Get on Board “Pirate Radio”

The 1960s were an incredible period of presidential assassination, political dissent, moral dissolution, sexual revolution, and, not surprisingly, the golden age of rock-and-roll. This movie captures the period’s tension and exuberance through the story of the off-shore (and privately ad-financed) broadcasters who arose to give people the music they wanted when the public tax-payer supported BBC nanny tried to ration rock music. It’s a great story told over one of the best and most integrated sound tracks ever. Two mother figures, one sends her son to the boat to find both his father and himself, the other sends her police to silence the boat and save her children from the evil music. The good mother wins.

posted by Bob


Grating Expectations

Regular readers have probably noticed that Jim’s post, Jobs “Saved”, was one of the first waves in what is becoming a tsunami of questions about the validity of the administration’s claims of saving over 640,000 jobs. Jim’s critique and my comment on it dealt largely with the impossibility of identifying and measuring saved jobs. According to the Tuesday Wall Street Journal Opinion Page it turns out that the validity of the numbers is even worse than Jim thought.  On Thursday the WSJ’s Kim Strassel wrote a terrific send-up of the statistics and the planned jobs conference suggesting the need for a new “jobs czar”. Now that the game is joined, many more journalists and bloggers will be pouring over the numbers and finding errors and perhaps even prevarications.

The Employee Relationship as an Asset

“New” jobs depend on “new” investment. Only by increasing the community’s capacity to produce new value can we create new positions for people to work in that creation. For example, if a primitive farmer saved only enough seed to grow a crop equal to this year’s harvest he would not create any “new jobs”.  But if he expected the tribe’s growing population to warrant an increase in his output that would lead to greater profits he might save (invest) more seed to grow a bigger crop next year and consequently need more workers to plant, weed, and harvest the larger crop. But, the key word in this story is “expected” – people invest in light of their expected return.

In this post I would like to take the notion of investment a bit further and apply some of the thinking in our forthcoming book on intangible asset management. We all know that most employers hire for the future (net of replacement for departed or retired workers). Employers “create” new jobs when they believe that increased effective demand will be sufficient to justify and sustain the investment that accompanies those jobs. All new jobs require some new investment if only in search, background checking, training, and setting up accounting and payroll files.  In many cases, a new job may involve substantial capital investments such as a new lathe, truck, or computer.

Once hired, the employee relationship represents an asset to the firm. One of this year’s Nobel Laureates in Economics, O. E. Williamson, defined the various forms of employee relationships and contracting frameworks in terms of increasing degrees of employee and employer specificity or investment on a scale from spot to obligational to relational. Because spot employees are generally fungible and are easily replaced, it is the latter two and especially the relational positions that are most analogous to assets.

Like any asset, an employee relationship involves an expected net cash flow, an expected holding period or tenure, and a fair amount of uncertainty. The value of the employee relationship is equal to the NPV of the expected net cash flow over the expected tenure of the employee less any initial investments in any employee acquisition and training, etc.

The Job as an Asset to the Employee

The asset analogy is most easily recognized from the employee’s perspective. In many countries, it is so difficult to discharge an employee that they, in effect, have a property right to their job. Not surprisingly, employers are reluctant to make commitments they can’t change as conditions change.  Employee claims to property rights in jobs are most visible in highly unionized or public sector workplaces. The UAW famously negotiated an agreement with GM that paid laid-off workers 80 per cent of their wages. One often hears of “getting on the payroll,” an expression not of incurring an obligation to work for an employer but of locking-in a reliable flow of income and benefits. Dave Bing, the great Detroit Pistons guard and now Mayor of Detroit remarked about escalating union demands as the city plunges toward bankruptcy, “we are not a jobs provider, we are a service provider.”

Needless to say, the actions that employees will take to protect the value of their job asset are not always consistent with increasing the value of their relationship to their employer. We are all in this boat together but not always rowing for the same shore.

