Friday, December 6, 2013
Angry Bear on Food Stamps and Dependency
Since dependency is the false belief that causes more damage to the American polity than anything else I can think of (with the possible exception of climate change, but the negative effects of a belief in dependency are a threat here and now while climate change is a future threat), I feel the need to link to another Angry Bear post commenting on a paper examining the impact of food stamps on health and use of government programs later in life. Like other research on the subject, it confirms that receipt of government benefits increases self-sufficiency later in life. As I've stated many times, the actual research points in the opposite direction that hacks like Paul Ryan claim. False ideological claims, like the dependency hypothesis, are doing untold damage to our Republic.
Anrgy Bear on Cooperatives
Since I just wrote about something similar, I thought it worth linking to an Angry Bear post on cooperatives. I haven't had time to watch the video but it provides a bit more information on their importance (including Mondragon).
The only thing I have to add is that I am skeptical how much room there is for the growth of cooperatives given the extreme levels of wage inequality in the US. As I stated, I believe a system that alters manager's incentives so that they use profits to achieve the same goal would gain more traction given current economic realities. I admit, however, that worker cooperatives have more intuitive appeal and would more directly address extreme levels of executive compensation which my thoughts do not.
The only thing I have to add is that I am skeptical how much room there is for the growth of cooperatives given the extreme levels of wage inequality in the US. As I stated, I believe a system that alters manager's incentives so that they use profits to achieve the same goal would gain more traction given current economic realities. I admit, however, that worker cooperatives have more intuitive appeal and would more directly address extreme levels of executive compensation which my thoughts do not.
Thursday, December 5, 2013
Republicans are Increasingly Becoming the Party of Bad Business
The New York Times today had an article on how many big businesses are planning for future carbon pricing and are even embracing this change. As they say this represents "a striking departure from conservative orthodoxy and a reflection of
growing divisions between the Republican Party and its business
supporters."
I believe this trend represents a deeper, partially generational, shift in business culture. The old culture, which remains the culture of many in senior management, was the highly individualistic, greedy, heroic type of businessperson featured in films such as Wall Street or as the hero of Ayn Rand novels. Modern business culture, by contrast, is highly collectivist in nature, group projects, participatory management, and systems thinking are modern best practices. In an article by Deming, for instance, he claimed that over 90% of faults are caused by the system and are management's responsibility.
However, while America's best performing companies embrace these new concepts, and have profits to show for it, old styles of thinking are far more common. Surveys indicate that the vast majority of businesses are badly managed, only the largest international firms are majority well managed. Surveys of investment decisions indicate that around 30% use gut feeling for investment decisions and another large proportion use primitive methods like pay back periods.
These types of attitudes match up perfectly with a lot of what I hear from the right. On a number of issues, like climate change referenced in the NY Times article, we hear of skepticism of modern science which matches well with the skepticism we see in many (mostly smaller) businesses of modern statistical methods and the focus on process. The right wing is constantly talking about individual initiative and attributing success or failure to individual traits, this is also perfectly congruent with the divide in best business practices between the modern systems approach and the old methods which relied strongly on individual performance reviews and attributing success/failure to individual traits while ignoring process.
In short, the ideological right increasingly looks like the terrible business manager who never wrapped his head around the modern focus on the customer, emphasis on value creation, statistical methods,** or systems focus. Instead, they want to somehow bring back the days when business was done with a handshake, personal relations mattered more than credentials,*** and hard work**** led to profit. They see this as how the competitive, free market is supposed to work. They haven't come to terms with the fact that the reason they are struggling is that today they face real competition and are feeling the true sting of the free market, the old system they thrived in was one of privilege and security.
This results in the stereotypical right winger being rather like a bad manager. They have no idea how to build a system that adds value, all they know how to do is to try to cut wages, bid low, or pressure suppliers to drive down costs. The idea of value chain focus, participatory management, flat organizations, and a systems focus is anathema to how they run business and how they see government. They just don't get it. Furthermore, these people are angry and frustrated. They are the small and mid sized businesses that used to be sheltered from competition with the big guys. Now the big players are moving into even the smallest towns bringing these folks directly into competition with the market forces they pay lip service to buy never felt until now.
The rift between these small and medium business owners and large corporations is becoming increasingly stark. To succeed against international competition big business long ago adopted more inclusive and collectivist methods. This is leading to a growing cultural rift between the traditional supporters of the Republican Party and the new business elite who thinks very differently. It will be interesting to see how it plays out, but it is shocking to me how different the values and teachings of business school diverge from current right wing ideology.*****
I believe this trend represents a deeper, partially generational, shift in business culture. The old culture, which remains the culture of many in senior management, was the highly individualistic, greedy, heroic type of businessperson featured in films such as Wall Street or as the hero of Ayn Rand novels. Modern business culture, by contrast, is highly collectivist in nature, group projects, participatory management, and systems thinking are modern best practices. In an article by Deming, for instance, he claimed that over 90% of faults are caused by the system and are management's responsibility.
