The 6 Pack Economist

I know that it makes people feel so much better when they can go after the rich corporate fat cats.  Of course it all turns to tears when they realize the rich fat cat was the one who was paying their salaries.  Even microsoft is threatening to move jobs overseas.

When are people going to learn that if you eat the golden goose it won’t lay any more eggs.  But it makes a bunch of short-sighted people feel better.  Everyone who works for corporations please raise your hand.  Ok that is just about everyone who still has a job.  And everyone who works at a school raise your hands too.  The corporations give educational institutions a lot of money.  So in a way you too work for the corporations.

I believe that corporate income taxes are simply counter productive.  The reason being is simple, when you have corporation the corporation has to employ people.  When people are employed by a private company then the state does not need to pay them to not come after the government with pitchforks. 

Employment for the average person has a lot of advantages both for the person but also for the government.  When a person is working they are less likely commit crime, protest in the street, and in general are just so much less annoying for the government.  After all if someone is home all day watching TV, surfing the internet, or just hanging around they so much more likely to start causing trouble.  This just requires more police, fireman, and morgue employees.

Employment is not just good for the government either it is also good for the person doing the work.  Let us assume the person doing the work at least believes that what they are doing is meaningful to someone (which is one the failures of communism more on this in a later post).  So the person has a job that they believe is doing some type of good, they don’t have wake up in the morning thinking they have the greatest job in the world for this to work either.  Said person has a purpose to their life.  They feel that they have some form of control.  In addition they have a strong separation between free time and work time.  This is very important as someone who either works all the time is burden to themselves, and a person who plays all the time is burden to everyone else.

Now that we have established that employment of people is a good thing we can also establish that we need something to employ them.  Well that is where corporations come into play.  Unlike small businesses (which are just smaller corporations), corporations have to employ a lot of low skilled specialists, in addition the usual skilled specialists.  These types of low skilled specialists must be drawn from the local population.  These are positions like mail room clerks,  janitors, the random copy and printer lady, computer helpdesk people (these are little more skilled), and we can’t forget the random hottie that always ends up at the front desk to greet people.  We all know that she is not going to be climbing the corporate ladder, maybe the corporate pole, but not the ladder.

See all these positions must be filled by the local population of the corporate office.  And when the government makes it very hard to do business and make a profit the corporation will move its offices.  There are plenty of countries in the world who would be more than happy to have these corporations put their shell headquarters in their country. 

Given all the bonuses I have outlined about the employment opportunities of keeping corporations happy why piss them off with higher taxes?  Because some left wing nut bags who can’t see the end result of their own jealously leads them to?

What fascinates the hell out of me is that some very smart people do not understand that not everyone can be rich.  Nor can everyone be poor either.  We are rich or we are poor based on the people around us.  Both Ted Rall and Cynthia Tucker do not understand how basic everyday economics work.

Although both are correct in criticizing the executive pay of these failing institutions, what they fail to recognize is aside from pulling back a little bit on the pay for CEO’s there will always be both wealthy, rich, poor, and a bunch of levels in the middle.  I also made a very conscience decision putting in both wealthy and rich as different levels. 

To the primary reason I wanted to post about tonight.  The amount of middle class people has not changed in percentage of the population.   The primary reason has nothing to do with economic policies or anything that complicated.  The middle class are the people who make more than the lower class but less than the rich.  The factory workers were never really middle class.  The manager at the plant was middle class and the diner owner was middle class.  Could the factory worker live comfortably with the two point five kids and a white picket fence?  Maybe it really depended on the supply of houses with white picket fences.  But that is my point.  What does the average person today have in comparison to thirty years ago?

Today the average household owns two cars (with reliability and features Mercedes Benz did not have), a HDTV in one or two rooms, air conditioning in almost every room, cell phones, cable TV with 100 plus channels, a computer with internet, some type of game system, and health care that those in the 1970s could only dream of (even if it’s expensive).   

Mean while in the 1970s when according to Cynthia Tucker all was great, the average American made car was complete junk, went 0-60 in 3.4 months, got about 15mpg, and were good for about 80K miles.  Air conditioning was something only the rich people in the neighborhood had.  A house might have two TVs only one worked.  Cable was something for rich people also, if they even had it all.  There were no cells phones.  Ok that last one is bonus.  The personal computer was just a series of blinking lights.  Geeks really were geeks.  The internet was for even bigger geeks.  And healthcare although cheap was abysmal by today’s standards. 

