Tuesday, October 25, 2011

Occupy Wall Street: Some Answers to Criticisms

A very good friend of mine is Russ Rogers, 1/2 of the awesome and clever band "Godz Poodlz", and eponymous star of "Rusty's Rocking Jamboree". Russ is one of my favorite people in the world. Russ and I are proof positive that two people do not have to agree politically to get along. We're in very different places as far as our economics go.

Russ not only read through the last four or so lengthy blog posts, but took the time to respond to me on Facebook with some detailed commentary of his own. I was going to talk about something else in this space, but decided to stop and answer a few of Russ' criticisms first.

I've asked Russ to post up his thoughts to the comments section here so I can link to them. He hasn't done it as of this writing, but I'm going to go ahead and respond to them anyway. Since they were pretty lengthy, I'm not going to post the entirety of each complaint. Instead, I'll post enough of it to get the flavor of the writing and also post "the gist" of it as I read it. I'm pretty sure that doing it that way will get Russ to attach his comments directly to these posts.

Oh, and one last thing... if anything I say here can be interpreted as snarky OR humorous, I was going for humor. I'm not kidding when I say Russ is one of my favorite people.

Since the Seventies, productivity is UP by 80%! It's not just that STUFF like computers and cell phones are better and do more, WORKERS are better too! ...

(The gist: workers are responsible for these productivity increases, and therefore deserve raises that they're not getting, so trickle-down economics doesn't work. I discussed the trickle-down effect in my last post, so I won't do it in detail here.)

That is just wrong. Actually, it's not that workers are better, too. It's that processes are better. I do know a thing or two about that, because it's my business to put processes in place that make workers more productive.

Some examples: I recently implemented a system whereby warranty claims, which used to be written and submitted on paper, are now filled in on a smartphone app. The result? Paper claims used to be paid in 6 to 8 weeks. Electronic claims are paid in 3 days. Are the workers any better at what they do? No, they're not. They're the same workers, doing the same work, the only difference being that they fill in the forms on a smartphone instead of paper. They used to make scores of mistakes and would still be doing it if the new system didn't prevent it. But you'll happily give them credit for the process improvement that was thrust upon them. I've done scores of these kinds of systems over the years. Sales Force Automation, loan analysis, truck load tracking, inventory management, paperless medical storage, etc., all of which are measured in increased productivity. Hell, my very first IT job was when I wrote a system for the USAF that reduced 2 weeks of manual circuit outage ticket analysis down to one pressed button and twenty minutes of printing. A fully-roboticized assembly line doesn't mean the guy pushing the "start" button is five times the worker he used to be.

Let's make this very clear; "the workers" didn't get 80% more efficient at anything.

Automation can make certain processes 2000% more efficient. I've hit that mark, or close to it, a few times. Be that as it may, companies are more profitable, and some of that profit should go to Labor. It does, but as I discussed last time, when outsourcing is involved, it's not our labor. And it's competition from foreign labor that depresses what our workers can earn here. Of course, we're going to re-visit this topic when we talk about hiring, below.


How are the incomes of the wealthiest of the wealthy doing? How is the top 0.1% doing? Their earnings are up 240% since the 70s! The percentage of income that the top 1% earns (their share of the total PIE) has gone from just under 10% in the Seventies to almost 25% of the TOTAL Income now. The top 1% now earn more than the bottom 50% of wage earners (whose share of the pie is around 15% and shrinking). The top 0.1% have gone from taking a 2.5% share of total earnings (in 1975) to 10.4% (in 2008)).
(The gist: the pie has gotten bigger over the last 35 years. The Economy has grown. But not everyone has shared equally in those rewards.)
There isn't one pie. This isn't a closed ecosystem or an electrical circuit where every electron that flows out eventually winds up back at the battery... it isn't a zero sum game.

