The American Dream changed somehow in the 1970s when real wages for most of us began to stagnate when corrected for inflation and worker age. My best financial year ever was 2000 — 18 years ago — when was yours? This wasn’t a matter of productivity, either: workers were more productive every year, we just stopped being rewarded for it. There are many explanations of how this sad fact came to be and I am sure it’s a problem with several causes. But this column concerns one factor that generally isn’t touched-on by labor economists — Wall Street greed.
Lawyers arguing in court present legal theories—their ideas of how the world and the law intersect, and why this should mean their client is right and the other side is wrong. Proof of one legal theory over another comes in the form of a verdict or court decision. As a culture we have many theories about institutions and behaviors that aren’t so clear-cut in their validity tests (no courtroom, no jury) yet we cling to these theories to feel better about the ways we have chosen to live our lives. In American business, especially, one key theory is that the purpose of corporate enterprise is to “maximize shareholder value.” Some take this even further and claim that such value maximization is the only reason a corporation exists. Watch CNBC or Fox Business News long enough and you’ll begin to believe this is God’s truth, but it’s not. It’s just a theory.
It’s not even a very old theory, in fact, and only dates back to 1976. That’s when Michael Jensen and William Meckling of the University of Rochester published a paper, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” in The Journal of Financial Economics. Their theory, in a nutshell, was that there was an inherent conflict in business between owners (shareholders) and managers, and that this conflict had to be resolved in favor of the owners, who after all owned the business; and the best way to do that was to find a way to align those interests by linking managerial compensation to owner success. Link executive compensation primarily to the stock price, the economists argued, and this terrible conflict would be resolved, making business somehow, well, better.
This idea appears to be more of a solution in search of a problem. If the CEO is driving the company into bankruptcy or spends too much money on his own perks, for example, the previous theory of business (and the company bylaws) said shareholders could vote the bum out. But that’s so mundane, so imprecise for economists who see a chance to elegantly align interests and make the system work smoothly and automatically. The only problem is the alignment of interests suggested by Jensen and Meckling works just as well—maybe even better—if management just cooks the books and lies. And so shareholder value maximization gave us companies like Enron (Jeffrey Skilling in prison), Tyco International (Dennis Kozlowski in prison), and WorldCom (Bernie Ebbers in prison).
It’s just a theory, remember.
The Jensen and Meckling paper shook the corporate world because it presented a reason to pay executives more—a lot more—if they made the stock rise. Not if they made a better product, cured a disease, or helped defeat a national enemy. All they had to do was make their stock go up. Through the 1960s and 1970s, average CEO compensation in America per dollar of corporate earnings had gone down 33 percent as companies became more efficient at making money. But now there was a (dubious) reason for compensation to go up, up, up, which it has done consistently for 40+ years, until now when we think this is the way the corporate world is supposed to work—even its raison d’etre.
But in that same time real corporate performance has gone down. The average rate of return on invested capital for public companies in the United States is a quarter of what it was in 1965. Sure, productivity has gone up, but that can be done through automation or by beating more work out of employees (more on that later). Jensen and Meckling created the very problem they purported to solve—a problem that really hadn’t existed in the first place.
Maximizing shareholder return dropped the compounded rate of return on the S&P 500 from 7.5 percent annually from 1933-76, to 6.5 percent annually from 1977 to today. That one percent may not look like much, but from the point of view of the lady at the bank the loss of so much compound interest may well have led to our malaise of today. Profits are high—but are they real? Stocks are high—but few investors, managers, or workers are really happy or secure.
Maximizing shareholder return is bad policy both for public companies and for our society in general. That’s what Jack Welch told the Financial Times in 2009, once Welch was safely out of the day-to-day earnings grind at General Electric: “On the face of it,” said Welch, “shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers, and your products. Managers and investors should not set share-price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.”
Tell that to Sam Palmisano at IBM, who, in 2005, and then again in 2010, set corporate goals for earnings-per-share, which is to say he set a target price for IBM stock based on historical price-to-earnings ratios, as one of his signature goals for the company. And he was applauded for it.
“…the dumbest idea in the world,” Jack Welch said. Remember that.
I didn’t come up with this idea that shareholder earnings maximization should not be the prime corporate motivator. It came from Roger Martin, former dean of the Rotman School of Management at the University of Toronto, only 169 miles from Rochester where this nonsense began. Martin’s very good book is Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. Here’s how Martin put it: “Imagine an NFL coach holding a press conference on Wednesday to announce that he predicts a win by nine points on Sunday, and that bettors should recognize that the current spread of six points is too low. Or picture the team’s quarterback standing up in the post-game press conference and apologizing for having only won by three points when the final betting spread was nine points in his team’s favor. While it’s laughable to imagine coaches or quarterbacks doing so, CEOs are expected to do both of these things.”
