Country and Company: Part I - Divergent Goals
While each economic crisis tends to drive the preceding one out of our minds, it is worthwhile to review the recent sequence of events and ask where did all this come from? First we had globalization and offshoring destroying productive industries and, with them, productive and well-paying manufacturing jobs. Then it was the financial crisis, with the sudden disappearance of familiar names like Merrill Lynch and Lehman Brothers; next came the plunge in share prices on the stock exchanges followed by the auto company crisis. Now we have a full-blown economic recession with job losses and uncertainty everywhere.
While it is tempting to blame this succession of crises on greedy executives, sub-prime mortgage pushers and others of that ilk, it is in fact much more a system problem than a sudden widespread collapse of human nature. Since 1980 we have gradually developed an economic system that drives corporations to maximize profit at any cost. If corporate leaders conform to this goal, they are rewarded with huge sums. If they don't, they are likely to be replaced by those who do.
If you are the CEO of a major firm and can increase your profits by offshoring, why not do it? You would be successfully fulfilling what has become the dominant purpose of the corporation: to maximize profit at all costs. Wall Street will cheer, economists will say that what you are doing is inevitable because of "comparative advantage," and your compensation -- tied to stock options and bonuses -- will soar to heights that earlier generations of CEOs never dreamed of. If you don't relocate some of your operations offshore and your competitors do -- and increase their own profits in the process -- you are unlikely to last.
If you head a major financial services firm and see the high profits that others are making on dubious subprime mortgage-based securities you might well say, as Chuck Prince, the former CEO of Citigroup, did in 2007: "As long as the music is playing, you've got to get up and dance." Commenting on Chuck Prince's remark, John Gapper wrote in the Financial Times, "His offense was not that he misunderstood or misstated how banks have operated over the past few years but that he blurted out the truth rather too openly."
Although this pursuit of profit at any price may well have a negative effect on the economy as a whole, the response of the previous administration was to endorse offshoring and maintain unlimited faith in the operation of free markets. In the absence of any accepted view opposing what was and is going on, how can we expect the individual CEOs and boards of directors to act against their own self-interest?
To a large extent our government has not yet realized that the self-interests of our corporations, especially our large global corporations, can diverge from the interests of our country. We need to find ways to fundamentally change the motivations of corporations to align with those of our country.
Is there an alternative to this profit-before-everything approach? Yes there is, and it is a very natural one. Let us take a historical perspective.
A Historical View
From the earliest times until the middle of the 19th century most of the world's work was done on small farms or in small shops. This traditional world was dominated by agriculture and the need to provide food. Large organizations, with the exception of the Army, the Navy and the church, were almost nonexistent. This was the also the world in which Adam Smith and David Ricardo lived and which they described in their influential economic writings.
The Industrial Revolution of the late 1800's changed that world. Steel mills and factories sprang up and the agricultural population shrank as people migrated on a large scale to the new centers of production. Economic activity became increasingly concentrated in factories, and production increasingly became the province of large organizations. Even in agriculture, the family farm increasingly gave way to larger agricultural corporations.
This emergence of industry and of steadily improving technology, which of course continues today, has fundamentally changed our way of life. The goods we consume today cannot be made at home, on a family farm, or in a small shop; they are too complex and require large organizations to create them. You cannot manufacture a car in your garage; it takes a large-scale organization to do it. The food we eat is not produced by a family on a nearby farm, but is made by large organizations on highly mechanized farms with machinery produced by other large organizations, and then transported on highly organized networks to huge outlets. The same is increasingly true of services; you cannot organize a telephone network on your own.
Today's goods and services are primarily created by organizations, not individuals. To contribute to the economy today, an individual usually must be part of an organization. Being part of an organization is what most people must do in the modern world to earn a living and support themselves and their families.
Therefore the fundamental social role of organizations, usually corporations, is both to produce the goods and services that are consumed in the modern world and to enable people to participate in that production, so that they earn a share of the value produced for themselves and their families.
In view of all this, there should be two goals that the United States wants of its corporations. I call them the Ketchum Goals as I am writing this in Ketchum, Idaho.
The Ketchum Goals:
(1) We want companies that are productive, each contributing as much as possible to the total of goods and services produced in the United States. It is the sum of these efforts that make America a prosperous nation.
(2) We want these companies to provide productive and well-paying jobs so that the value the companies create is widely shared by Americans. It is this widely shared wealth that gives the nation and its people economic security and stability.
What we want and need from our corporations is significantly different from the present goal of profit maximization. What we want and need is more akin to the broader role that corporations played during the prosperous 1950's and 1960's when interests other than those of the top executives and large shareholders were also taken into account. We must realize that since that time the goals of this country and the goals of its corporations have diverged.
Are there things we can do to move toward the Ketchum goals and change the system that is producing such destructive results?
