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Depending on the source, your industry made between $75 and $99.6 billion dollars just last year, but what’s $20 billion in these times, anyway? Forty percent of your employees are temporary, at least in several of the firms. The industry average is 25% of employees are outsourced and released when the product is finished. One firm, who shall remain nameless, each year signs over 100 contracts with teenagers who do contract work for you. Your industry, according to Michigan State University professor Casey O’Donnell, “is a decade ahead of where a lot of industries are going.” Yes, having forty percent of your employees being outsourced sounds like a great future for all, and the industry we’re looking at isn’t pounding nails or lifting sacks of concrete.

 

Of course, there are downsides to outsourcing: “Many companies play down the use of outside labor to encourage the perception that they alone created the technical wizardry” of the product. Sounds like the suck-ups have made it to the board room, huh? After all, the people who created the product don’t deserve any recognition. “Outsiders are sometimes required to sign ‘secret team’ contracts in which they are left out of production credits.” So if you’re a temporary worker, you won’t be able to prove that you worked on a product, to put that accomplishment on your resume to get a “real job.” It’s good to know that the industry is going to treat you like furniture, and deny you the ability to claim any success, at least when looking at the product.

 

Let’s not forget the global economy’s involvement in all of this. A firm based in San Diego farms out some of the work to a firm in Utrecht, Netherlands, who pays a worker in Tegucigalpa, Honduras, $7.00 an hour. From one side of the globe to the other, with billions of dollars in revenue, and paying workers in Honduras $7.00 an hour.

 

The multi-billion dollar industry admits that “overseeing outsourced labor is so time consuming” but apparently it beats the alternative of paying people when there isn’t much to do. Of course, some of us might think that what is to be done should be determined by the higher ups, the country club class, the Ivy-League MBAs that think up all of the brilliant ways to make themselves wealthier and how to maximize profits. It would seem that the folks up in the C-suite would be determining what needs to be done, but apparently not. Even with overseeing outsourced work being time consuming, it is better than paying people a regular wage, especially when your firm is only making a few hundred million a year.

 

The industry that I am referring to is the video gaming industry, and you can read all about it in The Wall Street Journal of April 11, 2017. High tech has come a long way, all the way to $7.00 an hour jobs in Tegucigalpa, Honduras to high school teenagers programming in their high-school library, to H1-B immigrants paid fractions of the wages American workers would be paid. Talent is now outsourced, and soon there will be more and more of it, even in the previously high-paid, well-educated information technology and programming departments. We have met the enemy and he is us. The future is micro employment. Independent contractors will be doing everything, instead of cross-training.

 

It might come as a surprise, but there is a steel company in America that keeps employees on the payroll even when business is slow. When business is slow, they find work for the employees, and when there is a lot of work, the employees understand that they have to work overtime, because the work is there and has to be done. The company that I am referring to is Nucor Corporation, where the swings of the economy are dealt with by keeping employees loyal. Loyalty. You might remember it from a long time ago. Loyalty is where there is allegiance to someone or organization or entity. Nucor is a very successful company that understands that loyalty is a two-way street. Cats, dogs and people are loyal when showed loyalty. Thieves, suck ups and sociopaths consider loyalty an opportunity to exploit people, a weakness that presents an opportunity.

 

People used to be loyal to products or organizations, and organizations to their staff. Now there are essentially two sources of loyalty; something that you find at the animal shelter and the other loyalty is to money. Of course, loyalty has always been a two-way street. You are loyal to entities that are loyal to you. I am consistently amazed by the organizations that pile on work, leave you alone to work late to deal with hours of problems that you didn’t create, and then consider you disloyal when you find a job where they treat you better; they have no idea what loyalty is or should be.

 

It’s all about the money. If we can farm it out, even if we have to watch or oversee the workers carefully, it is still cheaper than hiring people. Organizational knowledge, that concept of knowledge gained from remaining in an organization and learning how to do things from experience within the organization, has no more value. It’s the 1099 economy, the gig economy, the micro employed. She dated you all year, and then dumped you right after prom. People have moral objections over buying goods produced in sweat shops, and yet our outsourced goods and services are perfectly acceptable. They save us money. They can’t get health insurance, they don’t know where their next paycheck is coming from, but they’re like entrepreneurs. Could it be that America’s corporate leadership, which can’t seem to get pay right, can’t get running companies to keep and retain talent, so, due to their ineptitude, everything gets farmed out?

