Posts Tagged ‘Economics’

Management, labor, unions; influences on the economic transition.

December 11, 2012

Economic cycles see management (owners, in earlier times; management in the modern age) vying with production for profits. Go back to the beginnings of the industrial age and you’ll find management firmly in control. Political moves and periodic shortages of labor provided changes that weakened the near-absolute control of management. The long term trend has seen empowerment of labor and a diminishment of the control exerted by management. The relationship between the two was changed in the past by such things as disease and war and famine; more recent changes have been based on the rise of labor organizations such as unions.

Let there be no doubt: labor unions came into being as a counter to the power and exploitation of workers by management. We’re seeing some of that again where long-term employees are tossed out with no regard for the years they’ve spent building up a company by their work. Management feels free to make such decisions because once again power has shifted to the management half of the equation.

Unions began as a way to protect workers against the excesses of management. But unions then joined together into large aggregations which were capable of exerting national political influence. What was necessary in the beginning became something that had to demand ever more in benefits for workers in order to maintain power and relevance. A single powerful union could, and frequently did, demand more for employees. Under the umbrella of cross-union agreements, where one union would refuse to cross the picket lines of another, a single union could shut down not only a company but even an industry. In some cases they demonstrated the ability to shut down the national economy by strikes that closed ports or shut down rail services. Military personnel were sometimes used to break strikes. On one occasion, President Reagan acted to destroy a union; he fired all the air traffic controllers who’d gone on strike, and made it stick.

Meantime, unions had exerted a ratcheting effect on the economy. Autoworkers would begin negotiating a new contract for more wages and benefits. During the 20th Century wages were subject to taxation and unions worked to increase benefits such as health care insurance and retirement policies. Such benefits, being not taxed, became popular. The negotiations were between a company, say Ford or perhaps GM, and the Autoworkers Union.  Negotiations  were backed by threat of a strike, and inevitably workers received more in wages and benefits and prices of the product would rise to reflect the new cost structure. Prices would go up on autos, and steelworkers and other unions producing the materials that supported auto manufacturing would also see price raises as their unions demanded more in wages and benefits. And soon it would result in a slight but recognizable rise in prices and compensation across the national economy.  At some point even the national minimum wage would rise.

Unions needed to always demand more. By the late 20th Century, unions had the status of medium-sized corporations. They paid their top leadership salaries in the hundreds of thousands and donated millions to political campaigns. Dues paying members expected that the union would always provide raises in the next series of contract negotiations as well as protection from arbitrary decisions by management. A citation is appropriate here: Largest unions pay leaders well, give extensively to Democrats. The citation is from the Wall Street Journal, March 30, 2011.

A long term trend thus came to fruition. Management used their money and influence to gain power in politics; labor gained influence and power through money and the ability of union management to influence the voting patterns of members.

The economic result of the union vs management contest was to slowly raise prices in the US. The American national economy thus became considerably higher in nominal value, compared to Asian economies and even the economies of Eastern Europe. Foreign governments often resisted raising their own monetary system to true parity, because the differences acted to encourage export versus imports in their domestic economy.  The result of this was to effectively price many American products out of world markets.

Still, the American market was the largest in the world. As American products became more expensive, Asian and European products became relatively cheaper and so gained a long-term competitive advantage in the American market. At the same time, transportation costs were dropping worldwide. Larger ships, fewer crewmen, containerized shipments, computer routing, ever more efficient (and thus cheaper) ports…add this to low labor costs and a new paradigm became possible.

Management regained the advantage. Managers now had the option of evading union demands by simply bypassing the union. A number of strategies were employed in this effort. Outsourcing was one of the easiest; a company could avoid paying higher union wages to janitors and maintenance workers, for example, by laying off employees and contracting with another company to provide the services. There would no longer be any requirement to provide benefits, and usually even labor costs would be reduced. This was a win for management; but those well paid janitors and maintenance workers no longer got salaries that put them in the middle class. They had less disposable income and sometimes not even enough income to sustain mortgage payments or buy items such as new cars. Or even send their children to college. The prospective student thus needed loans to finance education, and paying back those loans in time removed the student from the consumer society for long periods. What went to banks and lending institutions wasn’t available for a house or a new car, or for health insurance or savings.

Offshoring was another option for management. While Boeing was working to move a plant from Washington (a state with union work rules) to South Carolina (a ‘right-to-work’ state, where union power was much reduced), other plants simply closed. Workers lost jobs. The products that had formerly been made by American workers were now being made offshore by workers in various countries: Ireland for a time, then Eastern Europe, and finally in Asia. American companies changed from manufacturers to importers. The goods still came in, but now profits were higher than ever and there was no need to share them with production employees. There was no need to worry about the well-being of foreign workers or rules regarding pollution of the environment. That was the problem of the manufacturing company and the government of the nation where the plants were located.

