Monthly Archives: June 2017

Economics

True Victims of Theft

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We frequently hear the cry that the rich are stealing the rest of us blind.  This accusation is particularly pointed towards those receiving vast compensation as the CEOs of companies.  Their compensation is so high, that their annual earnings are multiples of what the rest of us will make in our entire lifetimes.  Fortune magazine reported that for 2016, the average CEO of a Fortune 500 company received $16.6 Million (up from $13.8M in 2014 and $10.5M in 2012).

The youth are particularly loud in their claims that the CEOs are stealing from them, and in their demands that they get some of this money.  Well, the youth are correct that these corporate chiefs are stealing; it’s just not from them.  The CEOs, it turns out, are stealing from people that own the companies they operate.

Before I went into management consulting, I used to think that only a small group of individuals possessed the knowledge, skill, talents and expertise required to successfully run a large company.  This is the rationale that executives would have you believe exists to justify their almost inconceivable compensation.  Then I started working with such people.  Got to know them, found out what they were doing and how they were doing it.  I then came to realize, firsthand, that these people are no different from the rest of us.  They are mostly intelligent, focused, and hard working.  But any large company has a host of such people that could competently run it.  The person at the top was no more successful or talented than these other business professionals; they just were in the right place at the right time, and with the right connections, when the advancement opportunity presented itself.

The CEO thieves run publicly held companies.  They don’t own the company, the shareholders collectively do.  If a company has issued a million shares of stock, each share represents a one millionth ownership of that company.  The shareholders actually own the entire company, all of its buildings, all of its assets.  The shareholders also have a right to the company’s profits.  If they so desire, shareholders can collectively demand distributions of the company’s profits.  Salaries and other compensation directly reduce a company’s profits.  So the CEO’s salary is a direct reduction on the profits the shareholders legally own.

There are two reasons CEOs get the compensation they do.  The first is because the board of the company approves it.  A company’s board is supposed to represent the interests of the shareholders.  Unfortunately for most shareholders, the board is usually made up of CEO cronies.  They get something like $50K a year to attend a paltry number of meetings, where they usually vote for things the CEO recommends, one of them being the CEO compensation package.  Shareholders get to vote for people nominated to join the board, but they are nominated by other people already on the board.  And since they like the pay and perks of being on the board, they usually aren’t going to make waves.

The second reason is that few shareholders care about getting their share of a company’s profits.  The vast majority of shareholders didn’t “invest” in the company for the long term.  Instead they buy the stock for a short period (months or weeks, or even minutes), and are interested only in the movement of the stock price while they hold the shares.  This is an aberration enabled by the speculative economic system we currently live in.

What to Do

CEO compensation needs to be brought back to reality.  Historically, people running public companies have made about fifty times as much as the average worker.  Company boards need to truly represent the interests of shareholders.  To do so, they need to be truly independent of the executive team.  Corporate regulations need to be adjusted to eliminate crony boards.  These regulations should make the selection process much more open to shareholder input and do more to improve shareholder board selection.  We need to ask those that write such regulations, our political representatives, to do so.

Shareholders need to do more to demand that the board not allow these obscenely out-sized compensation packages for executives.  Shareholders need to take a vested interest in what is going on at the companies they are partial owners of.  They need to reject the re-election of board members that have created and continue to allow overpriced executive compensation packages.

Politics

The Politician’s Economy

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A lot of people think that a politician’s primary function is to create jobs.  People regularly say that the economy is their main concern, and if they feel it is broken, they want their elected officials to fix it.  And many expect the politicians to do that by creating jobs.

The problem is that while politicians can easily create government bureaucracy jobs, they have difficulty creating jobs in the private sector.  This is because the government cannot create such jobs, only businesses can.

Politicians can make the government give money to businesses to create jobs.  They do this by guaranteeing loans, providing grants and subsidies in addition to their favorite tool of tax breaks.  The problem is that the tax money involved in these methods is unbelievably inefficient.  In the famous case of Solyndra, a government sponsored builder of Solar Panels, the government spent about $10 Million (of our tax dollars) per created job.  And those jobs lasted only a couple of years.  It would actually have been better all around to just give those employees a couple of million apiece outright.  We would have saved tax money and they would be set for life.

To grade a politician such as the President by job creation is to mistakenly give them credit or blame.  Bill Clinton is widely credited with creating millions of jobs.  When he was President the economy boomed.  It boomed primarily due to innovations like computers ( along with word processing and spreadsheets) and cell phones while gas prices were falling.  Clinton didn’t invent computers or come up with Microsoft Office.  He didn’t create flip phones or even cause the Middle East to pump too much oil.  He just happened to be President during an opportune time.

