Business & Economics: February 2004 Archives

It looks like the grocery stike has ended, and the evil corporations got most of what they wanted and made some token concessions.

Current members probably wouldn't have to make regular contributions to help pay for their healthcare coverage for at least two years, as the union had feared, the sources said.

The supermarkets agreed to add millions of dollars to the healthcare fund's reserves, they said. But in a victory for the supermarket companies' bid to stem rising healthcare costs, their regular per-employee contributions to the healthcare program would be capped at a set dollar limit, the sources added.

They said current workers would not get raises over the three years of the contract. But employees would get two lump-sum payments, the sources said. ...

The main solution for the stores, it appears, is the two-tier system giving new hires less compensation. The employee turnover rate is relatively high in the grocery business, so those new, lower-paid hires could be in the majority within a few years.

So current employees (probably) get free health care for another two years, and no raises for three years. New hires will get paid less and and will have to (probably) contribute to the costs of their health care.

It looks like a complete loss for the union, in my opinion. The corporations still have to bear with the costs of the strike and the upcoming price war, but the strikers got almost nothing of what they wanted, despite their perseverance.

The union not only accused the chains of overstating the Wal-Mart concern, it claimed the markets were threatening to destroy one of the last U.S. jobs available that could provide middle-class comfort without requiring years of higher education.

Welcome to reality.

Just hours before the grocery strike was settled Thursday, presidential contender Sen. John F. Kerry joined a small throng of striking grocery workers on the picket line at a Vons market in Santa Monica, throwing his support behind their cause and describing them as heroes in their fight for access to affordable healthcare.

... no matter who you have to blackmail into buying it for you.

I've written a bit about outsourcing, but I just thought of an angle I hadn't considered before, thanks to an article about world demographics by Lexington Green. There's presently a lot of concern that high-tech jobs will be fleeing the United States for cheaper labor markets, and although there's a general feeling that new jobs will be created to fill the void no one knows exactly what those jobs will be. However, if the demographic trends given by Nicholas Eberstadt and cited by Mr. Green prove true, I don't think the US has anything to worry about -- I'll even go so far as to coin a new phrase to describe my position.

[T]he United States is [projected] to grow from 285 million in 2000 to 358 million in 2025. In absolute terms, this would be by far the greatest increase projected for any industrialized society; in relative terms, this projected 26 percent increment would almost exactly match the proportional growth of the Asia/Eurasia region as a whole. Under these trajectories, the United States would remain the world’s third most populous country in 2025, and by the early 2020s, the U.S. population growth rate — a projected 0.7 percent per year — would in this scenario actually be higher than that of Indonesia, Thailand, or virtually any country in East Asia, China included.

Mr. Green's conclusion echos my own thoughts.

Our destiny appears to be more Americans to work, think, create, innovate, invent, invest, build, trade, buy, sell … and, when necessary, to visit swift and crushing devastation on those who would do us harm. Good. Good. Sounds good. (Getting everybody "assimilated" remains an issue -- but we'll deal with that … .)

In contrary to all the chicken littles who always think the sky is falling, I've decided I'm going to be a chicken biggle. Ok, it sounds stupid, but frankly I don't think the sky is ever going to fall. If it does, I'll take a lot of convincing.

In relation to Virginia Postrel's NYT jobs piece, a commenter named SemiPundit wrote on Bill Hobbs' site that:

Ms. Postrel must have needed to knock out something quick and easy before rushing out to lunch.

What I got from her article was the rosy picture that if one loses a well-paid programming job to offshoring, there is always a bright future in cutting stone and giving facials.

Stonecraft is hardly a burgeoning new technology, since the ancient Greeks and Romans got to be pretty good at it. Besides, the market for extremely expensive granite countertops is quite limited--hardly affordable to those who earn a livelihood giving facials.

Where are we headed with a trend like this--to an interconnected network of cottage industries? Next thing, we'll be operating on the barter system.

First, it's obvious that stonecutting and facials are just examples and not intended to be an exhaustive list of undercounted jobs. I know plenty of programmers who lost their jobs and then went into business for themselves.

Further, where are we headed with a trend like this? I don't think SemiPundit is far off in suggesting that "an interconnected network of cottage industries" is in our future -- but I don't think that's a bad thing.

The main advantage corporations have over small companies is economy of scale. By (in theory!) streamlining management and facilitating communication between divisions, a corporation should be able to use the same resources more efficiently than could several small companies trying to work together to accomplish the same task. However, with the creation of the internet and the continual ascension of the service sector, it's not evident that large corporations will continue to maintain this advantage forever.

It may be that new technology is gradually making large corporations obsolete in some industries. Now, car manufactuing will require huge factories with thousands for workers for a long time to come, but the same isn't true for many other fields, particularly in high-tech. There are many advantages to working for yourself or working for a small company, and as technology allows small companies to be as efficient as large corporations (on an ever-increasing scale) I expect our economy will continue to shift.

Does that mean we'll return to bartering? Not likely, because money is simply too useful, and would become even more so if resources and production become further decentralized. I think SemiPundit was asking this question rhetorically, however.

What's ironic is that such a "an interconnected network of cottage industries" -- brought about by capitalism -- would be a better fulfillment of Marx's dream than communism and socialism have ever brought about.