Employee asset valuation

Most of my friends are not economists but all are experts in economic policy. Many are distressed that jobs are not returning or being created fast enough, despite extraordinary stimulus expenditures.  Some are appalled that some firms are reporting improved earnings and increased executive compensation but not hiring workers. When I suggest that expected future conditions and uncertainty about them might not warrant creating many jobs, they point to the profits and bonuses as evidence that the “money is there” to rehire or hire workers. When I try to point out that profits belong to shareholders and quote my old friend, George Rifakes, a veteran senior executive, to the effect that, “customers are our only source of revenues” I am told that this is a “bad time” to be rewarding shareholders and executives and that resources should be focused on hiring people to get the economy back on track.

Let’s examine the outlook or expectations for the factors that determine employee relationship value. First, expected profitable employee tenure depends upon the expected timing and duration of increased demand. If creating a job involves a substantial up-front investment, employers need to be confident that demand for the output will persist long enough to justify the investment. The recession may have ended last quarter but continued GDP growth is forecast generally to be modest and won’t reach previous levels for some time. As a result it is difficult for most firms to take on a long-term employee commitment at this time. Until there is more evidence of a sustained increase in demand employers will try to use the spot or part-time employment markets to handle any short-term increases in demand.

Second, the net revenues attributable to employee effort (the primary incentive to hire) depend both on the prices received for employee’s output and the wages and other costs associated with producing that output. Prices and wages are likely to be held down by the current slack in U.S. capacity and competition from imports. But other employee costs are uncertain, especially those involving health care and taxes. Health care  insurance mandates for employers are possible and health care costs will probably rise.  No one knows how much of the burden will fall on employers. The Bush era tax reductions seem almost certain to expire at the end of 2010. Since most small employers combine firm and personal income and must pay a matching amount on employee income taxes, the net funds available for hiring and investment will be lower in most cases. Employees live off of their net income after taxes and when they see smaller paychecks, they will push for higher gross salaries to compensate. Not all will be successful but some will, further reducing the employee relationship value and the amount available for investing in new employee relationships.

My non-economist friends often deny the role expectations play in employers’ decisions. So far as I can tell, they reject the notion that the decision is as sophisticated as investing in an asset and indicate that the employers they know don’t conduct the sort of analysis required. But people often make major investments without explicitly considering the math. For example, choosing to have children involves a highly speculative investment over a long term. In poor countries, fertility is often very high because the children pay off relatively soon as workers (quasi employees) and later as old-age service providers. As countries become wealthier fertility declines, and parents reduce their family size. In making the most intimate of investments, economic expectations are a major factor as The Economist explains in a recent cover page article. If parents in an emerging country can make delicate investments based on their intuitive grasp of conditions, surely an employer in the United States can base his hiring decisions on a feel for his commercial prospects.

We just hope that the offspring of the parents’ investment find healthy employers and jobs when they are ready.

Posted by Bob

Who Creates Jobs?

The right answer isn’t the government.    The government only can redistribute jobs from one sector or firm to another.  They do this via taxation, making the taxed less profitable and subsidizing someone who is less efficient than the taxed.  Nice, huh?

The government, though, through its tax and regulatory policies can either create an environment that encourages entrepreneurial activity or it can stifle it.  Typically, it opts for the latter.  It is easier to deal with (read: control) a handful of big entities: big business, large labor unions, etc.; that are beholden to the government than it is with an enormous group of smaller firms that don’t like to schmooze or be schmoozed by them.  As such, most of the US’s economic policy is directed towards making life easy for large firms and, consequently, more difficult for small firms.

Regulation can be thought of as equivalent to a property tax; you pay it regardless of the income generated.  Large firms can spread the costs of regulation over many more units than a small firm can.  In fact, big firms like regulation because it allows them to compete with the more nimble small firms.

Okay, then, who does create most of the new employment?  Big firms employ a lot of people but that isn’t the same as expanding employment.  It is small firms who tend to be in the growth stage of their life cycle and add employees as they grow.

