Archive for the ‘Business’ Category

Are management consultants of any use?

June 13, 2018

Recently I read and enjoyed THE MYTH OF MANAGEMENT: Why the Experts Keep Getting it Wrong by Matthew Stewart (2009).

Stewart told two stories in alternating chapters.  One is a history of theories of management, which is the topic of my previous post.  The other is Stewart’s personal experience of BS jobs in management consulting.

In 1988, Stewart, at age 26, found himself with a philosophy doctorate from Oxford and no job,  On a whim, he sent his CV to some management consulting firms.  By chance, he got a job from a firm looking for “non-traditional” hires—that is, people without MBA degrees.

Matthew Stewart

He soon found himself going to distant countries and convincing executives twice his age that he understood their businesses better than they did.   His tools were a set of algorithms developed by his firm, and his ability to play the role of an expert.

The main algorithm, as described in his book, was a system for estimating the cumulative cost, revenue and profit for serving each of a business’s clients.

What the system almost always produced was a graph, which looked like a whale, that showed that 20 percent of a firm’s clients produced more than 100 percent of its profits, 70 percent added virtually nothing and 10 percent cost the firm money.

Of course the question is how to disentangle the high-value, little-value and negative-value clients.  If you follow the Pareto 80/20 rule, then 20 percent of a public library’s books can be expected to represent 80 percent of its circulation, and the remaining 80 percent of the books only 20 percent of the circulation.  But you wouldn’t want a library to dump 80 percent of its books.

Companies that stop making low added-value products, as Eastman Kodak did with cameras and Xerox did with small copiers in the 1980s, find that ceding these markets empowers potential competitors.

That’s not to say that the quantitative analyses done by Stewart and his colleagues were worthless.  Understanding numerical data is useful.  But nobody ever checked whether Stewart’s firm’s interpretation of the data was helpful or even correct.  The consultants never suffered any consequences for being wrong.

Stewart did risk analysis—he had no training in risk analysis—for a Mexican bank in the eve of the collapse of the Mexican peso and the Mexican banking crisis.  Neither he nor his client had any notion that the crisis would be upon them, and his firm walked away with millions of dollars in fees.

He quit his firm for a while, then was enticed to join with some breakaway employees to form a new firm.  He invested all of his savings in the new firm.  After a time some the partners started to squeeze out Stewart and other partners.  They stopped his pay without telling him and refused to let him withdraw his stake.

But he successfully sued, got what was owed him and sold his shares in the company at the height of the dot-com stock market bubble.  He then began his new career as an author.

His whole saga reads like a satirical novel.  Indeed, since he doesn’t mention the name of his firm, his clients or his co-workers, it could just as easily have been fleshed out and published in the form of a satirical novel.

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The many pitfalls of management theory

June 12, 2018

As a newspaper reporter who covered business for 20 years, I learned that there are intellectual fashions in management theory as in everything else.

Once the key to success was thought to be vertical integration.  The idea was that a corporation should control every aspect of its business, from raw materials to distribution, in order to guarantee quality and eliminate the middleman.

Then the key was supposed to be diversification.  The idea was that a corporation should engage in varied lines of business so that a downturn in one line of business was offset by continued gains in others.

Then it was core competency.  The idea was that a corporation should limit itself to whatever it did best and enjoyed a competitive advantage, and outsource everything else.

The path of least resistance for any manager has been to follow the fashion of the day.  Failing by doing the same thing everybody else was doing has always been more acceptable than failing by doing something different.

I recently read a book, THE MANAGEMENT MYTH: Why the Experts Keep Getting It Wrong by Matthew Stewart (2009)that validity of these management theories ranges from highly uncertain to completely bogus.

I was surprised to learn that the ideas of Frederick W. Taylor, founder of scientific management, and Elton Mayo, discoverer of the so-called Hawthorne effect, were based on fake experiments.

F.W. Taylor

Frederick W. Taylor claimed that there was one best way to perform any physical task.  It was the job of the manager or industrial engineer to discover the best way and to micro-manage workers so that they followed it, mindlessly and repetitively.

He claimed to have taught a Bethlehem Steel worker he called “Schmidt” the most efficient way of loading pig iron onto a freight car, and made that a standard method for loading pig iron.

The reality was that, one day in 1899, he gathered a group of Hungarian immigrant workers and challenged them to load as many 92-pound ingots as they could in 14 minutes.  He then extrapolated this to a 10-hour work day, discounted the total by 40 percent.  The total was 47.5 tons.

He offered a wage incentive if they could do this all day.  This would have been quadruple their normal output.  They declined.

Taylor then recruited another group of workers and challenged them to meet the target.  The only one who could was a German immigrant named Henry Noll—the “Schmidt” in Taylor’s tale.  Bethlehem Steel did not adopt Taylor’s method, but it became famous anyhow.

Taylor’s system eliminated the need for skilled workers.  They were undesirable because they might have ideas of their own.  It was up to managers and industrial engineers, not the workers themselves, to determine how each job can best be done.

His method was the same as the Soviet Stakhanovite system: Take a strong and efficient worker, determine the most he can accomplish under ideal conditions and make that the target for every worker.  Lenin praised Taylorism.

Elton Mayo

Elton Mayo claimed that workers could be managed by offering them psychological and emotional rewards.

He claimed to have found by accident that workers at Western Electric’s Hawthorne plant became more efficient as a result of being the center of attention—the so-called Hawthorne effect.

