Sanford-nomics

by publius

"Rising star" Mark Sanford shows off his economic chops in today's WSJ. The quote comes from an article explaining that GOP governors who have national ambitions are going to find it hard to approve tax increases of any kind. Anyway:

Gov. Sanford, unlike most of his colleagues, speaks out against any federal bailouts, including a fiscal stimulus bill that is likely to include state aid. "When times go south you cut spending," Gov. Sanford said. "That's what families do, that's what businesses do, and I don't think the government should be exempt from that process."

This is of course dead wrong -- and confuses microeconomics with macro, as any student of Econ 101 could tell you. The micro-considerations of an individual family or business has nothing much to do with what governments need to do to get the larger economy moving again. (Or just go read someone who actually knows what he's talking about - Krugman). Even worse, it's often affirmatively harmful to adopt microeconomic solutions to macroeconomic problems. Hoover: Ain't that the truth.

I have no idea whether Sanford actually believes this or not. Maybe it's just politics and he actually does understand the difference. But either way, it's troubling. If he doesn't know, that's bad in and of itself. If, however, he does know, his words indicate that he thinks the public is economically ignorant. That is, he thinks the political conditions within the GOP (or the state/country more generally) require a candidate to show ignorance of important economic principles. And that will inevitably lead to misguided economic policies.

One larger point here is that, while "rising stars" like Sanford and Jindal may be individually compelling, they must operate within a Republican Party that has enthusiastically embraced ignorance on a whole host of subjects, economics included. The issue is whether they can escape these constraints.

Comments

[Dave S.]

I think it's a combination of actual and feigned-for-populism ignorance. It puts me in mind of the great Claude Rains quote from Lawrence of Arabia: "A man who tells lies... merely hides the truth. But a man who tells half-lies has forgotten where he put it."

[wonkie]

So the "party of ideas" is going back to Hoover for some creative thought? They be better off if gthey looked back to Teddy Roosevelt and Robert La Follette.

[Cynic]

Publius:

I think it's a mistake to assume that this is duplicitous, and misleading to label it ignorance. It harkens back to a long populist tradition of applying common-sense notions to governance. Sanford knows that families and businesses have to balance their budgets; he assumes the same is true of government.

The American right is inherently skeptical of any argument that advances the notion that there are some roles (aside from security) best filled by government. You needn't look very far to find conservatives arguing that FDR's New Deal delayed economic recovery - that, in fact, has become one of the most common right-wing memes in recent weeks. Keynesian orthodoxy has always held, at best, an uncertain grip over conservative thinkers. It clashes with their instincts. It seems counter-intuitive to them. When you're short of cash, spend? Preposterous.

Look back to John McCain's closing economic argument, a week before the election. He met with his senior economic advisers, and then mounted the stump to declare that "the difference is that [Obama] thinks taxes have been too low, and I think that spending has been too high." Lest you mistake that for a statement about the past, or of general principle, he continued on: "My approach is to get spending under control and cut taxes...Senator Obama's approach is to radically increase spending." For good measure, he attacked the Democrats for proposing a "spending spree they are calling a stimulus plan."

It's difficult to fathom. But just a month ago, 11 months into the deepest recession since the Second World War, the Republican nominee for the presidency was attacking Democrats as profligate for vowing to increase spending, and promising to get spending under control if elected. And this was the position he formulated after meeting with his economic advisers and business leaders. Nor was it a last minute stunt. A central plank of his economic platform called for balancing the federal budget - mostly through spending cuts - and committing all reductions in defense spending to deficit reduction. It also vowed (and I can't believe I'm writing this) a one year freeze on all non-defense, non-veterans discretionary spending. Really. Go look it up.

I shudder to think what would have happened had McCain actually prevailed. Would he have abandoned these pledges as so-much campaign year rhetoric? Perhaps. But honestly, there's no indication he didn't believe this stuff. He never hedged it, to the best of my knowledge. We might actually have seen the federal government return to Hoover-like policies, with similar results. Scary stuff.

So let's not assume they're ignorant, nor that they're manipulative. That'd imply that they only need to be educated, or that they'll abandon these pledges when it's tactically useful. I suspect they've already heard what Keynes has had to say, and oppose his prescriptions as a matter of principle. And that's a far more dangerous thing. I can deal with liars and fools; committed Hooverites are something else again.

[d'd'd'docile dave]

publius

It seems to me that governors are in a different situation than national leaders. They are less able to sustain deficit spending because they are not able to print money like the feds. Hence, the choice of cut spending vs raising taxes is forced on them.

You (and Krugman) are pointing to deficit-spending-as-economic-stimulant as the best course of action. IMHO that is a national level tool rather than a state one.

I think you're being unfair to Sanford by suggesting that he is ignorant when in fact it is a tool states just do not have.

[Cynic]

docile dave:

As a theoretical objection, that's valid. Many states have constitutional requirements to balance their budgets. But that's not what Sanford was talking about.

He was attacking plans to include, in the federal stimulus package, a big chunk of funds for states to spend themselves. And that's just plain crazy. States are still the front-line providers of social-services to the most vulnerable; economists agree that slashing state-level spending is a terrible response to recession. On the other hand, their revenues are falling, and they can't spend more than they take in. So the standard solution is for the federal government to pass along money to the states, so that they can increase spending in targeted areas, instead of cutting it in line with falling revenues. And what Sanford was saying was that he opposes such efforts; states should just tighten their belts.

[PoorForm]

Second Cynic @12:07. d'd'dave makes a good general point, I think, but I'm not sure it's relevant here. It's true that states don't have the kind of borrowing capacity that the federal government has, and I think most states have some sort of balanced budget or PAYGO rules.

But at least reading the Sanford quote in the context of the article, one gets the impression that he thinks increased spending is inappropriate for both federal and state governments

[wonkie]

To reinforce Dddd's point: Governor's are also closer to their electorate. They are easier to remove if they disappoint their voters. And people do tend to blame their state governors for things which really can't be controlled at the state level.

So while it is possible that Sanford believes what he says (and his thesis is probably correct at the state level), it is also possible that he is saying the only thing he can say and remain politically viable in his state.

But he is still wrong in terms of federal policy and that's indicative of what is wrong with the Republican party: what ideas they have, whether sincerely held or only matters of pandering, don't work in the real world of governance at the federal level.

So people who wish to revive the Republican party would be well advised to go back to the party when it actually functioned as an organization responsive to real problems: Lincoln, Teddy R, La Follette.

The problem with that is of course by the standards of their day those guys were left of center. In fact, by the standards of this day in significant respects they'd be liberals or at least moderate Democrats.

Which I think is Publius's point: the modern Republican party has fallen of a rightwing cliff. At least in terms of federral policy.

[Lars]

D'd'd'docile dave has it exactly right. Asking states to engage in deficit spending is a little like when President Eisenhower said that the way of of the then-current recession was for every American family to go out and buy a new car.

I suggest you re-read Krugman- everything he says about deficit spending applies to national governments.

And by the way, it is for this reason that state governments and the budget constraints that they face would in fact be considered a microeconomic issue. Sanford's right on this and invoking the all-holy name of Krugman won't change that fact.

[mikkel]

Can we stop pretending that politicians know what they are talking about? 95% of them have no idea and just spout mindless blather. The surface ignorance is real, that's why their "debates" consist almost entirely of family anecdotes. On the other hand, check out the Black Mirror thread or this link I posted in it that explains why Krugman is wrong.

He's not wrong generally, he's just not paying attention to the actual roles of the actors.

We're only hanging on because of reserve currency status, not because they are actually have the correct theoretical underpinnings. That will change at some point I can guarantee that much.

[d'd'd'docile dave]

Cynic
You say applying common-sense notions such as balanced budgets to governance is wrong thinking and //The American right is inherently skeptical of any argument that advances the notion that there are some roles (aside from security) best filled by government. ... Keynesian orthodoxy... clashes with their instincts. It seems counter-intuitive to them. When you're short of cash, spend? Preposterous.//

I have a quibble with this. Common-sense would suggest that you save during periods of plenty and deplete savings during periods of anti-plenty [sorry, the antonym escaped me]. In the same vein, an astute businessman would sell into bubbles and buy into collapses. Buy low/sell high.

You point at the right as being wrong-headed for wanting to cut now when we should run deficits. Fine, it is a fair charge. But, IMHO it is equally wrong-headed for the left to have wanted more social spending in times of plenty.

I guess my larger point is that common-sense notions do apply to government.