Comments

Dino Manalis Added Apr 11, 2017 - 1:52pm
Outsourcing should only be allowed when it's practically impossible for employers to find workers domestically!  We don't have that problem!
Jeff Jackson Added Apr 11, 2017 - 2:02pm
I hear it all the time, that there aren't enough qualified people to hire, and the hiring managers just can't seem to find anyone. At the same time, I see hundreds of people looking for work, skilled, experienced people. This is my cognitive dissonance. I really like the part where the outsourced people can't get their name on any of the product; that's a real scorching play. Help us make something that will make us billions, and no, we can't give you any credit. 
George N Romey Added Apr 11, 2017 - 3:58pm
Jeff demand has been crashing only gimmicks have covered it up.  One day the CEOs will wonder what happened to all of their customers?  Then the CEOS will realize they killed them all.
Jeff Jackson Added Apr 11, 2017 - 4:31pm
That's the thing, George. When you have a few people who want to buy Rolexes, Rolls Royces and yachts, and everyone else scratches to make a living, your economy will go  down the toilet.  The middle class has to make money or the economy will go right down the tubes. The contractors aren't going buy anything when they don't kn ow when their next job will be. Steady employment will kickstart the economy, and nothing less can do it.
George N Romey Added Apr 11, 2017 - 4:36pm
Jeff what we hear is that the middle class is just a fluke and that we should get the economy we now have.  We are told that's globalization and technology which can't be stopped.  We will excuse our country into third world status.
Bill Kamps Added Apr 11, 2017 - 5:25pm
No exactly George, but close.  No one is in charge of making the economy fair, it never was fair, and it never will be fair.  You and Jeff can complain all you want, but it wont "fix" things.
 
Its not possible to pass laws that restrict how and where jobs are created, unless you want to create a state run economy, which I know neither you nor Jeff want to do. 
 
Things were different before, because it was a luxury the companies could afford.  When companies are growing fast, when there is little global competition, then companies could  afford to be generous. That isnt the case these days, and no one is going to pass laws that guarantee high paying middle class jobs.
 
So yes, things are no longer as they were.  Times have changed, there is more global competition. When there is more competition, people's standard of living falls in those places that depended on minimal competition.
 
Of course companies, the rich, and politicians play unfairly.  Could they do more to support the worker, of course they always could do more.  The only way you can have a guaranteed job for life is if  you live in a king and serf society, and then you do have a serf job for life.
Jeff Jackson Added Apr 11, 2017 - 8:42pm
A hundred billion dollar industry that doesn't have the money to pay for staff? Does that sound feasible? I have seen the firms that that use people on-call, and many times they lose out on opportunity because they are not prepared- that is, they do not have the talent available, to deal with certain advantages that occur, as well as address problems in a timely manner, again, because of lack of staffing.
From personal experience, lack of staffing can cause frustration in both employees and customers, and I have had high-quality employees resign because of too much stuff piled on them, and I didn't have any more resources to give them to help the deal with what was given them. I realize that maximizing output is a goal, but pushing people over the edge and losing them as employees is too far, it is called losing talent and I have seen firms do it and then wonder why their efficiency was falling off. This story made The Wall Street Journal for a reason.
John G Added Apr 12, 2017 - 4:35am
So how are you geniuses going to create employment while at the same time cutting government spending?
 
Government spending is private sector income. And you want to cut it.
 
And you probably think that the private sector can save at the same time as the government can run surpluses.
Jeff Jackson Added Apr 12, 2017 - 5:38am
Nothing in the article mentions cutting government spending.
Ari Silverstein Added Apr 12, 2017 - 8:20am
I’m curious to know if you have a solution to the “problems” presented in this article or if you’re just venting?
 
The reason “problems” is in quotes is because I don’t see anything wrong here.  Businesses should attempt to maximize profits as making a profit is the purpose for being in businesses.  The best businesses maximize profit the most.
 
In maximizing profit, not only are businesses able to stay in business, many choose to grow, which could mean more jobs for starving Hondurans or unemployed Americans.  Depending on the nature of one’s business it may make perfect sense to outsource some work (Apple) and for others it may make sense to pay Americans (Walmart).  I certainly don’t propose anyone get in the way of making these critical decisions, they should be made by the leaders of these companies.  And those leaders whose decisions maximize profit the most, should be applauded for a job well done and not ridiculed and called nasty names, like I just witnessed in reading this article. 
Jeff Jackson Added Apr 12, 2017 - 8:51am
Ari, I said nice things about Nucor corporation, which as a different approach to retaining employees. In college they taught me about "organizational knowledge" where you learn things from being in the organization and witnessing its operations for some time. As the article mentions, given the outsourcing scenario, organizational knowledge is being sacrificed. 
If you consider those nasty names, you should read when I really want to call people nasty names. I usually prefer a more subtle approach. Apple's president Steve Jobs flatly said that some positions would never return to America. I think Jobs was convinced that there was no reason to try. I like profits, they pay the dividends of my stocks. I am also very concerned about social responsibility, a growing factor in today's marketplace.
Witness the American Airlines incident just the week of April 11. Social responsibility is an important aspect of doing business today, not just making a profit. In fact, I have analyzed the social presence of corporations and written reports about them. Today's media places a great deal of importance to social presence. American Airlines may be facing a boycott from Chinese customers because of their misbehavior. Corporations are influenced more and more by their social responsibilities. 
I think The Wall Street Journal published the article to demonstrate how those companies operate. From reading the article, all of the outsourcing does not paint a flattering picture of the video gaming industry, and neither does my essay. While I may be a bit more judgmental and sarcastic, companies who think only of profits, and the CEOs who do likewise, are not going to be cast in favorable light when examined by the media. Capitalism and profits are all fine. But I am far from the last person, including management experts, who do not look favorably upon organizations that consider profit before everything else. And I suppose I need to repeat that we cannot economically thrive when just a few make millions and the rest of the masses barely survive. I am not advocating socialism or wealth redistribution, I am advocating social responsibility. 
Bill H. Added Apr 12, 2017 - 11:11am
 