So where did all the productivity gains that the rich people ran away with go? It came back to the “poor people” in the form of better stuff for “poor people”.   One can argue that all the stuff is not worth it, but when it comes to economics the stuff and the services that people can have does matter.  Also if someone did not want the stuff they do not need to purchase the items.  

The second point I want to make is directly related to the statistic mentioned in Cynthia’s editorial.  I don’t think there is anything wrong with it.  I think it actually shows exactly what it should show.

A few years ago, Earl Wysong of Indiana University and two colleagues published a study on social mobility in this country. As outlined in the Economist, a right-leaning British news magazine, they “compared the incomes of 2,749 father-and-son pairs from 1979 to 1998 and found that few sons had moved up the class ladder. Nearly 70 percent of the sons in 1998 had remained at the same level or were doing worse than their fathers in 1979. The greatest social mobility occurred in those families already at the top of the income ladder,” the magazine reported.

So 70 percent of the study did not move up the income ladder?  No kidding.  Not everyone can move up the income ladder since they have to move past someone else and then that person would move down the income ladder.   I would bet the statistics would come out that 1/3 moved up, 1/3 stayed the same and 1/3 went down.  Also 66% is really close to “almost 70%”. 

The second part of the statement deals with that most of the social mobility was in the upper income brackets.  This too can be easily explained without it coming down to something evil republicans did by reducing taxes.  In 1979 a college degree was still a premium and those with them came from more affluent backgrounds.  While a high school education pre 1979 may have been good enough, after that is simply was not good enough.  One needed to have something besides a high school education.  So simply showing that those who were affluent made better gains was primarily because they had access to a college education and valued it earlier.  In addition it tends to the children of the rich that become the wealthy.  The grandchildren become drug addicts and home move porn stars.  So it sort of works out in the end.

Did some people become obscenely rich, while others were brushed to the wayside?  Yes.  Do I wish that people could live in a minimal of comfort even when they are on the lowest rungs of the economic ladder?  Yes.  And they do, but in comparison to the truly poor in this world they are doing pretty damn good, even if everyone else around them is doing better.

So who is to blame at the UAW for this mess?  My last post talked about the corporations blame.  This one will go into the UAW blame.

 I never begrudge someone from making a good living and trying to become rich.  I hope to be there one day.  What I don’t like is when it gets abused.  And looking at the salaries of the UAW, I firmly believe that it was abused.  

 Unions can be just as short sighted as Corporations and this is definitely the case with the big 3.  Who signed these contracts?  147K a year (salary plus benefits) for an assembly-line worker?  Is there a special talent needed for this or perhaps many years of technical training?  Just a high school degree and a good work ethic (plus a connection I am sure) is all that is needed. 

 I think what we have here is a supply and demand problem.  I can’t believe that the supply of high school grads with a good work ethic is so low that these assembly line workers can demand such a high salary (I would love to get the salary by the way).  I will never begrudge someone from getting a good salary but this is just ridiculous.

 Was there a time when the big 3 controlled all and were so full of profits that they could pay these salaries? Sure there was, oddly enough it was when they were making some of their worst products.  The unions pushed to get ever little bit they could out of the corps with the idea that they were only going to get stronger and would be able to pay these benefits.  But alas like all things, this was soon to change. 

 Now Detroit can no longer pay these extravagant salaries (the upper management too).  Detroit needs to change and change fast.  They need to cut costs and make better cars.  Some people will have be cut or everyone will have to be cut.

 Figures, just when they make a car I am really excited about too.

 NOTE: Although the orginal salary was based on a shady number, the real number is closer to $55 an hour for pay and benefits or about 100,000 a year.  Still seems like their would be a larger supply of people willing to the do the job then the demand for the jobs but who knows.

So the Big 3 American Auto companies look like they are screwed.  I have mixed feelings about this.  First off I think they put themselves into this situation, from the CEOs to the UAW.  On the other hand I always like my Fords, Dodges, and Cadillac (I drive two GM products right now) so I would hate to think that they would be gone.