[d'd'd'docile dave]

//We're only hanging on because of reserve currency status, not because they are actually have the correct theoretical underpinnings. That will change at some point I can guarantee that much.//

Yes, exactly. Which is another voice for the universal validity of common-sense notions.

[mikkel]

Here is a graphical representation of a major reason why our policies haven't lead to currency collapse yet.

[NonWonderDog]

"But, IMHO it is equally wrong-headed for the left to have wanted more social spending in times of plenty."

Have you already forgotten which recent president it was that balanced the budget and started paying down the deficit? HINT: He wasn't a Republican.

[NonWonderDog]

Paying down the debt, that is. By getting rid of deficits. (Need more sleep.)

[publius]

interesting thread -- i do think (as others mentioned) the key is that he opposes them even on the federal level.

on another topic, doesn't all this suggest that states should get rid of paygo and balanced budget amendments

[Donald Johnson]

I saw your link yesterday, mikkel, and I'm hoping that these arguments come to Krugman's attention, because I'd like to see what he has to say about them. No comment from me, as my vast economic training amounts to one semester in college, plus occasional bits of reading since (most of which I've forgotten).

[Free Lunch]

One of the serious problems with Republican claims that they should be allowed to touch state and local budgets is their total disregard for the economic cycle. When states manage to collect a surplus on the upside, the Republicans loudly and irresponsibly demand tax cuts so the state is on the edge of failure during good times, then they refuse to consider collecting enough taxes to run the state during bad times. Meanwhile, they cheerfully borrow as much money as they can while ignoring the balanced budget requirements of their states. It's no surprise that states have a problem during a recession. The Republicans forced it to happen, apparently thinking that destroying all government is the best way to govern.

It may be that not all of the Republicans are being intentionally dishonest. It is possible that some of them are truly too ignorant about public finance or government operation to understand the problem, but that doesn't really get them off the hook. They have the responsibility to know what they are doing and to make themselves informed, not just to repeat falsehoods that they were told by other dogmatic 'conservatives'.

[TJ]

I have to say, when I read the title, I thought "It's the big one, Lamont." Shows how old I am.

[Free Lunch]

on another topic, doesn't all this suggest that states should get rid of paygo and balanced budget amendments

I have no problem with states that require their legislatures to run a balanced budget over the economic cycle. Government accounting is pretty much a joke, so even balanced budgets are seldom as balanced as claimed. It is true that raising taxes during a recession may be self-defeating, but it is not true that running a surplus means that "the people have been taxed too much". Whether you are looking at George Bush cutting taxes too much or some silly governor or legislator who wants to 'give the money back', having a savings account to deal with problems is a good thing. If Mark Sanford doesn't have a savings account, he only hurts himself, but if he thinks that states don't need one, then he is harming everyone in the state by making his state less capable of dealing with problems that it is responsible for.

[ThatLeftTurnInABQ]

On the other hand, check out the Black Mirror thread or this link I posted in it that explains why Krugman is wrong.

He's not wrong generally, he's just not paying attention to the actual roles of the actors.

We're only hanging on because of reserve currency status, not because they are actually have the correct theoretical underpinnings. That will change at some point I can guarantee that much.

mikkel is correct IMHO.

Krugman is barking up the wrong tree on the subject of Keynesian stimulus. I still think we still need stimulus spending, but on humanitarian grounds and to build the infrastructural support for a transition to a less consumption driven economy, not because our economy would benefit from fiscal deficits.

The best marco-economic argument I can see for stimulus spending right now is as an income redistribution scheme (in other words financed by steeper progressive taxation, not more govt. borrowing) to move income from the wealthy (who will use it for debt reduction rather than consumption) to folks at the bottom of the ladder who will spend the money immediately on subsistence consumption needs. That would have the effect of increasing the velocity of the money supply (which is part of the problem in the deflationary spiral we are now experiencing) and addressing the paradox of thrift. But call it what it is - class warfare, not Keynesian stimulus, which it isn't.

But there are limits to how much we can do to support and encourage consumption without doing greater long term damage to the economy, because one of the biggest problems with our economy is that in aggregate we consume too much and don’t produce enough. Whatever we do in the short run needs to be congruent with the longer term need to rebalance our domestic economy to bring consumption and production back into alignment with each other. We can’t keep exchanging dollars for goods made elsewhere, out of all proportion to our exports. Oil is the other big import category driving our trade deficit – that will take longer to solve and making long term improvements in energy efficiency should be the focus of our new infrastructure spending.

I don’t see constructive way out of this trap without a large reduction in our overall level of consumption, combined with a net shift in consumption patterns from the top income tiers back to the bottom tiers. In the long run that should be via a shift in wages (which means we need a better educated workforce and less unskilled labor*), but in the short run the only way to get that is via govt. imposed redistribution.

If you are on the right in terms of economic philosophy, that really sucks. My answer to you is that global depressions have for centuries been the primary enablers of left-wing economic policy, and if you didn’t want to reach this fork in the road, you should have worked harder to ensure that we wouldn’t have a depression. Sometimes we have to lay down in the beds we’ve made, like it or not.

There is an alternative path. We could flail around trying to save the financial system and restimulate the economy without a govt. manadated transfer of wealth downwards, using borrowed money instead. That story ends (I think) with us defaulting on our debts, a horrendous crash in the value of the dollar, and the world shifting to a new reserve currency. Wars, possibly global in scale, are optional but very much on the menu.

On the whole I think this more violent scenario is more likely to actually happen than the redistributionist scenario I outlined above.

*regarding workforce education and wage issues, see this comment by tompain at 12:41pm on Dec 3 on the NakedCapitalism thread which mikkel linked to for an excellent summary, IMHO.

[d'd'd'docile dave]

TLTABQ

//Oil is the other big import category driving our trade deficit – that will take longer to solve and making long term improvements in energy efficiency should be the focus of our new infrastructure spending.//

This is true. Energy independence is good for security reasons and balance of trade reasons. It should be IMHO the top infrastructure issue. Sort of a 'Nasa: Put a Man on the Moon' project for our times.

The problem I see is that it is conflated with the global warming issue which runs at cross purposes.

A pure energy independence play would continue to exploit coal, oil and oil shale in the near and medium term while investing in clean research and development. The global warming folks want to suppress the dirty near term options like coal, oil, and oil shale. This defies common sense IMHO because it urges us to bypass the low hanging fruit as we precariously climb the tree looking for better fruit that we can't see but think might be there.

[mikkel]

ThatLeftTurnInABQ:

That is the most concisely stated set of strategic objectives we need to work towards that I've seen as you've incorporated basically everything. I've been feeling very pessimistic, but now I'm seeing Brad Setzer start to hammer the point that there is no fix without trade rebalancing and he is a somewhat well connected traditional economist (he blogs on the CFR website for chrissakes).

I think that all the goal oriented points you hit on need to be distributed far and wide and soon. I think the tactics for achieving the goals are up for more debate.

For instance, wealth disparity needs to be reduced, whether it's through forced wealth redistribution or other means. I think that there is a lot bigger chance of political success if it is voluntary and done through a shared struggle view.

If Obama came up and explained all those things you said and said that is what his Administration was going to work for and that he was open to ideas on how to accomplish it and nothing was off the table...I think maybe we could see a lot more contribution to nonprofits, etc. specially created to handle the situation. Especially because to me it would be a negotiation of a social contract for the wealthy -- i.e. contribute to these programs for short term needs while the government focuses on longer term infrastructural and technological investment that will naturally boost businesses.

That way it's not warfare, it's a contract.

However the effect of said programs should obviously be monitored and the government should reserve the right to carry a big stick to force the objectives through higher tax rates and more social spending as a last resort.

As you've said, if the intent isn't on keeping a downturn from happening, but a) survival and b) laying the groundwork for recovery, then we'll have some time to experiment before starting class warfare.

Sure this is highly idealistic and I think most likely all paths lead to major real war, but on the other hand I'm not sure forced redistribution will lower the probability of war either. That just starts wild and antagonistic populist movements, as opposed to what I think Obama epitomes which is rational and cooperative populism.

