Archive for September, 2011

The Real Crime? Calling Social Security a Ponzi Scheme

Sunday, September 25th, 2011


In a better world, words and facts would be the only things that matter in a serious discussion about the future of the country.

Sadly, in this world, the facts are that the current crop of Republican presidential candidates (backed by their senior advisors and supporters) is so dramatically distorting the meaning of two words in the English language that the future is in serious jeopardy.

Ponzi Scheme happily rolls off the tongues of Rick Perry, former Minnesota Governor Tim Pawlenty, Rush Limbaugh, University of Maryland economist Peter Morici and many others.

(I guess I should bang my head against a wall for deluding myself that they really don’t know what a Ponzi Scheme is. Of course they do.)

But let’s refresh. Here is the standard definition of this phrase in the English language.
Ponzi Scheme: “a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.” (For you keeners, here’s the SEC definition.)

The crucial word here is “fraud.” So just to be clear, let’s review what fraud means.
Fraud: “A wrongful or criminal deception intended to result in financial or personal gain.”
Now, let’s take this a little further, sticking with facts.

The Social Security Act was approved by the Congress of the United States and then signed into law by President Roosevelt on August 14, 1935. It has never been overturned by the US Supreme Court in the 76 years since then.

Who — exactly — over the past three-quarters of a century has criminally benefited from Social Security?

Social Security’s serious challenges — and there are many — derive from huge changes in the demographic makeup of the country, startling shifts in the ratio of workers to recipients, dramatic differences in the structure of the country’s economy since the 1930s, questions of appropriate contribution rates and debates over rising administration costs, among other factors.

Crime, however, ain’t one of the problems facing the system.

The real “deception” here is the craven mislabeling of Social Security as a Ponzi Scheme by so many Republicans. Their blatant distortions about Social Security are clearly — and only! — designed to result in “personal gain” for themselves during this election cycle.

Gee, doesn’t that sound like fraud?

Why “Welfare Capitalism” Could Still Work For All

Monday, September 19th, 2011


Bleak. Desperate. Urgent. The words leap from almost every headline about the state of the American economy these days. Official unemployment is stuck north of 9%, while the effective rate is likely above 16%. Millions of people are suffering.

Meanwhile, businesses of all sizes are sitting on mountains of cash, reluctant to hire workers — even those laid off in the past three years — because they expect things are going to get worse. Corporate leaders say they want to protect employees, but it’s hard for most Americans to believe a CEO who argues that “we’re all in this together.”

There was a time in American history when a few firms — some, very big — tried, and often succeeded, in living by the creed that it is possible to protect people as well as profits.

The Rise of Welfare Capitalism

From the last two decades of the 19th century to the start of World War II, “welfare capitalism” was part of this country’s economic landscape. There was never a precise definition of what welfare capitalism comprised. But starting around 1880, some business leaders came to the conclusion that the incredible level of strife inside their companies — perpetual, sometimes violent, war between workers and management — was just too inefficient to continue. Endless strikes, employee turnover rates of 200% to 300% a year — neither side was coming out a winner.

Gradually, a few companies began to reshape day-to-day operations to improve both working conditions and the size of weekly pay packets in the hope that employees might see it in their interest to reciprocate by working more productively.

It’s also undeniable that many of these employers hoped to convince their workers that unions (then in the ascendency, terrifying most owners) were unnecessary. Coercive? Sometimes yes.

Harvard historian Lizabeth Cohen identified five basic elements of welfare capitalism:

1. A desire to improve workplace relations.
2. Financial incentives to raise productivity.
3. Experiments with shop-floor democracy (as long as it didn’t include unions).
4. Programs to help the lives of employees outside of work.
5. Shouldering greater civic responsibilities.

And of course, the prime directive: to make as much profit as possible over the long term.

Who Were Welfare Capitalist Firms?

Some of the biggest names in the country embraced many of the basic principles, including Kodak (EK), Sears Roebuck, Procter & Gamble (PG), and General Electric (GE). None were perfect employers, some bent the concepts to favor management, others intruded into the private lives of employees, but overall, the idea that a company could and should provide some degree of security for its workers — even for self-interested financial reasons — became fairly commonplace.

These companies were generally both profitable and innovative. Workers weren’t necessarily whistling happily as they trudged onto the factory floor each morning, but the basic employment bargain — work hard in return for a decent, secure wage — seemed fair to many.

John Commons, the economist often regarded as the “spiritual father” of the New Deal, said the best welfare-capitalist firms were “so far ahead of the game that trade unions cannot touch them. … Conditions are better, wages are better, security is better than unions can deliver.”

The Decline of a Good Idea

Sadly, during the Great Depression, most welfare-capitalist firms abandoned the key elements in order to survive.

Was that inevitable?” has been a rich topic for debate by scholars ever since, with some arguing that welfare capitalism was simply too new to weather such a storm, while others claim that the increased security offered to workers was inherently too costly.

Some did survive, of course, evolving with the times, like the privately held S.C. Johnson, the huge maker of household cleaning products. Cleveland’s Lincoln Electric (LECO), one of the most successful manufacturing firms in the country, has retained its technological leadership and profitability over the past 100 years while avoiding layoffs for nearly three-quarters of a century and paying wages that have consistently exceeded the industry average.

Nearly 30 years ago, Harvard economist Martin Weitzman wrote The Share Economy, in which he argued that if significantly more firms shared profits with their employees, it would go a long way to ensuring a much more stable national economy — to the mutual benefit of workers, investors, and the country as a whole. The New York Times called the book “the most important contribution to economic thought since Keynes.”