When companies live only by spreadsheet results, they completely forget the real factors that drive a successful prosperous long-term business.
The elements of employee moral, teamwork, drive, "group think", along with driving thinking towards increasing revenue, rather than cutting costs. Having employees involved with suggesting ways of increasing revenue is another lost art these days, which is much better than having employees constantly worrying about the next "reorganization", layoffs, and working in an environment of fear and constant competition between employees who's only thought's are to hold on to their job at the expense of backstabbing other employees and worsening their own moral and health.
I watched what happened when a local power utility made the idiotic decision to replace their existing I.T. staff with a group of people from India on H-1B visas who were supplied by an "American" staffing company that was owned by a company in India. To make matters worse, the people that they were replacing were required to train their replacements, or risk losing their pensions and "separation benefits". Needless to say, once this was made public, the company was besieged and ridiculed by both local media and public pressure to the point of not only stopping this ignorant move, but becoming the prime local example of corporate greed and poor management that may have actually saved many other local jobs from being eliminated in other local industries.
George N Romey Added Apr 12, 2017 - 11:20am
The business cycle is focused on the current quarter.  People forget the number of privately held companies owned by "investment firms" out for a quick buck.  They are worse than the pressure placed on publicly held companies by Wall Street.
 
As Bill said we live in an environment where every decision is made by a spreadsheet. Business acumen, experience, creativity and critical thinking are out.  Ask all of the CEOs of these struggling retail chains about what has happened to aggregate consumer demand and how they have to keep prices super low to get the sales they do.  And by the way, the evidence shows only a part of that sales lost is going to online sales. About half of the decline is just weaker demand.
 
Turns out when people become economically dispirited, frightened and disadvantaged they do not buy as much.  Am I sure that must be a shocker to the seven figure, Ivy League MBA types that can always afford to go out and buy the latest hot item.  
Jeff Jackson Added Apr 12, 2017 - 11:30am
George and Bill H. please accept my thanks for  demonstrations of corporate wisdom gone wrong, and the  social/economic impact of poor decisions. I hoped that the example of Nucor could at least demonstrate that not all of the organizations are ran by numbers-driven drones. More and more organizations are realizing that they have social responsibilities, although there are still too many that think they should make several thousand times what an average worker should pull in. Maybe with enough of us, we don't need a revolution, just some clear-headed thinking. 
Bill H. Added Apr 12, 2017 - 11:43am
 
I was fortunate to have worked for several companies in the past that "had it right", and were ran by some really great leaders that had worked their way up the ranks and understood the entire operational "big picture". I also have worked with several in more recent years that were only concerned with cost cutting at any opportunity and had no clue of what really drove their profits. All of the issues that we observed these days seem to be tied to the "digital mindset", which is yet another product of technology gone wrong.
One of my biggest pet peeves!
Thomas Sutrina Added Apr 12, 2017 - 11:55am
Great article.  I have worked for Dow Chemical that promotes from within and is another Nucor.  I got my first few patents at Dow as a new employ right out of college.  I did learn something.  You can not always hire an outsider that knows anything more then an employ.  We did this and I know as much as the "expert" in our problem.  The solution was the patents that he did not even come close to solve.
 
Also they will learn from you and sell it to someone else.   Promoting from within at Dow means that you plan to train good employees.  And they acted for there future employer DOW.
 
You can hire hands but you can not hire thinking.
George N Romey Added Apr 12, 2017 - 12:03pm
By promoting within, encouraging loyalty and instilling a sense of business acumen not just being glorified clerks companies develop people that get to really know that business and how its changing.  This enables companies to compete better, versus those companies that hire people to crank out spreadsheets and that stay no longer than a year or so. I've talked to employment professionals here in South Florida and they tell me there is company after company in which people usually stay no more than six months.  These companies are constantly recruiting over and over again for the same positions. Also, many use solely contract workers so they are gone as soon as more permanent job is found.  Surely that most weigh on the bottom line.
 
Stable work forces benefit society, families, emotional and physical well being as well as the business cycle.  You can't find those advantages staring at an Excel Spreadsheet.
Bill H. Added Apr 12, 2017 - 12:09pm
Right George!
And stable well compensated employees benefit the entire community and all other local businesses, which comes back around to benefit the company in many other ways. It is the "fine-tuned machine" that many of us remember from the past.
George N Romey Added Apr 12, 2017 - 12:22pm
Bill over the years I've had many people work for me. At one time I managed about 40 supervisors and 450 employees.  Hard skills were never the real issue.  The employees that could work well with others, ambitious, caring, perceptive and level headed were truly great to manage. Then there were those that had difficulties with everybody, emotionally unbalanced, lazy or uncompromising. They were the ones that were a pain in the ass and the ones that I often had to go through the hassle of getting rid of.
 
