From the L.A. Times:
Workers at auto parts maker Delphi Corp. will be asked this week to take a two-thirds pay cut. It’s one of the most drastic wage concessions ever sought from unionized employees.
Workers at General Motors Corp., meanwhile, tentatively agreed on Monday to absorb billions of dollars in healthcare costs. Ford Motor Co. and DaimlerChrysler employees are certain to face similar demands.
The forces affecting Delphi and GM workers are extreme versions of what’s occurring across the American labor market, where such economic risks as unemployment and health costs once broadly shared by business and government are being shifted directly onto the backs of American working families.
This risk-shifting is only a small part of what is really a slow collapse of wages in the entire manufacturing sector.
Grocery workers at the 71-store Farmer Jack chain in Michigan agreed to take a 10% wage cut to make their operation more palatable to a new owner. Hundreds of workers at a hose plant in Auburn, Ind., approved a $2 cut in their $18-an-hour pay to keep the plant open. Police officers in Wyandotte, Mich., agreed to a three-year wage freeze and to pay more for healthcare.
Jerry Jasinowski, president of the Manufacturing Institute at the National Assn. of Manufacturers, said such givebacks would simply become a fact of life.
“From airline pilots to auto assembly workers, employees need to help reduce their costs,” he said. “We can’t afford to live with the very generous benefits we provided 10, 15 years ago.”
Workers’ reduced leverage has many origins, including a slack labor market and the offshoring of jobs to low-cost countries such as China and India.
Some companies, challenged by low-cost rivals, say they can’t afford more than minimal raises. And even at firms doing well, high premiums for healthcare insurance take away from the pool of funds that could be used to provide raises.
The problem of course, is that part of those givebacks do pay for our modern Gilded Age:
This [2004] was a year of record-breaking real estate sales, with high-end properties pushing through price ceilings around the country. In fact, the average price of the homes on our list jumped from last year’s $25.9 million to $34.9 million, a dramatic increase of nearly 35%.
Significantly, in 2004 the record for the most expensive house ever sold in the U.S. was broken when billionaire Ronald O. Perelman unloaded his Palm Beach estate for $70 million. Perelman, 61, whose holding company MacAndrew & Forbes owns cosmetics producer Revlon (nyse: REV – news – people ) and flavoring maker M&F Worldwide (nyse: MFW – news – people ), sold to Dwight C. Schar, 62, who has been chief executive of Virginia-based construction service company NVR for 18 years, and is a part owner of the Washington Redskins football team. The sale price shouldn’t be too much of a stretch for Schar, who had a paycheck last year of $58 million, making him the fifth best-paid CEO on our annual roundup of executive pay.
I’ve oft-quoted Neil Stephenson when he said (in Snow Crash):
When it gets down to it–talking trade balances here–once we’ve brain-drained all our technology to other countries, once things have evened out, they’re making cars in Bolivia and microwave ovens in Tadzhikistan and selling them here, once our edge in natural resources has been made irrelevant by giant Hong Kong ships and dirigibles that can ship North Dakota all the way to New Zealand for a nickel, once the Invisible Hand has taken all those historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would call prosperity–y’know what? There’s only four things we do better than anybody else: music/movies/microcode (software)/high-speed pizza delivery.
“once the Invisible Hand has taken all those historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would call prosperity” – has a kind of accurate ring to it, doesn’t it?
The rub, of course, is that a bunch of people in America are going to buy record-breaking numbers of record-breakingly expensive mansions while Jane and Joe America worry about paying the heating bill on their two-flat apartment.
That’s not inherently evil, and I’m not someone who believes that those who get don’t deserve.
But I do believe that if those who get don’t understand the social compact that allows them to keep getting and to enjoy what they’ve got, the consequences for our polity will be massively destructive.
It’s simple; we’re in this together or we’re not.
As my health plan, Pacificare, looks to consummate a sale to a larger health care organization, the CEO stands to make over $180 million in the transaction. Good for him, bad for us.
Cramming cutbacks down the throats of employees, while budget crises in local government limit their access to education for retraining, cutbacks in public health and local hospital networks limit their access to health care, and restrictive zoning and planning requirements limit their access to housing is a pretty clear signal that the answer to that question today is “not.”
When the largest group of voters wake up and see this, and their answer becomes “not,” too, the kind of demagoguery masquerading as populism won’t be anything we want to hear.
I’d like to forestall that, and I think we can.
Directors of California’s giant public pension fund voted Monday to oppose $345 million in payments that top executives of PacifiCare Health Systems Inc. would reap from the sale of the health insurer to UnitedHealth Group Inc.
The California Public Employees’ Retirement System, or CalPERS, holds a small fraction of PacifiCare shares, but it is the first institutional investor to take a position on the proposed $8.1-billion acquisition. Shareholders are scheduled to vote Nov. 17.
The deal, proposed in July, would grant payments to 39 top PacifiCare executives, including about $180 million to Chief Executive Howard Phanstiel. The payments include accelerated vesting of options granted by Cypress-based PacifiCare and signing bonuses and other incentives to executives who stay with UnitedHealth, the nation’s second-largest health insurer, for several years.
Good for CALPERS.
–
A couple of points here…
First, the social contract between the employees and management has been steadily eroding over the past decades. Although some has been driven by the greed of the very senior managers to grab as large a piece of the pie as they can, another part has been driven by the mad quest for short-term improvements in stock value. Many call this “productivity growth,” but when overdone it leaves once-agile and vibrant companies as hollow shells of their former selves.
I saw this effect in a large oil company I once worked for, and in other peer companies. In the name of improving productivity, engineering staffs were gutted. And seldom did the purge focus on getting rid of dead wood, but rather on numbers alone. Where we once had technical staff that could tackle a difficult process problem, find an innovative solution, and implement that to the profit of the company; we were left with an engineering staff who only had time to do their basic job description (while putting even more uncompensated overtime hours as they had previously). We went from a being a leading international fully-integrated petrochemical company to a company that did little more than extract oil and gas. These kind of staff cuts may make your bottom line look better, but they sure don’t make you more competitive. Imangine what happens when this happens across the board in our industries, and nobody has any spare time to do anything more than their basic job description!
The other point… about health care itself, and the availability of affordable insurance.
One of the old social contracts between the employees and management of many (most?) large organizations has been the healthcare provisions in the retirement plan. Simply, if you stayed with the company long enough to retire, you would be able to continue your subsidized health-care insurance into retirement… Perhaps at some modest increase in premium, but still, you got affordable insurance.
Those days are about gone, except for (perhaps) government employees. Retirement plans are being rewritten to exclude this benefit, and even where it still exists, the likelihood of a worker actually retiring from a company after enough years to accrue that benefit is becoming a lot smaller.
While it is a myth that for most Americans, private health-care insurance is neither available nor affordable, the costs of a plan that duplicates your old company’s group plan are probably far too expensive for most folks to consider seriously. And if you are unfortunate enough to have a preexisting condition, then you face some real problems.
I don’t pretend to know how we can solve this growing health insurance problem, but certainly more and reasoned public discussion needs to take place. Band-aid programs like the medicare prescription drug benefit, may sound nice, but they don’t address the underlying issues.
I think that was a little more than my $.02, so I’ll quit now.
DRK
Another thing about that Stephenson quote. He seems to think that wealth is a fixed amount that can be concentrated or spread, that itisall a zero sum game. Not so. As wealth is created we can create more,thus all getting richer at the same time.
For _decades_ unionised workers were able to extort greater-than-market-clearing wages out of employers who were in turn able to pass them through to customers. Juicy pension plans were a part of that landscape. They got it … because they _could_.