And management had no reason to consider that they were effectively destroying the American economy that their prosperity depended on. Profits to management was up; the middle class that drove the consumer market shrank. Upper middle class was forced down, and lower middle class became part of a swelling impoverished class.

And unemployment began to rise. As economies contracted, unemployment rose above 10% (and in some Western nations such as Spain and Greece, it went above 25%; Depression levels, in other words). Unemployed workers couldn’t buy; management sequestered much of their swollen income in investments which effectively removed their money from circulation.  Sales dropped across the board.  Bank foreclosures began to rise. Financialization, a major trend in the late 20th and early 21st Centuries, even took a hit as subprime loans were exposed as the junk they’d always been. Banks lost billions.

Unions now began to recognize that they were in a weakened position. New contracts were for less money, fewer benefits. And the negotiations were no longer under threat of a strike, but were driven instead by the threat of closure of the plant and loss of all jobs.

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Financialists and the Entitlement Nation

August 1, 2012

“On the campaign trail, Mitt Romney mocks it as “a social welfare state” and an “entitlement nation.” He rails that it smothers entrepreneurs and innovators. And he says it is simply not working. The target of Mr. Romney’s dismissiveness: Europe. And he warns ominously that if the United States is not careful, the country may end up just like it. ”

The above quote is from an article published in the NY Times, Aug 1 2012. It caused me to think about Mitt Romney and what his campaign and his comments have revealed about the man.

Entitlement nation. Mr Romney and his supporters use that term. One contributor complained that President Obama’s policies would ‘take my money and give it to those animals’.
Who is entitled to what?
Three groups, it seems to me, are involved if you’re to understand that view. Much ado was made about President Obama’s comments regarding entrepreneurs, “You didn’t build that.” He should have said, as Elizabeth Warren said, “you didn’t build that alone.” Both understand that there is more to building a company and creating wealth than simply identifying an opportunity, the root of entrepreneurship.
The economy needs all three, the entrepreneurs who see a need and move to provide for that need, and the capitalists and the production workers.
Perhaps that ‘need’ is imaginary, but never mind; advertising will sell us what we don’t really need. At any rate, it’s presumed that the entrepreneur takes the risks and so is entitled to rewards, whatever he/she can milk from the system. That concept gets lip service in the USA.
But the first thing many of these entrepreneurs do is set up a shield to limit their exposure to risk. It’s called a corporation or partnership or LLC. Limited Liability is the name of this game.
Entrepreneurs then seek financing from the third group, who also like limits to any liability (forgotten is the concept of ‘risk capital’; they expect guaranteed income from their money).
With financing, the entrepreneur is now poised to hire workers. Capital and entrepreneurship together cannot produce anything at all. But because workers are presumed to be interchangeable cogs to be slipped into the machine and removed at will, both classes have forgotten that production is at least equal to the other two parts…and production workers cannot milk the system for all that the market will bear. Only they have an upper limit to income.
And that attitude must change. The ‘entitlement’ part of that entitlement nation concept deals with the social support network that production workers need to gain some of the fruits of their labor. And some of the financing for that social support network comes from entrepreneurs and financialists. Both groups resent this in large part.
The American worker is at least as important as the other two parts. Financialists consider it ‘my money’ without regard to how that came to be and are adept at protecting money through political chicanery. The entrepreneur is lauded publicly but the financialists understand that it’s about money; the more you have, the more important you are, and the money is the source of that importance so therefore those who have little money have little importance. Once a company ‘goes public’, i.e. sells shares, the financialists now own what the entrepreneur built. And still at the bottom of all of this is the guys and girls who manufacture cars and steel and roofing and plumbing units and who install and maintain all of it. They are the ones who support the nation, generate the economic activity, and pay much of the taxes, but for some reason, the financialists see no need for them to BENEFIT from those tthings. Hence, ‘entitlements’. Somehow, they view the worker as a parasite unless he’s directly being exploited (and employment exploits; there’s no concept of sharing or equality involved. Employees are expected to produce a profit for employers to pay the entrepreneurs, the management elites after companies become publicly traded, and the financialists who own stock and sit on Boards of Directors).
The separation between groups is becoming greater all the time. The financialists at one time invested in a company and helped to make it profitable, and as it profited so did they; wealth was created. International finance in the 1970’s consisted of about 90% risk capital invested in development and creation of wealth, 10% speculation (gambling). That’s now reversed, according to Noam Chomsky; 10% is invested in development, 90% gambling. The gamblers, financialists, no longer involve themselves in creation of wealth so that their profits have some justification. It doesn’t matter; profits spend, regardless of how they are acquired.
And somehow the gamblers see everyone else as unimportant in their view of society.
Mitt Romney is the poster child for this view.
Understanding this may help you understand why he holds the opinions he does, and says and does the things that he does.