A simple example will explain why big firms, on balance, won’t add employees.  Think of the auto industry.  I use this because most are familiar with it.  Assume that all of the autos purchased are made in the US.  Prior to the recession that was about 18MM vehicles.  That is close to maximum that will be purchased every year.  Most vehicles purchased now are replacements for ones that are scrapped.  There is no need to increase employment in this industry if the total volume of output is constant (maxed).  However, if the manufacturers want to give raises to their employees without having to raise prices, which they couldn’t do very well in a non-inflationary environment, they will have to increase productivity.  With higher productivity, it will require fewer workers to produce the 18MM vehicles.  Therefore, it is easy to see that with increasing productivity the workforce at the auto plants will decrease.  They will be well paid but there will be fewer of them.

On the other hand, small businesses will be expanding output and have a need for more inputs, especially workers.  There are many more small businesses than there are big businesses, so if every small business hired even one additional employee the overall employment in the US would increase.  It is also important to note that large businesses tend to be capital intensive, while smaller firms tend to be labor intensive.

Unfortunately, the government: federal, state, and local; inflicts policies that strangle initiative in the small business sector.  They do this through a variety of mandates: health care, OSHA, workmen’s comp., building codes, etc.  One can say that the workingman /woman needs protection from big bad businesses.  I would submit that small businesses need protection from big bad mandates.  The elected officials who pass these bills don’t bear the consequences of the damage they wrought.  In fact, it allows them to come up with some additional legislation to address the damage.  The option of repealing the underlying culprit would never occur to them.

If the US expects to recover from the current recession and expand employment opportunities on a more consistent basis, it needs to radically revise the way it addresses economic issues.  It should do less, much less.  I know that the knee-jerk reaction is for the government “to do something”, every time there is a hiccup in the economy.  It needs to resist that impulse.  The fix stays forever, even though the “crisis” has passed.  The legislation should be designed to create a framework within which firms can compete on as level a playing field as possible.   Most legislation is crafted for favored groups, regardless of the impact on the economy as a whole.

Doing less can result in much more being achieved.


Posted by Jim

Jobs “Saved”

Jobs “Saved”

When I use a word [number],’ Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean — neither more nor less.’ From ‘Through a Looking Glass’ by Lewis Carroll.

The endless repetition by the Obama administration about the near magical effects of the stimulus package brings to mind this passage from Lewis Carroll.  Clearly, nonsensical jibberish has a long pedigree.  The administration has gone to extreme lengths to justify/rationalize the stimulus package.  For some inexplicable (to me, anyway) reason they have latched onto a concept they call jobs saved.  Latched may be understating their devotion to it.  There are two objections that come immediately to mind about it.  The first is well stated by Professor Allan Meltzer of Carnegie Mellon University :  “One can search economic textbooks forever without finding a concept called ‘jobs saved.’ It doesn’t exist for good reason: how can anyone know that his or her job has been saved?”  Simply put, this is something the administration has created on the spot.  The second objection is empirical, which is to say the evidence that has been used to support the 650,000 jobs saved figure is laughable in the extreme.

It is disgraceful that a) the administration should expect their economic advisors: Larry Summers, Christina Romer, et al. who are very good economists; to go along with this nonsense and b) that they do.  One can forgive Joe Biden for mouthing it, since he has a knack for getting things wrong and being arrogant about it. (One can stomach someone who is competent for being arrogant, but incompetent and arrogant is unforgivable.)

The growth or non-loss of jobs since February has been all in the government sector.  Private sector jobs have shrunk every month.  The only positive thing that has been said is that the rate of loss has slowed down.  Whoopee, let’s hear it for that second derivative turning in our favor!