 I do believe that the big 3  treated their customers like a bunch of dumb hicks for way to long especially from 70’s to late 90’s.  In the late 90’s even GM realized they may have to put money into research and development.  In addition they had to at least compete with the imports (Japanese, the Germans have never been too much better then the domestics) on the issue of quality.  The Japanese put out a very reliable automobile in most segments.  By the time the 1990s came around the Japanese cars have established a reputation for reliable cars (sure the wheel wells rusted out, but it still ran).  Meanwhile GMs, Fords, and Chryslers were making a reputation for inferior quality.  The market began to change and the big 3 refused to recognize this.  Unfortunately once your reputation for long-term reliability is lost it takes a long time to get back. 

 The only thing that saved the big 3 or at least staved off this problem for a few more years was the low-gas prices, OJ Simpson making Ford Broncos famous, and a series of bad winters in the north east.  The SUV and Big Trucks ruled the road and the Big 3 were good at making them.  Even during the dark days of the “80’s crappy domestics” the American companies were good at rear wheel drive V8s. 

 In what has become typical of American corporations all emphasis was on short term profitability.  R&D and marketing went into SUVs while the lower profit cars languished.  The Japanese were able to make steady gains within in the car market which was virtually ceded to them by the domestics.  Other then ford, which had a few nice cars in the late 90’s, looking for a domestic car was pretty disappointing.  All of their money or profit was going to marketing SUVs.  These short sighted fools held onto a belief that gas prices will never rise or that the imports will not start making some fine SUVs to compete with the domestic golden goose.

 In late 2006 the weather forecast was in and a perfect storm was coming.  Gas prices were rising, imports were making better SUVs, and a recession was on the horizon.  The big 3 had all of their eggs in one basket and that basket was smashed.  The innovation and quality improvements that they made in their product came too late, the well they poisoned for so long was going to take a lot longer clean up. 

 
My next post will go into what the UAW did to help cause this.

I think that what will eventually kill capitalism is these moron CEOs.  Capitalism depends on that the people who are rewarded, are also to take the risk.  But the latest issues with these CEOs who have golden parachutes have thrown the whole system to the wolves.

 I have no problem with the money they were paid per se, what I have a problem with is the amount of money they made with little to no risk.  They screwup and are forced to resign, the company is in ruins and they walk away with a multi-million dollar severance package.  That’s like walking into your neightbors house and throwing your feces on the wall and charging them for painting their house.

 This type of compensation for failure just pisses a lot of people who then vote in a socialist who say that they will take care of everything and tax the rich.  PS taxing the rich never really works.  They tax them which just trickles down to the person who put the socialist in office to begin with.  Which in turn brings more taxes on you etc….  I have whole posts on this crap.

 I would love for these guys to be hung out to dry.  Lets be honest most of these guys are not that smart anyway.  They really do not have some grand talent that makes them really deserve this kind of money. Then again they are not that stupid either they were able to set themselves up in such a way that if they succeed they make money and if they fail they make money and get a vacation.  I guess in the end they are smarter then I am.

 How to solve the problem?  I don’t know.  But rewards for failure should not be part of it.  I think the top salary should be limited.  I know it sounds socialist but the guaranteed pay should be limited.  Everything else should be bonuses.  With something nominal for becoming disabled or whatever, but the principle is simple.  Do good get stuff, do bad don’t get stuff.

 There should also be rewards for post retirement kind of like a five year bonus plan.  One bonus for yearly achievement and then more bonuses for two, three, four, and five year achievement.  This way short term actions that kill the company long run will not be undertaken.  It could be a dividend based system or some other method. 

 Think about it this way.  You go into your neighbor’s house (your neighbor had some bad luck).  You promise to make your neighbor more money this year then your neighbor made last year. They agree (we are going to pretend they really don’t know you too well).  Afterwards you sell everything they have including the house.  Take your 50% cut and leave them with the shirts on their back.  You on the other hand get to walk away with your 50% cut. At the end of the year they have more money but the next year does not seem too good for them.

 The only real punishment for these crooks is to empty their bank accounts and sell their assets.  Then force them to live off a janitor’s salary for 5 years with no-contact of their former business associates.  Then again their business associates are the same people giving out the punishment so fat chance there (Politicians are cheap).