Another example of why I'm not entirely libertarian: I really think we need to limit tort liability. Libertarians advocate a reduction in government regulation and claim that people will regulate their own activities if we have a strong court system that allows them to sue each other for civil damages. For example, we wouldn't need building codes if building owners could be effectively sued for damages when their buildings collapse on people. Such a suit could be brought now, but would likely lose if the buildings met whatever codes have been established by the government; under the libertarian system, the plaintiff would always win such a case based on the facts in evidence -- your building collapsed, ergo it was not built properly and you owe me money.

The multitude of problems with our medical malpractice system belies the theory behind this sort of regulation through unlimited tort. Jurors, unfortunately, don't appear to be smart enough or dedicated enough to make wise decisions in these matters, and their judgements are driving health costs through the roof and putting doctors out of business. Just as over-regulation can strangle an industry, so can trial lawyers and plaintiffs looking to win the legal lottery.

I'm amazed that people are still giving money to Howard Dean. He's burnt through so much of it already without winning a single state -- or even ranking 2nd place more than once -- and yet the moolah keeps pouring in.

I think the biggest factor is psychological. Many of Dean's volunteers have so much time and money already invested in his campaign that they can't admit defeat. They feel like their earlier donations aren't really "wasted" until they give up, and they're trying to put it off as long as possible because the thought of throwing so much effort down the drain is agonizing. (Much like money spent on declining stock isn't "lost" until you sell the depreciated shares.)

In economic terms, the time and money already invested are sunk costs: they can't be recovered to any significant degree, no matter how much more resources you throw after them. Although it may seem counterintuitive, it's foolish to allow sunk costs to influence decision-making; what's been spent is already gone, and the decision to spend more must be based only on the current situation and expectations for the future.

Dean supporters should ask themselves whether or not they'd make a first donation to a candidate who is lagging so far behind the leader. It may feel emotionally satisfying to "never give up", but having given money in the past is no reason to continue doing so once the cause has been lost.

Sunk costs have a way of warping our sense of reality and perspective. Just as a woman might be reluctant to break up with an abusive boyfriend because of all the time and energy she's already invested in the relationship, Dean supporters would rather ignore the numerical facts than admit their past contributions have come to naught. Meanwhile, to prove to themselves that there's still hope, they keep forking over the cash.

Unless Howard Dean is planning to run as an independent once he loses the Democrat nomination (*crosses fingers*), he's leading a pack of lemmings over a cliff by using his influence to con his followers out of their money. At least he had the decency to draw a line at Wisconsin.

(Previous posts on outsourcing.)

Robert X. Cringely writes a somewhat convoluted criticism of outsourcing. I say "convoluted" because its structure defies easy excerption; I'll try to convey the gist of his position.

Mr. Cringely responds to those who say outsourcing is good for everyone by saying that it's not good for the people who lose their jobs, and this is partially true. His thesis rests on three main points:
1. There's no guarantee that the jobs we're losing to "India" (or wherever) are going to be replaced.
2. Institutional investors (such as mutual funds) use our money to screw us over by voting in favor of outsourcing even though we wouldn't want it ourselves.
3. Politicians won't protect us and neither will the invisible hand of capitalism -- although near the beginning of the piece he does acknowledge that, "Entropy in the business world works in reverse, with the better organized operations (the ones that better serve their customers) growing in strength, not declining."

With regards to (1), he's certainly correct. Nothing is guaranteed in life. He says that:

Pretty much everyone sees biotech and nanotech as the new growth industries, but neither industry is very good at job creation.  Find me a biotech company that's a comparable employer to Hewlett Packard or Sun Microsystems.  Find me a nanotech company that has more than 100 engineers, total.  Maybe these are the future, but what if they aren't?  Why allow our current bread and butter to slip away if the benefits are doubtful at best and customer service suffers?

No one can predict the future, but similar arguements have been made all throughout history as we've continually moved jobs offshore. Somehow there's always something new to fill the void, because people can't consume if they don't have jobs.

The bit about customer service is pointless, and not something for a high-level economic discussion to deal with. That, at least, will certainly be taken care of by market forces.

As for (2), he quotes a reader who complains that:

Two insane examples of this are state of California bus drivers who bought into CALPERS investments, which included stakes in the company the state outsourced bus contracts to when the state eliminated its own positions; and schoolteachers in Florida, who now own through the state pension program the majority shareholder of Edison Schools (a for-profit operator of public schools).

I fail to see how either of these examples shows insanity; in fact, they both seem like net gains for the shareholders. If the bus drivers and teachers didn't own shares of those companies someone else would have, and someone else would have reaped the benefits of the changing market. Either way the drivers and teachers would have been out of jobs, but because of their investments they were able to hedge their financial future against potential job loss.

For (3), this is yet another argument in favor of personal investment in the concentration of capital.

Think of the term "political capital," which is generally accepted to be the grease that keeps the wheels of government turning.  Now do a Google search of "political capital" and see what verbs are associated with this noun.  There is only one -- "spend."  We don't invest political capital, we don't redeem it, we don't save it, we don't borrow it, we only spend it.  This means that progress in government is made possible by giving things up, with those things being ideals, constituents, even logic itself.

That's just rhetorical nonsense.

The article is interesting, even if it's largely sophistry; there's a core a rationality, but it's hard to find. In essence, I think Mr. Cringely is right in doubting the economic benefits of oursourcing. I've heard too many horror stories. Then again, it may just take time to smooth out the wrinkles in the system.

There's nothing to do but wait and see. Capitalism will work to increase shareholder value, and the way to maximize your chances of successfully riding the economic waves is to invest your money and become a shareholder yourself.