Today's employment process doesn't determine who is who. You can't put these qualities into a check off sheet. You have to do interviews and get to know people as well as you can in the process. Today I see where companies only want to do "hardskill matching", most of which can be easily taught to a smart person.  The soft skills are no longer in vogue.  No wonder we have the level of mismanagement that we do.
Jeff Jackson Added Apr 12, 2017 - 12:36pm
Listening to George Thomas and Bill, does this perhaps drift into the fact that the "world economy" is kicking U.S. companies all over the place? Is it possible, that U.S. firms have really managed things poorly and if so, is that a reason why we haven't kicked the butts of so many foreign competitors? We led the world economy into the 1980s, and then the Ivy League MBAs took over and led us down the path to poverty. Starting in the 1980s, the working blue class failed to earn any money, while the executives made more and more, despite the directions that management gurus like Peter Drucker said. Some pretty clear clear conclusions are coming out of this thread. 
John G Added Apr 12, 2017 - 2:35pm
Ari Silverstein
In maximizing profit, not only are businesses able to stay in business, many choose to grow, which could mean more jobs for starving Hondurans or unemployed Americans
 
This is micro thinking applied to macro. It doesn't work that way. Capital will always try to shed jobs and minimise labour income.
That's part of its rationale.
George N Romey Added Apr 12, 2017 - 2:55pm
Common sense should balance the needs and welfare of a society over the desire of an enterprise to make money.  Its why we stopped industrial companies from pouring cancer causing waste into local streams or required factories to have adequate sanitation for its employees.  Some countries do not value or honor the safety and security of its workforce.  We should be proud that in the US we do, and should remain so.  
Thomas Sutrina Added Apr 12, 2017 - 3:13pm
Part of the problem is the cost of doing business in America is increasing as federal and state government are feeding more mouths and employing more bureaucrats.  Their job is to create and manage regulations.  So we strangle startups and make products over priced.
The promise or myth that cost can be reduced by hiring people when you need them.  Do not have to pay to train them.  Don not have to pay for them when the cycle of business is low so you do not need them.  Do not have to pay for the expenses force upon the company by government.
 
At some point continuity and knowing what needed without being told has a value that exceeds the costs presented above.
Bill H. Added Apr 12, 2017 - 4:04pm
 
Yes, also the fact that more and more candidates are selected from internet employment sites and the initial face to face interview (if any) is done by HR. In many cases the "selected" employee is forced under the new boss simply to fulfill either a quota requirement, or because the employee has been found to "fit in with the company culture" (accepting low wages, no issues with working long hours constantly, and no issues with attending conference calls or "e-meetings" after hours or while on vacation)
I witnessed this practice take a company from highly successful with happy employees and customers to a building full of conflicting egos, a major drop in employee production and teamwork, and unhappy customers all within a span of less than 10 years.
George N Romey Added Apr 12, 2017 - 4:12pm
The hiring process is a joke because companies have downsized it or have outsourced it.  Often you are interviewing with "technology" or with some low paid, under resourced and untrained outsourced person that know only the items printed on a sheet in front of them.  
 
I can't tell you the number of times I get an email from recruiters with incomplete and often unintelligent sentences in which words like analyst, financial, and management are misspelled (I assume they are too lazy or too rushed to spell check their mistakes.)   
 
I few weeks back I sent a resume to the NBC office down here in Miami for a financial professional role.  They responded by directing me to download an app and on the app make a video of why I was applying for the job and why I was a good fit. 
 
Companies no longer see employees as assets, they now are nothing more than a cost item to be reduced or eliminated.
Jeff Jackson Added Apr 12, 2017 - 4:19pm
They run the organization into the ground, and they walk away with millions. They have no idea how to do the jobs of those that they are supervising, but they sure know how to lean on them and squeeze the last bit of blood out of them, and then bring in someone new who will take considerably less money, even if they can't perform or generate what the elder employee generated. I had one that didn't know a lot of basic facts about the industry, but was killer at computers, and resented every time I heard a problem and solved it because of years of experience. Solving problems means resentment, especially when they can't solve the problem.
George N Romey Added Apr 12, 2017 - 5:43pm
Jeff at age 55 with years of finance, operational and banking experience, including working on a team to clean up the S&L mess I had psychopath tell me I knew nothing of business.  Someone that would scream and stomp like a five year old to look important. The more they shout the less they really know.  Its amazing what people will do to hide their incompetence. 
Jeff Jackson Added Apr 12, 2017 - 9:37pm
Yes, George, the screamers and the ones who rant and rave are usually the ones who don't know much and definitely do not understand how to fix the problem.
Bill H. Added Apr 12, 2017 - 10:50pm
 
At all of the meetings I attended, incompetence made itself obvious during the endless hours of PowerPoint presentations. It ended up becoming a classic battle of spreadsheets and PowerPoints, along with the usual overdose of buzzwords such as bandwidth, core competencies, key metrics, killer apps, strategic theme areas, synergistic branding, take this off-line, holistic empowerment, and  get down to the minutia.
I ended up creating a meeting buzzword bingo game that the few of us attempting to remain sane would play during the ego sessions.
Sanely, I retired in 2012.
Jeff Jackson Added Apr 13, 2017 - 8:45am
Bill Your storytelling of the augmented reality and disruptive technology within the ecosystem really demonstrated some thought leadership but I thought I would pivot into something that has more popular optics on social media. The Millennials are convinced that they’re the smartest thing that ever happened to business, and in order to prove that theory, they have to use terms that reflect intelligence, no wait, that’s not it. If they were well-read, they wouldn’t be trying to impress people. I have had people use terms I use, such as “our only saving grace” or “cross contamination.”
Ari Silverstein Added Apr 13, 2017 - 9:41am
I’ve heard good things about Nucor and they should be commended for having good labor relations.  But the tone of your article is one of animosity for all sorts of companies, just because you give Nucor a pass doesn’t change anything about what I wanted to say to you.
 