The reality was that in 1924, an engineer named Henry Hilbert at Western Electric’s Hawthorne plant ran an experiment to determine whether increased illumination would increase worker efficiency.  The study was subsidized by the electric power industry.

He gathered seven women employees in a separate room and had them assemble telephone relays under different lighting conditions.  He also experimented with work breaks.  Efficiency seemed to increase no matter what he did.

Mayo learned of the results of the experiment and decided that the real Hawthorne effect was treating these women as though they were special and making them feel they were members of a team.

But Stewart pointed out that the factor he ignored was that the assemblers were given a group wage incentive to achieve greater efficiency.  Also, two members of the original team were fired for being shirkers and malcontents, and one of their replacements strongly wanted the higher wage and pushed her co-workers to do more.

Hilbert later repeated the experiment.  One group of workers were given the same special treatment, but no wage incentive.  Their efficiency did not improve.  Another were given a group wage incentive, but no special treatment.  They achieved the same efficiency gains as the original group.

So it was the pay, not the special treatment that mattered.  But the whole point of Mayo’s method was to avoid the need for increased pay.

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Is a non-BS economy even possible?

May 26, 2018

What would the U.S. unemployment rate be if all useless or harmful jobs were eliminated?

It would probably be equivalent to the Great Depression of the 1930s.

Barack Obama, in an interview in 2006, stated the problem:

“I don’t think in ideological terms. I never have. … Everybody who supports single-payer healthcare says, ‘Look at all this money we would be saving from insurance and paperwork.’  That represents 1 million, 2 million, 3 million jobs of people who are working at Blue Cross Blue Shield or Kaiser or other places.  What are we doing with them?  Where are we employing them?”

Source: The Nation

David Graeber, in his new book, Bullshit Jobs: a Theory, quoted public opinion polls that found 37 percent of UK employees and 40 percent in the Netherlands thought their jobs made no meaningful contribution to the world.

Now maybe that is exaggerated.  Maybe some of them think they make a contribution, but that it’s not “meaningful.”

Offsetting this, the inherent bias of people is to think we are accomplishing more than other people think we do or the objective facts indicate.

For example, public relations, advertising, lobbying, consulting and even speculation on financial and commodities markets have their uses.  It is just that they play more of a role in the economy than they should.

I myself think the U.S. military and intelligence services are much greater than necessary to protect the homeland from attack.  Of course, if the mission is to make the United States the world’s only superpower, no number could be great enough.

The question is: What would happen if all these people were thrown on the job market, all at once?

It would be a catastrophe, unless there were some sort of basic income guarantee (which Graeber advocates) or basic job guarantee.

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BS jobs, sh*t jobs and moral envy

May 25, 2018
  • Huge swaths of people spend their days performing tasks they secretly believe do not really need to be performed.
  • It’s as if someone were out there making up pointless jobs for the sake of keeping us all working.
  • The moral and spiritual damage that comes from this situation is profound.  It is a scar across our collective soul.  Yet noone talks about it.
  • How can one even begin to speak of dignity in labor when one secretly feels one’s job should not exist? 
  • David Graeber: On the Phenomenon of Bullshit Jobs (2013)

David Graeber, in his new book, Bullshit Jobs: a Theory, describes the frustrations of people doing jobs that they know are useless or even harmful, because the meaningful jobs are either unavailable or low-paid.

He said that forcing people to engage on tedious activities that serve no useful purpose, or, worse still, pretending to work when they actually aren’t, constitutes a kind of spiritual violence.

Not all useless or harmful jobs are BS jobs. Graeber defines a BS job as one you know is useless, but you have to pretend is necessary.

I think many of the people who invent BS jobs, or invent useless tasks for the useful workers, are under the impression they are making a positive contribution.  Graeber said his strongest critics are business owners who deny the possibility that they could be paying anybody to do anything useless.

A certain number of people think the world is divided into predators and prey, and pride themselves on being successful predators.  An example would be the bankers and financiers who, prior to the 2008 financial crash, made subprime mortgage loans to suckers who could never pay them off, then collateralized the mortgages and sold them to other suckers.

What all these jobs—hedge fund managers, telemarketers, diversity consultants, receptionists who never get phone calls, consultants whose advice is never heeded, supervisors with nothing to supervise—is that, if they went on strike, nobody would notice.

What Graeber calls the sh•t jobs are just the opposite.  Food service workers, health care workers, trash collectors, janitors and cleaners—all these workers labor under worse conditions and for lower pay than in BS jobs, and, contrary to reason and justice, they get less respect.

Coincidentally or not, the sh•t jobs are disproportionately done by black people, Hispanics and immigrants.

∞∞∞

Graeber said many of us have come to accept the idea that work consists of following somebody’s order to do something we dislike.  It follows, then, that if you want good pay, job security and benefits, you are lacking in moral character.  He calls this rights scolding.

It takes two forms.  Among right-wingers, if you think you are entitled to anything that working people in the time of Charles Dickens didn’t have, you are a fragile snowflake.  Among left-wingers, if you think you are entitled to anything that the most oppressed person alive today has, you are told to check your privilege.

It also follows that people whose jobs are fulfilling, such as school teachers, are not really working.  The idea is: You get to do work that is pleasurable, useful and respected.  How dare you want good pay and job security in addition?  Graeber calls this moral envy.