Economic Malaise, Simplified

June 20, 2012

This essay was written in response to a column by Thomas Friedman in the New York Times, edition of June 20 2012.

Friedman like so many others misses the point, I think. He has some good recommendations, but they won’t solve the economy’s long term problems.

Put simply, in simple and easy-to understand steps:
We have a surplus of workers. Half our workforce can produce all we require in goods and services. The relentless push for more efficiency has gotten just that, and efficient economic processes need fewer workers. Machines have taken the place of men.

If those workers are to be employed, then they must be employed in activities that bring in external revenue. They must serve tourists or manufacture goods for sale offshore, and in both cases what they sell must be something that others want to buy and can afford to buy. For a time, we produced commodities that people needed: oil and coal, metals, foodstuffs. Ultimately the minerals become depleted, the few remaining become too expensive to extract and sell, and other nations could extract minerals cheaper and could begin producing excess foodstuffs using the mechanization and efficiency developed here. Manufacturing, e.g. value addition, and tourism are what is left. And that need to produce competitive pricing means that our unrestrained capitalism must be controlled. Unions demand more, executives demand more, finance demands more, taxation demands more…but when the demands price the US economy out of the market, no one wins. Union workers are laid off, management sees the company decline toward bankruptcy, finance loses what it invested, there is nothing left to tax. The inflated manufacturing sector drags the economy down with it. Only by requiring readjustment of currencies (i.e., a cheaper dollar vs the euro and yen and renminbi) can this adjustment realistically be made. It’s not unilateral; those other currencies and the nations that issue them are involved, and so this is a government issue that only governments can address.  And a consideration to be factored in is that those who hold dollars will see their holdings decline in value.  Governments and banks will take major losses if there’s a decline in value of the dollar.  What helps our economy harms them.

Currency adjustment affects balance of trade. That trade cited above is the basis for a functional economy that employs those excess workers and that can support a large middle class. Our government is now controlled by a few who are positioned to exploit niches and extract riches from the status quo. But that status quo is unsustainable; it’s destroying the very economy it depends on. Those who once manufactured goods for external sale are now importers and salesmen; few goods go out, many come in. Foreign competitors have been joined by Americans who do the same thing those competitors do, compete with the domestic economy.  And money flows FROM the economy, not into it. Instead of employing our surplus labor making goods for export, we now employ foreign workers in foreign nations to do the work and bring the results of that work here. Economically, this is no different from firing American workers and replacing them in our plants with cheap foreign labor. It’s the problem that people cite when they oppose unchecked immigration; but the real job loss is not here, it’s THERE, when the job itself is exported. Exported jobs destroy the middle class.  Pressure on the middle class comes not solely from foreign competitors but also now from our own upper classes who have joined the foreigners in putting pressure on rather than sustaining that middle class.  The Walton family, despite claiming American citizenship and measuring their billions in dollars, have economically become Chinese.  Their economic activity benefits China at least as much as it benefits the US; and of course, it benefits them financially.

The other thing affecting trade balance is the concept of ‘free trade’. This type of agreement effectively removes government from trade and turns all trade decisions over to for-profit entities. In so doing, our inflated economy produces goods that foreigners can’t afford to buy and floods our markets with cheap goods that we can’t compete with on a pure price basis domestically; again, it’s that inflated economy that makes this happen. Regulation of trade is a government function; it’s done by imposing taxes or tariffs on imported goods to slow down the flood of imports that saturates the American market.  But no one in government is prepared to do anything except press for more ‘free trade’, without realizing that this means free imports without corresponding exports.  We freely buy but cannot freely sell.

Only a robust middle class can support our government. That government has been squeezed and faces further pressure. Middle class people can’t afford private schools for their children, they can’t afford to provide for themselves after they’re unable to work, they can’t afford to pay for expensive healthcare. Our middle class lifestyle actually is subsidized by the government we’ve built. That government needs income to provide these things. That income must ultimately rest on taxation. Borrowing is a short-term solution that is ultimately unsustainable. We are currently approaching that limit of sustainability.