[d'd'd'docile dave]

TLTABQ

//The best marco-economic argument I can see for stimulus spending right now is as an income redistribution scheme (in other words financed by steeper progressive taxation, not more govt. borrowing) to move income from the wealthy (who will use it for debt reduction rather than consumption) to folks at the bottom of the ladder who will spend the money immediately on subsistence consumption needs. ... call it what it is - class warfare, not Keynesian stimulus...But there are limits to how much we can do to support and encourage consumption without doing greater long term damage to the economy, because one of the biggest problems with our economy is that in aggregate we consume too much and don’t produce enough. Whatever we do in the short run needs to be congruent with the longer term need to rebalance our domestic economy to bring consumption and production back into alignment with each other....I don’t see constructive way out of this trap without a large reduction in our overall level of consumption, combined with a net shift in consumption patterns from the top income tiers back to the bottom tiers. In the long run that should be via a shift in wages (which means we need a better educated workforce and less unskilled labor*), but in the short run the only way to get that is via govt. imposed redistribution....If you are on the right in terms of economic philosophy, that really sucks. My answer to you is that global depressions have for centuries been the primary enablers of left-wing economic policy, and if you didn’t want to reach this fork in the road, you should have worked harder to ensure that we wouldn’t have a depression. Sometimes we have to lay down in the beds we’ve made, like it or not.//

I'm sorry to have copied so much of what you wrote but I'd like to engage you on this.

First, I think it is desirable for everyone to be prosperous. This doesn't necessarily mean to me that income discrepancies in the population need to be minimal. The person who chooses to spend their life counting tadpoles in a square meter of pond water should not expect to be as well compensated as a tech entreprenuer who creates tools of efficiency for everyone. There are non-cash benefits to a life of counting tadpoles in pond water: peace, lower stress, etc. which the research biologist has chosen as partial compensation instead.

Second, I think that investments at the bottom pay greater real returns than investments at the top. By that I mean, basic infrastructure like clean water, good roads and efficient power are more desirable when there is a lack thereof than an investment in more pixels per square inch or a slightly higher bit transfer rate would.

Third, I think distributed decision making is better than centralized decision making. In other words, generally it is better for 300 million people to make many small purchase decisions about what is valuable to them than having 5,000 government types make a few very large purchase decisions.

Fourth, I'm a guy who has acquired wealth [actual capital rather than just a high income] and so would give it up under your scenario.

Fifth, a basic safety net is a good thing.

With all that said, in the current conditions, with congress and the fed spewing obscene amounts of good money after bad, I just don't see how anyone can advocate taking my carefully built and conserved capital that I use to maintain jobs and industrial production and spewing it all over wall street and detroit. You call the capital returns of people like me excess consumption but it is NOT. It is risk capital held in experienced hands active in current industrial pursuits.

The state will get it when I die for goodness sake. That's what inheritance taxes are for. I have proven to be an efficient user of capital because, voila, I have it after starting with nothing. WHY does it make any sense at all to take it from an efficient user?

Please don't respond by saying that macro truths don't translate to micro truths and vice versa. That's like saying there is a parallel universe where magic happens and it makes discussion impossible.

Answer me this: why have I acquired capital and Mr X has not? Why give mine to Mr. X? Instead, teach him how to do as I have done.

[russell]

In the long run that should be via a shift in wages

First, I'd like also the applaud TLTIABQ's post for its depth and conciseness. Thank you.

I'd also like to thank docile dave for his consistently thoughtful posts, both in this thread and elsewhere.

I'd like to make a comment about the shift in wages.

The assumption in most discussion I've read in discussions of inequality is that it can only be addressed by either paying people more, or by transfer payments.

There actually is a third way, which is to share the value created by an enterprise with the people who work for it.

If the company makes money, you put aside what you want to invest for the future and split the rest up between the folks who do the work.

If capital investors are involved, they naturally get a share as well. But they don't get *all* of the profit.

This makes partners out of workers, rather than viewing them as an antagonist and a necessary evil.

And it makes the wealth created by the economy available to everyone.

Thanks -

[mikkel]

d'd'd'docile dave: that's a large part why I wrote that he should be careful not to conflate the goal with the means.

As for this: "Answer me this: why have I acquired capital and Mr X has not? Why give mine to Mr. X? Instead, teach him how to do as I have done."

I'm interested to see what he says, but I say that it really depends on whether your aims align with long term strategic goals. I happen to think that the government has proven that it sucks at figuring out the best way to actually carry out implementation, but it is extremely important in determining long term social transformation whether we like it or not.

For instance, when they decided to settle the frontier, or go for post-WWII suburbia or focus on the "new economy" that was post-manufacturing and primary consumer driven...those decisions have very long lasting implementations and consequences.

Our necessity to move towards off a petroleum based economy, combined with the messed up population pyramid, is going to require a MASSIVE shift in how our society works.

So if you are an expert in drilling for oil and you're very profitable, then that's fine, but resources need to be shifted away and given to deserving people that have new ideas. You should be allowed and actively encouraged to contribute of course, as you're the expert in the current paradigm, and I think that increasing taxes is a very clean way of simultaneously urging a resource shift and allowing current players to find a spot at the new table.

Of course this is not what most of them do. Most of the time all the people with the money refuse to restructure their worldview and society gets more and more wound up and more sensitive to changes, until it all falls apart...then the new strategy is followed. This is why few companies survive major crashes and the ones that do often have no similarities with their old selves except in name.

I think the government gets in trouble when it tries to create a strategic vision and then implement the details -- that should be left up to the masses. Right now they are trying to salvage a vision that is unsustainable and that's why they are wasting so much money. Of course the government has to get its vision from somewhere and that's why popular movements are so valuable.

Our current problem is that our macro goals are to keep up consumption and have a finance based economy and that just doesn't work anymore (even though having that economy the last 30 years produced some very good consequences). I vote for trying to move forward with a new strategic vision even if that means ruffling the feathers of some entrenched interests that aren't on board -- especially if it's through "light hearted" means like taxation instead of outright banning -- because that's preferable to social collapse, no matter how temporary.

[ThatLeftTurnInABQ]

d^4 dave,

Good questions and I'll try to get a thoughtful response out later, but I've got a heavy workload right now so that might take a while.

My short answer is that I think our current levels of income inequality are unhealthy in a democratic society - that is they are in fundamental tension with the idea of popular sovereignty and tend to work at cross-purposes with it. The late gilded age of the 19th Cen. which spawned the Progressive movement in Teddy R.'s time also had this problem, and I think we can do something similar today in terms of enhancing and preserving capitalism by taking the raw edges off of it via social policy.

In the long run (i.e, a decade or more) I think the way to reduce income inequality is not to beggar the rich but to grow wages from below (so that most of the income growth we enjoy goes to the bottom and middle, not the investor class almost exclusively as it as done for the last 2 decades), but doing so will require either that we turn our back on the global economy and hide behind high tariff barriers, or else our workforce needs to be better educated and trained so that we have less unskilled labor, and what there is in the way of unskilled labor shares in the general prosperity of our society.

The problem we have now is we have too many workers exposed to the perils of global wage arbitrage without the superior skills needed to justify occupying top tiers of the global income pyramid. That tompain comment I linked to in the NakedCapitalism thread makes what I think are very strong points along these lines.

So I view a govt. mandated income transfer as a measure which is necessary to get us through the current crisis, but in the long run I’d rather see the govt. address the income inequality problem more indirectly by putting public resources into giving our people what they need to have in the way of skills so that they deserve and earn top wages on a global scale rather than try to prop up unskilled wages. Teach a man to fish…etc.

[ThatLeftTurnInABQ]

Also, if you haven't done so already, take a look at this proposal from ndk, a commentor at NakedCapitalism who has of late been putting up some really solid comments.

My quick summary is that s/he is proposing something like the Swedish banking crisis solution (triage - save the good and let the bad default) for the entire financial system, coupled with govt. support for the more vulnerable members of our society to get them thru the resulting downturn, which would be more likely to be short and sharp (like the Depression of 1873) rather than long and drawn out (like 1990s Japan) if we continue to go down the zombie-bank path we are on today.

[Sebastian]

"but doing so will require either that we turn our back on the global economy and hide behind high tariff barriers, or else our workforce needs to be better educated and trained so that we have less unskilled labor, and what there is in the way of unskilled labor shares in the general prosperity of our society."

I don't know why hiding behind tariff barriers is considered one of the viable possibilities. It tends to stifle growth so I don't know how you expect the middle to grow under them. There is some small indication that for very short times tariffs can let backward countries catch up, though it often just causes companies to become deeply corrupt because of lack of competition and still not as vibrant as you can get with competition (see Brazil and/or Detroit).

I'm all for training however.

[OCSteve]

First, I'd like also the applaud TLTIABQ's post for its depth and conciseness. Thank you.
I'd also like to thank docile dave for his consistently thoughtful posts, both in this thread and elsewhere.