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Managerial feudalism and BS jobs

May 23, 2018

BULLSHIT JOB: A form of paid employment that is so completely pointless, unnecessary or pernicious that even the employee cannot justify its existence even though, as part of the condition of employment, the employee fells obliged to pretend that this is not the issue.  [David Graeber]

∞∞∞

Huge numbers of people work in jobs that they themselves think are completely unnecessary.  Many of them would prefer to do something useful, but useful jobs on average pay less.  Sometimes they quit and take a lower-paying useful job anyway.

Some five years ago, David Graeber, an American who teaches anthropology at the London School of Economics, wrote an essay for an obscure left-wing magazine called Strike!, about the phenomenon of bullshit jobs.

The article struck a nerve.  It got more than a million hits on the Internet, crashed the Strike! web site several times and was translated into more than 10 languages.

A YouGov poll soon after found that 37 percent of full-time employees in the United Kingdom thought their work made no meaningful contribution to the world.  A survey in the Netherlands put the number as high as 40 percent.  I imagine a survey in the United States would be much different.

Graeber himself communicated with hundreds of unhappy, useless employees via e-mail.

The result is his new book, Bullshit Jobs: a Theory.

He learned about a museum guard whose job was to report if a certain empty room ever caught on fire; a military sub-contractor who drove more than a hundred miles in order to give a German soldier permission to move a piece of equipment from one room to another; a receptionist who, to fill her time, was tasked with jobs such as sorting paperclips by color.

But most of his reports are about people who worked in offices—making studies that were never read, making proposals that were never acted on or not doing anything at all, but doing their best to look busy.

How can there be so many admittedly useless jobs?  We live in a time of austerity and layoffs.  Full-time jobs are being replaced by temporary jobs.  That is true of government as well as the private sector.

One thing that free-enterprise advocates and Marxists agree on is that competitive capitalism produces economic efficiency.  Free-marketers think everybody benefits and Marxists think that only the capitalists benefit, but they agree on the drive of business to maximize profit.

Maybe this is wrong.  Maybe competitive capitalism is a myth.  Maybe we live under what Graeber calls managerial feudalism.

Back in the days before the French Revolution, the peasants, who were the main producers of wealth, paid so much in taxes and rent they could barely live.  They supported an aristocracy, who, in turn, supported an economic class of coachmen, door keepers, lace makers, dancing masters, gardeners and the like, who were generally better paid than the peasants.

Just like the aristocrats of old, the prestige of managers in organizations is based on the number of people they have working for them.  Prestige is not based on whether they are useful or not.  In fact, employees whose work is essential are a threat.  They have the power to quit or go on strike or to unexpectedly reveal they know more than the boss.

So the incentive is to diminish the role and power of those who do necessary work while inventing new jobs whose existence depends on the discretion of the job creators.

A large number of new jobs are administrative staff.  They are different from administrators who make actual decisions.  Their job is collect quantitative information about the work of the useful employees on the principle that “you can’t manage what you can’t measure.”

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The vested interests in organizational stupidity

July 12, 2017

Supposedly we Americans live in a “knowledge economy,” in which the source of wealth is neither financial capital, physical plants or natural resources, but the knowledge, expertise and intelligence of individual human beings.   We have a whole industry called “information technology.”

But although employers require ever-higher levels of academic credentials, this is not reflected in the work itself.   College graduates wind up doing work that high school graduates once did, and high school graduates do work that school dropouts once did.

In the early 20th century, businesses adopted a practice called Taylorism—resolving factory work into the simplest, most basic, mindless human motions.  Now we have McDonaldization—resolving service work into the following of simple checklists.

Mats Alvesson and Andre Spicer, in their 2016 book, THE STUPIDITY PARADOX: The Power and Pitfalls of Functional Stupidity at Work, attribute this to the tendency of organizations to suppress critical thinking because of their need for obedience to orders and smooth internal functioning.

What they write is true as far as it goes, but organizational stupidity is more than a simple mistake in setting priorities.   Organizational stupidity is maintained by powerful vested interests.

Knowledge Is Power

Knowledge is power.  If I am a supervisor and my subordinate is more knowledgeable and competent than I am, that diminishes my power.   What college graduate, fresh out of business school, wants to be contradicted by some grouchy old skilled craftsman, who has less schooling but may know more than he does?

Harry Braverman, in Labor and Monopoly Power and David Noble, in America by Design and Forces of Production, described the de-skilling of the American work force and the development of technologies devoted to increasing command and control by management rather than increasing productivity as such.

The more knowledgeable and skilled a worker is, the more power the worker has in relation to the employer, both as an individual and as a member of a labor union.   So knowledge and skills aren’t necessarily wanted except where they are indispensable.

A friend of mine who went back to school in mid-life to get an advanced degree in his specialty discovered that employers did not want his new skills.  What they wanted, he said, was “a jack of all trades who would work cheap.”   Employers see more benefit in having replaceable workers than in having  productive workers.

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The theory and practice of functional stupidity

July 12, 2017

You need to be remarkably intelligent to be functionally stupid.
==Mats Alvesson & André Spicer, The Stupidity Paradox

A higher percentage of Americans than ever before have advanced college degrees.  I.Q. test scores are higher in every generation, a phenomenon called the Flynn Effect.   Information technology is a major industry, and we talk about our “knowledge economy.”

So why do corporations and other big organizations do so many stupid things?

Two management experts, Mats Alvesson and André Spicer, say that the explanation is what they call “functional stupidity”—which is “the inability and /or unwillingness to use cognitive and reflexive capability in anything other than narrow or circumspect ways.”

No big organization could function efficiently if everybody in it thought critically and independently about everything they did.    The whole point of hierarchy is to enable obedience to orders on a large scale..