However, while America's best performing companies embrace these new concepts, and have profits to show for it, old styles of thinking are far more common. Surveys indicate that the vast majority of businesses are badly managed, only the largest international firms are majority well managed. Surveys of investment decisions indicate that around 30% use gut feeling for investment decisions and another large proportion use primitive methods like pay back periods.
These types of attitudes match up perfectly with a lot of what I hear from the right. On a number of issues, like climate change referenced in the NY Times article, we hear of skepticism of modern science which matches well with the skepticism we see in many (mostly smaller) businesses of modern statistical methods and the focus on process. The right wing is constantly talking about individual initiative and attributing success or failure to individual traits, this is also perfectly congruent with the divide in best business practices between the modern systems approach and the old methods which relied strongly on individual performance reviews and attributing success/failure to individual traits while ignoring process.
In short, the ideological right increasingly looks like the terrible business manager who never wrapped his head around the modern focus on the customer, emphasis on value creation, statistical methods,** or systems focus. Instead, they want to somehow bring back the days when business was done with a handshake, personal relations mattered more than credentials,*** and hard work**** led to profit. They see this as how the competitive, free market is supposed to work. They haven't come to terms with the fact that the reason they are struggling is that today they face real competition and are feeling the true sting of the free market, the old system they thrived in was one of privilege and security.
This results in the stereotypical right winger being rather like a bad manager. They have no idea how to build a system that adds value, all they know how to do is to try to cut wages, bid low, or pressure suppliers to drive down costs. The idea of value chain focus, participatory management, flat organizations, and a systems focus is anathema to how they run business and how they see government. They just don't get it. Furthermore, these people are angry and frustrated. They are the small and mid sized businesses that used to be sheltered from competition with the big guys. Now the big players are moving into even the smallest towns bringing these folks directly into competition with the market forces they pay lip service to buy never felt until now.
The rift between these small and medium business owners and large corporations is becoming increasingly stark. To succeed against international competition big business long ago adopted more inclusive and collectivist methods. This is leading to a growing cultural rift between the traditional supporters of the Republican Party and the new business elite who thinks very differently. It will be interesting to see how it plays out, but it is shocking to me how different the values and teachings of business school diverge from current right wing ideology.*****
Monday, December 2, 2013
Shareholders are Non-Value Added
I never thought studying for an MBA would turn me into a socialist but that's exactly what it has done. I'm impressed with how most fields of business focus on the customer and on treating employees as an asset, and even more by the focus on the system, rather than individuals, as the source of a company's problems. Deming's 14 points in particular strike me as a good way to run anything.
However, as one of my professors has said regularly most companies are badly managed (and some research has backed up his statements) and we will be spending most of our careers pointing out common sense. Most owners and managers remain bound up in cognitive biases, fundamental attribution error appears to be particularly rife in business types.*
Yet, our system has developed a broad set of institutions that serves to increase the power of owners and managers at the expense of other stakeholders. Companies should be focused on their primary stakeholders, employees and customers, but instead they are beholden to their owners who are continuously draining off funds that could be more productively put to use by the company or distributed to the employees who contributed to the company's success and have a far more direct stake in a company's mission than its owners do. The one field taught in my MBA program that diverges from the focus on customer and employees is finance, which explicitly endorses the purpose of the firm as maximizing the current value of the firm's stock.
This results in the most important institutions in our society, private corporations, having a goal that is often at odds with the health and wealth of society as a whole. Companies focused on their customers and employees will have interests that line up very naturally with those of society as a whole, this is far less likely with owners. The malaise effecting America, and much of the rest of the world, has at least some of its origins in the fact that the conflict between owners objectives and companies' missions was decided in favor of the owners; with predictable impacts on corporate success and on income inequality.
Reforming this doesn't seem overly difficult, though it is in direct conflict with the increase in shareholder power which has been occurring since the 1980s as a result of the Friedman doctrine.** All that is really necessary is to change the rules governing corporations so that firms can purchase themselves through stock buybacks. As it stands, buybacks do nothing but concentrate ownership, but there is no good reason the stock should become inactive. A cultural change is also necessary, we are biased in believing companies should be owned, but there is no real need for a company to be owned by anyone.
Rules for composing corporate boards of unowned companies would have to be drafted, but this should be easy enough since their primary stakeholders, customers and employees, are readily identifiable. Boards composed this way would result in companies that have their interests aligned with society as a whole, and incidentally matching up with modern business best practices of having a focus on the customer and on their own personnel. This would also resolve the conflict between stockholders and other stakeholders how it should have been resolved decades ago, in favor of the other stakeholders.
None of this is to say that capital should be shut out. Capital does add value, where I find it problematic is in mature companies where the stock price has become disassociated from any need to raise further capital. Where capital plays a role is in financing start ups and long term projects. The life cycle I imagine is one where venture capitalists and other investors primarily play a role in the early phases of corporate growth. As a company matures it returns the initial investment to stockholders through the form of share buybacks, eventually getting a 51% stake and freeing itself from outside ownership. Provided this becomes an explicit corporate goal it should be easily achieved.