Martin contrasts two markets he calls the real market and the expectations market. The real market is where goods and services are produced, bought and sold, which is to say the real world in which most of us live. The expectations market predicts a certain performance and then delivers on it through whatever means necessary. The expectations market is really just gambling.
Once corporate America embraced the idea that all their main purpose was to maximize shareholder value that lead to distortions in nearly every part of nearly every business. Anything that could be seen as a drag on earnings could be cut with impunity. This included employee pay and benefits. So pay stagnated while pensions and health care were cut. This helped the company but hurt the market since every worker is also a consumer. Businesses moved to cheaper places of doing business, sometimes overseas. Research and development was cut and cut again as if there was no longer a connection between developing new technology and company success. There were exceptions of course, but the trend was clear, marginalizing workers, hurting the overall economy and the society it supports. And all for an underlying reason that wasn’t even true.
@Mark – but what we really want to hear is what your son thinks of this topic. He seems to be your “go to expert”, lately.
So do you see this as constructive, or are you just hoping for revenge?
I really liked the graph where productivity and worker’s wages were decoupled and executive wages started going into the stratosphere… It deserves an explanation…
I think the point Bob is trying to make is that things really come off the rails when the CEO begins to think “this is all ‘mine’, and the other stakeholders are merely ‘servers'”. Economists have coined the term ‘mine-server’ to describe this effect (often written without the apostrophe as ‘mineserver’), and it represents the ultimate end-game to what Bob is describing in this article — CEO pay goes to infinity, while everyone else is left with nothing. When this happens, minesever is to blame. I’m trying to think of a real-life example for you, but I’m drawing a blank at the moment….
How about IBM?
🙂
I’m not sure which is the chicken or which is the egg with regards to Jenkin & Meckling, but I often cite a reason for American economic malaise the fact that in the 70s, the U.S. finally had to start competing with the rest of the world — and it didn’t or couldn’t. Perhaps this shareholder value gambit provided a comforting distraction for executives while the Japanese were eating our lunch.
By that time, Europe and Japan (and other countries) had finally finished rebuilding their economies after the destruction of WWII. Until then, the U.S. was the de facto world economy. No one could touch us, especially since we bombed them into the stone age.
I do agree with Jack Welch, though. I never understood this preoccupation with stock price as a be all to end all. I was brought up assuming your stock went up when your company actually did well and produced great products. But what do I know?
Compete with the rest of the world?
Maybe.
And maybe the steady destruction of organized labor and collective bargaining.
You’re done with predictions and still not going to address the white elephant after promising you would well over a month ago? For shame. You’re not just hurting the backers, you’re hurting your loyal readers who want to get past this nonsense (and are also eagerly awaiting your side).
As someone who is just a reader, I too would appreciate an end to the Mineserver drama and a return to relevant discussion.
Interesting article – Jensen and Meckling was a key part of my honours thesis, many years ago.
Part of what has kept wages down is the internationalisaton of trade. Manufacturing jobs have been exported to where the labour is cheaper – the competion for jobs is in another country, not the next county.
Shareholders provide capital to businesses and demand a return based on the risk borne. People betting on a football match haven’t invested in the football club itself, so the analogy breaks down there.
BTW – who holds a “World Series” and only invites one country. Even Australia gets to participate in the Eurovision song contest these days. Now that’s more of a “World Series”.
Canada has always been invited, its just that the teams in Canada do not make enough money for the owners to keep teams there.
Blue Jays ‘92 & ‘93!!
It strikes me that “truth” is not involved so much as the choice of what to use for a an investing benchmark that the stock market (thus investors) has been focusing on.
It would be interesting to go back and find what Peter Drucker had to say on this issue in his heydey during the latter third (?) of the last century.
I seem to recall he had concerns similar to yours, that resonated with me as a corporate cog… err, employee for most of my IT career. I was glad to escape a couple years ago into full retirement with a an even better severance package than the one from IBM in 2007, when such packages were still “decent”, as a volunteer for a layoff at the big Brit global corp I last worked for (job functions shifted to their eastern European and Malaysian “global” data centers of course).
It does strike me that this “maximizing shareholder value” BS is along the lines of economists trying to believe that markets are “efficient,” so there has to be some underlying mechanism ensuring efficiency and thus the solution in search of a problem (well put Bob). Assuming markets are efficient is kind of a Divine Right of Kings theory which tries to give a justification on why the rich are rich and thus deserve it.
.
Seems to me this is peculiarly an American problem. I don’t see Japanese companies overcompensating CEOs and beating up their workers on salary and benefits. Alas this also reflects the difference in our cultures and not to our benefit.