That system started to break down with beginning with the Massey-Ferguson combine harvester plant in Brantford, Ontario in the mid-’70s. Ag profits were sagging after several extraordinary years, and MF management informed the workers that while there were plenty of jobs possible if the workers took a pay cut from about $20 to 17 dollars, 1977 money, an hour, but the company operation would quickly fold if the workers insisted on a pay rise to $24 (about $85 in today’s money).
In today’s economy, why on earth would Northwest Airlines be paying people who clean out the planes at a compensation rate well over $40 per hour? Etcetera, etcetera. Only because at one time unions were able to extort that kind of money out of the company.
That all said, the real embedded problem is with defined _benefit_ pensions. These are already under-funded by many billions of dollars each, and companies such as GM are required by federal law to extract profits to fund them. One reason the legacy airlines often choose bankruptcy is to dump their pension. Once United was able to do that, the others must follow or lose their ability to compete.
I’ll bet you at least a nickel that GM is forced into the same situation within three years. Then Ford will follow. But that is just the tip of the iceberg.
Roughly 360 of the S&P 500 companies have defined-benefit pension plans, and most of them hold lots of stock in — you guessed it — other S&P 500 companies. The more these pensions drag on profits the more it pulls down company earnings, which pulls down their dividends and stock value, which were supposed to support other companies pension funds. Lather-Rinse-Repeat.
That is the very large pile of elephant $#|+ that is only now starting to stink.
One final comment about cars, or much of anything else, being made in Bolivia … a country I know fairly well. Toyota are making great cars right here in the US with well-compensated, content, highly competent _non_-union labour. Have you seen any Yugos lately? Ladas? or for that matter Citroens? You’ll see well made cars from Hungary, or even Uganda, long before Bolivia is in the picture. There is a _lot_ more than wages involved in all of this.
Bart, which of the above definitions of extort did you intend? If the second, I agree and that’s what should be expected from anyone negotiating a contract. If the latter, some documentation of current auto workers (or automobile industry hourly retirees) using “force, intimidation, or undue or illegal power” would be helpful in supporting that claim. The ability of a union to shut down a company or industry is not extortion in the first dictionary definition sense.
When you go to the grocery store and pay $1.89 for a dozen eggs has the grocery store extorted the money from you?
I don’t want to defend labor unions. I think that in many cases they’ve made excessive demands. But management acceded to those demands and management and the other shareholders have benefited over the years from the contracts that have been negotiated. Shouldn’t management be subject to at least a little of the criticism over the current state of affairs? And some of the pain in correcting the situation?
this from the Economist regarding % of jobs in manufacturing and service industry jobs.
Manufacturing employment
Industrial metamorphosis
Sep 29th 2005 From The Economist print edition
Factory jobs are becoming scarce. It’s nothing to worry about
FOR the first time since the industrial revolution, fewer than 10% of American workers are now employed in manufacturing. And since perhaps half of the workers in a typical manufacturing firm are involved in service-type jobs, such as design, distribution and financial planning, the true share of workers making things you can drop on your toe may be only 5%. Is this cause for concern?
Our figure of 10% comes from dividing the number of manufacturing jobs—just over 14m, say the latest figures—by an estimated total workforce (including the self-employed, part-timers and the armed forces) of 147m. In 1970, around 25% of American workers were in manufacturing.
The share of manufacturing has also been falling in all other developed economies since 1970. The sharpest decline has been in Britain, where such jobs have dropped from 35% to 14% of the workforce (see chart 1). Indeed, the actual number of manufacturing jobs has fallen by half since 1970. The smallest drop has been in Italy, where manufacturing still accounts for 22% of employment. Germany is the only other big economy where more than one-fifth of workers are still in the business of making things. In Japan, the share has dropped to 18%.
Most people today work in services: in America, as many as 80%. But this trend is hardly new. As early as 1900, America and Britain already had more jobs in services than in industry. Even at its peak, early in the 20th century, employment in manufacturing never exceeded one-third of America’s workforce.
What is new is the recent absolute decline in factory employment. Although manufacturing has long been shrinking as a proportion of America’s expanding workforce, the number of industrial jobs stayed more or less the same between 1970 and the late 1990s. Since then, however, manufacturing employment has fallen in every year. Chart 2 shows that since 1996 the number of manufacturing jobs has shrunk by close to one-fifth in America, Britain and Japan. In the euro zone, the average loss has been only 5%.
Similarly, manufacturing output has fallen as a proportion of GDP (measured in current prices), although in most countries manufacturing’s share of total production is slightly higher than its share of jobs. For instance, it currently makes up 13% of America’s GDP, down from 26% in 1970. However, a closer look at the figures shows that the slide in manufacturing’s share of GDP largely reflects a fall in the prices of goods relative to services. Measured in constant prices, the share of manufacturing in GDP has been broadly unchanged in America, and in developed countries as a whole, since 1980.
For all the bellyaching about the “decline of American manufacturing” and the shifting of production en masse to China, real output has been growing at an annual pace of almost 4% since 1991, faster than overall GDP growth. And despite China being widely acclaimed as the new workshop of the world, America remains the world’s biggest manufacturer. Japan is in second place, with China a distant third, producing $700 billion-worth of manufactured goods, a mere half of America’s total.
China has around six times as many manufacturing workers as America, but they are much less productive. And even China has not escaped the worldwide decline in manufacturing employment. Between 1995 and 2002 (the latest figures available) the number of such jobs fell by 15m in China, mainly due to the restructuring of inefficient state-owned enterprises. Manufacturing’s share of employment has also been falling in Singapore, South Korea and Taiwan since 1990.
Since, contrary to conventional wisdom, manufacturing output has been growing strongly not declining, the fall in employment in America and elsewhere should be seen as a good thing. It does not represent a wholesale shift of production from developed economies to China. Instead, it largely reflects rapid productivity growth. And because unemployment rates in most developed economies have not increased during the past decade, even though manufacturing jobs have been lost, it would appear that most laid-off factory workers have found new jobs.
Deindustrialisation—the shrinkage of industrial jobs—is popularly perceived as a symptom of economic decline. On the contrary, it is a natural stage of economic development. As a country gets richer, it is inevitable that a smaller proportion of workers will be needed in manufacturing. The first reason is that households need only so many cars, fridges or microwaves, so as they become richer they tend to spend a bigger chunk of their income on services, such as holidays, health and education, rather than on goods.
Second, it is much easier to automate manufacturing than services, replacing men by machines. Faster productivity growth than in services means that manufacturing needs fewer workers. In turn, as workers move into more productive areas, this gives a boost to overall productivity and hence living standards.
From this point of view, the fact that manufacturing is still such a high share of jobs and output in Germany and Italy could be a symptom of economic weakness. Not only have both countries tried to protect manufacturing jobs with employment-protection laws, but a tangle of red tape also discourages the creation of new jobs in services. These two countries will therefore be more challenged by growing competition from emerging economies in years to come.
Any analysis of labour-market trends soon gets bogged down in a statistical swamp. For instance, a small part of the fall in manufacturing jobs is a statistical illusion caused by manufacturers contracting out services. If a carmaker stops employing its own office cleaners and instead buys cleaning services from a specialist company, then output and employment in the service sector appear to grow overnight, and those in manufacturing to shrink, even though nothing has changed.
A redundant distinction
More generally, the line between manufacturing and services is blurred. McDonald’s counts as a service company, but a visit to any of its restaurants puts one in mind of an industrial assembly line, turning out cooked meat products. Similarly, an increasing slice of value-added in manufacturing consists of service activities, such as design, marketing, finance and after-sales support. Last but not least, Britain’s number-crunchers stick The Economist, along with the whole publishing and printing industry, in manufacturing, even though almost all our staff are engaged in service-like activities.