Ditto on both.

If the company makes money, you put aside what you want to invest for the future and split the rest up between the folks who do the work.

That is what every private company I have ever worked for does. Put some aside for next year’s plans, give the investors their piece, and use the rest to give everyone a nice bonus. True, the top folks get the nicest bonus, but the rest end up pretty happy as well.

In the best places I’ve worked it’s also very open and transparent. You get regular briefings on where the company is at and where it needs to be. At the end of the year the boss mostly opens the books. Here is what we made, this piece goes to fund the stuff we talked about for next year, investors get this chunk, what’s left gets split up amongst everyone as a bonus – different percentages based on seniority and performance.

Not only is it very fair, it gives everyone tons of incentive to work hard and insure that the company is successful. It also makes you want to stick around for the long term.

But it’s only really possible in private non-union companies…

[gwangung]

But it’s only really possible in private non-union companies…

Aw, come on....

[ThatLeftTurnInABQ]

I don't know why hiding behind tariff barriers is considered one of the viable possibilities. It tends to stifle growth so I don't know how you expect the middle to grow under them. There is some small indication that for very short times tariffs can let backward countries catch up, though it often just causes companies to become deeply corrupt because of lack of competition and still not as vibrant as you can get with competition (see Brazil and/or Detroit).

Personally I prefer the free-trade, high skill path, but I threw in the other path for the sake of intellectual honesty.

Keep in mind that the mid- to late-19th Cen. industrialization of the US took place behind a protective wall of high tariff barriers, something that the Victorian era British free traders liked to complain about. So at least historically speaking high tariffs aren't just for poor and/or corrupt 3rd World nations. Whether our domestic market and resources would be adequate to doing that again and making it work as well as the free-trade alternative, I don't know. I suspect that we are much more dependant on raw materials from outside the US today (and not just in oil) than we were back then, and that would be a problem.

But the thing I keep coming back to is that in an free trade world we either need some sort of comparative advantage or else we have to accept that unskilled labor here in the US isn’t going to be any better compensated than workers in India, China, Mexico, etc. are. We have to either keep climbing to the top of the value-add chain (which means a highly skilled workforce), or accept the consequences in terms of wages. If we don’t want to accept either of those outcomes, then the only way I can see to maintain unskilled wages at levels well above global averages is to hide behind trade barriers and force consumers to subsidize unskilled labor via higher purchase prices (I think this might be what the Japanese have chosen to do but I'm not well versed in the details of their economy so consider that ignorant speculation rather than informed opinion).

[russell]

That is what every private company I have ever worked for does.

Me too. It's pretty common in the industry you and I work in.

Other folks, not so much.

It would not be a difficult thing to incentivize through public policy, I think.

Anyway, that's my big, completely non-original idea for the day.

If people who work for a living got more of the value they help create, we wouldn't need handouts. We wouldn't need special sub-prime loan programs to help buy a freaking house.

From the CIA Factbook page on the US:

Since 1975, practically all the gains in household income have gone to the top 20% of households.

1975 was 34 years ago. Gerald Ford was President. Do you have any idea how much wealth "all the gains in household income" over that period of time amounts to?

But it’s only really possible in private non-union companies…

I don't know about that, but I do know that it's extremely uncommon in publicly traded ones. Shareholders rule, everyone else can pound sand.

I make a practice of not working for publicly traded companies, for that among other reasons.

Thanks -

[Sebastian]

"So at least historically speaking high tariffs aren't just for poor and/or corrupt 3rd World nations. "

They are *sometimes* effective in letting you catch up with other countries. That isn't at all the same as suggesting that it is an effective method for staying ahead of everyone else.

[John Thullen]

Well put, Publius.

This "government is just like family and business" is crapola.

On the other hand, when I was a kid and hard times befell the country (disco), my Dad (the ghost of my Dad, who missed disco) would call us away from "The Fugitive" reruns and intone sober measures to be taken, namely, we were to stop bombing the neighbors immediately and mothball the family Navy.

Then he would fire a sister or two. Off they would go, into the cruel night.

He would cut layers of family, mostly cousins and the odd great aunt or three, depending on whther or not they were equally odd.

The dog was placed on a diet of lentils.

[d'd'd'docile dave]

ocsteve and gwagung

//But it’s only really possible in private non-union companies…//

I don't think 'private' and 'non-union' is determinate. I think size is more determinate. Trust and understanding among the parties is key to this. It works best when you can all gather in a room and talk to each other directly. It breaks down when there are degrees of separation between the parties which necessarily happens as businesses expand to multiple locations and levels of management.

[Bernard Yomtov]

I don't think 'private' and 'non-union' is determinate. I think size is more determinate. Trust and understanding among the parties is key to this.

This sounds right to me. In a small company everyone knows who's making the place go and who's just putting in time. Managers can't get away with a lot of BS around pay, bonuses, etc., even if they want to. Mostly they don't want to, at a minimum because they know too, and are terrified of losing the major contributors.

In big organizations there is too much distance between management and the grunts, so incentives get distorted.

[gwangung]

I don't think 'private' and 'non-union' is determinate. I think size is more determinate. Trust and understanding among the parties is key to this. It works best when you can all gather in a room and talk to each other directly. It breaks down when there are degrees of separation between the parties which necessarily happens as businesses expand to multiple locations and levels of management.

Yeah, I think this sounds right. Bigness of organization hits both sides, and neither side has good enough knowledge of the other side's needs (and probably even their own).

[von]

This is of course dead wrong -- and confuses microeconomics with macro, as any student of Econ 101 could tell you.

Oh, for the love of God. I used to teach a discussion group for Econ 101 as an undergrad - which, by the way, is Microeconomics at most universities. (Econ 102 is usually into to Macro).

Now, I happen to agree that Sanford is (at best) a little confused here. There are reasons to cut spending (and good reasons to cut selected spending) during a recession. But even granting that his analogy is better at the state than federal level, it's still bad.

OTOH, Krugman is hardly a good cite in response. Krugman did great work and truly deserves his Nobel. But his public persona is fundamentally dishonest. He has become the master of creating an impression of X is great while either ignoring (or ambiguously caveating) glaring problem Y.

[Nell]

TLTiABQ: the way to reduce income inequality is not to beggar the rich but to grow wages from below (so that most of the income growth we enjoy goes to the bottom and middle, not the investor class almost exclusively as it as done for the last 2 decades)

One of the surest and soundest routes to this is for Congress to pass the Employee Free Choice Act in the next year. (Union YES!)

Increased union membership will not only boost the wages of workers who unionize, but those in the same industry. And the political power of organized workers can make possible the passage of some long-term, structural changes that will level the "playing field".

[Tony P.]

To the extent we agree that economic inequality is a problem, it can be mitigated by economic growth, we are told. But what if there are limits to economic growth?

Here's a screwball notion that I am prepared to see shot down: "economic growth" is not perpetually possible on a finite planet populated by mortal beings.

People normally worry about production-side limits to growth -- natural resources, for example. But it takes consumption, as well as production, to make an economy. Consumption takes time, just like production does, and human beings, rich or poor, only have 24 hours per day to consume goods and, especially, services.

Docile Dave says, "I have proven to be an efficient user of capital because, voila, I have it after starting with nothing." Now what does that mean? It means he's not doing his part as a consumer. He has produced more than he has consumed. His personal output, over and above his personal consumption, is his accumulated personal capital. Capital's purpose is to make production more efficient. But what's the point of ever-more-efficient production of goods and services, if we don't have the time to consume what we're already producing?

"Answer me this," says Dave. "Why have I acquired capital and Mr X has not? Why give mine to Mr. X? Instead, teach him how to do as I have done." What would the economy look like, I ask back, if we could all be Mr. X and learn, like Dave, how to produce more than we consume? The instinctive answer is that the economy would grow like gangbusters: look at all the surplus we'd be producing. Piles and piles of capital all over the place. And what would that capital be doing? Why, producing goods and services we are by definition not consuming. "Export the stuff," I hear you cry. In exchange for what? Foreign goods and services that we don't have time to consume either?

Sure, the world is full of people who have lots of time on their hands, and no goods or services to consume. We could give our extra goods and services to the poor of Africa, couldn't we? I'm not sure how that would translate into "economic growth" statistics. I'm not sure what it would do the economic value of our capital. I am sure it would count as "redistribution".