In a hierarchy, employees have to teach themselves to focus on their own jobs and not worry about the big picture.   Otherwise the organization wouldn’t function smoothly.

Functional stupidity reduces conflict, soothes anxiety, improves morale and increases self-esteem.   The problem is when the organization is blind-sided by reality.

The philosopher John Dewey said that all human action is the result of impulse, habit or reasoning.   It is not humanly possible to reason out every single aspect of life, according to Dewey.   We turn to reason  when our habitual ways of acting or thinking fail us.   Why do people in big organizations so often fail to turn to reason before it is too late?

In their 2016 book, THE STUPIDITY PARADOX: The Power and Pitfalls of Functional Stupidity at Work, Mats Alvesson and André Spicer identify five categories of functional stupidity.

Leadership-Induced Stupidity

 In contemporary organizations, it’s thought that the duty of an executive is not only to manage, but to inspire.   Leaders are supposed to be “change agents.”  But change can be either good or bad, depending on circumstances.  Adolf Hitler, after all, was a transformational leader.

Executives can waste their time engaging in what they think is inspirational leadership to the detriment of their tasks as managers— budgeting, assigning work, quality control, employee evaluation and so on.   Most employees, according to Alvesson and Spicer, don’t want leadership.  They just want to be left alone to do their jobs.

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Donald Trump, a walking conflict of interest

May 3, 2017

I doubt if Donald Trump could get through a single day, certainly not a single week, without being involved in a conflict of interest.

The Atlantic magazine has drawn up a list of 39 issues (and counting) in which decisions by President Trump will affect the profitability of the Trump Organization.

Maybe the biggest one is the federal investigation of the Deutsche Bank, which holds $300 million in IOUs from the Trump Organization.

U.S. banks wouldn’t give Trump credit after he defaulted on debt when his Atlantic City casinos declared bankruptcy, so he turned to the Deutsche Bank, which is under investigation by the U.S. Department of Justice on charges of  laundering money for Russian mobsters.  Attorney-General Jeff Sessions said he will continue this investigation impartially.  We’ll see,

The Department of Labor and Internal Revenue Service have been conducting investigations as to whether the Trump Organization violated labor law and tax law.   Will these investigations continue?  We’ll see.

The Trump Organization’s lease agreement with the General Services Administration for the Trump International Hotel property contains a provision that no elected official will be part of the lease.  But the GSA has ruled this doesn’t apply to Trump because he’s no longer officially head of the business.  An impartial decision?  Maybe.

Trump’s business is involved in business deals with politicians and close relatives of politicians in India, Indonesia, the Philippines, Turkey, Dubai and Argentina.  Will Trump, if necessary, make decisions that threaten those relationships?  We’ll see.

And then there are daughter Ivanka’s women’s fashion business and son-in-law Jared Kushner’s family real estate businesses.

Never even mind the penny-ante stuff—Donald Trump charging the Secret Service for use of Trump facilities while they guard him and his families.

Any of these conflict would be highly controversial as a stand-alone issue.  The problem is that there are so many issues it is impossible to remember any one of them.

The problem is that there is hardly any decision that Trump or his appointees can make—whether in foreign policy, tax policy, labor policy, environmental policy or consumer protection—that will not in some way affect the profitability of the Trump businesses.

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The case against the Internet

March 29, 2017

Double click to enlarge. Source: Visual Capitalist.

Andrew Keen’s book, The Internet Is Not The Answer (2015), which I recently finished reading, is a good antidote to cyber-utopians such as Kevin Kelly.

Keen says the Internet is shaping society in ways we the people don’t understand.  Some of them are good, some of them are bad, but all are out of control.

Like Kelly, he writes about technology as if it were an autonomous force, shaped by its own internal dynamic rather than by human decisions.  Unlike Kelly, he thinks this is a bad thing, not a good thing.

He does not, of course, deny that the Internet has made life easier in many ways, especially for writers.   But that is not the whole story.  He claims that—

  • The Internet is a job-destroyer.
  • The Internet enables business monopoly
  • The Internet enables surveillance and invasion of privacy.
  • The Internet enables anonymous harassment and bullying.
  • The Internet enables intellectual property theft

Keen quotes Marshall McLuhan’s maxim, “We shape our tools, then our tools shape us.”

What he doesn’t quite understand is that the “we” who shape the tools is not the same as the “us” who are shaped by them.

Or to use Marxist lingo, what matters is who owns the means of production.

Technology serves the needs and desires of those who own it.  Technological advances generally serve the needs and desires of those who fund it.

Advances in technology that benefit the elite often serve the general good as well, but there is no economic or social law that guarantees this.   This is as true of the Internet as it is of everything else.

Let me look at his claims one by one—

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Your life on the Internet is an open book

March 28, 2017

Double click to enlarge

How Google Tracks You—And What You Can Do About It by Jeff Desjardins for Visual Capitalist.

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Donald Trump’s real Russian connections

March 18, 2017

If you were looking for links between Donald Trump and Russia, you’d be more likely to find them by investigating Trump’s sleazy business dealings than his 2016 election campaign.

His connections with racketeers in the construction business in New York City and in casino gambling in Atlantic City, N.J., were well-known before the election, so it wouldn’t be surprising that he would have dealings with Russian racketeers and oligarchs as well.

I don’t claim—and none of the writers of the linked articles below claim—that there is proof that Donald Trump broke any specific law.   The significance of his associations and business deals are as evidence by which the public can judge his character.  Of course we voters had plenty of evidence about his character before the 2016 election.