The government is actually a brake on the economy.  A brake doesn’t cause a vehicle to move or accelerate.  But, when applied, it slows it down or stops it.  So the only real action a politician can take is to reduce the brake pressure on the economy.

More than almost anything else, businesses want predictability.  They want to know what their tax rates will be in the future.  They want to know what the regulatory conditions will be.  This is because they want to plan for the future.  If they fell they can’t, they become risk averse and hold off doing things.  Like expanding capacity and hiring workers.

Brakes are still important.  We use them to keep moving vehicles from going out of control.  Some regulations are necessary.  We don’t want to go back to the polluted environment of the 1970’s.  We don’t want monopolies and insider deals.  But we all certainly want the economy to move forward quickly and rapidly.  It’s just that politicians aren’t going to accelerate its progress; they can only minimize how much they slow it down.

What to Do

Don’t fall for politicians telling you they are going to create jobs.  Don’t fall for them telling you they are going to save jobs.  By the way, when they try to do this, they only stave off the inevitable for a few months or years at a huge price.

Instead, tell them to create an environment where entrepreneurs can create new businesses.  Tell them to provide existing businesses with a stable environment so they can plan for the future, where they can anticipate the government’s restrictions on them both now and in the future.

Tell the politicians not to stand on the brake while the economy is trying to move forward.  Tell them only to use the brakes when prudent and necessary.

War

Paperwork’s Cost

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The Power of the American Army is in its Combat Battalions.  The battalions of Infantry, Armor, Artillery, Cavalry, Engineers, Special Forces and Attack Helicopters project the force to defeat America’s enemies.  Everything else in the Army is in a support role to the combat Soldiers in these battalions.  If you count all of the Soldiers in all of the Active Duty combat battalions, there are roughly 60,000 of them.  The number of Soldiers doing “everything else” is about 480,000.  In addition, the Army employs about 300,000 full time civilians.

In World War Two, the German Army had a ratio of four support personnel for every Soldier in a combat unit.  This was barely adequate, but the Germans had serious manpower problems, as they were basically fighting everyone else.  The Russian Army had a ratio of two to one, and, due to this inadequate support base, they had to periodically stop their forward movement against the Germans in order to restock supplies close the front line, a process that took months.  The American Army at the time was comparatively lavishly supplied, and had about eight support Soldiers for every combat Soldier.

So currently, the American Army has a ratio of about 13 support personnel (Soldiers and civilians doing jobs Soldiers mostly did in the past) for every combat Soldier.  Now a lot of that support is crucial.  It does take a good sized logistical and administrative chain to keep an Army supplied and its equipment maintained.  The issue is whether or not it takes 13 people to support a single combat Soldier.

What I need to point out next is that most of the Army’s budget is for personnel.  Modern Soldiers and civilian workers are not cheap.  The pay is relatively good, and the benefits are fantastic.  So it costs a lot of money to employ a Soldier or a Department of the Army civilian.  This is money that is not going towards equipment, training, or increasing the number of combat Soldiers.  In addition, the Army also employs quite a number of third party contractors whenever it deploys units outside of the USA, and this is also a significant cost.

So what are the 13 support people doing?  Many of them are indeed performing needed maintenance and administrative functions.  But many of them are performing what in business are routinely described as “non-value added” functions.  Anyone with any military experience knows what a nightmare the paperwork is.  This is because the bureaucracy has grown to the point that it has overwhelmed everyone.  It seems impossible, even for Generals in senior leadership positions, to change archaic and byzantine processes.  To say that the bureaucracy is entrenched is to put it mildly.  In the Department of Defense, it is fortified in permanent positions!

Our Army’s readiness is below what it should be, in large part because of what we have asked of our Soldiers over the last fifteen years or so.  But throwing money at the Army will not necessarily improve it.  Most of that money will go into a bureaucratic black hole.

What To Do

The Army (for that matter all services) is in dire need of bureaucratic overhaul.  Administrative and support staffs need to be drastically trimmed.  But this can only happen by drastically improving the administrative processes within the Army.  The Army needs to go through the same processes used to save failing businesses.  Personnel need to be re-aligned to be in jobs where they can add the most to the true combat power of the Army.

The Army isn’t going to do this by itself without being forced to do so.  The only entity that can impose this mammoth, yet desperately needed reform on the Army is Congress.  Tell your Representative and your Senator that you support the military, but that you want to see your dollars well spent.  Ask them what they are doing to force bureaucratic reform on the military and how they are doing it.  And if they aren’t doing it, point out why it is so urgently needed.