Now the Wall Street meltdown could, in my opinion, have been mitigated with much less pain if the Geithners’ of this world would having been willing to have a big bank or other financial institution go bust on their watch.  Let them go bust on Friday and on Monday they’ll open for business under a new name.  Life would go on.  The keys in all of this are that in the private sector there are substitutes for everything, competition would force corrective actions to take place, and this episode was of a cyclical not secular nature.

The situation is diametrically the opposite in the public sector where the bulk of the stimulus money has actually gone.  In this arena the problems are of a secular nature.  Time isn’t going to cure them.  Four or five years ago Business Week had an article about the coming public sector pension disaster.  Politicians granted pensions and other retirement benefits that far outstripped their ability to deliver.  These mistakes and the bloated labor forces have become albatrosses in more than a handful of states.

This current crisis would have been the perfect time to address these problems.  Instead, the Feds slipped a two-year supply of methadone to these junkies so that they could avoid making the hard decisions that need to be made.  A year and a half from now the problems will be that much worse and the adjustment that much more painful.  Adjustments don’t have to mean people being laid off.  They do mean that when a person resigns or retires the slot is eliminated and productivity increases.  It means that raises are eliminated or reduced just like in the private sector for those who are still employed.  It means that defined benefit pensions are frozen as of now and all future pension accruals are in the form of defined contribution plans, just like the private sector that has to keep topping off the public sector defined benefit plans even as their own 401Ks are tanking.  This all could have and should have been done if the goal is to make our economy productive and competitive again.

In New York State where I live, the governor has sounded the alarm over and over again about the catastrophe otherwise known as the state budget.  The legislature, led by Sheldon Silver, act as if nothing is wrong.  They are out there re-arranging the deck chairs on the Titanic.  Wall Street provided something like 40% of the State’s income tax revenue.  That’s history.  Goldman Sachs notwithstanding Wall Street won’t be as profitable as it was for many years to come if ever.  Rich people have fled the state.  Only someone seriously deranged or subsidized beyond recognition would open a business or expand one in NY.  Most prosperous locales are living examples of Schumpeter’s creative destruction: some businesses, the less efficient ones, close, while new ones continually open.  In NY businesses close but they aren’t being replaced by new ones.

This is the cost of “saving” jobs in the public sector.  It prevents new ones from be created in the private sector and, ultimately, it won’t save the public sector ones either.  The politicians in the states need to be held responsible for the terrible choices they have made in the past.  Letting them off the hook will only serve to make the day of reckoning more severe.  How will the administration explain those losses:  jobs that didn’t disappear two years earlier because we increased the Federal deficit one more time?

Posted by JIm



The Profane Comedy

Dante’s excruciatingly long 14thcentury poem, The Divine Comedy, never really struck me as funny when I was forced to read selections in high school. In the poem’s most famous section, The Inferno, Dante, as would most intolerant Christians of the time, placed Mohammed and Ali in Hell. But, so far as I know, Dante never killed a Muslim for his beliefs.

I buy (but rarely read) Salman Rushdie’s tedious books as a tiny token of respect and support for his right to pen tedious books that offend Muslim fanatics whose response to his 1988 book, The Satanic Verses, was to place a private-sector death warrant on him. This seemed excessive punishment even for the tedious and improbable nature of the book exemplified by its interminable, fantastical opening scene of Gibreel and Saladin tumbling and babbling and then flapping down through the sky 29, 500 feet to a soft landing in the English Channel after their airliner explodes. (This by the same guy who recently slammed the plot of the terrific film “Slumdog Millionaire” as unrealistic.) Several booksellers declined to stock Verses and people tended to grant him more than the usual personal space. To its credit the British government provided guards for Rushdie. Eventually the fatwa seemed to rot away or expire and Rushdie was able to resume a more normal life although riots in a few Muslim nations followed his knighthood in 2007 and the Pakistani Prime Minister noted that the honor justified suicide bombings.