Still About the Bottom Line

More recently, the concept of shared capitalism, drawing on the insights and research of leading economists such as Richard Freeman and Doug Kruse, has been receiving increased public attention. (A major challenge, understandably, is developing the mutual sense of trust that short-term sacrifices are worth the pain for long-term gains.)

None of these ideas for running a successful business in America — from welfare capitalism to shared capitalism — are based on altruism. That’s a nonstarter in this economy (bemoan that as you wish).

But surely it’s time to revisit the idea that a corporation can remain highly profitable over the long term by providing a floor of economic security for its employees — given that far too many American employers are doing neither.

Layoffs Leave Everyone Worse Off

Thursday, September 15th, 2011


The script for a layoff announcement in America these days is numbingly predictable, whether delivered by email or live at a beleaguered head office: The CEO reviews the tough economic landscape facing the firm, promises that “our employees will remain our most valued asset,” then announces that 10% or 15% or more of the workers will be let go while claiming that “I had no other option.”

Given the financial and emotional carnage that layoffs have inflicted during the Great Recession — on workers, their families, communities, the whole country — it would be reassuring to know two things: first, that those CEOs could justify exactly how a layoff was going to forestall impending economic disaster; and, second, that they really had explored all their options.

Sadly, there is little evidence that either of those things take place in most boardrooms across America.

The Alleged Efficiency of Layoffs

There are legitimate alternatives to layoffs. Consider Cleveland-based Lincoln Electric (LECO) — a company that has not given a single employee a permanent pink slip for economic reasons since 1948. Lincoln found other ways to go lean, like reducing hours, instituting hiring freezes, and offering early retirement incentives to volunteers.

Lincoln’s no-layoff policy is the outlier in corporate America. It shouldn’t be.

Evidence is mounting that layoffs represent an extraordinarily risky and costly business strategy. Far too few executives are aware of what they unleash on their own firm when they downsize or rationalize (or whatever other antiseptic euphemism they have for destroying people’s lives).

Peter Cappelli — from the University of Pennsylvania’s Wharton School, and a leading expert on layoffs — is depressingly blunt about the layoff thought process used by the majority of CEOs in America: He says most have absolutely no idea if cutting employees is a good strategy.

“They don’t have a systematic way to assess what is the net present value of the decision whether or not to lay people off,” he says. Yet these same executives can make detailed calculations for virtually every other decision that comes across their desks.

The Real Cost of Pulling the Layoff Lever

Given the apparent ease with which those running U.S. businesses have been pulling the layoff lever, we should demand that they think more rigorously — and much further ahead — about these issues than they do now.

CEOs should start by examining the actual costs of reducing headcount in tough times. Calculating the impact of a layoff on the morale of those who survive is hard, but not impossible.

Increasingly, research demonstrates that the stress on those left to pick up the slack leads to higher costs in the long run. The survivors wonder, “Am I next?”; instead of waiting for the answer, they head for the exits. It’s not uncommon that, for every worker formally laid off, up to five more voluntarily decide to leave within a year.

And what happens when business starts to pick up again? Employers find themselves understaffed — and scrambling to survive. The costly race to recruit and hire replacements can easily wipe out the expected savings used to justify the initial layoff.

Employee morale isn’t all that suffers when workers are let go. When remaining workers live in fear for their jobs, does anyone rationally expect the quality of production not to deteriorate?

It happened to Caterpillar (CAT) in the 1990s, when the company endured near-continuous labor strife. Caterpillar’s customers (and who counts more?) consistently rated the quality of the firm’s tractors and heavy equipment produced in those years as significantly lower than normal.

The cost of that loss of confidence is estimated to have been nearly half a billion dollars — and that’s not the kind of money shareholders can just let slide.

Who Really Makes Money When Heads Roll?

“A layoff will protect our stock valuation” is one of the perverse justifications CEOs use when trotting out their plans to shareholders and analysts. Yet, increasingly, research shows that it’s simply untrue.

A study by Bain and Company found that while very small layoffs may have little effect on share value, a public company that slashes 10% or more of its workforce — and that’s not rare! — will see its stock drop nearly 40% in value, and that it may take years to recover. (Take note, Research In Motion (RIMM) shareholders — the BlackBerry maker cut 10.5% of its workforce this summer.)

Another global review of the effect of layoffs on stock valuations is equally grim: “[L]ayoff announcements have an overall negative effect on stock prices … whatever the country, the time period or the type of firm considered.”

So, we know layoffs are horrible for those who lose their jobs. And we also know that cutting workers doesn’t reward shareholders. So who wins when heads roll? You probably won’t be shocked at the answer to that question.

Cut Headcount, Boost Paycheck

Researchers at the University of Arkansas tracked the earnings of executives at major U.S. corporations who ordered 229 layoffs during the 1990s. A year after the layoff, average total CEO compensation was up 23%!

Granted, the ’90s was a decade of growth. Now, however, the growing chasm between bloated CEO earnings and poor corporate performance (which clearly includes ordering a layoff) is fueling widespread public suspicion that far too many compensation systems are badly skewed in favor of those at the top. (Check out William Lazonick’s work on this issue.)

Lacking convincing evidence that layoffs represent an effective long-term business strategy — even in emergencies — it’s time to get much tougher on corporate leaders who claim that they have no other option.