In any case, I say the ultimate point of the frantic to-and-fro we call "the economy" is consumption. Production is just a way to provide stuff to be consumed. Goods not produced cannot be consumed. But goods not consumed are hardly worth producing. The value of capital lies entirely in its capacity to produce more and more goods and services. That value starts to diminish if consumption can't keep up.

One way consumption can fail to keep up is obvious: The Market does not give goods and services to non-producers, e.g. the unemployed or the retired. Government can do it, but then it's a "handout". Without such handouts, though, the proud owners of capital find themselves in a pickle: they haven't got the time to consume all their own output, and their potential consumers haven't got the money.

What I'm trying to say in a convoluted way is that inequality (the thing that defines rich people as "rich") may be exactly the recipe for reducing the value of capital (the thing that makes rich people rich) because it reduces the world's overall capacity to consume.

Or maybe not.

--TP

[liberal japonicus]

the only way I can see to maintain unskilled wages at levels well above global averages is to hide behind trade barriers and force consumers to subsidize unskilled labor via higher purchase prices (I think this might be what the Japanese have chosen to do but I'm not well versed in the details of their economy so consider that ignorant speculation rather than informed opinion).

Japan does this to a certain extent, but it's not simply forcing consumers, but a strategy that has a lot of facets. Frex, Japanese consumer goods manufacturers spend a lot more time adding features and designing products for the domestic market. This 'featuritis' then allows them to discover the really neat features that can be included on export models. And they spend a lot more time and money in mock consumer testing and surveying to address actual consumer needs (one can see this in their approach to automaking as well)

Add to this the friction of the traditional Japanese network that tends to add to the price, which keeps out lower price goods, but creates goodwill and connection to consumers.

This tends not to work out when we are talking raw materials, so trade barriers with rice took a big hit when airfares to the US came down and Japanese were filling their suitcases with California Rose, but for a car or a fridge, it is a bit of a different story.

[OCSteve]

gwangung: Aw, come on....

Any thoughts on how something like that could work in a publicly traded environment or a union shop?

I’m open to dave’s suggestion that size is more determinate, certainly it gets more difficult to manage as the company grows. But I’d add that a small company is almost always going to be non-union. And to russell’s point, it’s not likely to happen in a publicly traded company.

Russell: Me too. It's pretty common in the industry you and I work in.
Other folks, not so much.

I’m not so sure about that. My brother works a very blue collar manufacturing job. His profit sharing has been pretty awesome. His annual salary is considerably less than mine, but some years his bonus has been larger than mine. That is high tech vs. manufacturing, small company vs. medium sized company, white vs. blue collar. The only real common factors are that we are both hard working high value employees in privately held non-union companies.

[Brett Bellmore]

May I ask a simple question: Even granting the theoretical case for counter-cyclical spending, running deficits during bad times, and paying them down during good...

Does the 20th century look like proof to you that the federal government, allowed to borrow, actually engages in counter-cyclical spending, rather than running deficits in bad times AND good?

As far as I can see, it's like a junkie claiming that if makes sense for him to have an unlimited supply of heroin, because of the (real!) evidence that prompt pain relief leads to better health. Yeah, maybe it WOULD make sense for somebody who wasn't planning on having a needle in their vein 24/7...

And the Clinton administration? We have neither divided government, nor an economic bubble driving revenues up faster than Congress can respond with increased spending. It's not an example of fiscal rectitude when somebody hits the lotto, and goes into the black for a little while because they couldn't immediately reach the store to go on a shopping spree.

[russell]

I think size is more determinate. Trust and understanding among the parties is key to this.

I basically agree with this, especially as regards employee participation in governance and decision making.

I also note, however, that there are very large companies that are employee-owned. How do they work it out? I don't know but I would be interested to find out.

Just to revisit OC's point about bonuses -- compensation is definitely part of the issue, and was more or less TLTIABQ's concern, but I think what I'm trying to understand is how to achieve something more like a formal stake in the enterprise for workers -- something like ownership, or partnership.

I am a shareholder, through my 401k and other equity investments, in companies that I've never even heard of. I don't know what they do, or how they do it. I just like to see an ascending trend line on my monthly statements.

It makes no sense to me that people who work for those companies have less standing in their governance than I do.

I'm becoming convinced that capitalism as a model for understanding (at either a descriptive or normative level) human economic behavior is kind of played out. Far from being efficient, it seems, to me, insanely wasteful.

To the degree that those inefficiencies are due to government "interference", I'd suggest that without that interference we'd be living in an essentially predatory economic world.

Greed is not good.

Virtually all of the fruits of the productivity gains in the last 35 years have gone to the top 20% of the population. That's not Chomsky talking, it's the CIA Factbook.

We pay more than almost any other nation in public money, and *way, way* more in private money than any other nation, for health care, and get mediocre results.

If I understand the figures correctly, almost 10% of Americans, and almost 18% of children under 18, live below the poverty level. That's currently $21,200 a year -- about $400.00 a month -- for a family of four.

I don't care how many f'ing TVs you have, if you're raising two kids on $400 a week, you are poor.

And, of course, periodically the whole thing blows up, although not quite as often, as reliably, or as badly as before the institutions created during the New Deal were put into place.

I'm not sure it's a really good model. In fact, I think it is, or has become, kind of toxic.

Thanks -

[russell]

The only real common factors are that we are both hard working high value employees in privately held non-union companies.

I think if you're working in a place where you are valued and well compensated, unions are kind of redundant.

The purpose of unions is to give workers a lever to use in negotiating with management. When workers have a place at the table, they don't need unions.

I don't necessarily disagree with your claim that unionization can be counterproductive, and I definitely agree that an adversarial approach to negotiation will almost never yield the best outcome.

But if an adversarial approach is the only one available, it's what people will use.

If you want unions to go away, then we need to find some other way for working people to gain a stake in the governance of the enterprises they work in.

Thanks -

[OCSteve]

russell: I don’t necessarily want them to go away – I think that there are places they are still valuable. But I think there are other places where they are counterproductive. I think it depends on the situation. I’ll save the rest for when the inevitable card check thread comes up. ;)

[Sebastian]

I've been wrestling with my thoughts about unions (though not about card check, removing secret ballot because you think it would help your side is awful, if there are problems in the length of the time between ratification of a vote and actual voting, attack that problem directly. And saying that the company can't talk about possible plant closings AT ALL seems dumb).

What do I hate about unions? I don't like how many of them strenuously resist any technological innovation which make workers more efficient because they think it threatens their jobs (see for example Detroit autoworkers or the longshoreman's unions). I hate how they usually make it very difficult to fire bad workers (and that job bank thing in Detroit where they have workers who literally do nothing is ridiculous). I hate lockstep seniority rules which seem very common in union shops.

What don't I mind is collective bargaining for wages. I totally get that it helps to level the power differential between individuals and the corporation at large. I don't mind negotiating for benefits so long as they are paid out of the current account and don't require that the company survive for 50 years (401k--good, defined benefit penison--bad).

Digression, I see a potential objection on that last statement along the lines of "the economy tanked so relying on the 401k is crazy, they would be much safer with a defined benefit plan." Preemptively I want to note: that is an illusion. It confuses the promise to pay with the ability to pay. Any promise to pay which requires that the one manufacturing company or other (or God forbid a software company) is still around 40 years from now is a bad thing to rely on.

Anyway, it strikes me that the things I don't like about unions are rarely the things that pro-union people defend. I rarely see the "unions are great when they don't stifle mechanization" argument. I rarely see the "seniority rules are wonderful" argument. And I rarely see the "making it impossible to fire bad workers is good" argument. I suspect that most pro-union people aren't thrilled about those things either, they just on balance are willing to eat it because they think overall unions are better than not-unions in lots of cases.

So my question is: is there any way we can change the institutional structures so that unions will be focusing more on the things we like, and less on the things we don't like?

[liberal japonicus]

So my question is: is there any way we can change the institutional structures so that unions will be focusing more on the things we like, and less on the things we don't like?

How about taking a second look what you don't like and consider some redefinitions? Instead of looking for unions saying "making it impossible to fire bad workers is good" argument, look for the "making sure that workers aren't fired for spurious reasons". Or replacing "seniority rules are wonderful" with 'let's make sure that the company doesn't think that hiring scabs when senior workers get more pay is a viable option'. These are things that I would defend, when viewed thru that lens. Certainly, stated as you have, they are not things I would defend, but stated as I have, they are. At what point does the scale tip one way or the other?

The mechanization argument is one that I have an interest in, cf here and here, though the mechanization issue in this sense can completely eliminate the player, whereas you are discussing something not as drastic.