Culture

Yelling “FIRE”

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Credit: AP / SANA

Our ability to voice our opinions, to say and express what we think, is one of our most cherished freedoms.  In fact, the most basic rights in a free and open society are Freedom of Speech and Freedom of the Press.  These rights are a prerequisite for Democracy. It is worth noting that Democracy will fail in any country or society where these rights either don’t exist in the first place or if they are taken away.

Everyone has to be able to say what they think in order for there to be honest and open debate.  Such debate allows people to form their own opinions and make their own choices once they are well informed by a broad variety of voices and arguments.  Any restriction on the presentation of the arguments and evidence of different points of view reduces our ability to arrive at informed opinions and positions.

We can all readily acknowledge the increasing lack of civility and politeness in political discourse.  The unwillingness to listen to the arguments of the other side.  The chanting and other attempts to drone out what one side doesn’t want to hear from the other.  All of these are bad enough, and are attempts to limit freedom by limiting debate.

But there is an attack on our freedoms from a different direction.  What I mean here is the abuse of the freedoms in order to eliminate them.  Freedom of Speech is meant to enable debate.  It is NOT meant to enable violence.  It was recognized long ago that while you may have the freedom to say whatever you want, this right ended when you did something like yell “Fire” in a crowded theater.  Any rational person recognized this as a necessary limitation on free speech, as it could lead to a stampede and the actual injury and death of others.

Freedom of Speech was meant to enable debate and allow for differences in opinion.  It was never meant to allow the speaker to create danger, incite violence or advocate murder.  It is one thing to say “I don’t agree with how those who don’t share my religious beliefs live their lives”.  It is a very different thing to say “I think we should kill all the infidels”.  The later is not part of any debate.

Speakers and writers cross the line when the call for brutality or force.  Advocating violence is evil and wrong.  To be more specific, saying or writing that those with different opinions or objectives should be hurt or killed is both evil and wrong.

Over the past couple of decades, countries that enjoy freedom of speech have welcomed millions of immigrants from areas devoid of such rights.  Some of them, unfortunately, abuse their newly acquired rights.  They preach harm and death to the very people that have welcomed them, and in large measure materially support them.  They are doing more than abusing their welcome.  They are actively recruiting and inciting others to violence.  This is not the exercise of a basic right.  This is not very different from crying “Fire” with the intent of harming others.  It is much, much worse.

What To Do

First of all, recognize that free speech does not include the right to tell people to hurt or kill others.  It does not give people the right to say that others should be dead.  Incitement to violence is in fact a crime.  It should be treated as such.  We need to demand that such crimes be prosecuted.

If someone committing this crime is a citizen of another country, they should not be welcome.  There is no law or fundamental right compelling us to import those who seek our destruction.  We need not admit the foxes into the hen house.

Economics

Modern “Wealth”

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By WMS Gaming 1998

I recently watched a movie on slavery (The Free State of Jones).  The basic argument against slavery was that everyone should get to keep what they produce.  The bad people were those that got rich off of what their slaves produced.

This is one form of the old idea of trying to get Something for Nothing.  In the distant past the only way to do this was by outright theft.  You held up a bank or robbed people, maybe you were a pirate on the high seas, or, as in the case above, a slave holder.  Unfortunately for us all, there are now a lot more ways, many of them subtle, to try and get Something for Nothing.  But in every case, you can only get Something for Nothing by taking it away from somebody else.

I once read that an old saying about Democracy was that it works great, right up until the majority figures out they can vote themselves a “free lunch”.  The “free lunch” being Something that they voted to get in return for nothing that they themselves have earned or produced.  We are almost all complicit in doing this.  If you vote, and I have to admit I have done it too, you have no doubt voted for someone who is committed to providing some sort of unearned benefit to those that voted for them.

But remember, to get the Something for Nothing, you have to take it from someone else.  This may mean taking money from others in taxes.  Or it could mean having the government borrow money to provide it, which takes the money from future generations.  The point is that all of the benefits that we get have to come from someone.  We may contribute part of what we get (through taxes or Social Security and Medicare deductions), but when we get more than a dollar (plus interest) for what we put in, we are indeed getting Something for Nothing.

It is not just the government.  Most people are deep in debt.  They are buying things they cannot afford.  Most can barely afford to pay the interest on their debts.  They have literally stolen from their future selves.  And if they have any unforeseen expenses, they cannot pay, and have to borrow even more.