I think it’s possible that Trump’s views about Russia prior to the election were influenced by his Russian cronies.   I favor an impartial investigation into whether Trump had any improper ties with Russia.

But I also think this investigation would be pretty much a footnote to what is going on now.  We don’t have to speculate about what Trump’s policy toward Russia will be.  We see it in action.  Trump caved in to the anti-Russia war hawks.  Regardless of what Trump’s motives may or may not be, this is a bad thing, not a good thing.

LINKS

The Curious World of Donald Trump’s Private Russian Connections by James S. Henry for The American Interest.

Did Russian Oligarch Rybolovlev Bailout Trump in 2008? an interview of James S. Henry for the Real News Network.   (Hat tip to O)

The Florida mansion that Donald Trump sold to a Russian billionaire now torn down by Glen Garvin for McClatchy newspapers.

Donald Trump’s Worst Deal by Adam Davidson for The New Yorker.

How Did an Alleged Russian Mobster End Up on Trump’s Red Carpet? by David Corn and Hannah Levintova for Mother Jones.

400 years of poor white people in America

January 17, 2017

When I was a boy in western Maryland in the 1940s, I sometimes heard people say things like, “The Negroes aren’t so bad, compared to the poor white trash.”

The underlying meaning was that it was part of the nature of things for black people to be poor and marginalized, but there was something deeply wrong with white people who let themselves sink to the same status.

9whitetrash-iisenberg780670785971I just finished reading a book, WHITE TRASH: the untold 400-year history of class in America by Nancy Isenberg (2016), that tells how these attitudes go back literally to the first settlements at Plymouth Rock, Jamestown and before, and persist today.

Today’s poor rural Southern white people of today may literally be lineal descendants of the convicts, debtors, beggars, orphans, homeless vagrants and unemployed vagrants who were shipped to England’s North American colonies in the 17th century.

Many were victims of the enclosure movement, in which wealthy landowners privatized common lands formerly used by small or tenant farmers, leaving them without an obvious means of livelihood.  These displaced poor people were regarded as useless—much as workers replaced by automation are regarded by economists and corporate executives today.

The prevailing attitude then was that families were “the better sort” or “the meaner sort,” that they were “well-bred” or “ill-bred”.   Today we think of “good breeding” as applied to individual persons as meaning the person has been taught the proper way to behave.   Back then, roughneck poor people were regarded as inherently inferior.

Our American tradition is that the seeds of our nation were planted by freedom-seeking New England Puritans and adventurous Virginia Cavaliers.  This is true, but only a half-truth.    The ships that brought them to the New World also brought penniless, landless English poor people, who were regarded as surplus population.

What set the English poor white colonists apart was that they were not given land.  They were intended to be servants and field workers.  When black African slaves turned out to be more efficient and exploitable workers than indentured English servants, they lost even this role.

Even so some of the poor whites acquired property and a measure of social status.   White Trash is about the descendants of the ones that didn’t.

They fled to the western frontier of settlement.   But the wealthy and well-connected had already obtained title to most of the frontier land.  Poor whites became squatters.  They contended that clearing, improving and planting land gave them the right to have it; title-holders disagreed.  This was the source of much conflict both in the colonies and the newly-independent United States.

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Can Trump make U.S. industry great again?

December 1, 2016

Donald Trump in his campaign promised to reverse the decline of American manufacturing.

Can he do it?  I’m willing to be pleasantly surprised, but I don’t think so.

President-elect Trump’s proposed economic policies are the same as what most Republicans and many Democrats have been advocating for 30 years or more—lower taxes, less regulation, fewer public services.

None of these things has stopped the increase in U.S. trade deficits or the increase in economic insecurity of American workers.

Trump did speak against the Trans-Pacific Partnership agreement, promised to renegotiate other trade agreements and threatened to impose punishing tariffs on China and Mexico in retaliation for their unfair trade policies.

I myself am in favor of rejecting the TPP and renegotiating trade treaties.  This would be a step forward.  But it would take more than this to rebuild the hollowed-out U.S. manufacturing economy.

China, Japan, South Korea and most nations with flourishing industrial economies use trade policy as a means of strengthening their economies.

Their leaders, like Alexander Hamilton in the early days of the United States, seek to build up their nations’ “infant industries” under those industries are strong enough to stand on their own feet.

When foreign companies seek to sell these nations their products, their governments demand that the foreign companies not only set up factories in their countries, but that they employ native workers and transfer their industrial know-how to the host countries.  The USA does nothing like this.

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Donald Trump’s sleazy business record

September 4, 2016

87aa7546_donald-80s[This was originally posted July 13, 2016.  Links added since then are in italics.]

Candidates for political office can be better understood by their records than by their rhetoric.

Donald Trump has never held public office, but his record as a business owner and promoter tells what to expect from him if he ever does.

His record is one of success through use of political influence, and at the expense of investors and customers who believe his claims.

I’ve compiled links to articles about Trump’s business record.   They should be a good warning to voters who think Trump’s business success qualifies him for high political office, or who think that Trump can be trusted to act in their interests.

Probably there are links to more articles than you, as a busy person, have time to click on.  I recommend that you skim the headlines to get a general idea, and click on whatever seems interesting to you.  I particularly recommend the articles by David Cay Johnson, who has been following Trump for many years.  Or, if you have time to read only one a couple, read the following:

Trumpology: A Master Class, a group interview of Trump biographers Wayne Barrett, Michael D’Antonio, Harry Hurt III, Gwenda Blair and Timothy L. O’Brien by Susan B. Glasser and Michael Kruse for POLITICO magazine.