The division between manufacturing and services has become redundant. A more sensible split now is between low-skilled and high-skilled jobs. Neither manufacturing nor services is inherently better than the other; they are interdependent. Computers are worthless without software writers; a television has no value without programmes. The issue is not whether people work in factories or not, but whether they are creating wealth. Manufacturing once delivered the highest value-added; high-tech industries, such as drugs and aerospace, still do. But in developed economies today, telecoms, software, banking and so on can create more wealth than making jeans or trainers. Writing a computer program creates more value than producing a computer disc.
Before long no one will much care whether firms are classified under manufacturing or services. Future prosperity will depend not on how economic activity is labelled, but on economies’ ability to innovate and their capacity to adjust.
Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.
Armado Liberal:
Can you tell us who you voted for in the recent Presidential Election of 2004?
From there, perhaps we can proceed to considering solutions to the problems you raise, something that seems to be missing from your dialog.
Gracias,
Che
Dave S: “The ability of a union to shut down a company or industry is not extortion in the first dictionary definition sense.”
How can you not consider that intimidation? Unless, of course, what you don’t state is that the employer can, with minimal disruption, go hire another, say, 1,000 workers and be running smoothly again in a few weeks. Because inimidation is, in essense, making someone do something he would not otherwise do without the input of something like “WE’LL SHUT YOUR BUSINESS DOWN!”
Che:
“I’m Voting for Bush”
http://windsofchange.net/archives/005762.php
A.L.
“Another thing about that Stephenson quote. He seems to think that wealth is a fixed amount that can be concentrated or spread, that itisall a zero sum game. Not so. As wealth is created we can create more,thus all getting richer at the same time.”
Of good grief, no, no, no, no, and ten times no. Read some Stephenson before smearing him with your usual brush.
Stephenson believes that wealth comes about by being able to perform a service which other people desire. He would be the first to admit that as the collective value of the services increases, that value of the collective wealth has increased. What Stephenson is saying is that the relative wealth resulting from a service depends on how easy it is to do, and that in the past the US acquired relative wealth by being able to perform services that noone else could do (or do as well). But once those services become easy – once lots of people can do them – then the premium for those services is inherently reduced. What Stephenson is saying is that the only way to stay wealthy is to keep doing things that are _hard_ and that no one is entitled to wealth merely because of who they are. What Stephenson is saying in snow crash is that people who come to believe that they are entitled to wealth, stop working hard, and then wake up one day to find that thier wealth has moved over to someone who had been working harder than they were. In Snow Crash, the only hard things that Americans were still able to do were, “music, movies, micro-code, and high speed pizza delivery”. As a result, wealth had moved elsewhere.
But no one who read the Diamond Age or The Baroque cycle could imagine that Stephenson had a merchantile commodity or communist view of what wealth was so stop speaking about things you are ignorant of.
I believe that the only way that Americans will be able to continue to enjoy the lifestyle we have become acustomed to is if continually invent new things to do that noone has ever done before. There is no other solution. As Scotty used to say, “You cannot defy the laws of physics.”
Or, as I paraphrase it, “You cannot fight the universe. You can only make deals with it.”
I agree that there is a problem in the executive culture of our corporations, but if the American people are lead to believe that they are entitled to be wealthy simply because they are Americans and that the only reason that the good times can’t last is those dastardly CEO’s, then we are all doomed.
There’s only four things we do better than anybody else: music/movies/microcode (software)/high-speed pizza delivery.
And weapons.
Armed, haven’t you read Diamond Age, Stephensen’s paen to nanotech? IMHO, it is the sequel to Snow Crash. 😉
“Stephenson speaks”:http://www.reason.com/0502/fe.mg.neal.shtml
To make the obvious point, workers need portability of their health-care/retirement benefits. Its not a pretty thing to watch what a company will do starting around year 25 to an employee whose pension benefits vest at year 30.
The only question appears to be whether portability is achieved through taxpayer funded programs or through private accounts or some combination of both.
One question I have is whether companies which directly or indirectly pay their employees health-care and retirement benefits can compete with companies which have those benefits paid by taxes?
Dave,
This is not a matter of crime and punishment. Who would you punish? The managers that are long since retired? The shareholders of record at the time of said offenses?
Your perceptions must be recast. It’s not a matter of crime and punishment. It’s purely a matter of market forces and competition. The expectations of middle Americans were largely set by the prosperity of the post WW2 era, when there was little competition.
It’s like the water sharing compact amoung the western states that, by ignorance, divided the water of the Colorado river based on it’s highest flow rates in a 100 years. The pie did exist, but it was more bonus than salary.
Unfortunately, it turns out that defined benefit pension plans can only be afforded by goverments over the long term; and that’s not even a certainty anymore. It looks like medical care may be in the same boat.
Again, it’s all market forces. There’s no long term protection from reality, and reality bites.
Before plunging in, I’ll preface the comment with this: It’s personal. My father is an octagenarian GM retiree, a lifer white collar employee who took early retirement in one of the earlier waves of RIFs / buyouts. Onward…
AL, the class warfare rhetoric may be soul-satisfying and/or politically useful, but it neither explains what’s going on, nor illuminates some root problems.
To the first point, even if I granted that every one of the executive salaries, perks, and golden handshakes were ill-gotten gains, all of them summed together would not make a dent on the financial problems of just one company. Taking GM, we’ve got the gov’t and the company differing on the current funding obligation of just the pensions by $31 billion. I’ve seen an outside estimate that the total obligation of GM to its pension and health plans is $184 billion, and that its shortfall when including the healthcare is about $68 billion. Throw all the executive salaries and bennies into that hole, and it won’t even make a splash. Righteous outrage, but little relevance.
In an Economist article that’s behind a subscription wall, it’s given that GM has 200,000 current employees, and about 1,000,000 total retirees and dependents. Stated as a dependency ratio, that’s 5 on 1, far beyond the worst fears ever stated for Social Security. That’s been created by a shrinking company, but also by retiree longevity beyond anything envisioned when the plans were written. And that hits twice. Once in long than expected pension payments. But second and worse in health care obligations, since the very treatments that extend lifespan create an ever increasing payments burden. Let’s be very clear about this: the retiree healthcare now being funded by GM, and others similarly positioned, is far beyond anything that existed or was envisioned when the open ended benefits were defined in the ’60s and ’70s.
And because of cases like this, we will NEVER see the like again. In this day of Sarb-Ox and personal liability for CEOs and CFOs, can you imagine anyone putting up a defined benefit pension plan, or open ended retiree medical benefit, and signing off on the financial implications for their companies? The very transparency backed by antagonists of corporations is ripped the covers off the unsustainability of the ‘obligations’ that they wish corporations would assume.
Having seen a bit of GM up close in my past, I’d put a lot of that situation up to the co-dependence and mutual arrogance of the UAW and GM management. Arrogance of the UAW in assuming they could lumber GM with work rules and benefit obligations with no eventual consequences. Arrogance of GM in assuming they had so much market control the consequences could be passed on the consumer indefinitely. The bill for that arrogance was written with the 70s oil shock. It’s just taken thirty years to come due. Take a look at the company’s share of sales and margins in SUVs, its CAFE, and its unit labor costs, and tell me it’s learned anything.
GM, however, is also a microcosm of what’s to arrive across the economy. An open column at the Economist frames it appropriately as the harbinger of an inter-generational conflict society wide: How much will we tax the younger generation to support the pensions and healthcare of the older, whether under guise of FICA, or expense burdens on companies? Perhaps Delphi is stating its demands on current workers so starkly simply to force that question: Should it be able to try to make a go of its current workforce and business? And if so, will society as whole take over the unsustainable commitments it made? And behind it, waits GM, and then Ford, and…
There are some damned serious issues here, but pettifogging over class envy doesn’t address them.
As usual, Tim bring the balance I was looking for to the discussion. Thanks, Tim.
A.L.,
Believe it or not A.L. your government is at work (stupidly as usual) trying to fix things. They recognize that the only way out of the hole (temporary) we are in is innovation and invention.