First of all, in my last post I talked about the value of ideas. Those that have the valuable ideas are going to make more regardless of the real effort that goes into monetizing them. It's going to be a bigger percentage, too, because until it's shared, and sometimes even afterward, they own 100% of the idea. That's not really a huge concern because, although there's a delay, that money eventually does go back into general circulation. Moguls become philanthropists, and when they die then inheritance taxes bleed off that capital. Financial dynasties do not last forever. They do last long enough to be tremendous incentive for innovation and growth, and that's incredibly good for society.

Now, if things are working the way they're supposed to, then money flows from one company to another and eventually back around again, through salaries to the workers who buy the usual stuff, and from the top 1% from executives who make luxury purchases from other companies with workers of their own who are buying bread and clothing with that money. Remember that the guy who buys a corporate jet just paid a bunch of aircraft builders who are just as much "Labor" as the guys in the plastics plant a mile from my house. At a very high level, it you might think it would tend to resemble a zero-sum game over time. Some capital would flow constantly; some would accumulate to be released back into the economy over time.

Except for three things: the creation of ideas, bringing new wealth in; competition from foreign labor, taking wealth out; and automation, reducing jobs.

We don't have enough competitive Labor to produce all of the products we consume. The companies are American; the products are American; the labor is Chinese (or Malaysian, or what-have-you). So the money that should have flowed back into our labor pool didn't, and our workers are competing with those overseas workers that aren't receiving the bulk of that money. And there's the cause of the discrepancy. We have people who could do the jobs, but they can't compete on price against people who will work all day for a pittance doing tasks that Americans just won't do.

Corporate profits are at RECORD levels, but that is NOT reflected in corporate hiring? Why? Because there isn't demand. Why? Because Economic times are hard and people are pulling back on spending. So what incentives do Corporations have to raise wages or hire more people if they are already making historic profits? Why should CEOs make changes to a system that is already rewarding them more than handsomely for laying off workers.

This expresses two diametrically opposed thoughts and a big misconception:
1. Profits are way up.
2. Demand is way down.
If actually weren't any demand, then profits could not be up. No one would buy the product, and without sales, there could be no product. It is true, however, that most people are pulling back on spending. I know I am. But hold on to that thought; it makes sense if you're talking about the demand for labor.

Corporate hiring is not directly proportional to demand for their products. Who told you that it should be? Most likely, he's going by historical trends while ignoring modern realities. I told you we would re-visit automation, and here we are... because that's the new variable.

You've already noticed that productivity has noticeably increased. Since Labor is expensive here, productivity has to increase for a company to remain competitive. Automation increases productivity, though often at the cost of the net number of jobs. Frankly, I'd rather keep five Americans working than export 25 jobs overseas, and I can help a company do that by devising better tools and processes for them. But when productivity increases, you expect profits to rise and hiring to not rise. It is the natural result of automation. There is no reason to be surprised by this. It's math.

Now, when I automate, the general goal I have in mind is to make the drudgework do itself to free the worker up for more productive tasks. For instance, I designed a business rules engine for a subsidiary of AIG that processes thousands of loan applications in the time a human underwriter does one. The output is basically, "approved", "disapproved", or "refer it to a human". The idea was to apply the "no brainer" business rules where appropriate, and refer to a human underwriter only those loans that required a judgement call. Without removing a single underwriter's job, they became more productive. Electronic claims means you're talking to your customers, not doing paperwork.

Unfortunately, not all automation just frees you up for more important work. A lot of it simply eliminates human jobs. A lot of jobs are nothing but drudgework, though they may be considered skilled positions. Auto manufacturing is a classic example. Skilled welders and painters on assembly lines have been mostly replaced by robots. As we continue to move into the future this will continue to happen. In every case, the next guy to be replaced by a machine is likely to be someone who you thought couldn't be replaced.