We might rationalize what we are doing.  We could say that we had nothing to do with the creation of such programs, they were set up long ago, and there is nothing we can do about it.  We could say that we are just trying to get our “piece of the pie”.  We could say that we deserve it, for any number of reasons.  But the truth is that we are trying to justify doing something that we know is wrong, theft.

We are at the point now where the so-called “Entitlement” programs are about to bankrupted us as a society.  The government has borrowed so much money that it can never be repaid.  Many individuals are in the same boat.  The amount of debt, by governments and by individuals is staggering.  In the USA, government debt is about $20 Trillion, while private debt is about $30 Trillion.  These levels are only projected to increase, and at an increasingly rapid pace.  And eventually it will be too much.

When it becomes too much, the unimaginable will happen.  Unimaginable to us, because it is not part of our lifetime’s experience.  Or even our grandparents’.  At least during the Great Depression of the 1930’s, the government had the ability to borrow to try and provide assistance.  That won’t be the case this time, as the government will be as broke as anyone else.

What To Do

I fear that for our government, it may be too late.  Even if so, we can try to reduce the magnitude of the disaster.  We need to stop asking for Something for Nothing.  We need to enact reforms to try and to reduce the pain we are all going to suffer when the financial day of reckoning comes.

We need to drastically reduce the size and scale of our Something for Nothing programs.  We need to be willing to take back only what we have put in (plus maybe the interest).  If not, we will all get Nothing.  At the very time we most definitely will need at least Something.

Politics

Corruption

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Arguably the greatest brake on a society’s progress is Corruption.  This is nothing new.  Corruption has been with us since the beginning.  There are many different forms of Corruption, but it is generally about abusing power for your own benefit.  The Corrupt ruler or politician does a favor (often of the illegal variety) for someone, in return for something else.

The most common form of Corruption is to take money from those who want the favors.  People give money to the powerful so that they can make more money themselves.  Bribes can be direct payments, like bundles of cash, but this is rather “old school”.  Most bribery now is done much more “indirectly”.  It might be through multiple bank accounts to various third parties, so the trail is difficult to trace.  It could be done through donations to political campaigns, or investments in dummy corporations.  There are almost innumerable methods today, but the basic model is payment for the misuse of authority.

Another form of Corruption, almost as widespread, is to gain the power and authority to do the favors for yourself (or your friends and family).  Plenty use their positions in government or business to enrich themselves unscrupulously at the expense of others.  There may not be any bribery, but the effect on society is the same, as the rules are bent or broken to provide an unearned advantage.

The more Corruption in a country, the worse the conditions, economically, and in terms of personal liberty.  Corruption is a huge tax on everyone and every business.  And yet this tax doesn’t go to the government for the common good.  It goes into the pockets of criminals, for that is what the corrupt are.  Fortunately for those of us living in the United States, bribery is not as prevalent as it is in many other parts of the world, but Corruption is still a major problem.

Politicians regularly take money (usually in the form of campaign contributions) from businesses in return for writing laws favorable to those businesses.  This is corruption.  It is taking a bribe in return for a “favor”.  The laws might be barriers that prevent open and equal competition.  They might be laws that provide special grants or reduce or eliminate taxes on certain products.  The laws don’t even have to be for businesses, they could be for certain professions.  There are plenty of laws, for example, that are advantageous to lawyers at the expense of everyone else.

Politicians in the US also regularly use their positions to enrich themselves through the manipulation of laws, regulations, and ordinances.  I once heard it said that while the Corruption at the national level is most regularly reported on, Corruption is much worse at the state and local level.  Look at your own state house and city/county governments.  Notice how many are involved in Real Estate in their careers.  Why do you think this is?  It’s because many of them are using their positions of power to increase the value of their holdings in ways that others cannot.  The altruistic politician, the one who is sacrificing his or her time solely for the benefit of others, is the exception, not the rule.

What To Do

We all need to spend more time looking at our politicians.  We can’t vote for someone based on their looks or on their advertising.  We have to investigate what they have done in the past, and try to anticipate what they might do in the future.  Read about candidates, what they have done, and what their positions are.  Then try to educate others around you about what you have learned.  This will influence more than one vote.

We need to remove individuals from power who are Corrupt.  We need to question the wisdom of voting for the incumbent and allowing them to retain power if they have abused it.  We should continually be seeking out good alternatives to replace those that have failed the public trust.

We need to purge our political and economic systems that of anything that creates an uneven playing field.  All should have the same advantages.  There should never condone a system where there is one set of rules for those with power and influence and another set for those who have little or none.