Markets are efficient – the mistake is thinking that the are efficient in anything other than maximizing the returns of the people who run the markets. Look at the charts here and then compare them to the DJI over the same period of time … productivity and wages are both virtually flat lines when plotted against the DJI value increase.
The bidding war for young women that erupted between the economy and the family turned Ricardo’s Iron Law of Wages into an objective function for the unfriendly artificial intelligence called “The Global Economy” and blew a demographic hole the size of the Grand Canyon in the US population. But look on the bright side: It selected out of the next generation the very characteristics demanded by the economy.
Ding! Ding! Ding!
Flood market with women suddenly expecting “real” jobs, add a rising tide of improved communication, computation and transportation capabilities, and lookee there, downward pressure on wages and increased productivity. The graph diverges.
“your main constituencies are your employees, your customers, and your products”
and Welch still doesn’t get it. You’re also responsible for contributing something good
to your society – and not polluting the environment and lying about it…
https://m.youtube.com/watch?v=K_CMXLBd17k
https://youtu.be/O7wVsvoM6tE
https://youtu.be/2VnUgT-QTdY
In my opinion, business firms are created for various reasons. Some developers want to build a profitable enterprise and then sell out for a big payoff to themselves. Other developers may only want to see their ideas put into practice so they can feel proud about themselves. The best developers want to create products that can benefit mankind while earning a profit.
I don’t think any developers start a business primarily to benefit their future shareholders. Most of these unknown people come and go with little impact on the business. The idea that a corporation should mainly benefit its shareholders is utter nonsense. That ridiculous concept comes from some college professors who live in a world that is divorced from everyday reality.
Customers are the people who pay the bills and employees are the people who do most of the meaningful work in a business. These are the two groups of people, besides the developers and managers, who deserve to benefit the most from any profitable business enterprise.
Wow! Bob, we’ll make a socialist out of you yet. However, you describe how “Shareholder Value” impacts workers, but neglect to mention how it impacts customers. Customers are the people the money comes from. Shareholders are always a net drain because they only put money in with the expectation of taking more out. “Shareholder Value” also results in the “charge as much as you can get away with for the least effort/quality” ethos. Thus the customer gets the mucky end of the stick as well.
Michael Moore made a nice documentary about this way that American capitalism is destroying society: Where to Invade Next, https://en.wikipedia.org/wiki/Where_to_Invade_Next
Not quite as long-winded as most Michael Moore movies.
You’ve completely ignored the elephant in the room, meaning the federal reserve bank. When Nixon ended Brenton Woods it meant that the money supply could be manipulated at will by the central bank. The members of the federal reserve system receive currency but they have to do something with it. So they put it out on the street, charging a few points. The big commercial banks get that money for extremely low interest rates (since 2008 all integrated into the federal reserve system, so now they can get money for almost nothing). They’re not into retail lending so they buy up stocks and corporate bonds on margin, then start looking for suckers to sell to, such as a retirement fund or foreign sovereign wealth fund. Eventually even they get tapped out and then here they go selling to retail investors. We’re just about to that point today but the retail investor is pretty well tapped out at this point thanks to the banks and their version of the same game. The investment banks were created to supply capital for new business ventures, but now they’re just stock traders. The VC firm shouldn’t really exist except that commercial banks are completely out of the lending business.
There’s really nothing a CEO can do that warrants their extremely good compensation aside from convincing a bunch of investment bankers to buy their shares instead of someone else’s. Basically glorified salesmen. Nice work if you can get it. As for why the rest of us aren’t enjoying the same raise of compensation? Well, we don’t get access to that money. We only get it after the inflation has kicked in. Sure, there are a lot of other factors but you can’t forget the intentional inflation of currency by out of control government spending and soviet-style central banks. It is nearly impossible for the average worker in this country to save money, and that’s completely intentional. I’m forced to put my retirement savings into a risky 401(k) plan that’s extremely opaque and could have the rug pulled out at any time by Jamie Diamond and Warren Buffet. I’d much rather just keep my money in a nice safe bank CD but that won’t even keep up with inflation. So even though I might get a raise every year, in the long run what that money buys is less and less. Unless I’m buying transistors.
Robert Reich thinks only management should be paid
He says Americans can have the confort jobs
Last time I checked gueishas can be imported too
I sincerely don’t think you have any idea what Robert Reich thinks, so best not to say anything on the subject, thank you.
Emacs, not that I agree with him, but that doesn’t seem like something Robert Reich would say. Can you point us at a source?
To paraphrase Bob, sometimes the comment section just blows your mind away!!!