I’m all for socially responsible companies to, but who gets to make the call when a company is being socially irresponsible or responsible?  I don’t see anything wrong with maximizing profits, even if that means employing starving Hondurans.  Or is it your belief that Hondurans should starve so that Americans make more money?  That sounds socially irresponsible to me, but I’m not the one making accusations.  So let’s leave our moral judgement out of this and allow companies to maximize profit to the best of their legal ability. As it relates to the video game industry, if outsourcing some development is the way to achieve maximum profit, so be it. 
 
As it relates to CEOs that only think about profit, please name one?  Just like you and I, CEOs are humans and I’m sure they’re very aware of the pros and cons of all of their decisions. 
Jeff Jackson Added Apr 13, 2017 - 11:20am
Do I know what CEOs are thinking is not a rhetorical question, it is an impossible question. I can only judge people by their actions. Free markets are very efficient, but not always for the best. I have attempted to get some people to recognize that maximizing profits can be at the cost of society, or, as others have described it, “socializing costs.”
 
Suppose I will have a business where the working environment is dangerous, but if workers get injured, I will just hire new workers, rather than make the workplace safe, because I want to maximize profits. Injured workers become a burden on society, but I don’t care, I’m maximizing profits. By deliberately choosing profit over safety, I am, like it or not, passing the care of the people who are injured back on to society, because my job is to maximize profits. The society where I sell most of my products, the society that provides most of my market, the society that allowed me to start a business, wants too much money in pay. So, to maximize profits, I farm out the work to be done in societies where I would never have had a chance at starting the business, but who cares, because I am maximizing profits.
 
The society where I outsource the work would never allow me to start this business, and the wages are so low that the people of the society where the work gets done can’t afford my product, but who cares, because I am maximizing profits. If I owe Honduran society wages, why stop there? Why not Brazil, Argentina, Mexico, Ecuador, and everyone else? Do they owe us anything? Is my moral obligation that everyone gets to make money, even if, as a society, my business would not survive very long in those societies? But if they tax me or run me out of business, that’s all fine and well, because, they taxed me out of existence, or, to put it another way, they maximized the profitability of their taxation. Let’s all look out for ourselves, and maximize our profits while socializing our costs.  I am not a socialist, but the people who believe in maximizing their profits sure are, because as they maximize profits, they socialize costs, or, pass them along to society while they collect their maximum profits.
 
Somewhere along the line in the American system we realized that most of us bear social responsibility, even the millionaires. While I may not be my brother’s keeper, I do not have the right to deliberately jeopardize his health or safety, especially when I’m maximizing profits. Start thinking about your society. You can maximize profits until the health of the society is so damaged all they can do is lay around and breathe, and not much more, but you maximized profits. When you have maximized profits until you have all the money and the population which comprises your market is broke, you will win, and then you will lose.  
George N Romey Added Apr 13, 2017 - 12:18pm
Jeff because we live in a world of limitations the "maximizing of profits" is not finite. Yes you can fire workers, move production to where labor is cheaper and you will have no regulations to contend with. Since initially it works out so well other companies begin to do it in mass. Others get more creative like bringing the cheaper labor here.
 
The same goes true when companies realize that they can fire 25% of their workforce and heap the additional work on remaining employees that will do it fearing their own economic well being. 
 
However, the point gets missed that workers are also consumers of goods and services.  Joe the CEO is only worried about his own bottom line and is not and does not want to be concerned about the consequences of the bigger picture.
 
At some point the aggregate of actions cause very negative consequences.  We are now at that stage and it will only get worse. Look what is happening to retail and by the way of the lost store sales only about half has been due to the transition to online retail sites.
 
Think of this way.  You throw trash out of your car window and you know you can do it without repercussions.  Your itty bitty amount of trash won't do any harm or make the sides of the road unseemly. More people start to do it realizing that they won't be fined or ticketed and for awhile still no problem. Then it becomes a huge trend and suddenly the sides of our roads look like they did in the early 1970s.  If you are my age you remember what the sides of the roads looked like with mountains of trash, until the practice became strictly illegal with stiff fines and penalties.
Ari Silverstein Added Apr 14, 2017 - 8:08am
If knowing what CEOs are thinking is impossible, how can you be so sure they only care about profit?
 
A dangerous workplace will make it more difficult to hire, train and retain workers, not to mention the legality of putting people at risk.  All of that translates into increased cost.  So even if you’re right that CEOs only care about profit, it would behoove them to make the workplace safe.  You see, the free market is more than adept at solving the problems you keep presenting. 
Jeff Jackson Added Apr 14, 2017 - 9:29am
One more time: I can only judge people by their actions. And that's why the government is going to shut down the Occupational Safety and Health Administration,  because all of the companies have taken such strides to make sure that all of the workers are safe, that there is no more need for it. Yeah. That's going to happen.
George N Romey Added Apr 14, 2017 - 9:40am
Let's take a look at former Merrill Lynch CEO Stan O'Neil.  One of the very few African Americans to ever make it big on Wall Street he was born into poverty.  His father eventually got a job at a GM plant in which the younger O'Neil worked summers while attending school. He excelled in school and was accepted into the General Motors Finance Program. He eventually ended up on Wall Street.
 