[russell]

So my question is: is there any way we can change the institutional structures so that unions will be focusing more on the things we like, and less on the things we don't like?

I'd ask a different question, although with (I think) the same goal.

How can we eliminate the adversarial relationship between capital investors, management, and labor?

Thanks -

[fledermaus]

95% of them have no idea and just spout mindless blather. The surface ignorance is real, that's why their "debates" consist almost entirely of family anecdotes.

Bingo. We are on our own, folks. If the Bush years have taught us nothing else it is that the powerful will tell themselves all sorts of happy tales about how well things are going for everyone because they aren't hurting and my isn't this all so wonderful, let us link arms in bipartisan unity and let the people eat cake.

I understand the court of Louis XVI did the same thing right up until their heads fell in the basket.

[Sebastian]

Sure, but the fact is that in long term institutions, unions change "don't fire people for spurious reasons" into "you can't really fire people. And every incentive they have short of actually driving the company under (which unions like the UAW act as if could never really happen) is to go that route.

And the seniority one is even worse.

My question is: how do we change the institutional arrangements so that they tend more toward the things we would defend and less toward the ones we wouldn't?

[liberal japonicus]

But Sebastian, doesn't it seem plausible that those things are not the starting point, but where they end up because of the adversarial relationship? Those two points are things that grow out of the protection from arbitrary firing and replacement by cheaper workers. The latter is probably the main impetus for creating unions in the first place. Saying that you are ok with unions working for wage increases, which presumably are scaled so that senior workers get more benefit, to argue that unions should then say that seniority isn't important, or that management gets to define who is a bad worker seems to undermine the whole purpose of a union.

[liberal japonicus]

Sorry, I hit send accidentally. I meant to add that changing institutional arrangements probably means giving workers some stake in the company, so the obvious solution is anarcho-syndicalism ;^)

[Brett Bellmore]

"How can we eliminate the adversarial relationship between capital investors, management, and labor?"

By making them the same people.

[Sebastian]

"But Sebastian, doesn't it seem plausible that those things are not the starting point, but where they end up because of the adversarial relationship?"

Maybe, though I'm not totally convinced because the same types of things show up in areas where the management and union aren't particularly at odds--see public sector union interactions. Trying to get someone fired from a county clerk's office is even harder than under private company/union interactions. In these cases, the union almost completely captures the workplace, but we don't see a reduction in the excesses, we see an intensification of them.

[farmgirl]

fledermaus, that was worthy of russell, methinks.

[ThatLeftTurnInABQ]

it is that the powerful will tell themselves all sorts of happy tales about how well things are going for everyone because they aren't hurting and my isn't this all so wonderful, let us link arms in bipartisan unity and let the people eat cake.
I understand the court of Louis XVI did the same thing right up until their heads fell in the basket.

I think this is largely a myth.

Judging from the books I've read on the subject, the French Revolution was far more complex and interesting than that (and worth digging into in some detail because some parallels exist with our situation today), and no, the elites were not lost in some land of the Lotus Eaters blithely assuming everything was OK.

That the French monarchy was in an extended state of fiscal crisis for years before 1789 and that this was not merely a superficial problem but indicative of much more extensive problems in society more generally, was well known and frequently discussed in French high society well before the tumbrels arrived with armed mobs in escort to take their victims off to be "shaved by the Republican Razor". Check out the very turbulent ministries of Necker and Calonne for example, or read about the political maneuvering which preceeded the calling of the Estates General (Simon Schama’s book Citizens is a good place to start).

Also, a good many of the leaders of the Revolution were minor (and in a few cases not so minor) members of the nobility or the clergy. The Ancien Regime collapsed not just under the pressure of angry mobs of sans culottes, but also because ideological support for the monarchy and older feudalistic aspects of society collapsed amongst the elite, who took advantage of their superior station and privileges to traffic in seditious literature and more or less openly scheme against the monarchy well in advance of its collapse.

If there any one moment of "bipartisanship" where everybody got together to sing kumbaya and foolishly assume that it was all going to turn out well, that would have been The Tennis Court Oath.

If our elites today behaved the same way, you’d be reading speculation in the Wall Street Journal about the impending failure and total collapse of capitalism and the need for a radically different approach to economics, members of Congress and the media would be exchanging email with a reconstituted Weather Underground about how to infiltrate the govt. from within with subversive intent, and the likes of Warren Buffett and Bill Gross would be publishing books and going on TV crying out for the need to confiscate large inherited estates, impose 90% marginal tax rates and nationalize the banks (rather than just bailing them out).

[russell]

fledermaus, that was worthy of russell, methinks.

And here I was, trying to behave myself.

Thanks -

[d'd'd'docile dave]

I endorse this comment: Brett Bellmore|6:34 AM

[farmgirl]

russell -- what can I say, I like it when you blow off steam by calling for the summary execution of those who misuse their power.

[radish]

How can we eliminate the adversarial relationship between capital investors, management, and labor?

I like this formulation, because it exposes the underlying problem. Namely that the relationship isn't naturally "adversarial" in the first place, because owners and employees aren't competing for the same niche. They're just competing for the same, finite, resources. Also I endorse Brett Bellmore's answer, though I think it's a bit unrealistic.

Unions are a kludge. They're designed to address the fact that the relationship between owners/managers and labor is an inherently asymmetrical one, between a naturally institutional entity (management, which acts as an agent of capital) and a naturally non-institutional population (labor). Their purpose is to turn the population into an institution which can, as a unitary entity, enter into an adversarial negotiations with other institutions.

Whatever you think of that kludge, I think it's safe to predict that it will look very different in the future. The last move in this particular Red Queen race was the reaganomic globalization of capital. In which, as can now clearly be seen, capital essentially managed to destabilize the system to its own advantage. The big old manufacturing and service unions are hollow shells of their former selves, and so are the big old manufacturing and service concerns. The old institutional structures of unions are useless because they're adapted for a environment that no longer exists.

If you prefer to think of unions as the parasite and bidness (or gummint) as the host, then it's all over because the host is no longer healthy enough to sustain parasites and still survive. If you prefer to think of bidness as the predator and labor as the prey, then it's all over because the population of prey is no longer healthy enough to sustain apex predators and still reproduce.

Either way, the system has crashed and Sebastian's question is about to be answered, along with a lot of others, whether anybody likes the answers or not. Can unions adapt to working across political boundaries and dealing directly with capital now that management has disappeared, or will they disappear and some new version of "institutional safety in numbers" for labor gradually emerge? Or perhaps capitalism will collapse altogether and Brett's solution will come to pass in some way that hasn't come into focus yet? I personally doubt that, but you never know.

[Hogan]

Trying to get someone fired from a county clerk's office is even harder than under private company/union interactions.

Civil service regulations long predate collective bargaining in public employment. You could abolish public sector unions tomorrow and you'd still have the same problem (unless you want to return to a full-on patronage system).

[russell]

By making them the same people.

How does that scale to efforts like:

design a car and bring it to market
build a building larger than a house
give someone a heart transplant

Not being a wise guy, "make them the same people" sounds like a good way to go, to me. But I don't understand what "make them the same people" means in these cases.

Thanks -

[ThatLeftTurnInABQ]

In case you haven't seen it yet, CalculatedRisk links to a nice trio of articles about how our Chinese banking overlords are taking the comedy of errors on this side of the big pond. A quick summary would be:

USA: Did you hear the one about the not very ancient American curse "May you live in interesting times"?

China: Meh, that was so funny I forgot to laugh, thank you very much. We don't care if a cat is white or black, as long as it pays back all the money it owes us. By the way, is it true that the phrase "eating humble pie" was coined in America, or is that just an urban legend?

[d'd'd'docile dave]

liberal japonicus

//Those two points are things that grow out of the protection from arbitrary firing and replacement by cheaper workers.//

When you buy things do you consider price? If two workers have identical skills but different prices it would not be strictly arbitrary to purchase the lower priced one.

[d'd'd'docile dave]

liberal japonicus
// Saying that you are ok with unions working for wage increases, which presumably are scaled so that senior workers get more benefit, to argue that unions should then say that seniority isn't important, or that management gets to define who is a bad worker seems to undermine the whole purpose of a union.//

I contest the notion that wages should be scaled so that senior workers get more benefit. Value is based on productivity, ease of use - things like that. Age or years of experience doesn't really have anything to do with it except, one would hope, that the years of experience would bring with it more productivity and ease of use.