They have set up (ineffectively so far) a number of public/private corporations to generate new ideas and new businesses. I have been involved in that process and to me it looks totally parasitic. i.e. it has added another layer of management without any corresponding increase in productivity. Instead of getting your “no” directly from the venture people you get to go to a government office and get deterred by them. i.e. the folks with resources who are partnered with the government are no longer making the decisions.
So let us look at real wages. i.e. what the worker gets to take home. Government is sucking the life out of workers.
You want to figure out how to improve wages? Figure out how to reduce the burden of government.
Milton Friedman says that if we reduced government to the size necessary to do its Constitutional duties and nothing else, we could have an economic growth rate of 10% a year vs our current 3% average. What would that do to wages? One need only look at the dot com boom to figure it out. In the last year of the boom the economy was growing at around 8% a year and wages went through the roof. The more government tries to help the more it strangles the economy.
A.L., the cure is not more of the disease.
BTW re: car companies.
Currently a wise investment of $20 million is all that is required to start a car company. If a product was made that the consumer wanted that company valuation would be in the billions once the product was on the market.
Once that happens the gold rush will be on and the dinosaurs will die.
What has happened is that innovation has reduced the value of both capital and labor.
The big money is in ideas and the management required to execute.
There are of course no shortage of ideas. What we are short of is the talent to execute. Thus the high prices paid for management talent. The high prices are a sign of shortage.
Ask any venture guy. They are not looking for “A” ideas. “B” ideas are sufficient if you have an “A” management team. The real question then is: where are we going to get all the “A” teams we need to execute all the good ideas floating around?
I have no idea.
M. Simon
The dot com industry is not at all a good example. The excessive wage growth in that industry was not soley brought on by high growth but also by emerging technology and a limited ability to train new workers in that technology.
And to refute your thesis I would offer a comparison of economic growth over the past 4 years with real wage growth during the same period across all industries. Certainly not 10% annual growth, but good growth none the less accompanied by negative real wage growth or at best stagnant wage growth.
“There are some damned serious issues here, but pettifogging over class envy doesn’t address them.”
Market forces only compete within the legal and infrastructure framework provided by government. Almost all industrial countries except the US have chosen to fund national health care and retirement through taxes, whether progressive income tax(taxing the wealthy more always brings up the “class envy” whine) or various consumption taxes (which tend to be regressive, because the most affluent cannot consume in proportion to their wealth).
Issues of class and wealth distribution are central to this discussion. Extending social security taxes to income beyond the current ~$92K limit would ensure SS solvency and retirement security for decades to come. Repealing the Bush tax cuts for upper income brackets could fund Medicare/Medicaid to provide medical care for retirees.
Government funded health care is clearly more cost-effective (global results are clear: less funds in, better metrics out), while comparision of government to private retirement systems is difficult, since the primary private example of the US defined benefit system is imploding, with an untested defined contribution system replacing it for some percentage of the work force.
Competition does not operate only on the corporate level between companies, but on the national level as well. For a while, it appeared that the “Japan Inc.” model was out-competing the US laissez-faire model, but Japan disappeared into stagnation. Currently, the “directed, authoritarian capitalist” model of Singapore, Korea, China appears to be outcompeting the Bush “low taxes on wealth, low public investment” model in the US.
I tend to agree with Stephenson on the leveling effect of the invisible hand. As a US engineer, my guess is that engineering salaries worldwide will tend to converge. Indeed, in 20 years of working with Asian engineers, I believe that substantial leveling has already ocurred. The decline of the dollar alone serves to bring the purchasing power of US salaries closer to their global competition.
The US could simultaneously win and lose to global competition. If US companies are more successful in a low tax, low public services environment than global competitors, we “win”. However, in that same scenario, individual US employees may be “thrown to the sharks” with no retirement or medical benefits after a lifetime of work, losing the quality of life competition while US corporations “win” in the marketplace. Most citizens do not own enough stock to benefit much from that “win”.
Davebo – M. Simon did not say ‘dot-com’, he said ‘venture’. They aren’t the same thing. There was indeed a bubble in Internet equity values and compensation in the late 90s, driven by a combination of a spot labor shortage (which you did say), excess capital inputs, and extreme present value discounting due to a combination of desire to avoid ‘disintermediation’ (read ‘fear’) and desire to get in on the game before the next IPO (read ‘greed’)
That bubble famously was unsustainable and blew up, but it did leave sustainable changes in place. Just ask any of the bricks and mortar companies or MSM outlets that have the pleasure of competing with eBay, Amazon, Google, Yahoo, et al. And, if you look at the entirety of ‘venture’, it also gave us the likes of Genentech and other biotechers, and is now digging into energy and nanotech. That innovative process is sustainable, and it’s one of our best sources of competitive advantage, if we can keep the economic agility that sustains it.
Trying to stay vaguely keep on topic, let me assure all that if every new venture were to be burdened with the present value of a GM style retirement and healthcare package for its employees, us VC types will start looking for a new line of work, or head for the beaches. Those days are gone, they are part of what’s sinking the old line companies, and no one is even thinking about baking them into the economics of new ventures.
Quoting economic stats from the last four years is disingenuous. That’s been a period of recovery from recession, brought on by the bursting of that same bubble, plus a certain event on 9/11/01. The initial recovery part of the business cycle typically has increasing economic activities, improving profits, but without a lot of hiring, or pricing power on the part of either business or labor. Just what we’ve seen. When/if we get to the high growth / labor crunch part of the cycle, then you’ll have a real comparable. That could take a while, given the combination of oil price worries and deliberate angst inducement by the Fed.
Tim, Tim – you know me better than that!
I’m not advocating a ‘class-war’ driven strategy; what I am suggesting is that the oblivious greedheads currently on the top of the pile are going to wake up one day and find that there is one if the more responsible members of the soiree don’t start raising their hands and pointing out that we are all in the same boat, and that if they want to feel free to eject the un-needed without lifejackets, that the unneeded will wake up soon and recognize that they have more votes – and that with that, they can choose who to eject.
Class war is a bad thing, whether practiced from the bottom in the name of social justice, or from the top in the name of market reality.
And the issue isn’t whether we could sell all the mansions and yachts andhave an impact on the medical/pension overhang, but whether we can keep our social compact together then one group’s medical benefits are being torched to keep those mansions heated.
A.L.
davebo,
During the dot com boom McDonalds in my town had signs in front of their store saying help wanted starting at $7 an hour. During a time when the minimum government enforced wage was 5 something an hour.
Ours is a manufacturing city deep in the rust belt.
We had very few if any dot com jobs.
It wasnt just techies who were advantaged by the dot com boom.
Tom,
The French social model has been a rousing success.
Unemployment at the 10% level for the last 10 years. Germany about the same.
In Britain recently a hospital ran out of mops. It was a number of days before they got resupplied. There is always rationing. Do you want to do it by bad services or high prices? At least with high prices there is no shortage of mops.
A.L.,
They are not gread heads at the top.
There is a serious shortage of management talent compared to the number of opportunities.
The price paid for talent is just as much driven by supply and demand as is the price for wheat.
I mean what about all the greed heads working in Major League Baseball? Why pick on executive who actually add value.
As I wrote here several years ago. Socialism is dead. If workers are not being paid enough (in your opinion) they should figure out how to add more value. It is the only way.
In fact given the shortage of management talent and the high wages paid for it perhaps your underpaid workers should set their sights on management.
Having been in China and toured SOE (State Owned Enterprises) I can say that a great deal of manufacturing in China is redundant stuff designed to keep people busy/employed; vital when nearly all social services are tied to work units. China is horribly inefficient at manufacturing, but has VERY cheap labor.
The problem is that the US has failed to capitalize on it’s strengths in manufacturing; particularly JIT and short-run products of high sophistication and quality. Tax and investment policy should be structured to encourage business to invest in capital and thus highly paid workers here.