In 2006 when investors stopped buying mortgage securities his risk advisers told him to get out of the business even though it had been insanely profitable.  He fired them and instead doubled down.  Even though there were no takers, he "warehoused" the securities sure in the fact that the subprime mortgage securities business would come roaring back, despite all the evidence otherwise.  His greed and stupidity caused him his job and for Merrill Lynch to be sold in a fire sale to Bank of America.  The strong culture that had persisted at Merrill Lynch for years of taking care of your customers and employees was squashed by this man, someone that by all means had the right stuff.  
 
Can you say his actions were designed to insure profits and a successful business in the long run?
Jeff Jackson Added Apr 14, 2017 - 12:19pm
It seems more that the government is more adept at handling problems than any of these geniuses. And by adept, we mean "bail them out" because the greed gets the best of them, they go broke, claim that the economy cannot function without them, and their pals in the government just hand them money. Why, Ari, why do we need regulations and regulatory agencies if the market is so just so darned efficient and magnificent? If the markets are perfect and the people running them so brilliant, why do we have such problems?
John G Added Apr 14, 2017 - 11:19pm
If the markets are perfect and the people running them so brilliant, why do we have such problems?
 
In no small part because of the ridiculous levels of money these people can get paid for, in effect, manipulating balance sheets. The business model of Wall St is 'control fraud'.
 
There's a 1992? paper written by Romer and Ackerloff available in pdf on the www called Looting: The Economic Underworld of Bankruptcy for Profit which all but predicted the GFC.
There's also a book by William K Black called The Best Way to Rob a Bank is to Own One.
 
Jeff Jackson Added Apr 15, 2017 - 12:25am
Wow John G fantastic paper. Lots of excellent examples of how the execs feed off of failure. I guess it is the really smart people who can figure out how to fail and still make money. Of course, most of the time it is the government's money, but then, they don't care about that- Thanks John!
John G Added Apr 15, 2017 - 12:31am
You're most welcome.
George N Romey Added Apr 15, 2017 - 8:55am
When I worked in NYC I worked with a lot of companies in the Chapter 11 reorganization process.  Executive Management would expand recklessly to pump up their stock price.  When it would all go bad the Company would file for Chapter 11.  Vendors/creditors were screwed as well as rank and file.  Shareholders were wiped out. Employees were forced to take pay cuts and give up benefits, sometime having their pension crushed.  However, the C level was paid huge "retention bonuses" to stick around and clean up the mess they made.
 
Yes, in the C suite failure does pay, and it pays well.
Stephen Hunter Added Apr 15, 2017 - 11:17am
Great article Jeff. You have inspired some insightful comments. 
What you are describing are the reactions to a shifting economy. All boils down to supply and demand. What we are geared up to produce now, is over supply for what is actually needed. And it only gets worse as time moves forward. Add to that the over supply of labour in the world, and many are caught in between, with 'not in demand' job skills. 
And yes the folks in the C suite will do whatever it takes to survive, that is just human nature.
George N Romey Added Apr 15, 2017 - 11:39am
As executive severance packages and golden parachutes were included in employment contracts starting in the 1980s the risks to senior management have been eliminated.  Even when they lose they win.  I'm sure the regular working stiff would like such guaranteed provisions.
 
Since demand is down we move from a country that produces high value goods and services to a country that provides mostly garbage services.  Think payday lenders, pawn shops, assisted sales, and the casino products peddled on Wall Street.
Jeff Jackson Added Apr 15, 2017 - 5:55pm
Thank you Stephen, I like to make people think. George, as I recall, in the 80s there were a lot of buyouts and hostile takeovers. There was the "white knight" who would buy enough shares to keep the hostile takeover from happening, and the white knight let the company stay the same with no changes. Then the executives (probably with the help of accountants and certainly with the help of lawyers) dreamed up the poison pill and the golden parachute.
The poison pill was to protect the executives from the free market that some of the commentators of this essay find so gosh-darn efficient and lovely. The poison pill was for the executives who knew that there was no way they were ever, ever going to get the millions that they were getting paid anywhere else (think Chipotle's $25 million a year CEO in the last few years) and so they arranged that if the company was taken over (yes, free market takeover) then they were guaranteed a severance payment of millions of dollars. Guaranteed, that is, and screw the working stiffs, nothing for them, but if you wanted to take over the company, fine, just remember that the CEO was going to walk away with millions of dollars, and the new owners were going to sign the check. Free-market self preservation at its best. The poison pills were really money for nothing. You want the company? Pay me. New contracts for all the working stiffs? Who cares about them?
 
