Saturday, July 23, 2011

Colbert, Romney, and Ha-Joon Chang

In 23 Things They Don't Tell You About Capitalism Chang explains why it is not true that businesses should be run exclusively in the interests of shareholders. In a nutshell stockholders interests are not necessarily aligned with the long term interest of a company. A stockholder can shift his money very quickly. So if a company can maximize profits today, by reducing wages or resisting investment in equipment, that can translate to big payoffs for a stock holder today. They can reap large dividends. And if that means down the road the company is not capable any more, that's OK because it's easy to jump out. There's risk here for the stock holder because he may not get out in time, but if he's smart he can do well.

That's not true of a worker. A worker can't just learn new skills or move to a new location in a single day. So a worker is more interested in the long term prospects of the company that he works for.

Chang uses GM as an example. Decades ago GM was on top of the automotive world. To please Wall St they focused less on innovation and investment in themselves and more on paying out dividends. They rode that strategy all the way to bankruptcy and state bail out. The stock holders were happy and didn't really mind the exorbitant CEO salaries. They were paid well. But the workers had tough times.

Steven Colbert kind of illustrates the point in this commentary related to Romney. It touches on the idea that what we need in Washington is people with business experience.


HispanicPundit said...

GM's problems were unions and bad luck. Because unions artificially increase labor costs so much relative to their competitors, GM was kinda pushed into the large SUV market.

This made sense: they needed a product with higher profit margins - to compensate for the overpaid employees. They were doing okay for a while. Then gas prices skyrocketed. Harming GM and others in the same situation.

Small cars have much tighter profit margins. Very difficult to compete in that arena...but they are trying nonetheless, but still getting crushed by their competition.

Oh and, the same criticisms you give about stockholders can also be said about workers - they can have the same short term gain. Of course they are less mobile - but stockholders too can suffer from bad timing.

Jon said...

Two anecdotes for you. A friend of mine was a welder at Ford. One day he tells me that an employee was high on the job and was fired. But he was union, so he was back working shortly afterwards. This friend was kind of a fan of the union, but thought that was crazy.

As much as I'm a fan of unions it's true they come with costly abuses. I have another family friend at GM. He's a master mechanic. Fixes all their stuff. He is like the worst caricature of a union worker you would ever meet. Totally feels entitled. He took a "layoff" that included unemployment, plus compensation from GM and this meant he was making like 80 or 90% of his pay. Got like 2 months off. Soon as he went back he took his regularly scheduled 2 week vacation to Florida. Drove me crazy. And I was a right winger then.

But the other thing this guy said was that the state of the plant where he worked was shocking. He was the one that kept the equipment working, so he knew it better than anybody. He'd tell management that the equipment was so old it barely functioned anymore. The failures of the equipment were constant. He'd say that it just needed to be replaced. They'd say no. Get some duct tape and glue and keep it going (I'm exaggerating, but this was the mentality).

Of course it's just a story, but the thing is Wall St doesn't necessarily care of workers are over paid. I mean, reduce it if you can to increase profits. But if your hands are tied that's fine. We need profits in any case. So cut capital expenditures. Let's go for short term profits and dividends.

The short vs long term horizons of stockholders/employees is one of contrast. You're right that ultimately I'm not as concerned with the long term health of my employer as I am in my own self interest. But I'm MORE interested in the long term health of the company than Wall St because I'm not as mobile as they are.