It is beyond question that other countries are actively working to advance the first goal the development of productive industries, in their own countries. They often do so by employing an active government bureaucracy specializing in industrial development. These countries are subsidizing important industries and cutting special deals with U.S. companies to bring their technology and know-how in exchange for financial advantages or market access.
However, the means employed abroad are not those that have historically been used at the national level in the United States and are often not well suited to our tradition or our government's actual capabilities.
So the question remains: are there things that our country can do to advance these two goals? Can we foster productive companies and industries? Can we provide individuals with productive jobs and a good standard of living? Are there specific actions that fit our tradition of minimal government interference and build on our actual capabilities, and that can be pursued in a globalizing world?
In Part II of Country and Company we will address this question and find that the answer is a very definite "yes." Once we have a clear view of what the country needs from our corporations, we will find that there is no shortage of ways, compatible with our own history, to move toward these goals. There are incentives that we can give corporations that make it profitable for them to act in ways that benefit the country; there are incentives that will attract more productive companies; and there are ways to better take into account the interests of all those who contribute to economic growth. In short, In Part II we will describe how to better align country and company goals.
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OT: I think an american company that out-sources jobs to foreign lands should be branded Un-Patriotic.
The bottom line isn't just money it's people. Invest in the American peopleand the money you lose by not paying people in other coutries below minimum wages will be returned to you in the form of Brand Loyalty.
The existence of huge transnational corporations is the problem. We've let them get so big and powerful that they're ruling the world. With annual revenues that exceed the GDP of most nations, they expect not only people but governments to serve them. The only time you'll hear one of these companies calling itself "American" is when it wants contracts, bailouts or policy and tax concessions from Washington.
The same lack of loyalty is evident among the uber-rich who shelter their income offshore.
Patriotism -- that's for the little people who pay taxes so the tycoons and corporations don't have to and staff the armies that protect the grillionaires' sources of wealth.
Subprime mortgages securitized are a good example of what investment bank analysts see and effect. Assume a $100,000 mortage with a 30 yr fixed rate and monthly pay of $665.30. Goes on the books of your credit union at $100,000. Now... Lehman purchases the loan and securitizes the flow assuming a 10 year maturity to yield 6.0%. Lehman takes $107,400 for that credit union asset that was booked at $100,000. Think of $10 trillion of mortgage loans that repeat and a $700 billion slice for created wealth by the investment bank. This rate differentiation, a 7.0% loan to you, sold to yield 6.0% (when fed rates are artificially low) in the bond market with triple A ratings and a credit default swap insuring them are the game that has been played for this entire decade. Until it popped about a year ago. The premium is wealth produced by the investment bank but as you can see, it really adds nothing to the economy and indeed, taken to its length pops the whole balloon. This kind of thing did not happen in the 70s.
It adds a lot to the economy as it results in higher investment, not only in the US but worldwide. The period from 2002 to late 2008 was the greatest global economic boom since the 1970s, and it was even greater considering it was from a much higher base. This credit phenomenon in the US fueled a tremendous amount of investment in construction domestically and in production and construction abroad. It also fueled a tremendous increase in worldwide trade. Once we recover from the current recession, global economies will be able to build from the tremendous investments made in recent years. I believe American's tremendously underestimate the positive effects of the massive investments made worldwide in recent years. From 2002-2006 the US benefited from lower interest rates and greater access to consumer goods and services and increased trade, and benefited from 2006 through 2008 from greater exports and infrastructure spending. We will continue to build upon those advances once the global financial crisis passes.
"The period from 2002 to late 2008 was the greatest global economic boom since the 1970s, and it was even greater considering it was from a much higher base."
Utter nonsense; what you and other clueless free market fundies are referring to is the ILLUSION of a boom, at least in any longterm tangible sense. A lot of people made a lot of money based on HOT AIR, GREED, and SHORTSIGHTEDNESS. The World is defalting all around us, and protectionist provisions crafted to some degree by every nation in crisis. The bottom line to this is that when the smoke clears, the world market is going to be a very different animal.
You don't believe this I know, but you will discover the truth of it the hard way.
Trillions from the fed, trillions from the treasury. All of the nations investment banks effec tively failed (except for Goldman), the credit system on terminal care by the government, credit ratings agencies that are corrupt or meaningless, our very debt being scolded by our chief creditor, Communist China, and you think this was an era of meaningful investment? What happens, Dugan, if there is a run on the dollar? Think we may be approaching that point? If that happens, it's Weimar Republic time in the USA. It's not pretty.