Manufacturing matters; just ask Scaled Composites or any other innovative US company.
A.L.,
The money earned by top management talent is not put in a mattress.
It gets invested. Which makes the system regenerative (with lumps).
We are in one of those lumpy periods. They happen when old ideas run out of steam and there are not yet enough new ideas that are big enough to fait le bon temps roulez.
The kind of social responsibilty you are asking for is another way of saying that the accumulation of large lumps of capital is harmful to the system.
Wrong.
It is the main engine.
I am sorry it comes with so much pain. Easing that pain by leveling will not help our system. It will hurt.
Marc, if you trot out this kind of rhetoric: “The problem of course, is that part of those givebacks do pay for our modern Gilded Age”, perhaps I may be forgiven for detecting a tinge of class warfare. As I’m pointing out, giving back all of those gains, ill gotten or not, will not matter a whit to the underlying issue, old age and health insurance, driving your cause celebre of the moment, Delphi.
You’d like to talk about Gilded Age executives. Fine, shall we talk about the California state bureaucrats who are being handed pension and healthcare benefits that private sector employees can only dream of, to be paid by taxpayers, and pretty much guaranteeing the future insolvency of the state and most local governments? And which legislature voted that in, and what governor signed the bill? If we’re all in this together, let’s talk not just about the private sector, but about the ‘public’ sector and its attempt to insulate itself from the pains of competition that the rest of us face.
Rockford,
Manufacturing has invested in capital. That is why there are so many fewer workers in the industry.
We don’t need nearly so many machinists because of so many automated CNC machines.
BTW I live in your last name. Heart of the rust belt.
Basically what happened to farming is happening to manufacturing. Output is constant or increasing. Labor input declining. Same for autos.
If any one is interested in blame you can blame me. I helped develop the machine automation industry.
Tim, how else would you describe what’s going on in Atherton today, except as a “Gilded Age”?
And the income numbers are pretty clear in supporting both greater disparities in come and wealth and greater concentration of wealth than at any time in recent history.
I’ve obviously got no problem with people becoming rich; but I’m also realistic enough to know that this kind of distribution brings substantial costs both to the political and the economic well-being of our society.
As a VC, you have to be sensitive to management that simly takes too much of the deal…and when CEO’s – not owners, but well-compensated CEO’s stand to become centimillionaires from transactions that they trigger – trasactions that may be wonderful feats of financial engineering, but add little to the actual productivity of the enterprise – don’t you think things have tipped a little too far?
A.L.
May I suggest a visit to Tim Oren’s site.
Visit his venture company’s fund focus page.
Let me quote you a bit that explains why we have what A.L. thinks is a serious screwing of workers to pay for executive talent:
Pacifica entertains seed investments only if the fit with our investing targets is excellent, and the founding team includes strong executives with relevant domain and startup experience.
So here you have it: they only invest in things they can understand (feel in their fingers – there is a German word for it fingersptitzel I think or something like it) and they want top management talent.
Top talent is in high demand. There is not enough of it. How do you get more? In a market economy prices rise.
Curtailing the price rise will insure a shortage of talent. Think mops in the British hospital.
So A.L. which is better for our system? A shortage of talent or “paying too much” for it.
Every body has their own area where they are sure supply and demand don’t work. Liberals believe that it is executive pay. Conservatives believe it is the dope market. Some folks believe it is baseball player salaries.
There are not many rational players in the game.
Concentration of wealth is a natural result of concentration of ability, and recurs in history. The rate of concentration varies (other factors being equal) with the economic freedom permitted by morals and the law… democracy, allowing the most liberty, accelerates it.
— Will and Ariel Durant
Originally blogged here.
And over at my place last year.
A.L.,
The French are up agaist it. You have the choice of liberty or economic equality.
Read Hayek’s “Road to Serfdom”.
He explains in 1944 when events were close how socialism leads to fascism.
The best way to raise the bottom is to let the top do the best they can in generating wealth. Even if it means large accumulation. Wealth diffuses over time. However, that time is generational. My #2 son is on 100% scholarship at the University of Chicago, paid in part by the Rockefeller endowment to the University. He is benefitting from the “robberies” done 100 years ago.
If managemet was easy then they would be paid as much as a McDonalds worker.
So tell me A.L., if management is so easy why aren’t you pulling down the big bucks?
It really is the old socialist idea that managers add no value. Which is bunk.
Fortunately I was a communist back in the day and recognize the symptoms.
A.L.: OK, assuming there is a problem, do you think that there is a government solution to the problem? If not, what would constitute a solution?
M.Simon: Is it possible for a market economy to, over the short term, produce salaries not commiserate with merit? Is this ‘short term’ necessarily shorter than what you call the ‘generational’ accumulation of wealth? Would you agree that government regulation can interfere with a market economy to the degree that the market fails to function correctly and misallocates resources? Other than government regulation, what forces could interfere with a market economy to the degree that the market fails? Is it possible that there are some theoretical commodities for which a free market always fails?
A.L.,
I know managers add value. I have had good and bad.
Being a contractor for 30 years wized me up.
I usually got called in only when a project was in trouble. Projects get in trouble for two reasons.
1. Bad management
2. The unforseeable
Managers who held the reigns loosely on me (not slack) got big dividends. Those who insisted on doing stupid things despite my best advice (I had a manager insist that I develop a one bit processor for control of an assembly machine) wound up some place else.
BTW I hate stupidity. One company I worked for insisted on using the microprocessor in the product as the microprocessor for the test tool. If the product didn’t boot you couldn’t test it. How stupid can you get?
In addition the product itself was poorly designed. It had a main bus much too long. Then I needed to add an extension bus for the test peripherals that added very little load to the main bus. Too much load on the marginal bus and it died.
The upshot? The pre-production run ran perfectly. After that – in production the failure rate was very high. And because of the long bus the field failure rate was 99%.
But the manager saved a lot in extra design work. Funny thing is: it seemed like a good decision at the time.
Management is not easy.
#33,
The market rarely fails. What fails is time. There is always a lag. So folks are not willing to wait and want to put a gun (government) to people’s heads to make sure they do the right thing. So the government regulates. And when the need for that regulation is long gone it remains a dead weight on the economy.
As to where government is needed: large scale violence – Armies and Navies.
Enforcement of contracts.
Prosecution of crimes.
Hell I’m liberal enough to believe we can afford a sub par social net for those on the bottom and a better than sub par deal for the disabled.
Why sub par at the bottom? As a goad to self improvement.
What’s going on in Atherton? From my daily commute, it looks like the full employment act for Bay Area construction workers. Yeah, I know that’s not what you’re getting at. But if you look at (for instance) the gap in real estate styles of the real Gilded Age – the Carnegie mansions vs. the steelworker accommodations – versus those between IT execs and their rank and file, I do think you are stretching the rhetoric.
Let me try and come at the executive value thing from two different directions.
First, startups. (BTW, M., A.L. is quite aware of my day job.) I like that German word, though, will have to remember that. Sounds a lot better than my own term: BS detector. I want a startup exec that’s smart, humble, and comes with a BS detector in the domain he or she is addressing.
I agree with that ‘A team / B idea’ statement up there, simply because such a team will quickly get in touch with the market and iterate the B idea into A quality. The A exec also knows you can’t hang onto too much – equity, comp, whatever – because you’re only as good as the people and investors you can attract. And the A exec know when to hand off to someone else.
If someone like that – an Omidyar, or Bezos or Jobs – walks off with a few hundred megabucks, well bully for them, they earned it, they made something out of nothing. And let it be noted that for every one of the high profile CEOs that come out of the Valley and other venture venues, there are hundreds of small scale, small town entrepreneurs that also create value – they just don’t make nice ‘hero or goat’ MSM stories.