‘The Making of Donald Trump’: David Cay Johnston on Trump’s Ties to the Mob and & Drug Traffickers, an interview by Amy Goodman for Democracy Now.

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Highest-paid CEOs are mostly below-average CEOs

July 27, 2016

CEOpayvsstockholderreturenp1-by114-payper-16u-20160724183306

I always thought, based on long-ago conversations with compensation expert Graef Crystal, that the relationship between chief executive officer pay and corporate profitability was random.

But a new study indicates that there is a relationship—a negative one.  The higher-paid CEOs actually deliver less for stockholders than the lower-paid CEOs do.

What’s odd about this is that CEO compensation packages are structured so as to reward them for gains in stock prices.

It’s an example of Goodhart’s Law in operation.   All other things being equal, the rise and fall of a company’s stock price, relative to other companies in the same business, is a measure of how well a company is doing.  But there are ways for a CEO to manipulate the stock price that has nothing to do with company performance.

One is stock buy-backs.  These increase the price of the remaining shares.  But often the money might be better spent on making improvements in the company’s operation.

Another is layoffs or shifts to low-wage locations.  These immediately boost a company’s profitability by reducing the expense of wages.  But sometimes it costs the company in the long run to have the work done by workers who are low paid, but also less skilled, less well-trained and less loyal to the company.

All CEOs of big companies are well-paid—and should be.  Maybe what the chart tells us is that there are those who spend time negotiating or manipulating even higher pay that they should have spent tending to their businesses.

Maybe the best plan is to hire or promote a good person to be CEO, pay that person adequately and leave them alone.  A CEO who needs an extra incentive to do a good job shouldn’t be a CEO.

LINK

Highest-paid CEOs run worst-performing companies, research finds by Peter Yeung for The Independent (UK)

Obama, lame-duck GOP Congress may enact TPP

July 20, 2016

Republicans in Congress refused to vote President Obama’s Supreme Court nominations on the grounds that he is a lame duck.  But it’s highly likely they’ll join with him to enact the odious Trans Pacific Partnership agreement right after the November elections, when he and they really will be lame ducks.

Pac-Money-400x266When Congress voted to allow a “fast track” decision—an up or down vote with little time to discuss the agreement—it was Republican votes that provided the margin of victory.

“Fast track” means there’s no way to stop a lame-duck vote on TPP, even if anti-TPP candidates sweep Congress in the November elections.

All it would take is that President Obama, House Speaker Mitch McConnell and other TPP supporters are brazen enough.

Bernie Sanders opposed the TPP.  Donald Trump opposes it.  Hillary Clinton promoted it when she was Secretary of State, but she says she now has reservations about it.  Her supporters on the Democratic platform committee voted down a plank that would criticize the TPP so as not to embarrass President Obama.

The TPP—and the related Transatlantic Trade and Investment Partnership agreement and Trade in Services Agreement—are corporate wish lists written into international law.

These limit the power of governments to legislate and regulate to protect workers, consumers and the environment, grant drug and media companies new intellectual property rights, and create panels of arbitrators that can impose penalties on governments for depriving international corporations of “expected profits.”

So it’s fitting, in a way, that these anti-democratic trade agreements are likely to be enacted into law by a President and members of Congress who may not have run for re-election or been voted out of office.

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Monopoly power and what to do about it

July 2, 2016

The trouble with the U.S. economy is monopoly power.

Concentrated business power means less consumer choice, less opportunity for entrepreneurs and greater concentration of wealth.

Senator Elizabeth Warren

Senator Elizabeth Warren

Senator Elizabeth Warren described the problem very well in a speech on Wednesday.  If you care about this issue, I strongly recommend that you click on the first link below.

She noted that five banks have been designated as “too big to fail” by the Federal Reserve Board and the Federal Deposit Insurance Corp.

But that situation is not limited to the banking industry.  Four airlines (down from nine in the past 10 years) control 80 percent of all airline seats.  If American, Delta, United or Southwest were to be in danger of ceasing operations, could there be any doubt that the government would want to keep them flying at all costs?

There’s another problem with concentration in the transportation industry, and that is the incentive to abandon small and remote communities and concentrate services in a few hubs.   The second article linked below describes how concentration in the airline, railroad and trucking industries has harmed small cities in the Heartland.  “Flyover country” wasn’t always flyover country.

Concentration means less consumer choice.  Warren pointed out that more than half of Americans who with Internet or cable television service use Comcast.  Yet, she said, a third of U.S. citizens who theoretically have access to high-speed Internet service can’t afford it.   Americans pay more than Europeans for Internet service and get worse service.

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Donald Trump’s real art of the deal

June 14, 2016
Trump's Castle Casino on Atlantic City Boardwalk

Trump’s Castle casino on the Atlantic City Boardwalk

Last September I wrote a post speculating that Mitt Romney and Carly Fiorina may have been responsible for more human suffering than Donald Trump. I take that back. Based on what’s come out about Trump University and a New York Times report on Trump’s casino operations, I have to say that Trump’s business record was by far the worst of the three.

I assumed that Trump’s failures were honest business failures, such that most business owners and investors experience over the course of their careers.  Since then I have learned better.

