November 25, 2013

Greedy Capitalist Pigs!!

" You see there is only one constant. One universal. It is the only real truth. Causality. Action, reaction. Cause and effect. " ~The Merovingian [The Matrix Reloaded]

Back in the summer I read an interesting article in the Financial Post about the problem with capitalism as it exists today.  The premise was stated very clearly in the opening sentences:
One of the big reasons the U.S. economy is so lousy is the American companies are hoarding cash and “maximizing profits” instead of investing in their people and future projects.

This behavior is contributing to record income inequality in the country and starving the primary engine of U.S. economic growth–the vast American middle class–of purchasing power.

To some it may come as a shock that the American economy is "lousy".  Wall Street is performing well (for now).  The United States has by far the largest economy in the world (for now)and unemployment is falling (not really, and for more than one reason).  But if you believe the rosy picture painted for you, you need to take your head out of the sand.  That type of glass-is-full thinking led to the current Obamacare fiasco.  If the same thing happens to the entire economy because of a national head-in-the-sand mentality on the fiscal sustainability of the American economy then America is bound to falter.  So it is important to understand what has caused the United States to have economically flat lined over the last 5 years.

Setting aside the "blame Obama" notions and all of the very robust arguments made by the likes of Milton Friedman, there's a much more fundamental question to be asked.  What's causing the accelerating decay of American economic supremacy?  There are only three possible 'culprits': the people, the government and business.  Those are three very large, overly-homogenized groups.  Arguably the former and the latter only operate in response to what the government mandates or dictates as the rules to be followed.

Nevertheless the article in the Financial Post raises some interesting points about how corporate America has started shooting itself in the foot because of its own greed.  The points are worth visiting.  In order to do so, let's break down the arguments into the specific premises that are postulated in the commentary.

(1) Share the wealth: American works are not being paid a living wage and therefore do not have enough to spend on the goods and services provided within the American economy.  As a result the short term record profits companies are experiencing are just that - short term.
If average Americans don’t get paid living wages, they can’t spend much money buying products and services. And when average Americans can’t buy products and services, the companies that sell products and services to average Americans can’t grow. So the profit obsession of America’s big companies is, ironically, hurting their ability to accelerate revenue growth.

One obvious solution to this problem is to encourage companies to pay their people more — to share more of the vast wealth that they create with the people who create it.

The companies have record profit margins, so they can certainly afford to do this.
Cause and effect?  Setting aside the moral implications of under-paying employees, let's look at the economic argument. Firstly, Blodget assumes that there are no other consumers in the world that can afford American products.  An even more macro view of the situation would include a world-view of the issue.  Companies are offshoring jobs in an effort to bypass the minimum wage laws, intrusive health and safety regulations and such that are present in the U.S.  The companies are indeed reacting to a competitive environment which requires that they maximize profits by any legal means available.

Conservatives have often sarcastically made the argument that if raising the minimum wage to $14 per hour is a good idea, why not raise it to $100 per hour?    They argue this knowing full well that $100 per hour as a minimum wage would kill employment.  there would be a fraction of one percent of the jobs left in America.  Either that or toilet paper would cost in the neighborhood $1500 for a package of 12 rolls. Companies don't pay more because they simply cannot afford to do so.  Reversing the logic, killing the minimum wage laws would create additional jobs, and likely a labor shortage at the low end of the pay scale as workers would not be willing to work below a certain pay floor.  These are the laws of simple supply and demand, and not a matter of corporate greed.

Granted, bonus structures of senior executives are typically focused on short term goals rather than sustainability.  In a free market, you'd think some companies would have figured that out by now.  Some have. But the model of paying employees more is not a simple one-size-fits-all solution.  Raising the wage of a lawn care summer job employee is a different matter than doing the same for a lawyer.  Once you get to the point of making distinctions like that, then human judgement comes into play.  Once that happens you now have to decide who you want to play God.  If not the free market, then whom?  Can anyone do that at consistently get it 'right'?  No.

(2) Companies exist to 'serve' three constituencies, not one.
These days, if you suggest that great companies should serve several constituencies (customers, employees, and shareholders) and that American companies should share more of their wealth with the people of generate it (employees), you get called a “socialist.” You get called a “liberal.” You get told that you “don’t understand economics.” You get accused of promoting “wealth confiscation.” You get told that, in America, people get paid exactly what they deserve to get paid: Anyone who wants to get paid more should go out and “start their own company” or “demand a raise” or “get a better job.”

In other words, you get told that anyone who suggests that great companies should share the value they create with all three constituencies instead of just lining the pockets of shareholders is an idiot.

After all, these folks say, one law of capitalism is that employers pay their employees as little as possible. Employees are just “costs.” You should try to minimize those “costs” whenever and wherever you can.

This view, unfortunately, is not just selfish and demeaning. It’s also economically stupid. Those “costs” you are minimizing (employees) are also current and prospective customers for your company and other companies. And the less money they have, the fewer products and services they are going to buy.
The broad strokes used in this argument are unfortunate.  By maximizing the value for customers, you are as a result, maximizing their interest in and loyalty to, your company's products.  That in turn maximizes the value for shareholders as consumers continue to purchase your goods.  You can maximize the perceived customer benefit based on either quality, price, or customer service or the best possible mix of the three based on your value proposition niche (e.g. we're the cheapest brand out there vs. we are the top quality provider).  Where do employees fit into that model?  They are, in the labor market the equivalent of the company and the corporation is the consumer of their product.  The difference is no one laborer can fill the entire need of the corporation alone - dozens or thousands can be required.

How an employee differentiates the job they do from other suppliers of labor is the same as above.  they are either a great worker (an artisan of welding for example) or they can do the minimum standard as cheaply as possible.

(3) It's not a law to pay employees more, it's a choice.
It is a choice made by senior managers and owners who want to keep the highest possible percentage of a company’s wealth for themselves.

It is, in other words, a selfish choice.

It is a choice that reveals that, regardless of what they say about how much they value their employees, regardless of what euphemism they use to describe their employees (“associate,” “partner,” “representative,” “team-member”), they, in fact, don’t give a damn about their employees.

These senior managers and owners, after all, are earning record profits while choosing to pay their employees so little in many cases that the employees have to live in poverty.
All of this to say that greedy capitalist pigs are destroying the American economy, which is based on a successful version of capitalism. The irony is that there have been over the decades a significantly added overhead of regulation applied to companies to protect employee safety and earnings that have fundamentally transformed the economy since all of those early successes built America into an economic superpower in the first place.

Blodget makes an interesting, and I'd argue at least in part correct conclusion about the cause of America's growing non-exceptionalism. Unfortunately he concludes with this as summation of his argument that employees need to be paid more and it lacks the cause and effect connection. This should have been Blodget's starting point for the commentary:
In short, the obsession with “maximizing short-term profits” that has developed in America over the past 30 years has created a business culture in which executives dance to the tune of short-term traders and quarterly earnings reports, instead of balancing the value created for employees, customers, and long-term owners.

That’s not what has made America a great country. It is not what has made some excellent American corporations the envy of the world.
Are American's not paid enough?  Maybe.  Are they under-employed? In many cases, yes.  Is low pay the reason American companies are suffering a malaise?  Maybe but the argument has not been successfully made in this article. Blodget may bristle at being called a socialist or a liberal, but if he wants to convince corporate America to share more of the wealth with workers he's going to make a much stronger case about causality or perhaps even frame the problem differently to begin with.

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