Where value is harder to assess is with established and/or public companies, where the initial market definition and product creation is long in the past. And there I suspect we get equally misled by the hero stories of the likes of Welch and Iacocca, or the goat stories of Enron or Worldcom. Having seen parts of lower profile trainwrecks up close, I’ve been led to posing the question this way: Given (let’s say), a $1b turnover enterprise, what’s the value of a CEO that at a minimum enables his subordinates to do their jobs, and doesn’t screw up big time during his tenure, let’s say ten years. Screwing up includes both Ken Lay style malfeasance, as well as the failure-to-get-the-message that we might ascribe to (for instance) GM, Kodak, or Time-Warner.
Sounds easy? I really don’t think so. Especially with a bunch of auditors, analysts, attorneys, and journalists leaning over your shoulder second guessing or playing gotcha. And you need a somewhat different breed of cat. Replace the ‘BS detector’ requirement with something more like ‘BS tolerance’. And that requires motivation, take your pick – ego, money, power. As a shareholder, or pension holder, of such a company, would you NOT want to pay up, given the consequences? The fun, of course, is you don’t know what you really bought until the ten years is up.
While not denying there are some overcompensated turkeys out there, you’ve also got to look at some driving forces. Let’s take Sarb-Ox for instance. It’s arguably not only necessary to restore confidence, but a reasonable function of government to create a well-regulated market. But its increased obligations and scope of liability have consequences, and they really aren’t that hard to see. Fill in the blanks: Increased risk must be matched with ? rewards. Reduced supply will result in ? prices. Works with execs just like everything else.
So how about those bureaucrats trying to exempt themselves from market forces, huh?
And do we really think this one act class melodrama is as significant as an inevitable demographic inversion and an onrushing healthcare/insurance/genomics trainwreck?
I think there may be another thing going on behind all being discussed here. More than half the non-government GDP is now generated by small business, and small business is notoriously difficult to track.
That’s one reason employer-reported jobs have barely increased in five years, while _household_-reported employment has moved ahead quite steadily, by millions.
Computers have given the small business an immense level of managerial and operational power not available even a few years ago. Quite a few of those small businesses are manufacturing profitably on a small scale, and a lot of it never makes it anywhere near official numbers.
This adds a whole new level of problem for large ‘legacy’ companies and their pensions. ‘Legacy’ BTW is probably just a euphamism for ‘dinosaur.’ It is widely accepted that long-term average real stock growth is roughly equal to real GDP growth, ex dividends.
Yet most of the companies in the small business half of non-government GDP are _not_ publicly traded, and their growth is therefore _not_ really available to legacy pension funds. Hence the growth rate of these funds may turn out significantly lower than their planners and actuaries estimate, without even taking into account the problem of dinosaur pensions depending on dinosaur companies for their growth.
This won’t be pretty, and the harder the unions try to prevent it the worse the problem will become. In spite of a few glaring exceptions (like energy) we’re already into a broadly _deflationary_ era, the first pulses of which are now hitting wages.
M. Simon: What is this, Presidential debate class? I note that you not only choose not to answer any of my questions, but you choose to answer questions I didn’t ask. In a TV interview in which people’s attention span seldom extends past the current sentence which is being spoken, you might get away with that with a majority of viewers, but as a textual matter of record it just sets there for everyone to see. At the least, if you don’t want to answer any of my questions, explain why not.
As for your answers, I did not ask you why government regulation fails.
I did not ask you what the proper role of government regulation is.
I did not ask you if you believed that government had a role in promoting social welfare.
Those answers have nothing to do with the thrust of my questioning. The only thing you said which has even a slight direct bearing on my questioning is, “The market rarely fails. What fails is time. There is always a lag.”
So, you must admit therefore that the market fails over ‘short’ time periods. The specific case of ‘lag’ that you site is only, however – as you should know – an example of a more general failing of Adam Smith style free markets. Namely, Smith’s markets assume that all buyers and sellers are both omniscient and have perfect judgment. But clearly humans are not omniscient and do not have perfect judgment. In fact, buyers do not know all sellers, and sellers are unable to reach all buyers. Buyers do not know the price offered by all sellers, and buyers are unable to perfectly judge the value of the products being offered. Sellers meanwhile are unable to perfectly judge how demand will change in the future, and are thus unable to judge how much or even what products to produce. And even if they did have perfect knowledge, even the best management and planning would often fail through simple friction. In short, not only does the market often fail, market failure is actually the usual situation in a capitalist system. It doesn’t rarely happen. It’s happening all the time.
So, not only is your answer incorrect, but its wildly incorrect. And we haven’t even delt with special cases in which you can show mathmatically that the free market always fails.
Normally at this point, people making this argument jump on the Marxist band wagon and start advocating central planning in some form or the other. That’s why I’m courious to see what Armed Liberal is actually trying to say with his post. But the problem with the central planning thesis is that it doesn’t actually solve the problem, and in fact it makes it worse. Central planners don’t have perfect knowledge and judgement either, and when centralized systems fail they fail catastrophicly. Distributed systems – free market capitalism with a healthy does of libertarianism in its government – fail continually, but they don’t usually fail all at the same time, so that when one part of the network goes down the other parts are thier to pick up the slack. Likewise, distributed systems exceed the computational power of centralized systems by orders of magnitude. Distributed systems collectively ‘know’ more than any centralized authority, particularly when that authorities computation power, knowledge, and insight is constrained by the limits of the human wetware.
celebrim,
As you noted I answered your question.
Then I went on about what people usually do about it.
No process that exceeds its current capacity can respond quickly.
There is no solution to this except to build more capacity. If you eliminate market signals (high prices) or damp them the response is slower than optimum.
BTW the essence of good management is to make good decisions based on limited information. Marxists theories of the value of managers is based on the idea of perfect information. And in that case they might be correct. The real world is different.
Adam Smith’s theories may depend on perfect information. Real markets do not. In fact a few Nobel’s recently have been won based on the study of imperfect information in markets.
There is no magic want except to be patient.
BTW exceeding the capacity of a system is not a market failure unless the spike in demand was predictable (Christmas shopping is an example of that).
Even re: Christmas shopping a lot of effort goes into predicting demand. Another management function in real markets.
Re: the supply of high talent labor. Prices have been high and higher for decades. And yet demand is still outstriping supply.
I have some ideas on how to fix it.
Maybe I will write them up.
Thing is: human capital is the hardest of all to develop. Engineers can be made. Good education and 10 years of seasoning and you have a pretty good engineer for 15 or 20 years.
We have no such organized system for management development. The difficulty is that motivating people is a big part of the job. About the only organization built to teach that skill is the military. Which was one of the foundations of post WW2 success.
Celebrim, M. Simon, and… actually everyone in that sub-discussion: It would probably be useful to specify and agree upon definitions for “market failure.” Perhaps as distinct from “economic failure” as market economies are not the only games in town.
Otherwise, you’ll continue to talk past each other.
BTW prices signal areas that need attention.
If you think of the market as a feed back system (why isn’t control theory widely taught?) then a shift in prices is not a sign of failure. It is a signal.
#40 Marcus Vitruvius,
I was thinking about the question even as you were posting.
I hope the above helped.
What people normally mean by market failure is: prices are too high. The “price gouging” idea is usually touted.
Take batteries in an area hit by a hurricaine. Governments go to great lengths to prevent “gouging” so rationing is done by scarcity instead of price. Demand exceeds supply at the normal price.
If government would let the price spike supplies would be brought in sooner. i.e. gouging gives incentive and the means of increacing commercial transport into the affected area.
To the economically illiterate it just seems so unfair. Government must do something.
In general I would agree with Celebrim that markets fail all the time, yet markets are still superior to central planning for allocating labor and capital. High prices are the opposite of a market failure, for example, current high gas/oil prices are signaling consumers that demand is outstripping supply and the least efficient/necessary consumption should be curtailed,etc.