We have a lot of unemployed... the figure is bouncing between 9% and 10%, and no amount of hope has changed that. The solution to this is not to look for increased hiring from established businesses; nor is it to get the old jobs back from overseas. The solution is new business, competitive business, run by people who understand the value of local labor and have incentive to hire. And, it means for the laborer that he has to be willing to do something new. You cannot just sit there and pine for the good old days. This kind of change was predicted more than 50 years ago. When people say, "Small business entrepeneurs will be doing most of the hiring. Do not trample on the people who are trying to create jobs," you need to bloody well listen to them because that is 100% accurate in every respect.

For those corporations that use large amounts of human labor... CEOs should make the changes because they can recognize the pain of the horrible mistake they've made from outsourced Labor. There's a great story by Steve Denning in Forbes magazine called "Why Amazon Can't Make a Kindle in the USA". Click through and read it. If that doesn't chill you to the bone, it should. Management should forego short-term maximization of profits in favor of long-term strategy and stability. And Management and Labor should be doing everything they can to work together to make local labor competitive, because without it we're really, really hosed.

The Tax Laws on investments were designed to encourage REAL investment. But those laws are being GAMED by corporate CEOs and people in the Investment Industry. They take large portions of their compensation (their pay) in Stock and Stock Options, versus a standard salary... 
(The gist: All CEOs are greedy, greedy, greedy, gaming the system, doing everything they can to exploit every loophole, and they -- all of them, to the last man -- are dirty rotten thieving bastards.)
Let's start off by correcting a misconception... this is "real investment". Any time a company makes an expenditure that they expect will return value to them in excess of that expenditure, we're talking about "real investment". And here the Board is making an investment in what they think is going to be sound management.

CEOs don't "take" anything. A board of directors hires them. The compensation is negotiated. They're offered stock and stock options in lieu of cash because that way the Board doesn't have to cough up cash, and as an incentive to perform. Illegal practices should be prosecuted, but taking stock options is neither illegal, immoral, nor "gaming the system". Stock options are worthless unless the company actually performs well. The stock options are there as incentive to do a decent job because you don't get paid at all unless you do. And yes, you get paid very well if the stock performs. So does everyone and anyone who's invested in the company. But let's be clear, offering stock options costs nothing in immediate cash dollars, and the returns for success always exceed the payoff.
(BTW, a stock option isn't a gift of stock. Rather, it's exactly what the name implies. Typically, you're given the option to buy stock in the company at some later date at today's prices. You can exercise that option or not. If the company does well, and the price at the future date is higher than when you were issued the option, you can turn around and sell the stock at a profit. But it doesn't mean you were handed free money.)
This form of compensation becomes high-profile when a company is really on the skids and can't immediately afford to pay someone to fix the problem. I mentioned my previous post the examples of Lee Iacocca and Steve Jobs. It's also used as compensation for start-up companies in lieu of salaries that they can't yet afford to pay because they haven't overcome their start-up costs to become profitable.

I'll say it again: CEOs are employees. They can be fired and forced out, whether they be Carly Fiorina or Steve Jobs. The payouts for some of these folks is outrageous. Here are five examples at moneycentral.msn.com. But not all severance packages are outrageous. Not all CEOs are crooks and not all Board members are cronies. And sometimes the "golden parachute" is not something that you can do much about. In some cases, the "compensation" comes in the form of stock options that were granted at his hiring in lieu of salary (as we've mentioned), and which don't vest until years after the CEO leaves, and then only if his successor manages to do a better job.

Here's how that happens: Mr. Incompetent is hired as CEO and offered stock options instead of a mega-salary. He takes the offer, then does a terrible job, pisses off the Board, and they fire him. He didn't intend to do a poor job, and they didn't intend to hire an incompetent, but what's done is done. So now he's out, but he's already got the stock options. So it looks like he's walking away millions of dollars richer, which might become truth, but the only way to punish the guy through his stock options is for the company to do poorly, which punishes all of the shareholders. They're not going to shoot themselves, so they fix the mess, the stock price goes up and Mr. Incompetent is richer. So why not eliminate the "golden parachute" this way: why not say you only get the stock option if you perform, and if we have to fire you, then you don't get it at all? Because that would be exactly the same as back-dating the stock option.