Basically Trump set up businesses with other people’s money that were so loaded with debt that they were doomed to fail.  But he extracted a lot of money for himself before that happened.  Here are highlights of what the New York Times reported:

His audacious personality and opulent properties brought attention — and countless players — to Atlantic City as it sought to overtake Las Vegas as the country’s gambling capital. But a close examination of regulatory reviews, court records and security filings by The New York Times leaves little doubt that Mr. Trump’s casino business was a protracted failure.  Though he now says his casinos were overtaken by the same tidal wave that eventually slammed this seaside city’s gambling industry, in reality he was failing in Atlantic City long before Atlantic City itself was failing.

But even as his companies did poorly, Mr. Trump did well. He put up little of his own money, shifted personal debts to the casinos and collected millions of dollars in salary, bonuses and other payments. The burden of his failures fell on investors and others who had bet on his business acumen.

In three interviews with The Times since late April, Mr. Trump acknowledged in general terms that high debt and lagging revenues had plagued his casinos. He did not recall details about some issues, but did not question The Times’s findings.  He repeatedly emphasized that what really mattered about his time in Atlantic City was that he had made a lot of money there.

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Disinvesting in America, and what to do about it

March 21, 2016

Corporate executives and holders of financial assets—I’ll call them “capitalists” for short—are ceasing to invest in American industry.

BusinessCutsBack-1x-1

Instead corporations are investing their profits in buying back stock, which automatically increases the value of the rest of the stock.  This, by the way, were an illegal form of stock market manipulation prior to 1982.

buybackbonanza-1x-1

Meanwhile American manufacturing jobs are going away.

Manufacturing-Employment

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A venture capitalist’s argument for inequality

January 20, 2016

Paul Graham, a venture capitalist and essayist, thinks economic equality can be a good thing, not a bad thing.

Since the 1970s, economic inequality in the US has increased dramatically.  And in particular, the rich have gotten a lot richer.  Some worry this is a sign the country is broken.

Graham-cover3I’m interested in the topic because I am a manufacturer of economic inequality.  I was one of the founders of a company called Y Combinator that helps people start startups.

Almost by definition, if a startup succeeds its founders become rich.  And while getting rich is not the only goal of most startup founders, few would do it if one couldn’t.

I’ve become an expert on how to increase economic inequality, and I’ve spent the past decade working hard to do it.

Source: Economic Inequality

He goes on to write about how rich rewards are necessary to motivate people to found start-up companies, and how successful start-ups are good for everybody.  I think that is true as far as it goes, but I don’t think it addresses the real driving forces behind today’s increasing inequality.

I’ve written a good bit on this web log about economic inequality, but my concerns have been less about successful business founders and more about the following:

  • Wall Street speculators who get rich at the expense of the public, sometimes by breaking the law, and not only go unpunished, but shift the burden of their losses onto the general public.
  • Executives of business corporations, government agencies and so-called non-profits who milk the system to increase their own incomes and the incomes of their cronies, while imposing austerity on those who do the actual work.
  • Crony capitalists whose wealth is based on personal connections, especially with politicians and government officials, rather than creating value.
  • Rich people whose share of national wealth, as documented by Thomas Piketty in Capital in the Twenty-First Century, tends to grow automatically, all other things being equal.

All this is made worse by rich people who turn their wealth into political power, which they use to destroy the social safety net, starve public services, weaken labor unions and subsidize corporations..

That said, Paul Graham raised a fair point, which I want to discuss.  He pointed out that there is a difference between those who get rich by playing zero-sum games at other people’s expense and whose who get rich by creating value.

I agree.  I think there also is a difference between those who participate in zero-sum games with each other, such as those who participate in high-stakes poker games, and those who participate in zero-sum games with the general public, such as the sub-prime mortgage speculators.

People who create value deserve to be rewarded.  People who make a maximum effort and an important contribution to society deserve more than people who make a minimum effort and a routine contribution.  But I don’t think the rewards system should be structured so that the former get virtually everything and the latter virtually nothing

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The passing scene – October 9, 2015

October 9, 2015

Welcome to a New Planet: Climate Change, “Tipping Points” and the Fate of the Earth by Michael T. Klare for TomDispatch.

How the Trans-Pacific Partnership Threatens America’s Recent Manufacturing Resurgence by Alana Semuels for The Atlantic.

Harvard’s prestigious debate team loses to New York prison inmates by Laura Gambino for The Guardian.

10 Stories About Donald Trump You Won’t Believe Are True by Luke McKinney for Cracked.com.  Donald Trump is notable not as a business success, but as a promoter with the ability to distract attention from failure.

Can Community Land Trusts Solve Baltimore’s Homelessness Problem? by Michelle Chen for The Nation.  (Hat tip to Bill Harvey)

The Second Amendment’s Fake History by Robert Parry for Consortium News.  (Hat tip to my expatriate e-mail pen pal Jack.)

The Afghan hospital massacre: Snowden makes a brilliant suggestion by Joseph Cannon for Cannonfire.  Why does the United States not release the gunner’s video and audio?

Ask Well: Canned vs. Fresh Fish by Karen Weintraub for the New York Times.  Canned fish is probably better.  (Hat tip to Jack)

Shell Game: There Is No Such Thing as California ‘Native’ Oysters, a book excerpt by Summer Brennan in Scientific American.   The true story behind Jack London and the oyster wars.  (Hat tip to Jack)

Overall, CEOs don’t earn their big paychecks

April 14, 2014

o-CEO-PAY-570

The following is by Mark Symonds for Forbes

It isn’t every day that academic research comes along to tell you something you really wanted to hear and that you suspected was the truth all along.  In this case it’s about the long running debate around top executive pay.