The whole seniority notion, I think, is an arbitrary one. It is based a little on truth - that experience brings special skills - and alot on political power. A new guy joining the union has to ask to be admitted to the club. The guys in the club set the rules. It doesn't matter if the new guy is the best guy in the club - he hasn't got enough political power within the club to change the rules.

We have a conflict of notions. Your arbitrary firing is my justified allocation of precious resources. Your paying extra for seniority is my patronage for political cronies.

[d'd'd'docile dave]

Russell

You've made a string of comments on this thread about the relationship between labor and management/owners/capital which were wishful of a circumstance where the parties were full partners sharing in the fruits of their labor. I have been meaning to respond but hadn't quite formulated how. But i'll give it a shot.

I too have a desire for the full partnership of all the parties. It is a noble idea and a goal to strive for. There are things that occur in actual practice that in my view seem to always evolve to where it presently stands. Those things have to do with the individual needs and desires of the parties. If two identically skilled people started an enterprise together it could easily evolve to where one was the owner and the other was an employee. One would have family expenses or outside interests that made him relatively incapable of dealing with variable pay amounts and pay dates. The other, valuing the work of the first, might take up the slack by subsidizing the first in slow times and getting it back in good times. This would naturally evolve into employer/employee because one is somewhat dependent on the other. The first traded away higher reward for greater certainty.

The same thing happens in another way. Two partners in a stable business might have different attitudes toward growth. One might be willing to put in more capital, time, and effort to grow the business and the other might be content with the status quo. Their interests would diverge and probably the risk/reward bargain between them would change.

When a potential employee approaches an existing business looking for a job he wishes for a share of the profits but does he do what it takes to be a full partner? Does he pay capital in on the day he joins the business? Does he shoulder an personal obligation for his share of the liabilities? Does he agree, like the other owners, not to take any paychecks until there is excess profit to be distributed?

Believe me, if skilled workers come forward offering these things to an enterprise, they'll most likely be accommodated. But if a guy comes forward and says, i'll work for you in exchange for a full market wage and full benefits PLUS a share of the profits PLUS i'm not paying in any capital or assuming existing liabilities PLUS if there are future losses they aren't my problem PLUS i want a full vote at the next board meeting...and ,by the way, I have a cousin who needs a job. Well, I doubt that guy will be accommodated.

Perhaps I'm a bit cynical about this. I just think the average employee who complains about this stuff has no idea about how the employer got from there to here. He just sees the going concern and the profits and says "me too". But if he is taken aside and shown the path to take to get from where he is to there he'll opt out.

[russell]

When you buy things do you consider price?

The assumption here is that hiring someone to work for you is buying their labor.

That's a really common assumption, but I think it's wrong-headed.

People don't (in good shops, anyway) hire people in order to buy their labor. Economists think of it that way, but real, live people don't. They hire them for what they, as people, bring to the enterprise as a whole.

"Buying somebody's labor" is called contracting out a task to them, or engaging them as a consultant. Hiring someone involves you in a stronger relationship than that, with a greater set of mutual responsibilities.

I'm not talking about in Econ class, I'm talking about in real life. It just does.

Speaking personally, if I were to sell my labor, I could make more money than I do now. On a purely hourly basis, a *lot* more. I could also write off all of the technical books I buy, any and all computer gear I buy, I could take a deduction for my office at home, and I could write off the mileage of my commute.

In turn, I'd take a bigger FICA hit, and I'd have to buy my own health insurance. But my guess is that I'd net out on the positive side.

I have worked on a consultancy basis before, and I liked a lot of things about it. But I don't do that now.

Partly that's because I prefer the reliability of regular employment, but to a larger extent it's because I like having full-life-cycle involvement with the products I build, over the whole lifetime of the product.

I am, personally, invested in the quality and usefulness of what I build, and in how well it does or does not do in the marketplace.

You have mentioned that you have spent years building the capital that you put at risk. I have spent years -- 25 years -- building a body of technical expertise, engineering judgement, and general understanding of how to build and work in a team of people to bring successful products to market.

That's what I bring to the table.

When I work for a company as an employee, I put *that* at risk. I give up a lot of control over how my skills are used. I have to work with product management, marketing folks, and others, and trust that their judgement in their areas of expertise will combine with mine to create a good and successful result.

Consultants -- people whose labor you buy -- don't do that. They are not invested. If the overall effort goes well, great, if not, oh well. They get paid either way.

If you wanted to buy my labor, it would cost you a hell of a lot, because it's very valuable. You'd also only get a relatively small slice of everything I actually bring to the table. Believe me, I'm not going to invest myself, personally, in your project for mere money.

If you wanted to bring me in as a member of a team of people who wanted to build and bring to market good, cool, useful products, you could get me for less. And, you'd get the whole package.

But I'd expect more from you in other ways.

That's what I'm talking about.

Thanks -

[russell]

When a potential employee approaches an existing business looking for a job he wishes for a share of the profits but does he do what it takes to be a full partner?

That's an excellent point.

Not everyone will want to or be able to work 70 hour weeks, put personal capital on the table, forgo compensation or not take vacations for years.

Not everyone will mortgage their house to make payroll.

I'm not calling for everyone involved to be compensated equally. They shouldn't be. People should be compensated for the skills they bring to the table, but also for what they put at risk, and for what they sacrifice for the success of the enterprise as a whole.

What I *am* calling for, or at least what I think would be a very, very good thing, would be to organize our commercial lives so that the people who work in an enterprise share in the gains realized by that enterprise *in reasonable proportion to the value they create*, and that they have a voice in governance *in reasonable proportion to the responsibility they are willing to assume*.

That is not typical here. It really isn't.

In this country, unless you work in a skilled specialty, workers are viewed, and treated, as commodity labor. Fungible, disposable commodities.

It's a toxic, destructive attitude.

Virtually all of the fruits of the productivity gains in the last 35 years have gone to the top 20% of the population.

Are people in the top 20% solely responsible for all of the growth in the US economy for the last 35 years?

Thanks -

[d'd'd'docile dave]

Russell: your 5:59p

I agree with your concept that an employer gets less with a labor-only consultant than by committing to an employee who is able to bring his 'whole person' to bear on a project.

As an employer, however, before I come to the point of hiring, I've estimated what I think hiring will do for me. An extra employee or project might bring X revenue so I'm willing to risk Y in expenses to bring it about. So I hire someone for Y (+ or - a little). Realistically, at first, the only chance the employee has for profit sharing on the first project is to the extent he delivers more than I expected. On future projects, he'll have more ability to expand because I'll have discovered that he is wonderful and we can formulate the next thing together.

What I'm saying is, at the hiring point when there has been no prior commitment, what I'm buying is the amount of labor I've estimated in my head that it will take to do the first project. I HOPE for an employee that becomes a long term partner. The employee may hope for a situation that he can put is whole person into fruitfully but ... we just don't know how things will turn out at the point of hire.

[d'd'd'docile dave]

//In this country, unless you work in a skilled specialty, workers are viewed, and treated, as commodity labor. Fungible, disposable commodities.

It's a toxic, destructive attitude.

Virtually all of the fruits of the productivity gains in the last 35 years have gone to the top 20% of the population.

Are people in the top 20% solely responsible for all of the growth in the US economy for the last 35 years?//

My experience only extends to a small part of the world so my comment on this might be useless.

I suspect it has something to do with globalization. People doing rote or relatively unskilled jobs were replaced by lower paid workers oversees. The management and equity guys here profited from that. The rote or relatively unskilled guys here didn't. New industries have appeared in the last 35 years that are after the new model (tech for instance rewards skills highly and creates rote or unskilled jobs overseas).

I'm 48 and I've been hearing since I was a child that the economy is changing and to be successful one will need transferrable skills, education is key, blah blah blah. It's not like people haven't known for 35 years what was coming.

I don't know what to say. I didn't make the system. The thing to do is see where the wave is coming from and ride it.

I find it hard to dislike globalism. I've grown up my whole life being taught to have a concern for the poor 'other' including in foreign countries. It seems incongruous to me to say but don't give the guy over there a job.

[Fledermaus]

Geez left turn I'm begining to think you're angling for farber's job. But the larger point is that I don't see any fix here. But given the trillions thrown at wall street, I guess I'm pro auto bailout, albeit in a "if it's going to be that kind of party I may as well stick my dick in the mashed potatos" kind of way

[russell]

What I'm saying is, at the hiring point when there has been no prior commitment, what I'm buying is the amount of labor I've estimated in my head that it will take to do the first project.

I think that makes sense.