Vivek
People often point to the 22 veterans who commit suicide every day, as evidence the US government has abandoned them. How many Americans commit suicide because of being replaced by H-1b Indian hires? My guess? More than 22 a day.
https://m.youtube.com/watch?v=K_CMXLBd17k
https://www.washingtonpost.com/news/wonk/wp/2017/04/03/this-one-group-gets-70-percent-of-high-skilled-foreign-worker-visas/
For me it was 2017, FWIW. I guess I’m an outlier. However, once the AI bots can do Linux work, I’m toast.
If the lady at the bank, to whom Bob often refers, invested in stocks directly or indirectly through some type of fund, insurance, or pension plan, wouldn’t she care primarily about shareholder value?
I would think that her concerns would be the same as mine… that since the corporate rewards are very short sighted (this quarter and maybe next), that we are both screwed over the long haul by the incentive to lie to consumers, employees and owners, to prop up the illusion of short term gains. The focus on shareholder value seems ultimately to cost the shareholders far more than it costs the C suite folks who have daily access to The Books.
And in response to a post upstream a bit… I too would like to see an end to the Mineserver saga and a return to quality posts and commentary. Though I also recognize that that ball has been in Cringely’s court for quite some time, and he has refused to “serve” the ball…
Good point: “The focus on shareholder value seems ultimately to cost the shareholders far more than it costs the C suite folks who have daily access to The Books.” That’s what Bob’s been saying, that the focus on shareholder value ultimately causes a reduction in shareholder value. I still contend that the lady at the bank ultimately cares about shareholder value, perhaps both long term and short term, so the focus should be on both. Employees are an expense, which should be lowered, and high prices, which are bad for the customer, still make a positive contribution to the bottom line.
“The focus on shareholder value seems ultimately to cost the shareholders far more than it costs the C suite folks who have daily access to The Books.”
And whose compensation is significantly composed of stock options. I believe that Board of Directors also frequently get options.
Of course the options are generally backdated to unreasonably low prior values, so the option becomes valuable as soon as granted; not really an incentive to improve the stock. And if they go underwater, they typically adjust the option price to make it valuable again, instead of leaving it as a lack of reward for lack of outcome.
So the interest of the lady at the bank is in line with that of the board of directors, since both benefit if the stock goes up, neither benefits if it doesn’t.
Lady at the bank has no money in the pocket and uses credit card on Tuesday morning – can’t wait for Friday afternoon – What about buying stocks you are talking about ?
If she has a job, she should manage it so that she spends less than she makes. That excess, along with her pension, may be invested in some type of fund that, in turn, likely invests in stocks.
So called middle class is flat out broke. They pay mortgage and car payment and they have no money left. They can’t buy stocks in any amount that can enhace their income significantly what get us to another interesting question what is middle class. If you lok throughout history there were only two types of people – those who had it and those who had not. Middle class is artificial term that can relate to most people who managed to have decent living between the end of WW 2 and 1970s. Oil crisis in the 70s marks the beginning of the end of so called middle class. It is still around but it is disappiering faster than ice on the North and South pole. Today in Florida to be middle class you have to make 150k plus and that gives you only good life. You won’t send your kids to Harvard with it.
In 1972 Nixon traveled to China. Since then the unskilled or low-skilled American worker has been in growing competition with Chinese labor. This has placed a lid on the earnings of American workers. Skills which have no Chinese competition are exempt, but those openings are declining.
The other side of the coin is that millions upon millions of Chinese peasants have been lifted out of grinding poverty. Their incomes have multiplied more than those of the communist party.
I would like to see the same graph for China, India, South Korea and countries formerly behind the iron curtain.
And if you think trade barriers and protectionism are the answer, you are voting fodder for a recently-elected president. Stay the course with free trade and shareholder value – China’s authoritarian tendencies, restrictions and censorship doom it to perpetual third-rate nation status, despite appearances. Let’s not be like them.
The working class disagress, and frankly, they’re more important than you.
Think of every US government program, department, committee, agency, regulation, law and executive order since 1970, nevermind the thousands of pages of tax code. The country is being dragged down by cruft and complexity. As Nassim Nicholas Taleb explains, the economy is more and more fragile. Barriers to entry for small business and young or unskilled workers (licensing laws) lead to stagnation.
The working class may disagree, but if you think that more of the same policies since 1970 are the solution, I say stop digging your hole, we can barely see you any more.
The established players see bureaucracy as a feature, not a bug. When the primary feature of a tax overhaul is reduced rates, it was not intended to favor new players, without which consumer disposable income declines further. Time to start thinking about the end game, one where a handful live like Gods on top of squalor seems sub-optimal.