The middle class is being squeezed ever smaller; the upperclass now controls the government that has the power to save that middle class. The mechanisms that provided education and housing and health care and retirement are being destroyed, even as the government that provided them is being destroyed. All wealth now flows not into the middle and underclasses but only to the wealthy, who become wealthier thereby.  Government policy protects that wealth.

And so we’ve rebuilt a system of nobles and serfs. The nobles profit by rents, from lands and properties occasionally, but mostly from renting out the money they’ve extracted. They live well not by producing more, but by extracting wealth from rents. They remain wealthy because they ARE wealthy.

It’s not sustainable. Never has been, never will be. The traditional solution is violence, the kind of violence that pushed the American Revolution and the later French one. At some point, the level of unsustainability will reach that tipping point. It’s not here yet, but it appears certain to come.

If I can figure this out, why can’t our elected leaders? Why are they so unwilling to act before a crisis overtakes us, a crisis that we can’t recover from?

And why do we keep putting the venal and stupid and uncaring in positions to control our lives?

A Vision for a Better America

September 1, 2011

Without regard to Huntsman, who like all presidents has to deal with congress to enact his ‘promises’, lets look at his plan.
Tax reform, yes. Urgently needed, and wiping out the special advantages for wealthy individuals and multinational corporations would help. Lowering the corporate tax rate as a part of this is good, so long as the special deals are eliminated at the same time.
But free trade without some kind of parity agreement is foolish. We’ve had that. We freely buy, but can’t freely sell, because we’re selling to nations (China, and now India) who have huge populations who can’t afford our products, but must work at whatever poor wages are offered there under whatever conditions employers impose. No ‘regulations’ to deal with, such as those that keep workers safe and provide for their well-being. Think sweatshops. Corporations are happy with this, because it increases their profit margin, lowers taxes, allows huge paychecks for the managerial elite. The real effect is to force a machinist in Ypsilanti or Cleveland to compete with one in China or India for his job, and if they can work for less and survive, then that American worker will have to do the same or watch his job outsourced. We’ve seen this happening now for years.
Free trade…but only between nations that are approximately equal in per-capita income. The only good reason for importing manufactured goods is if the quality is higher than what’s produced at home. Trying to produce goods cheaper is a game a developed nation can’t win.
I propose a gross receipts tax for all goods sold in the American market. American firms could offset this by the amount paid as corporate taxes in America. But if you don’t pay those corporate taxes, then the gross receipts tax kicks in, and it should be adjusted to provide price parity between imports and domestic production.
I also propose a tax increase on all fuels except those used for agriculture. All other fuels, no exceptions. Begin with a $.25 increase (a quarter), increase that annually by another quarter every year, until prices for gasoline are at least an additional dollar per gallon. The money raised goes to the government to build infrastructure and possibly reduce the national debt. Meantime, you can cancel the phony ‘fleet MPG average’ and let the market work. If you’re paying $100 to fill up your gas guzzler, fine; but a lot of people won’t want to do that. Hello electric vehicles. Automotive stimulus, parts stimulus, all sorts of benefits.
Reform immigration; go to a single-payer medical system, something the bastardized Obama plan wanted but couldn’t get. Take that burden off the jobs creators. Reform banking, and put in a special tax rate for the highest income people. Don’t reward excessive greed. Make it easier to earn money by creating things that contribute to the national wealth than by manipulating money, which creates nothing but excessive pay for the very few at the top. Reform the interlocked boards of directors who control the economy for the benefit not of the workers or the nation, but for the benefit of the managerial elite class.
Reform education. Make schools a place for education rather than a place for social reform experiments. Clear out the deadwood, teachers, administrators, and students. If they can’t teach, fire them. Make principals and school boards responsible for the results achieved by their education system. Teachers have very little power to cause change; put the responsibility on those who have the authority. If a student has reached the maximum benefit from public education, as shown by inability to pass standardized exams, then dismiss him. The idea that a student must stay in school a prescribed number of years is foolish and outdated. At the same time, provide alternatives such as remedial classes (for a limited time) and non-college training or apprenticeships so that a student leaving the public education system can immediately qualify for a job. Allow those who can qualify, by grades and demonstrated ability to continue to benefit from education, to continue with the public paying most of the costs. Possibly not for all career fields; if you want to be a lawyer or psychologist, then pay for it yourself. But engineers and scientists and business managers and entrepreneurs should have our assistance, because the investment pays off in later years.
If I can think of these things, why can’t our elected ‘leaders’ in government?
The answer is that they are more concerned with getting reelected, seeing their party in power, and personal advantage or power. We need term limits to reduce the accumulation of power, and development of a multi-party system that reduces the power of the majority parties. That is something we must do, as a voting electorate. We can’t blame this on congress. And they won’t take action unless we force them to do it.
I have a vision; it’s there above. Where is Mr. Boehner’s vision? Where is Ms. Pelosi’s vision. Where’s Mr Obama’s vision? I can be specific because I’m not afraid I might lose a vote or two; they’re all fearful, as is everyone in the government.
The above? That’s a real change you can believe in. Not that it’ll happen. See the concerns they have in the paragraph above. Feel free to share this with anyone you want. Copyright hereby renounced.