 
George N Romey Added Apr 15, 2017 - 6:06pm
Jeff in the 1990s they turned into severance agreements.  Essentially as part of a employment contract the company agreed to pay the CEO (and usually CFO and COO at a lower amount) a certain amount if the company chose not to continue his/her employment. It was originally crafted on the alleged idea that you could not get a successful CEO (CFO/COO) unless you gave them a guarantee. It turned into nothing more than a freebie.  Most of the Wall Street executives that were fired walked away with tens of millions.
Jeff Jackson Added Apr 15, 2017 - 8:47pm
Great observation George. The rock-solid employee, one one with the organizational knowledge, that came in every day and worked, solved problems, took care of their responsibilities as well as others, they got nothing. I think the next job interview I'll ask them about the severance package!
Thomas Napers Added Apr 16, 2017 - 7:41am
“The poison pill was to protect the executives from the free market that some of the commentators of this essay find so gosh-darn efficient and lovely.”
 
I think you’ve missed the point your commenters are attempting to explain to you.  The free market is not always efficient and lovely, it’s simply a better way to run an economy than one in which the government exerts its power too often and too heavy-handedly.  There will always be a need for some government regulations and control, it’s a question of how much is too much?  In America, our government allows the free market to work it’s magic far more than other countries, but in my opinion we still search for government intervention too often. 
 
As it relates to poison pills, some pills allow companies to remain in America or as mutual companies.  If not for these pills, it could cause some of these companies would cease to exist. 
Jeff Jackson Added Apr 16, 2017 - 10:00am
Actually Thomas I think I get it, I have certainly written enough econ papers and business analysis papers that made the grade.
Economically, the problem is not free markets, it is the greed of individuals who seek to have everything. In societies where the government (the other side of the problem) allows certain people legal and economic advantages far exceeding others, the markets become imbalanced. Eventually, because wealth is concentrated in only a small minority, the entire economy becomes blighted (pick any African country you want here or most of the South American countries).
Eventually, the wealth concentrated with only a small minority of the population renders the economy (by default, if not intention) into a feudal economy, not a capitalistic state. I am a free market believer, but I also understand that the leverage certain people or corporations possess is too great and must be tempered, thus legislation like the Sherman Antitrust Act or the actions taken against the Hunt brothers when they tried to corner the silver market.
What I see Thomas, is that the wealth of nations (if you don't get the pun go back to econ class) is becoming far too concentrated for free markets to function properly. I suppose what the people are trying to convince me of is that everything is fine, when there are too many economic indicators that illustrate otherwise. The economic problem becomes a political problem, and things just get worse from there. So, no, I think the people that missed the point are the people in denial about the current economic situation and the indicators of its further decline. I would love for the government to stay out of the economy, but that is not going to happen in the 21st century.
George N Romey Added Apr 16, 2017 - 11:09am
Jeff beginning in the 1980s with the relaxing of anti trust provisions and allowing mega mergers or companies to grow to a state of too big too fail (think Wal Mart or GE) has enabled business to have undue sway over a society.  This is the genesis of our issues. 
Jeff Jackson Added Apr 16, 2017 - 1:03pm
Exactly, George. My textbooks said that when only a few hold the entire economy in their hands, it is a feudal state or economy. Capitalism is not just a few mega-corporations holding markets hostage and squeezing every dime out of customers, suppliers, and last but certainly not least, employees. Silver was a free commodity market, but the government forced the Hunt brothers to relinquish their stranglehold because of an unfair advantage. While the free markets usually resolve unfair advantages (yes, I believe in  free markets) irreparable harm is inflicted in the meantime. Cornering the market is great. Cornering the market and destroying all existing as well as potential competitors does not make for a stable economy, and I do not see how anyone could consider sanctioning monopolies or oligopolies (with certain exceptions, granted) a good economy.
Thomas Napers Added Apr 17, 2017 - 6:25am
“Economically, the problem is not free markets, it is the greed of individuals who seek to have everything.”
 
I just wrote an article on that very subject and I reject your belief completely.  Your first mistake is labeling people greedy who desire to have more.  All capitalists desire more and that is why our country has skyrocketed ahead of our competition in terms of providing more its populace.  So let’s not call the natural byproduct of capitalism as evidence of greed
 
The second mistake is your not so veiled attack on the rich.  Like the poor, the rich should be encouraged to make more money.  It’s thanks to those that you perceive to “have everything” to keep striving for more, that the rest of us benefit as well.  Or do you believe the economy is a zero sum game?
Jeff Jackson Added Apr 17, 2017 - 9:53am
OK Thomas, have it your way. Have 5% control 95% of the wealth, like so many other successful countries have allowed, Mexico for example.
When scavenging for food, be pleased the the rich have it all. One more time: the middle class built the wealth of the U.S. Our country skyrocketed ahead because a vast amount of people had money to spend, i.e. the middle class, which has been falling for three decades now. The direct result of the falling middle class is the deficit that we have been carrying, and will not likely carry for too much longer before we have to start paying on the interest of that debt.
I will state it again, I have nothing against the rich, despite the paranoid rants of people who see "veiled attacks." The middle class built America. Feel free to completely reject that notion, and let 5% control 95% of the money. You will get markets that can no longer sell things like homes, cars, and appliances, but that will be OK as long as the rich have everything. Like Mexico and other poor nations. But that's OK because the rich make each other rich. Screw everyone else. Great idea. I recommend moving to Mexico, where 55 million people live in poverty, according to the World Economics Association. I don't want to make the rich give up everything, despite my "veiled threats." I just want the economy to move forward, which it won't if the middle class does not have money.
George N Romey Added Apr 17, 2017 - 10:20am
Jeff back in 2009 when I started to become acutely aware of what was happening in this country as many others were (I had three friends that committed suicide because they lost it all with no hope) I began to write.  I've spent a lot of time in Brazil along with other South American countries. I wrote at the time and write again in 2017 if you want to see the future of the United States just look to our south.  When 5% controls 95% of the wealth you will get the same problems seen in Brazil, Argentina, Ecuador, Columbia, Bolivia and Central America.  Americans like Mike that defend the current system, this is what America will look like in a few short years.
 