Then pre-emptive cowardice in the face of radical Islam became so common that a false 2005 story in the Lancaster Evening Telegraph reporting that British banks were banning piggy banks because they were offensive to Muslims was widely believed. The British were once made of sterner, if a bit more intolerant, stuff. In 1853 when sepoys who believed that their new Enfield cartridges were coated with pig fat revolted, the Commander in Chief in India, General George Anson, said, “I’ll never give in to their beastly prejudices.”

In 2005 the Danish newspaper, Jyllands-Posten, seeking to highlight and confront  incidents of fear-based self-censorship, commissioned and published a dozen cartoon depictions of Mohammed. A group of Imams then took the paper’s cartoons and a few uglier ones of their own creation and toured Muslim countries whipping up violence that resulted in calls for sanctions against Denmark and cost about 200 people their lives. A fairly large number of papers and Internet sites have since published the cartoons with little follow-on hysterics, though the Danish police did arrest a few people suspected of plotting to kill the cartoonist responsible for the portrayal of Mohammed wearing a turban in the form of a bomb. It is fair to question the motives of the newspaper, it is fair to question the use of unflattering depictions of The Prophet that conflate him with current extremists (we don’t use distorted depictions of Jesus’ to represent moronic super-fundamentalists). But the paper, however misguided or insensitive, should be free to comment on an important subject.

Disturbingly, a lot of people seem to believe there should be a constraint on freedom of speech if its exercise might cause mayhem. They have moved all controversial discussion of Islam and its followers under Justice Powell’s exemption to free speech for “yelling fire in a crowded theater.” But Powell was referring to false cries of alarm. The new cowards don’t even want you to whisper truthfully that the theater is smoking though they would yell at you if you were.

The cartoon incident revealed some distressing flaws in many Islamic fundamentalists’ senses of tolerance and humor. The incident also provoked many to question western commitment to free speech – especially that from the right side of the political spectrum. So, Jytte Klausen, a Danish-born professor of politics at Brandeis, set out to explore the incident in a book, The Cartoons That Shook the World, that included not only the newspaper cartoons but a selection of historical Mohammed art from western and Muslim artists. Her publisher, Yale University Press, then seems to have taken pre-emptive cowardice a step higher by commissioning a group of experts to perform a risk assessment of the consequences of publication. The group, not surprisingly, warned of dire consequences should the illustrations remain in the book. The YUP then browbeat Professor Klausen into accepting reluctantly the gutting of her book and diminishing its value to readers. Now my quandary is that I can’t buy Professor Klausen’s latest book because that would benefit also the YUP. So, to be consistent with my Rushdie Rule, I’ll have to buy one of her earlier works –none of which really interest me.

The YUP has been criticized by some journalists, academics, and authors, though the denunciations of censorship seem mild to my ears compared to the uproar when NASA’s James Hansen accused the agency that employed him of censoring his public statements about climate change. A subject which, holding aside the unsettled science and unclear consequences, has its own intolerant believers. But, so far as I know, none of them have murdered any “deniers.”

The most recent event, the one that prompted this note, is the admitted cowardice of Roland Emmerich, the director of the disaster movie “2012” which features the destruction of a Buddhist Temple, the White House, the Sistine Chapel, and a number of other western cultural and religious icons – but not the Kaaba, the strange black cubic structure  that looks like a small Borg space ship landed in the center of Mecca. At least he was honest about his cowardice, “We have to all in the Western world think about this. You can actually let Christian symbols fall apart, but if you would do this with [an] Arab (sic: he doesn’t distinguish between Arab and Muslim) symbol, you would have a fatwa…” Sadly, the 2004 murder of Dutch filmmaker Theo Van Gogh by a Muslim extremist objecting to his film “Submission” that was critical of the treatment of women in Islamic societies suggests Emmerich has reason for his fear.

I’ll buy Rushdie’s books, I’ll buy Klausen’s, The Challenge of Islam: Politics and Religion in Western Europe (Oxford University Press, fall 2005), but I’ll be damned if I will buy a ticket for “2012”. I hope you’ll do the same.