Board of Directors need to do a better job negotiating compensation and severance packages, and keeping stock options short-term; and shareholders need to keep the Boards' feet to the fire by voting for reasonable limits. It's their money, and they are the ones who have both the right to be outraged and the power to do something about it.

Wanna REALLY occupy Wall Street? Buy some common stock.

Our Economy was driven into the ditch 4 years ago, and it wasn't put there by welfare moms, it wasn't Social Safety Nets that put us there. We were put there by unscrupulous, under-regulated investment firms that were GAMING the SYSTEM. They over-leveraged themselves and expected that the Country would bail them out...
(The gist: CEOs are still greedy, greedy, bastards, gaming the system, doing everything they can to exploit every loophole. Oh, and trickle-down economics still doesn't work.)
Our economy was aimed at that ditch a long time before that. This economic situation only apparently began when the housing market collapsed in 2007. This caused mortgage-backed securities to fail, mortgage insurance, banks, etc.

So why did the housing market collapse? This article at WTFFinance.com actually explains it just about perfectly. From that point forward you can watch the dominoes collapse.

Lenders were forced by our government into accepting risk that they never would have accepted for themselves, regulation or no. As you have seen, the smooth operation of a lender's business depends on you successfully repaying your loans according to the terms. So they don't want to lend to people who can't afford it. It's the old Catch-22... those who can get credit don't really need it. But we wanted to have our cake and eat it too. We let the politics of envy and applied accusations of racism and social justice to force banks to offer loans to home buyers and businesses that could not repay them. We wanted to make home ownership a right instead of the fulfillment of an aspiration.

If you want to talk about the gaming of the system then by all means do not fail to discuss in full the gaming of the political system by shysters who could play the part of saviors who brought the American dream to their voters back home without any foresight or regard for how encouraging piss-poor investments could bankrupt our country in the very near future. These, incidentally, are the very same politicians who are still gaming the system by playing the part of the outraged everyman who "can't believe" the banks made the very same investments they were forced by these politicians to make! If you have two words of value to say about gaming the system, then let those words be "GET OUT!" to the politicians who set the stage for this mess with their ineptitude.

As for trickle-down... it does work and I showed you where it goes. Now, when huge quantities of money are siphoned off to another country, the effective solution is not to shout that the huge quantities of money don't exist. The solution is either to find ways to siphon it back into this country, or plug the leak that's sending it that-a-way in the first place.

There is Class Warfare going on this country. And one group of people are winning. And the lower classes and middle class aren't just getting squeezed. We are getting juiced.
(The gist: I like clever slogans)
As an adult, I have been dirt-poor, making just $10,000 per year. Today, I am firmly in the working middle class. I am not and never have been uber-elite rich. Being one of the middle-class being "juiced", and fairly well educated, I nevertheless have a fairly good handle on how the system does work, how it should work, and what's not going to address the problems with which we're faced.

Sloganeering won't solve it. And blaming the affluent simply because they are affluent and therefore convenient scapegoats isn't a solution, either. Storming the castle and divvying up the loot won't make a single job. You should want people to want to be rich, and you should want them to have the opportunities to do that make them more innovative and productive, contribute new ideas to society, and put other people to work... and not just because they put in their 8 hours a day or stood in the right line to get their dollop of the public porridge. I can tell from your complaints that you want that too, although your "solutions" would make exactly the opposite happen.