The Economy, Politics, Social Contracts, Taxes, and International Relationships

August 15, 2011

This is excerpted from the International Mensa Forums; I posted it there on August 15, 2011.  It contains my thoughts on current affairs regarding taxation, contracts between government and the citizenry, politics, and the effects of all these on the world.

US taxes need to be reformed. There’s a huge potential there for national income, and I was thinking about this just last evening. The television news program was “60 Minutes”, and it includes numerous interviews with business people and a political figure from Switzerland; not just the newscaster’s opinion, in other words.

The program made the point that the US taxes corporations at the second-highest rate among developed nations. As a result, US corporations are moving their headquarters offshore and keeping their funds out of the US so as to avoid taxes. This is also related to offshoring and outsourcing that has removed manufacturing jobs from the US. As a result of this, I’ve come to believe that the US economic recovery may be delayed for years. It has to do with taxation and how the taxes are used; Americans see the waste and selfishness of politicians and have no vehicle to correct this because of the control that the two major parties exercise over American politics. So their only vehicle for complaint is to withhold taxes, and voters do this.

As an aside, another reason for the recovery to be delayed is that many of the ‘spenders’ in the economy had large credit card debt when the recession began. It’s only foolish in hindsight; banks, merchants, a constant blitz of advertising urged people to buy now, pay later. Many did. If you had a good job, a nice house, a salary that included raises in pay every two or three years, why not plan on paying the cost later when your salary had been increased? But when the economy began to go sour, when the house wasn’t worth what you had paid for it, when layoffs began, all this turned out to be not true. And the ‘spenders’ who had driven the economy had no more disposable income to spend and their credit was stretched to the maximum; so they stopped spending. They won’t spend again until they recover from what they’ve already spent in the past few years.

Back to tax structure: I was thinking that it’s silly to force US citizens and US corporations to be the only ones to benefit from the American economy. Something like a national sales tax or, even better, a gross receipts tax that gets passed on to whoever is selling within America would be helpful. This tax might be offset by whatever federal corporate taxes the company had already paid, so that the result was a tax on economic activity that would be paid by everyone doing business. So long as only native companies pay the taxes, there’s an incentive to be a ‘native’ of Switzerland and just sell your goods here. And that’s why Google and a number of other firms are now headquartered, at least for tax purposes, in Switzerland. In return for raising taxes in this way, corporate tax rates could be reduced and personal income taxes restructured to ensure that all citizens paid at some fair rate. Possibly a ‘flat tax’ could be the way to go here, where all income, from whatever source, is taxed. Currently the wealthiest persons have any number of legal ways to evade paying taxes. That needs to be addressed.

So the US Government is, through unwise tax policy, forced into this policy by citizens who aren’t willing to be taxed and then have their money wasted by venal and corrupt politicians, subsidizing the governments of Ireland and Switzerland and other places. Those tax-evading companies are now headquartered there and happily pay a lower corporate tax than they’d have to pay in the US. Why not? It’s not as if Europe was far away; they’re only a few hours away by airplane. So the executive commutes back and forth from his home to Europe in a corporate jet.

With a more-equitable tax structure, the social contracts made by the government can be funded. Citizens would be happier if they could see that incumbent politicians aren’t using tax money to help get themselves reelected.

I don’t have a practical solution. No politician is going to advocate anything like what I’ve written, because they’d rather keep on pandering to corporations and using tax money for their own purposes and to aid their friends. We need to get the career politicians out, and go back to the time when public service was a duty, a kind of ‘noblesse oblige’. And as for educating the public…fat chance. They mouth the TEA Party’s slogans or whichever propaganda is current, and refuse to think for themselves. It may require a revolution, probably not a bloody guns-and-bodies revolution, but a revolution nonetheless. A powerful third party composed, not of TEA Party or Progressive fringe elements, but of centrists who won’t be the pawn of either extreme element might be able to do it.

I don’t see any good outcome from any of this. Not for the US, not for Europe, not for the world. The stability that depended on the US economy and the US military may be coming to an end.