Working class are just dumb asses. It is shame that a professor at Harvard/Stanford/etc has same one vote as redneck. Democracy is nothing but rule of dumb people over smart ones but it is less evil than the other choice which is dictatorship. Historically after living in either of them for certain amount of time people get tired of them and opt for the other choice.
With no idea as to how to implant such a thing, I have often wondered if a means of limiting any business or owner to no more than five locations with the same look, feel and product line might be the way back to a middle class. Every Walmart comes at the cost of local business owners making a reasonable living, and replaces them with a poorly paid manager, and the bulk of the “savings” go to a bunch of entitled inherited-wealth brats who never did a thing to earn their wealth, aside from winning a sperm derby. For the life of me, I cannot figure why the notion that a single person deserves or should have a billion dollars or 100 times more of our nation’s resources than anyone else. I guess this marks me as a socialist, but it seems indefensible.
If it’s any consolation, the billionaire’s billion dollars are completely useless to him, until he gives it to someone else for goods and services.
Ronc, that is partly my point. Billions camped in an offshore fund do nobody any good, including the owner. Those same billions in the community do good for everyone in the community. I go very far out of my way to avoid spending money at chains for this very reason.
Some years ago, I recall reading something in the writings of John Taylor Gatto. IIRC, Amish communities have a self-imposed limit of half a million dollars per annum per household. The thinking is earning too much money denies opportunity to others.
In other news, I recall another gentleman ( I cannot remember his name ) stating something similar to this :
There are two ways to succeed in this world. Treat everyone so fairly that everyone wants to do business with you.
The other way is to be unconcerned about who you hurt and the harm you cause.
They call it maximizing shareholder value, but it’s really jacking up the share price “right now” regardless of the future detriment to those who continue to hold the stock instead of selling “right now”.
Out of this idea also came the real sickness, that making huge money was always the goal. Quite a few years ago I noticed that in media I would see an article where some individual was getting rich so it must be good. Enron as Robert mentioned comes to mind. Combine this up with the shift to capital being in charge, I.E. in most companies the CFO frankly is in charge! Where they call the shots on any move in the company, think expansion is needed, what is it going to cost and how will it effect the next quarter? Lines are cut, because they don’t bring the right rate of return, never mind that they supply additional services that get customers in the door? I know a little about consumer electronics and in that business they cut and cut the service end of their business to the detriment of some pretty big names.
The other big motivator in that shift to capital was a move to collecting rents. That is everywhere. The tax cut just passed is a prime example. A lot of companies are getting a huge windfall for nada. None of the stock buy backs they are using it for are improving their real competitive edge or making their company more efficient, just making shareholders money and the CEO richer. But see that fits in with as long as someone is getting rich it is just fine.
As for worker compensation, workers are now just an expense. Time in the job, overall experience are valueless to the those self same CFOs. I frankly blame the computing industry for that, and I am a member. Before the .com bust computer professionals pushed high expenditures in computers and software. There was good productivity growth from it but it was costing a lot. After the crash, IT departments were decimated and the surprise was those systems did not collapse. No they stayed afloat and to the eye of finance IT people still sat around staring at screens. This got them wondering, can we maybe do without some workers other places? Now the trend was set, cut and delay hiring and see if the place still runs and it did. Maybe not as efficiently, maybe customers were upset but shoot they are always upset, look at our over all efficiency? Etc, etc.
I agree with u completely
They also use h1b imported labour, mostly from India to destroy American labour, this part of it is often not spoken about
https://www.youtube.com/watch?v=vg0wCam2oDc
The power and wealth of The United States came about fortuitously, through historical accidents, one of these wafer thin financial incidents is liable give us the Mr. Creosote experience, and we won’t be missed.
https://en.wikipedia.org/wiki/Mr_Creosote
I’ve also wondered why corporations sacrifice all in the name of stock price. If corporations returned the value to employees with better pay, that would allow people to save more money for retirement themselves (buying more stock – or consuming more goods/services), or have it collected in increased Social Security payments (which would save Social Security, BTW). Or at the VERY least, pay stock holders more dividends – getting the money back into the market again.
But everyone with a 401K is a prisoner of the “stock price is everything” philosophy. If you fight against stock value, you’re fighting against your own retirement plans now.
The real solution to all economic problems is too simple: Do the Right Thing. Start treating the people – the only “asset” on balance sheets that truly matters – right by voluntarily give the money back to the workers through better pay, pensions, etc.
Things are only going to become more difficult to fix down the road, as people lose patience and faith in the system.
Is the increased productivity due to greater or better worker effort, or is it due to the application of greater or better capital? If the increase in productivity is largely due to the provision of better capital goods by the owner, then the productivity gains should accrue to the owner. Any increase in the welfare of the workers, whether through increased nominal incomes or lower prices, is a gift from the owner.