GM's profits as a percentage of sales slumped from 10.3% in 1965 to 4.4% in 1980. In the 1950s and 1960s, GM was a very profitable company, while in the 1970s and early 1980s it was not. And it's not now again. There was a massive increase in private investment from 1946 to about 1966 precisely because there WAS very high profitability. When the potential for corporate profits began to dissipate from the late 60s to the early 1980s because of lower profitability, mostly because of union based wage-price inflation and subsequently high interest rates, private investment fell. Private investment increased again from the mid-80s onward, particularly in the 1990s, because profitability once again increased. High profitability means high investment which translates into low unemployment. Low profitability means low private investment which means high unemployment. And low profitability arising from union automatic cost of living adjustments translates into lower productivity and higher inflation.
Dugan,
And how about interest rates? What role do they play in the economy. Prime was 20% during the Reagan administration. I remember a home rate of 14%. Interest rates are now -0- at the fed rate level. Tell us about the high profitability during the Bush administration and tell us where that has put us, please?
High interest rates beginning in the late 60s and lasting until the early 80s were largely the result of union cost of living adjustments. These cola's forced companies to raise prices to maintain profitability, even during periods of lower demand/economic recession (and these companies were largely unsuccessful because of lower demand from higher interest rates). Fed Reserve Board Chairman increased interest rates in the late 70s/early 80s to increase unemployment and reduce wage pressures and thus inflation. It worked. About the Bush administration, there was tremendous profitability. Corporate profits increased tremendously as you can see by S&P earnings in this table:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm
"Since 1980 we have gradually developed an economic system that drives corporations to maximize profit at any cost."
Corporations have always tried to maximize profits. To think they didn't before 1980 is laughable.
Dugan,
You must be a youngster. In 1980 deregulation. Usury gonzo. Savings and loans that had government controlled rates they could pay ondeposits had an advantage, but they could only make home loans. (not to be securitized as subprime stink-bombs for immed profit). Then in the 90s with repeal of glass steagall. Airlines. Military contractors. Ever thought about what the 401(k) spigot of cash has done to the stock market? All post 80s, eh?
Carter deregulated most the transportation industry in the 1970s, and made a good start with deregulating tele-comm and energy as well. Much of the stock market boom in the 1980s was from pent up demand following the 1966 to 1982 bear market as well as due to the drop in inflation and massive ensuing bond market rally. The 1949-1966 equity bull market, don't forget, saw the Dow go from 150 to 1001 without any 401k cash, and much of it was due to the incredible profitability those companies saw. That period also saw a massive increase in stock prices of airlines and military contractors.
When you really think about it, social health care for all is really a cementing first step towards what you are looking for. Health care providers with profit as a motive are a bad bad way to set up. From a business international competive standpoint it helps business. From a business cost standpoiint, it is a boon to business. And as any compasionate conservative who really is a christian can tell you, it's just the right thing to do in the progress of civilization.
Sir,
I do hope and wish that you can spark something meaningful. Too many aspects of the life is however devoid of intellect to such an extent that, I believe, that is one of the priority things to do something about.
I'm all for profit maximization, so long as the profit is shared with ALL the employees (from CEO to Janitor), and a fair percentage in taxes paid.
That would actually be the trickle down theory Reagan touted.
But as long as Greed motivates competition (which may actually be it's true definition) then the Government must step in to check and balance (and sometimes punish) mega corporations.
BTW, if companies such as Walmart were to suddenly invest it's profits in its employees (Benefits and raises) then they could really turn this recession into a marketing coup.
I was with you until:
"What we want and need is more akin to the broader role that corporations played during the prosperous 1950's and 1960's when interests other than those of the top executives and large shareholders were also taken into account."
Can you give examples of "interests other than those of top execs and large shareholders" that these mid-century corporations took into account? In other words, when has the motive to maximize profit NOT driven the actions of a modern corporations?
I catch what he refers to, for example, Henry Ford stating that he wanted his workers to be paid well enough to afford the product. Airlines with beauty queens as stewardess and a service that surpasses anything today. Unions as a viable part of industry decisions.
Henry Ford was anti-union and one of the biggest opponents to FDRs New Deal. While it's true that Ford increased wages, he did so because there was incredibly low worker retention (turnover of as much as 390% a year in 1913) in his factories and not because he felt charitable. Plus, he cut jobs and started sub-contracting to sweatshops at the same time he increased wages.
"Since 1980 we have gradually developed an economic system that drives corporations to maximize profit at any cost. "
You probably meant to say you had such a system since "1780". No offense, but can there be anything worse than slavery to minimize cost and maximize profit?
I don't see any historical break that would have changed anything since 1980. People were greedy before that date and they are greedy since. Maybe the capitalists of the old days had a slightly longer outlook than the quarter by quarter analysts and the day traders, but that's pretty much the only difference. If they could get away with murder (literally) they always would.
It's a fine time for Jack Welch to say this now. Where was he when he was practicing the opposite?
The sole emphasis on profit maximization is also being questioned today even by Jack Welch, former GE CEO and long thought of as one of its leading practitioners, who told the Financial Times last week that the strict shareholder value movement was a dumb idea.
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