A recent paper by J. Scott Armstrong of the Wharton School and Philippe Jacquart of France’s EMLYON, seem to have finally established that paying top dollar simply doesn’t get a better job done.  And, in fact, it might actually get a worse one done.

According to Armstrong and Jacquard, while there is plenty of evidence that financial incentives can be effective in motivating people to do mundane and boring tasks, individuals do the more interesting and challenging stuff…well, because it’s interesting and challenging.

Perversely, they say, very large financial incentives may actually hinder top performance. The paper argues there is strong evidence that individuals can become fixated on incentives and either become limited in their thinking, unable to digest and adopt new ideas or alternately become convinced that they will achieve the goal automatically so do not need to try as hard as they might otherwise.  Whatever the outcome, every other stakeholder from the more modestly earning employee to the corporate stockholder loses out.

And finally the research also suggests that we might not really be getting the brightest and best talent at the top because the tools and processes used to identify candidates are either limited or downright faulty

There is simply too much emphasis on past performance, personal recommendation, unstructured interviewing, an unwillingness to ask really difficult and searching questions and that more dangerous selection criterion of all – gut instinct. Worryingly, it seems that the headhunters and in-house recruiters charged with hiring occupants of the corner office may be relying too much on perception and too little on good, hard facts.

The paper points out that CEOs who win prestigious industry awards constantly out-earn those that don’t.  Yet the stocks of the companies the award winners head up consistently under-perform in comparison to those of their less publicity hungry peers.  Perhaps because the latter spend their time running their businesses well instead.  [snip]

Unlike many academics, who might shy away from coming up with a solution, EM Lyon’s Jacquart is one willing to give the obvious if uncomfortable answer – namely that current incentive models need to be abandoned and overall executive pay should be reduced.

And he’s also ready with a counter to those who will doubtless argue that this will make it impossible to recruit the right people and bring major banks and corporations crashing to the ground.

“Yes, of course this may make it more difficult to recruit very senior individuals from outside an organization, at least in the short term. However it would force businesses to focus more on the development of the talent it already has, the talent that is more likely to be more loyal to and understanding of its aims, goals and methodologies.”
[snip]

via Big Company CEOs Just Aren’t Worth What We Pay Them.

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Chipotle profits by investing in employees

April 12, 2014

The Chipotle Mexican-style restaurant chain enjoys good profits and good growth, while paying its employees generously and promoting from within.

220px-Chipotle_Brandon_Its current policy began about nine years ago when founder Steve Ells and then-COO Monty Moran visited the restaurants, and notice that the one that were best-run were all managed by employees who had started as restaurant crew members and worked their way up.

They decided to make that into a system, and reward restaurant managers, not for achieving set targets of holding wages and other costs down, but for mentoring employees and training them to be managers.

Click to enlarge.

Click to enlarge.

Why do so many managers ignore the examples of Chipotle, Costco and other companies and instead grind their employees down instead of building them up?  

I am reminding of a saying Bertrand Russell once made about human nature, When people are mistaken as to what is in their interest, the course they believe to be wise is more harmful to others than the course that really is wise.

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Costco: doing well by acting decently

June 12, 2013

CostcoLogo

Retail store chains face tough times because of the slow economy and competition from Amazon and other on-line sellers.  But Costco Wholesale’s sales are up, its profits are up and its stock price is up.

What’s noteworthy about Costco, according to Bloomberg Businessweek, is how well it treats its employees.   “If you treat customers with respect and employees with respect, good things will happen,” CEO Craig Jelinek told Bloomberg.

Costco is the second largest retail store chain in the United States, and is fast gaining on Wal-Mart, the largest.  Here are some facts and figures about the two chains.

  • Average hourly pay for Costco employees is $20.89 an hour, versus $12.67 for Wal-Mart.
  • 88 percent of Costco employees have company sponsored health insurance, in which they pay less than one-tenth of the cost of the premium.  Wal.Mart says “more than half” of its employees have health insurance.
  • CEO Craig Jeninek got a base salary of $650,000 a year, plus a $200,000 bonus, plus stock options worth $1.2 million.  Wal-Mart’s CEO got a base salary of $1.3 million , plus a $4.4 million cash bonus, plus $13.6 million in stock.
  • While Costco is doing well, Wal-Mart is in trouble
Costco's stores are no-frills

Costco’s stores are no-frills

Costco overall is a no-frills operation.  It has no public relations department, and Bloomberg reporters were able to talk to the CEO directly.  Costco does not hire managers out of business school.  Its managers are promoted from within.

Its prices, according to Bloomberg, are competitive with Amazon, which Costco managers see as its chief competitive threat.  Profit margins are thin.  About 80 percent of Costco’s gross profit comes from its annual membership fee.

Costco is not necessarily an exception, according to Bloomberg.  Nordstrom, The Container Store, Sephara, REI and Whole Foods Market, all know for treating employees well, are also doing well in the marketplace.  It is true that Amazon, which is not known for treating employees well, also is successful, but maybe they could still be profitable if they treated their warehouse workers better.

A lot of people assume that being callous toward people is always realistic and treating people decently is always naive, but Costco’s experience shows this isn’t so.  Treating employees as assets instead of costs can be good business price.  Bertrand Russell once wrote that if human beings all knew what was in their self-interest, most would be better people than they are and the world would be a better place.

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Why lobbying is a highly profitable investment

May 24, 2013
Double click to enlarge

Double click to enlarge

Hat tip to occasional links & commentary.