Likewise, the guy that you hire may also be taking you for a test ride.

That seems fair to me.

I think your point, way upthread, about the size of the organization being most relevant, was apt.

In smaller companies, you, as a business owner or decision maker, can know the person, see them work, see what they contribute, it's easier to understand where they fit in, what contribution they can make.

In bigger organizations -- more than 200 people, say, and definitely in organizations numbering in the thousands -- a job is basically a slot in an org chart, and you are basically just interested in filling it. Relative goodness or not-so-goodness of individuals just kind of evens out over the whole population.

Once the human dimension gets lost, it makes perfect sense to, for instance, lay a bunch of people off to make your numbers look better this quarter so you get your bonus, or to "send a message" that you're ready to respond to a dip in your stock price by "making the tough decisions".

All of which happens, basically, every damned day of the week. Damned straight that I, as long as I have a choice, will never work for a publicly traded company.

I'm not talking about full partnership for new hires. I'm talking about, frex, that in a company that's basically healthy and making money, you are willing to accept being a point or two short on your financial projections as a reasonable tradeoff for keeping your people on board.

They work hard for you. Get their back.

That, unfortunately, does *not* happen every day of the week. To the contrary.

Want to eliminate the adversarial relationship between capital, management, and labor? That's the place where it will happen.

All of this is, naturally, the editorial "you".

I suspect it has something to do with globalization. People doing rote or relatively unskilled jobs were replaced by lower paid workers oversees.

That's certainly true in manufacturing, probably also, if less so, in other industries.

I appreciate your comment about giving the guy over their a job, but there are people here who need jobs as well. It's not like more jobs are being created, they're just being moved around.

What it really comes down to is maximizing profit for capital investors. If, net/net, the cost of doing something really far away is less than paying somebody local to do it, the guy overseas will get the job.

The fact that this has, basically, hollowed out the economy of entire industries and regions of the US is not seen as being a compelling argument to not do it.

The numbers are better for the capital investors, and maybe for management, so there is *no question* that it's the thing to do.

Right now, the US GDP by sector is:

Agriculture - 0.9%
Industry - 20.6%
Services - 78.5%

We are, as a nation and as individuals, massively in the red. Nobody saves money. The crisis we currently face was sparked by a downturn in housing prices, but it's fundamentally about the fact that, through the wonders of financial number-crunching, nobody could freaking figure out if the paper they held was worth a damned thing. That, and the fact that there was so much money flying around looking for a home that the best place anyone could find to park it was in a bunch of side bets.

Nobody freaking makes anything anymore. Our entire economy is based on buying stuff on credit. There is no "there" there.

So, it's great that your living room furniture is now made in Thailand rather than High Point, and that you not only saved a couple of hundred bucks on it, but the guy that put the deal together made an extra hundred on top of that.

But we're f*cked.

Thanks -

[now_what]

I hate lockstep seniority rules which seem very common in union shops.

Why should unions care what you think about their rules?

Does the screen actors guild follow first hired last fired? Why not, don't they follow the one true union handbook? Oh, no they don't. The union decided on what was in the best interest of its members. Funny how unions do that. When they make mistakes, you call for the elimination of unions. When corporations make mistakes, you call for the elimination of unions. Apparently this makes sense to you.

Do some unions follow seniority rules? Of course, and they did so because they decided it was in the best interests of their members. No, they didn't consult you first.

Why would they decide seniority rules were in their interests? There's a whole history there. You should read some of it. A lot of people died to get the right to make those rules, a lot of blood was shed. There were good reasons for them to do that, there are good reasons still. From your arguments here, you know none of them, or you think they are reasons that were true in the past rather than reasons that are true today more than at any time since 1929.

[ThatLeftTurnInABQ]

Geez left turn I'm begining to think you're angling for farber's job.

I wish. But in my heart I know that i.am.not.worthy.

Someday when I have much better writing and research skillz, I hope to be worthy of tending the flame (on alternate weekends) at Gary's shrine. Until then, I'm just some guy on the internet who reads too many books.

But the larger point is that I don't see any fix here. But given the trillions thrown at wall street, I guess I'm pro auto bailout, albeit in a "if it's going to be that kind of party I may as well stick my dick in the mashed potatos" kind of way

LOL

But don't try that at now_what's house, where my understanding (gleaned from the Meat thread) is that there is a strict policy of "guests may not screw around with the food".

Ditto on the auto-bailout. What is good enough for AIG is good enough for Detroit.

[liberal japonicus]

About seniority rules, I think it makes sense to pay people more as they have experience. If you disagree with that, d4dave, perhaps you can explain why every workplace I think of has some sort of seniority system. I find it hard to imagine someone claiming that experience isn't a valuable commodity, be it in teaching, law, real estate management or whatever.

[d'd'd'docile dave]

//I'm not talking about full partnership for new hires. I'm talking about, frex, that in a company that's basically healthy and making money, you are willing to accept being a point or two short on your financial projections as a reasonable tradeoff for keeping your people on board.

They work hard for you. Get their back.//

I'm in agreement.

[d'd'd'docile dave]

Lib Japon

In my business I pay a basic wage plus a liberal bonus based on how well the business does. The basic wage is based on my perception of a person's value to my business. The basic wage is adjusted from time to time based on changed responsibilities. A guy may have the same basic wage for years or he may go up several times in one year - it all depends. Every year there is an inflation adjustment based on the cpi so that a guy's basic wage won't decline in real terms.

The size of the bonus pool is based on a percentage of the businesses profits. I allocate it among all the workers subjectively based on my perception of their performance. 10% of the basic wage is probably a minimum a person would get but 50% or even 100% of the basic wage happens too.

The basic wage is not huge, but it is enough. My primary business is real estate development where projects tend to take several years. I end up putting money in for three years with the hope of getting alot out in the fourth or fifth year. Cost control and low overhead is important, thus the merely adequate basic wages. But everyone shares in the bounty when it comes.

[liberal japonicus]

d4dave,
not every profession is structured so that it is possible to calculate a bonus. And in places where it can be, the unscrupulous can game the system. How do you propose that your notion of a liberal bonus be applied to them? And when you say 'I allot it subjectively', surely you see the problem that could arise?

[d'd'd'docile dave]

// How do you propose that your notion of a liberal bonus be applied to them?//

In the same way really. It would just be more formalized. There'd be a companywide pool set at some percentage of overall profits - say 20% or so. Metrics would be set for each division, department, small group, and individual in consultation with the relevant party. There would essentially be annual goal setting. Metrics would be reviewed at least quarterly so parties know where they stand.

It's not so hard. Management should be setting metrics in conjunction with their staff anyway so it shouldn't be hard to do. Maybe instead of the arbitrary 20% figure you might try to divide profits between capital and labor in some other way. For example, if the basic wage can be said to be a more or less fair return on labor, maybe you'd set a capital yield that is thought to be historically 'fair'. I.e. maybe equity historically returns 11% or so. If total wages equal x and capital multiplied by the rate equals y then you'd establish a ratio. Labor and capital would share the earnings over the historical rate in the ratio of x:y.

I don't know. It's just an idea.

[Scottybill]

People, let me tell you why we fiscal conservatives are suspicious of macro stimulus strategies - it's because when times are GOOD, you macro-types want to spend more money, and when times are BAD, you want to spend more money, always on the same projects and priorities that never seem to work well anyhow. It looks to us like you're just looking for excuses to spend more money. We think a lot of federal spending is actually harmful and counterproductive, and intended to foster people's dependence on politicians. We just don't trust the government to make wise decisions with our tax money, or the money we're borrowing from overseas sovereign wealth funds, or the money the Fed is printing by the truckload. The federal government is already looking at 40 to 50 trillion dollars in unfunded liabilities for social security and medicare, and we're borrowing more money by the minute. We're worried that this deficit spending is saddling our children and grandchildren with punitive levels of taxation without even letting them vote on the question. We believe that tax revenues and jobs are best produced by the efficient allocation of capital, and the most efficient system for allocating it is the free market. Far from perfect, but better than letting a bunch of elected jackasses pick winners and losers from the comfort of a subcommittee meeting. If all these macro stimulus decisions are being made by a jury of blindfolded archangels with perfect judgment, we'll be a lot more comfortable. But we don't see many wings and halos in Washington, so we'll just keep arguing for lower taxes and regulation. Before anybody questions my credentials, I'll say my BA is in journalism, I'm a civil servant and I live in Michigan surrounded by the UAW. I've come to my conclusions after studying both sets of arguments.