True market failures would be more like the Tulip Bubble where assets traded with no relation to underlying value, ending with market collapse and impoverishment for many. Overharvesting/extinction of cod, passenger pigeons, tiger penises, etc. are other examples of market failure, where individual greed results in damage or destruction of the underlying resouce with permanent consequences for temporary gain. The Dust Bowl in the US was arguably a market failure, where short term economic gain for farmers resulted in permanent loss of soil and agricultural productivity.
Every society limits the range of market function, either by prohibiting or taxing various kinds of trade (drugs, prostitution), by legislation to control market externalities (private gain at Bhopal but thousands of Indian citizens were killed or crippled, coal burning in London prohibited after thousands died, lead removed from US gasoline after measureable lead levels increased throughout the population), by regulation to ensure transparency (SEC), and by taxation to provide some safety net for the losers in economic competition,etc. Many of these market limitations show benefits many times greater than their cost (pollution regs in the US estimated to prevent health costs and productivity losses many times their costs). In these particular cases, societies have chosen an alternative to simple market allocation as offering greater benefit.
No successful society trusts education purely to market forces, since trial-and-error has shown that public investment in education offers tremendous returns in productivity. Even nations much poorer than the US, such as China, provide government paid higher education to qualified students as a long term investment.
Ironically, provision of a secure government safety net for retirement and medical care may free individual economic actors to take more start-up risks in entrepeneurial endeavors. This seems to be the case in the growing economies of Europe, such as Finland, the Netherlands, Estonia, etc.
Much as I love France (many relatives there) I do not believe that social welfare systems are the most significant variable in its’ economic success or lack thereof. Note that the word “bureaucracy” descends from “bureau”, the French word for office. France long ago invented bureaucracy and still suffers from it today, as I know well from personal experience, along with rigid class, employment and educational systems.
“Take batteries in an area hit by a hurricaine…If government would let the price spike supplies would be brought in sooner.”
I believe that that the point is that that is false.
In the case of batteries in an area hit by a hurricane, the restriction in supply is not driven by the market and government price controls in general do not in this case suppress supply. Regardless of the price paid for the batteries, the batteries will arrive at the same time because the problem is not that manufacturers need incentives to create batteries, or even that batteries aren’t awaiting delivery, or that sellers need incentives to order them from the manufacturers. In fact, the problem is not even for that matter that manufacturers need incentives to create trucks to deliver the batteries, because even if they did have those incentives they could respond (build trucks) quickly enough to actually impact the problem before the short term constriction of supply was allievated.
The problem is that there is a physical obstacle to the batteries delivery and no ammount of price increases can remove that physical obstacle in the general case. Also, you have to ask at want point the demand for the good is irrationally high. If you let the demand for batteries soar irrationally high, what is that going to do to your strained transportation resources? Should batteries be allowed to drive up the price of water by competing with water for space on the finite transportation resources you have available at the momment? You have a market in which the free market’s normal inability to see its own long term interests is the dominate factor in the market’s behavior because demand relative to supply has spiked nearly infinitely, but demand relative to supply is going to crash equally fast in an economic blink of the eye. In this case, temporary government price controls and hurricanes are acting to cancel each other out, resulting in a market with greater long term health. During extremely chaotic situations, the market needs some stability.
The economic value of altruism is that it anticipates the long term health of the whole system better than self-interest alone can. People didn’t decide to have free public schools because they thought that it would make them a wealthier society. It’s ultimate result though has been to accomplish that.
The goal of an economy is to maximize wealth, where wealth is the ability to perform work, where work is something which leads to something valued by humanity. Note in particular that wealth is not the thing valued, but the ability to produce it.
Market failure occurs when an economy fails to maximize wealth over a given interval of time given the resources it has at the beginning of that interval.
Market failures occur for all sorts of different reasons.
“True market failures would be more like the Tulip Bubble where assets traded with no relation to underlying value, ending with market collapse and impoverishment for many.”
That’s one example of one class of a market failure. In the case of the Tulip Bubble, humans began to value a non-capital good (something that wasn’t itself wealth). Now, this is in and of itself not bad. Humans are free to value whatever makes them happy. The market failure occured because producers of the good failed to realize that the valued object was not itself wealth, because buyers began to value the object because of a percieved scarcity which did not in fact exist (the object was scarce only because until recently it hadn’t been in high demand) and lost interest with the object once it ceased to be scarce, and producers failed to anticipate the coming drop in demand and overproduced the object.
This kind of failure occurs all the time in large and small scales, from the collapse of the market for Magic The Gathering cards during the release of Fallen Empires, to the collapse of the dot com industry in 2000.
Since the particular market failure we are talking about is in a market for talent, lets discuss the idea in terms of something everyone can understand – the wages paid to NFL football players (or other professional atheletes). I would claim that the NFL represents a comparable market for talent to that of CEO’s. The question is does that market for talent actually work, and if not, why not?
Guys, the problem of course is that neither CEO nor NFL salaries are set in a free market, with unlimited entry and open outcry.
CEO salaries are set by boards that have been – up until now – very much under the control of the top management, and have readily acceded to the demands of management without the immediate discipline of the market.
NFL salaries are set as a consequence of the monopoly power of the league in allowing new teams to enter.
I just love how folks wave the ‘market’ for such obviously non-market outcomes.
And, again, that’s not my point.
It is, simply, that the consequences of shortsighted selfishness on the part of one group is going to have significant consequences for the politics (and economy) that we all have to live within.
I’ll post some suggestions in the next few days.
A.L.
“Guys, the problem of course is that neither CEO nor NFL salaries are set in a free market, with unlimited entry and open outcry.”
That’s certainly true, though I wasn’t sure how long people would take to notice it, but it isn’t a problem with the analogy so much as it is a feature of it.
One of the big problems with the CEO culture in my opinion is that the CEO’s have been allowed to collude together to raise each others salaries. In effect, the CEO’s have formed a defacto ‘executives union’ to leverage payment from the boards. CEO salaries have not been based on merit or other market driven forces, but instead boards have allowed themselves to be advised on how much to offer prospective CEO’s by other CEO’s, whose own self-interest encourages them to raise the wages earned by thier counterparts. This in turn lets them go to thier own boards and demand wage hikes commiserate with what they have said thier colleagues should be paid. During the ’90’s in particular, when many companies were awash with cash, boards neglected thier oversight duties. In the worst cases, boards and CEO’s have colluded consciously or unconsciously to rake all the capital out of corporations, change it into personal wealth and left the company to die. CEO’s tied to the economic failure of corporations were not ruined by this, but could turn around and accept jobs at other companies – and even if they couldn’t could retire with more than sufficient funds to live comfortably. With personal fortunes no longer tied to the success of any one business – with no ‘ownership’ incentive – managers have little incentive to care about the long term health of the corporation.
That’s scarcely the sum of the problems a free market has with successfully regulating the market for talent, but it – to put a name on it ‘corruption’ – is one of the more intractable problems.
I’m uncertain whether or not a solution exists. I do not think this is a problem that the tools of state power can easily address. I think that the problem is at its heart cultural, and cultural problems are generally intractable and are particularly intractable problems for libertarian cultures in general, and the case of the ‘post-modernists’ controlling the cultural commanding heights in America in particular.
Back to Stephenson: “The success of the U.S. has not come from one consistent cause, as far as I can make out. Instead the U.S. will find a way to succeed for a few decades based on one thing, then, when that peters out, move on to another. Sometimes there is trouble during the transitions. So, in the early-to-mid-19th century, it was all about expansion westward and a colossal growth in population. After the Civil War, it was about exploitation of the world’s richest resource base: iron, steel, coal, the railways, and later oil.