So let me get this straight, Trump decides to impose tariffs on steel imports and the DOW is now in free-fall again? Why do we give a shit about Steel being imported? No help for Tech workers that are impacted for decades due to cheap IT labor being imported. Nothing being done there.. Honestly the trouble these tariffs are causing will not be outweighed by the few thousand steel worker jobs that might be created. So stupid.. doesn’t matter what party.
Bob, I think it worth noting that Apple seems to prefer “making great products” over “maximizing shareholder value”.
There are surveys that compare the relative spread of compensation between the highest-paid and the lowest-paid employee of any particular corporation. Typically, for the US, this is now around 400%. At the time in 1973 when your graph diverges, it was around 40%. In Japan, it is still around 40% today. So it is clear the US executives have taken more than their share of their corporation’s value since that time, and ordinary US workers have suffered. Around 1973 was when the phrase “Greed is Good” became common.
I think we can now conclude that that view was mistaken. Not so easy to see how we can reverse it.
That stagnant wages chart leaves out the increases in benefits given by companies. This is because due to corporate greed, they recognized they could deduct many of these, even get credits for some, and the workers would get more value on untaxed benefits.
And stock buybacks are corporate suicide.
https://www.forbes.com/sites/aalsin/2017/08/09/how-stock-buybacks-cause-economic-stagnation-a-qa-with-robert-ayres-and-michael-olenick/#932031b16dd4
https://youtu.be/4mKqqhtebQ0
It does not seem to be the popular current of this comment section but here are a few thoughts that impress the hell out of many people in the rest of the world.
In the 20 years from 1996 to 2016 the US added 60 million to its population while increasing the GDP per head from $23k to $53k and not raising unemployment.
The US has effectively redeployed vast amounts of capital (those hated shareholders!) into new industries, continuing to reinvent, keeping its intellectual capital enriched and making many of its businesses tough competitors wherever encountered. It is true that the inefficient businesses are hurt and drop away, they will anyway.
The panic over imports is misplaced too. Twenty years ago we were paralysed by how the Japanese were going to roll all over us, with 18% of all our imports coming from there (and effectively nothing from China). Now China is 20% and Japan is down to 6% – but look! Now that China has money coming in from their exports to us, 8% of US exports go there from nothing in 1996.
I don’t deny that the system that has powered a staggering ability for the US to reinvent itself has also unduly enriched a minority of the CEO set. I don’t see this as desirable but it is also entirely irrelevant in the overall context of the economy.
There is no question that the “production/non-supervisory” sector, has been hit (in 1973 primarily male semi-skilled workers) but they could not be preserved in the face of automation, lower cost alternatives and the change in society’s requirements. So the US has gone about creating jobs and opportunities for things, services and experiences that are needed and our children face a better future for it. What they will be doing I don’t know, but I have a strong feeling that they will, because of the efficient deployment of capital, have a better chance of doing it here than almost anywhere else on earth
…while increasing the GDP per head from $23k to $53k and not raising unemployment.
This is highly misleading because the increase has been very unevenly distributed. Only relatively few have benefited. Mean household income has remained very flat, except for the wealthy. The rich have gotten very much richer, but everyone else has stayed much the same.
See the graphs here:
https://www.advisorperspectives.com/dshort/updates/2017/09/19/u-s-household-incomes-a-50-year-perspective
Thank you for your reference to these charts which are a good addition to the debate, but if you have them what would be really interesting is to know how people (and how many) progress through the quintiles as their careers move along. Most people, especially immigrants, start their earnings in the bottom quintiles and then move up, maybe dropping down again in eventual retirement.
An example might be an commercial pilot where there is a subsistence level for quite some time as a pilot goes through education and the stages of training. Pitiful salaries are then paid at the bottom end of the airline pyramid (local short haul/commuter aircraft), but for many there is then a jump up through the quintiles as they move up to more established airlines and larger aircraft. Similar plot lines would follow for lawyers.
With greater numbers spending a longer time in tertiary education the bottom quintiles for a while at least hold many who are going to move up later – or maybe not, that is information I have not seen clearly presented.
The curse is if people cannot move up the chain and clearly there are areas that appear to offer very little progression, disability care might be an example. In general I acknowledge that it is very difficult to devise a system for paying significantly more to those unable or unwilling to move beyond semi-skilled labor in a market that continually offers people willing to work at low pay.
It is a necessary debate but the fact that the low quintiles offer an entry level for those who want to progress should not be discounted.
It’s a double-edged sword, because many of us in the middle class also have 401K accounts that invest in the stock market. Has anyone calculated how much we might have made in the market versus how much we’ve lost in salary?
