’
There are, regrettably, plenty of prominent media voices who insist on characterizing the Republicans’ debt-ceiling crisis as a disaster brought on by “both sides.” Yes, David Gergen, I’m looking in your direction.
But for all the complaining I do about this, it’s only fair to also note those who get it right, and resist the Village’s agreed upon narrative. Here’s Time’s Joe Klein yesterday, before last night’s breakdown in the House.
[S]o, here we are. Our nation’s economy and international reputation as the world’s presiding grownup has already been badly damaged. It is a self-inflicted wound of monumental stupidity. I am usually willing to acknowledge that Democrats can be as silly, and hidebound, as Republicans-but not this time. There is zero equivalence here. The vast majority of Democrats have been more than reasonable, more than willing to accept cuts in some of their most valued programs. […]
The Republicans have been willing to concede nothing. Their stand means higher interest rates, fewer jobs created and more destroyed, a general weakening of this country’s standing in the world. Osama bin Laden, if he were still alive, could not have come up with a more clever strategy for strangling our nation.
That last line was of particular interest, because it echoes a recent point from Nick Kristof. Indeed, the NYT columnist recently argued that Republicans represent a kind of domestic threat, possibly undermining the nation’s interests from within: “[L]et’s remember not only the national security risks posed by Iran and Al Qaeda. Let’s also focus on the risks, however unintentional, from domestic zealots.”
Are Klein and Kristof suggesting Republican extremism has become dangerous? It certainly sounds like it.
This is pretty bold stuff from media establishment figures. It also suggests the “both sides” nonsense hasn’t exactly achieved universal acceptance.
By: Steve Benen, Contributing Writer, Washington Monthly, Political Animal, July 29, 2011
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