For much of the 20th century it was about science and technology. The heyday was the Second World War, when we had not just the Manhattan Project but also the Radiation Lab at MIT and a large cryptology industry all cooking along at the same time. The war led into the nuclear arms race and the space race, which led in turn to the revolution in electronics, computers, the Internet, etc. If the emblematic figures of earlier eras were the pioneer with his Kentucky rifle, or the Gilded Age plutocrat, then for the era from, say, 1940 to 2000 it was the engineer, the geek, the scientist. It’s no coincidence that this era is also when science fiction has flourished, and in which the whole idea of the Future became current. After all, if you’re living in a technocratic society, it seems perfectly reasonable to try to predict the future by extrapolating trends in science and engineering.
It is quite obvious to me that the U.S. is turning away from all of this. It has been the case for quite a while that the cultural left distrusted geeks and their works; the depiction of technical sorts in popular culture has been overwhelmingly negative for at least a generation now. More recently, the cultural right has apparently decided that it doesn’t care for some of what scientists have to say. So the technical class is caught in a pincer between these two wings of the so-called culture war. Of course the broad mass of people don’t belong to one wing or the other. But science is all about diligence, hard sustained work over long stretches of time, sweating the details, and abstract thinking, none of which is really being fostered by mainstream culture.
Since our prosperity and our military security for the last three or four generations have been rooted in science and technology, it would therefore seem that we’re coming to the end of one era and about to move into another. Whether it’s going to be better or worse is difficult for me to say. The obvious guess would be “worse.” If I really wanted to turn this into a jeremiad, I could hold forth on that for a while. But as mentioned before, this country has always found a new way to move forward and be prosperous. So maybe we’ll get lucky again. In the meantime, efforts to predict the future by extrapolating trends in the world of science and technology are apt to feel a lot less compelling than they might have in 1955.”
umm…i think America is still on the cutting edge technologically, with the exception of bioengineering where we are definitely falling behind. Delphi’s action will force an evolutionary change in the kinds of jobs that Americans do. I wonder what the effect of Kurzweil’s exponential speed-up in technological advances will to do to manufacturing–will we have Matter Compilers for the underclass?
I have three things to say, but I’ll prefix this in saying that as a scientist, economics makes no sense to me. It probably should, but doesn’t.
Still, I have these things to say:
32#) Do you know why ‘upper class’ people tend to put lots of money into scholarships, endowments and charitys?
Of course, some(maybe even a large portion) is really charity. Often though, these endowments serve as tax shelters. By creating an a non-profit center that spends money on noble deeds they can keep another chunk of money safe and tax-free. The Howard Hughes medical center is a great example, which mascaraded as a medical institute until 1984, when the board finally used the money to fund research (it is now one of the largest private biomedical research centers in the country).
So taxing the rich sometimes does reap benefits… even if they don’t neccessarily come out of taxes.
2)It might be easier for goverment to fulfill healthcare duties if everyone paid what they rightfully owed in taxes. Unfortunately, a large numbers of companies skirt the law with offshore accounts to withhold taxable funds.
This means that the money not collected from those taxes is collected from everyone else’s paycheck. Regardless of your view on how companies should be taxed, it should be apparent that intentionall thwarting tax law is bad for everyone.
3)Let’s just say it… America no longer cares about innovation. Oh they’re are a few out there, but the kids don’t care. They don’t care about science, about math, about engineering about real work peformance. I recent study (small but apt) showed that a series of 5th graders care more about being rich than being smart. And although these things aren’t absolutely necessary to do well, they don’t give me any faith that they will be the next ‘bill gates’ or ‘Hughes’; which required the dream of invention as much (or more than) the dream for cash flow. And why should they care? There’s no money in science anymore, no prestige, no national ‘dream’ for the future. Nobody else is paying attention either.
On the other hand, the Indian/Asian/Middle-eastern students I meet are dying to get out there into the engineering and science fields. This is partly due to the fact that these students have sacrificed alot to get here, while many american students sacrificed…. well, nothing. It’s also partly due to the fact that we are growing an instant-gratification culture; and science is anything but instant.
Without a fundamental passion for learning, our nation will fall behind.
#48 matoko-chan,
Well not matter compilers yet.
Desktop machine tools?
Definitely.
alchemist,
Might not the brain power used to avoid taxes be better invested? Might there be better investments for tax money than government spending?
If so then taxes are reducing our economic potential.
BTW people with great piles of money have always put their money (not all of them or all the money) into socially useful projects.
The desire to leave a legacy is very strong. i.e. death may be a more important motivator than taxes.
alchemist,
Before government took over its health care duties medical inflation was running an outrageous 5% a year. Since government got involved it has been a more reasonable 10% a year.
As to your point about not being an economist. Sadly, too true.
#49 alchemist,
re:passion for learning.
Our top performers on whom advances depend are still well educated.
It is more than evident that we will be surfing the future on the backs of the Jews and the Chinese. Just as we have done in times past.
BTW wanting to be rich is the #1 American disease. Has been that way for over 200 years. It is one of the reasons that the fruits of science are so widely distributed. Some one figured out how to make a buck.
As I have noted above we have a severe shortage of top management. Those folks wanting to get rich are just what we need.
I have been in the trenches of transfoming science into products. The problems are very different from what schools and our popular culture would lead us to believe.
BTW a shortage of scientists/engineers would be reflected in salaries. I don’t see it.
Alchemist,
America has always had a thing against “egg-heads”. Get a bio of Adlai Stevenson. This was at a time when the fact that the eggheads helped us win WW2 was very well known. Radar, the atomic bomb, etc.
BTW one of the heros of the detective show “Simon and Simon” was a geek who suppled the detectives with amazing gadgets. Occasionally he even got the girl. Sometimes the best looking one.
BTW I have had more than one high school acquaintance (female) regret that she wasn’t more into geeks at the time. In fact if you follow today’s underground pop culture there is a subculture of females devoted to geeks. The word is getting out.
Please note that GM has announced it will not declare bankruptcy, (a business’s preview of the next quarter of sorts), and of course, since its profits are based on financing it can’t afford to lose those purchasers of GMAC notes.
Exactly. If China and India think minting an oversupply of scientists and engineers is the way to prosperity then they are wrong. Scientific and technical knowledge can be bought and sold like anything else. If there’s an oversupply, then it will be cheap to buy.
China and India are basically following into a managed economy trap. They think that, since it worked in the past, that having an abundance of scientists and engineers is the way to prosperity. That may have been try when there was a shortage of such skills, but not so much when they’ve gone out and created an oversupply.
Americans are doing what that should be doing by letting the marketplace tell them where to invest their talents.
“China and India are basically following into a managed economy trap. They think that, since it worked in the past, that having an abundance of scientists and engineers is the way to prosperity. That may have been try when there was a shortage of such skills, but not so much when they’ve gone out and created an oversupply.”
From a “managed economy” point of view this may be OK. ie., an oversupply of science geeks (such as myself) may be bad for the individual geeks because they earn less, but good for society as a whole because innovation proceeds faster and on more fronts, increasing overall productivity. Every industrial society subsidizes science education from taxes to some degree, so all governments are making the same value judgement, but just to varying degrees. Time will tell if the China/India level of commitment of resources is a bad or good investment (looks OK to me so far).
I should have prefaced my previous comment, pointing out that just taking that money and putting it into goverment spending does not neccessarily solve the problem.
HOwever, some companies merely ‘opt-out’ of their taxable burden, leaving the rest of us to deal with the problem. Regardless of how well goverment would use that money, that still is money the rest of us have to cover. And thus, cuts into the spending ability of individuals.
Regardless of the growing ‘geek culture’, I still say there is a shortage of ambition. Most of the ‘cool geeks’ I knew in college (and I knew quite a few), had incredible skills in computers, electronics and other abilities that would place them in high demand in the ‘real world’. However, their ability to tinker was greater than their desire to actually ‘finish’ something. Maybe this generation will grow out of it, we’ll see.