Unemployed don’t have 401k or stocks
Once American workers get replaced by imported Hindus they will not have stocks, salaries or 401k
This column is the equivalent of a two-minute hate. Cringely just rants about greed, saying things that have been said for many decades now.
But nothing has changed
Nobody is fighting to ban h1b and protect American labour
Only sessions was against h1b
This is where Cringely’s political bias comes into play. He can’t run articles praising Trump, or Republicans. In his view, they are for rich people and the vehicle of greed. With Democrats in power, it is just the government that isn’t cracking down on H1B.
While there has been no elimination of H1B, DHS has started enforcing existing H1B laws. Some of this enforcement was reported in other countries as the end of H1B, because one memo is a bit vague. It looks like you can no longer bring in someone who has a computer degree on H1B, you have to show specialized skill for the job. Other aspects of the law are being enforced as well, such as did you look for jobs here.
Cringely I think posted an article ridiculing Trump and H1B due to his political bias, but never really went into detail on the changes, the way he used to go into detail on H1B.
Also, while no one was looking there was a crackdown on the hedgefund carried interest loophole last week.
https://home.treasury.gov/sites/default/files/2018-03/Sec%201061%20Notice%203-1-18.pdf
Test
Why do you talk about H1B threat to labor? What about threat of illegal immigration(and legal immigration) to low wage labor?
For that matter, minimum wage laws are also threat to low wage labor, banning them from the market.
Test2
Test3
Rohrabacher: I’m really not talking about top people here. You know … there’s a lot of other people in society rather than just the top people. It’s the B and C students that fight for our country and kept it free so that people like yourself would have the opportunity that you’ve had. Those people, whether or not they get displaced by the top people from another country is not our goal. Our goal isn’t to replace the job of the B students with A students from India, because those B students deserve to have good jobs and high-paying jobs.
Gates: That’s right, and what I’ve said here is that when we bring in these world-class engineers, we create jobs around them. … The B and C students are the ones who get those jobs around these top engineers. And if these top engineers are forced to work, say, in India, we will hire the B and C students from India to work around them.
Rohrabacher: But according to BusinessWeek, almost 150,000 computer programmers have lost their job in this country since the year 2000. Now, my reading of all of this is that there are plenty of people out there to hire but people want to have the top quality people from India and China and elsewhere, and they’re willing to have these 150,000 American computer programmers just go unemployed.
Gates: Actually, BusinessWeek doesn’t do surveys. I think you’re referring to a quote in BusinessWeek from an Urban Institute study …
Rohrabacher: That’s what I said, according to BusinessWeek, yeah.
Gates: It’s not according to BusinessWeek. There was a study that a group at Urban Institute did that was deeply flawed in terms of how it defined what an engineer is. When we say that these jobs are going begging, we’re in business every day. We’re not kidding about it. These jobs are going begging, and the result is that in a competitive economy …
Rohrabacher: You’d have to raise wages.
Gates: No, wages are —
Rohrabacher: If a job’s going begging, you raise wages, now in a —
Gates: No, it’s not an issue of raising wages. These jobs are very, very, very high-paying jobs. And we are hiring as many of these people as we can.
Rohrabacher: Well, let me give you one example —
Test
tEST
This applies to h1b
The difference between people who understand statistics and people who don’t is that people who don’t understand statistics see a 1% annual chance and think, “This will never happen to me,” whereas people who do understand statistics think, “This will eventually happen to me if I live long enough,” and plan accordingly.
It isn’t a question of whether any given person’s job will be replaced, but rather when. Eventually, nearly everything will be automated. Manufacturing is already mostly there. Retail and fast food will be next, replaced by touchscreen ordering, website-based ordering, delivery robots, etc. The trucking industry will follow shortly thereafter. Doctors likely will be replaced by a machine learning model within a couple of decades at most, though surgeons and nurses will hang around somewhat longer. Police will eventually be replaced by drones. Office workers will be slowly become unnecessary as the people they support cease to work.
At some point, the only jobs left will be writing software for the machines, designing the machines, jobs in arts/entertainment, and maybe firefighter robot drivers. The only real questions are how long it will take and whether the rate of redundancy significantly exceeds the rate of attrition.
Importing millions of h1b Indians every year…
The difference between people who understand statistics and people who don’t is that people who don’t understand statistics see a 1% annual chance and think, “This will never happen to me,” whereas people who do understand statistics think, “This will eventually happen to me if I live long enough,” and plan accordingly.
It isn’t a question of whether any given person’s job will be replaced, but rather when. The only real questions are how long it will take and whether the rate of redundancy significantly exceeds the rate of attrition.
So whenever I have a chance to bet on a horse to win when the odds are 100 to 1 it will not win, I could become rich by repeatedly betting with the odds against me, since I’ll eventually win.