I want all boats to rise. They don't have to rise at the same rate because we eventually get it back, and if things are done right there's a steady rise while we wait. So here are some things that I think we're not doing right:
  • American companies should prefer American labor. When it comes to outsourcing IT for example (since that's my industry), I really dislike in principle the idea of off-shoring. I prefer what I call "boondocking", which is ... well, let's face it, it's basically hiring folks like me. People living in economically depressed areas where the cost of living is low are a fantastic deal compared to off-shoring. They offer a competitive labor costs, and have no time-zone disadvantages (which far outweigh the fictional and theoretical time-zone advantages pushed by sellers of off-shoring) and have greatly reduced shipping costs.
  • American labor must be competitive to be prosperous. Look -- the unions chose an "us vs. them" business model, so they now have to live with the situation they chose: there are separate pies for them and for the businesses they rely on, so they have no choice but to be competitive or reap more of what they've sown. They've been sidelined in favor of off-shore competition. You might like unions, but I like being competitive, and when my approach makes companies come to me instead of you then you might want to try my approach. The need for gathering IT workers into exhorbitant-dollar neighborhoods to collaborate is long-since obsolete. With today's high-speed Internet, we're all as good as next door.
The same thing goes for manufacturing. BMW built a plant here, not in Detroit. Our folks get good wages and want to work. We want BMW, We want Boeing. We want Amazon, and many more like them... and we're going to get them.
You might read this and say, "It's not fair to ask us to take a step backwards!" Well, guess what? Labor already took that step... and more! So instead of a reasonable salary and a secure job, they get nothing but the claim of being "an unemployed worker". Meanwhile, somebody else is getting paid. Labor is a competitive market, and those who don't want to compete simply shouldn't be surprised when they lose business.
The unions' answer to this is to beg Congress to somehow mandate that people must hire them. That's S-T-U-P-I-D. Businesses simply won't do that. Where they have the choice they'll move to where there is non-union labor. Where there is no choice then they will just discard opportunities as being "not cost-effective". And where the opportunity would have been cost-effective if it weren't for organized labor, then it will not be pursued by an encumbered company, but by new start-ups, in unencumbered areas, started by executives who have quit to pursue the new opportunity. What they won't do is roll over and bleed money. Nevertheless, the unions have actually filed suit against companies that want to open new factories in these same United States, hiring Americans, because the Americans that were hired weren't "those" Americans.
I needed some trees pruned in my yard. I'm terrible with a chainsaw, and I know it, so I called a few landscapers. The guys who gave me quotes understood to a man that labor is a competitive market. The one I hired was the one who wanted and needed my business the most, and this was reflected in his quote. As the day progressed I liked what he was doing and asked him to do some more, so he made a bit more than he originally quoted... as much as I could reasonably afford. When he finished the day, he went home knowing that I would most likely call him back the next time I needed work done (and I'm inclined to call him soon). THAT man understands something about economics that has eluded union negotiators across this country. The proof? Empty factories.
  • I don't mind a hefty estate tax. I did mind it, until I thought about it. Money flows to innovators as a reward for their innovation. We should have no expectation of it being otherwise. But an estate tax does ensure that the money thus collected re-enters the economy. Keep in mind that money thus collected represents only a portion of the value of the wealth already distributed by an entrepeneur.
Warren Buffett rightly points out, "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing." But a guy like Buffett has his own plans for the distributing the money that has nothing to do with taxes. He'll be distributing 99% of it to charities on his death, much of it to the Bill and Melinda Gates Foundation.  
You really need to re-think the assumption that the money just goes to the top and stays there.
  • I don't think you should need an awful lot of incentive to give to charity. I don't itemize charitable contributions. But to the extent that tax deductions encourage some people to make charitable donations, they're a net gain for Society. Charitable spending is far more efficient than government spending, whether it's a Shriners Hospital for Children, or helping the old lady next door with her heating bill. Charitable spending is frankly better than government spending; and any time you hear, "somebody should..." your first thought should be for what you can do, not what the government can do. Government-first thinking is just plain lazy. If everybody taught this to their children in word and deed, we wouldn't need a government dole.

  •  I think commercial banking and investment banking should be separate.  As such, I'd be for re-instatement of key provisions of the Glass-Steagall Act of 1933. But that's boring as hell to talk about and this is already too long.

No comments:

Post a Comment