We can be proud that the US successfully transitioned from an agricultural society then went on to build a middle class and broad based economy never known to mankind.  The countries I listed above never made the transition and instead splintered into a small ruling elite and a massive number of working poor.  Their problems have been multi decade and generational.  Is this what we want for the future of the US?
Jeff Jackson Added Apr 17, 2017 - 11:22am
George, my sentiments exactly, and precisely where the U.S. is going, while certain people continually insist that everything is fine. Yes, people can completely reject the idea that wealth concentration in the hands of a few is "the American Dream" and cheer them on as we go the same way as the countries that you mentioned. The 5% owning 95% is why we have a lot of people from Brazil, Argentina, Ecuador, Columbia, Bolivia and Central America trying to get to America, where there used to be a chance. I'm sure that the rich need to be warned of my "veiled threats" because, um, what, I might vote? Or, I might want America, not just the rich, but America, to be a wealthy nation, not just 5%.
George N Romey Added Apr 17, 2017 - 11:48am
Jeff a 2013 report showed that the 1% owned nearly 42% of the wealth and that was more than double or nearly doubled than any other industrialized nation.  What people forget is that every system in this country social, public, and private can only be sustained by a broad base economy.  All of these systems have interdependence.  Ultimately there is no choice but an epic fail.
 
You also make an excellent point.  If living in a nation where the wealth is concentrated is so desirable than why would citizens of that nation risk their life to escape and come to another country?
John G Added Apr 18, 2017 - 3:13am
The US economy is in a bad way because the Federal government isn't spending enough to get aggregate demand back up to the trend level of pre GFC growth.
The spending gap is due to the non-government sector wishing to save i.e. repair its balance sheets after a period of explosive private debt growth.
If you are scared by deficits and so called government debt, you are part of that problem and you are unable to offer a solution.
You need to understand the concept that is known as "the paradox of thrift".
It isn't really a paradox, it is just straight forward macroeconomics that is easily explained in sectoral balance accounting form.
Stop being stupid and wake up. Your rich class has been lying to you all your lives.
Jeff Jackson Added Apr 19, 2017 - 8:08am
The US economy is in a bad way because the Federal government isn't spending enough to get aggregate demand back up to the trend level of pre GFC growth.- The U.S. government needs to spend even more money? We've spent too much money as it is.
If you are scared by deficits and so called government debt, you are part of that problem and you are unable to offer a solution.  I'm part of the problem- OK, how so? I have offered many solutions, no one is listening. I am not costing the government money, I am paying taxes and working for local governments for far less than they pay their regular employees. That's part of the problem?
The spending gap is due to the non-government sector wishing to save i.e. repair its balance sheets after a period of explosive private debt growth. I keep hearing that corporations are hoarding piles of cash offshore because if they bring it into the U.S. it will be taxable, and this is why President Trump is moving for a reduced tax repatriation day. Yes, some companies like Basic Energy Services ran up too much debt acquiring other firms, but I am not aware of any widespread corporate debt, and I read The Wall Street Journal almost every day. 
Please elaborate, I'm confused. 
 
 
John G Added Apr 20, 2017 - 4:01am
- The U.S. government needs to spend even more money? We've spent too much money as it is.
"We" (you) are not the US government. The private sector is not growing because it is trying to save i.e. spend less than its income. The government, as issuer of $ needs to fill that spending shortfall and then some.
If there is unutilised capacity i.e. unemployment and underemployment, then the government is not spending enough to fulfill the private sector's appetite for saving.
John G Added Apr 20, 2017 - 4:05am
working for local governments for far less than they pay their regular employees. That's part of the problem?
Absolutely. Low wages are an enormous part of the problem.
Spending = income.
Ankur Mithal Added Apr 23, 2017 - 10:28am
We created an artificial entity called Corporation several hundred years back whose primary aim would be to make money for itself (and its owners). This entity has gotten better and better at it. Meanwhile, many individuals, and some governments, seem to have gotten better at abdicating responsibility for their own lives by assuming the supply of monthend pay-cheques is their right. Governments could legislate more, but that may be seen as interference with a free market.
Jeff Jackson Added Apr 23, 2017 - 12:55pm
One of my best friends is a legal entity. It is not a corporation, it is a trust. The trust owns property and makes transactions pretty much like a corporation. A trust is a great thing to have for a of of reasons, the same way a corporation is a good thing to have. Ran right, corporations are great things.