Hitler only killed a few at a time
In the end how many were left ?
You talk of statistics, but you start with a wrong statistic. The US does not import millions of H1B Indians a year. There are 65,000 H1B visas assigned each year for all countries.
That’s not the whole story
1. You have exemptions
2. U have the spouses
3. U have the outsourcing enabled by the h1b
I’m sure Hitler only killed 60k at a time in the end all are dead
Importing millions of h1b Indians every year…
The difference between people who understand statistics and people who don’t is that people who don’t understand statistics see a 1% annual chance and think, “This will never happen to me,” whereas people who do understand statistics think, “This will eventually happen to me if I live long enough,” and plan accordingly.
It isn’t a question of whether any given person’s job will be replaced, but rather when. The only real questions are how long it will take and whether the rate of redundancy significantly exceeds the rate of attrition.
Also creates a lot of waste as you now have corporate goals to make customers buy again instead of providing lasting, quality products – whether it’s a fridge, freezer, car, media player, etc…
Chany Krumins https://www.cheatsheet.com/money-career/fear-not-the-green-card-how-immigration-really-threatens-your-job.html/?a=viewall
https://www.youtube.com/watch?v=bkqjO107pNs
https://youtu.be/loN56tcy5QQ
Going off the gold system (Bretton Woods) gave countries the ability to create “fiat money”. And so the developed world in a giant “money race” where we all effectively print money and devalue our currencies in sync. How is this related to the current discussion?
1. The relative power of the government is growing rapidly and the power of individuals is declining rapidly. Money is loaned at ridiculously low rates to big corporations and “preferred borrowers” (companies and individuals who are preferred by the government), while borrowers who are not “preferred” pay “the market rate” or the “risk adjusted rate”. It pays to be a friend of those in power.
2. Laws are enacted and manipulated to help “friends of the government”, while those who are just trying to compete in an open marketplace find them themselves not only locked out financially (#1) above, but are also locked out by regulation and threats of patent enforcement. Why do you think IBM has been the “patent leader” for 25 years now? The real money is in getting a “royalty” from each and every technology that IBM claims to own a patent for. The FDA helps powerful drug companies every year effectively protect their price and have a monopoly, like EPIPens.
3. The rich are getting richer, because even in financial crises “friends of the government” are chosen who are “too big to fail”, and then given grants and loans to continue their existence. And, by the way, which would you rather own, a GM product, who was bailed out by the government, or a Ford product, who was not? I see a lot more people lining up for Escapes and Fusions than for Cruzes, Sparks, or the Traverse. And that isn’t even covering the foreign carmakers, who also are effectively government funded, but somehow build much better quality than we do at less cost, even using American workers in the Southeast.
4. The natural phenomenon of recessions and depressions, if not interfered with by the government, is to let everyone go bankrupt, rich and poor, and start over, and price adust and reward savers. Prices reset, and low and behold, homes are affordable again. They certainly were in California in 2009. I had a friend who could be a cash buyer, sold his 3 bedroom $535,000 home for $375,000 and then took the balance and bought a 5 bedroom foreclosure for $169,000 and a 3 bedroom for $100,000, and now he has both paid off and collects rent from the smaller one! Instead, with bailouts, the government preserves the high home prices, and the market no longer works and everyone is priced out of the market, because it doesn’t get a chance to reset.
5. So, IMO, the market no longer works, and you have to watch the politics of what the government is deciding to do each month and quarter, because what they decide to spend on has a much larger effect than the actual marketplace. There are places, like computer hardware and software, where this is not true, and innovation has historically thrived because of a lack of regulation and taxation, but our day has come, and we’re about to be as regulated and messed up as every other industry. So find your business, to document, support, follow the latest government regulation, and make some friends in that agency. Good Luck!
Geez, it’s almost like some kind of office technology came along in the late 1970s that allowed workers to be much more productive. Some kind of “Computing Machine” or something that let people do spreadsheets more easily and not have to type memos and copy them using carbon paper. Someone should do a documentary on this “Triumph of the Nerds.”
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Charles Moorehead 2018 March 8, at 02:55 wrote
“How about IBM?”
We all do. Deal with it as gracefully as possible.
State Department says the last time fewer than 85K H-1B visas were issued was 1997.
181,351 new/initial H-1B visas were issued in FY2016…mostly because of the open-ended exemptions, exceptions, waivers, yadda yadda.
Source:
https://travel.state.gov/content/travel/en/legal/visa-law0/visa-statistics/nonimmigrant-visa-statistics.html
See my graphs:
http://www.kermitrose.com/jgo/Econ/Data/jgoVisaStats.html