While this is a utopian pipe dream, it's unlikely for cultural and not institutional reasons. For whatever reason Americans have powerful beliefs about ownership and don't seem to be able to shake out of these beliefs even when performance is lackluster. Institutionally, we know that finances tend to shift powerfully in response to even small relative incentives. To achieve corporate independence on a national scale all that would be necessary would be a fairly small tax advantage to encourage firms to compensate their investors through share buy backs rather than through dividends and other means. Most investors are fairly neutral in the form their returns take so provided they don't object on cultural and ideological grounds (which is likely) it shouldn't be difficult for firms to free themselves of the tyranny of ownership.
Unfortunately, other than a very small movement in favor of employee owned firms*** I haven't heard much on this subject. However, like Deming, I believe that systems matter and that systems are responsible for the majority of faults in any organization. Treating the world economic system as this kind of organization I believe that 3rd party ownership is one of the fatal flaws at the heart of many of our social problems. Ending this problem wouldn't be difficult but it would take a revolution in how we think about our economic system. Perhaps momentum will build, this is perfectly congruent with everything I have been reading outside of finance texts with modern business thinking.
[Lest it need be added, while I think freeing firms from ownership is clearly socialistic I see even more problems with state ownership than I do with ownership by investors. Organizations function best when they are independent, while this is a socialist program the state has no role other than in changing institutions to allow for this. I'm going on a tangent but I am very frustrated at how often socialism is confused with the state when the state has nothing to do with socialism in theory or often in practice.]
However, as one of my professors has said regularly most companies are badly managed (and some research has backed up his statements) and we will be spending most of our careers pointing out common sense. Most owners and managers remain bound up in cognitive biases, fundamental attribution error appears to be particularly rife in business types.*
Yet, our system has developed a broad set of institutions that serves to increase the power of owners and managers at the expense of other stakeholders. Companies should be focused on their primary stakeholders, employees and customers, but instead they are beholden to their owners who are continuously draining off funds that could be more productively put to use by the company or distributed to the employees who contributed to the company's success and have a far more direct stake in a company's mission than its owners do. The one field taught in my MBA program that diverges from the focus on customer and employees is finance, which explicitly endorses the purpose of the firm as maximizing the current value of the firm's stock.
This results in the most important institutions in our society, private corporations, having a goal that is often at odds with the health and wealth of society as a whole. Companies focused on their customers and employees will have interests that line up very naturally with those of society as a whole, this is far less likely with owners. The malaise effecting America, and much of the rest of the world, has at least some of its origins in the fact that the conflict between owners objectives and companies' missions was decided in favor of the owners; with predictable impacts on corporate success and on income inequality.
Reforming this doesn't seem overly difficult, though it is in direct conflict with the increase in shareholder power which has been occurring since the 1980s as a result of the Friedman doctrine.** All that is really necessary is to change the rules governing corporations so that firms can purchase themselves through stock buybacks. As it stands, buybacks do nothing but concentrate ownership, but there is no good reason the stock should become inactive. A cultural change is also necessary, we are biased in believing companies should be owned, but there is no real need for a company to be owned by anyone.
Rules for composing corporate boards of unowned companies would have to be drafted, but this should be easy enough since their primary stakeholders, customers and employees, are readily identifiable. Boards composed this way would result in companies that have their interests aligned with society as a whole, and incidentally matching up with modern business best practices of having a focus on the customer and on their own personnel. This would also resolve the conflict between stockholders and other stakeholders how it should have been resolved decades ago, in favor of the other stakeholders.
None of this is to say that capital should be shut out. Capital does add value, where I find it problematic is in mature companies where the stock price has become disassociated from any need to raise further capital. Where capital plays a role is in financing start ups and long term projects. The life cycle I imagine is one where venture capitalists and other investors primarily play a role in the early phases of corporate growth. As a company matures it returns the initial investment to stockholders through the form of share buybacks, eventually getting a 51% stake and freeing itself from outside ownership. Provided this becomes an explicit corporate goal it should be easily achieved.
While this is a utopian pipe dream, it's unlikely for cultural and not institutional reasons. For whatever reason Americans have powerful beliefs about ownership and don't seem to be able to shake out of these beliefs even when performance is lackluster. Institutionally, we know that finances tend to shift powerfully in response to even small relative incentives. To achieve corporate independence on a national scale all that would be necessary would be a fairly small tax advantage to encourage firms to compensate their investors through share buy backs rather than through dividends and other means. Most investors are fairly neutral in the form their returns take so provided they don't object on cultural and ideological grounds (which is likely) it shouldn't be difficult for firms to free themselves of the tyranny of ownership.
Unfortunately, other than a very small movement in favor of employee owned firms*** I haven't heard much on this subject. However, like Deming, I believe that systems matter and that systems are responsible for the majority of faults in any organization. Treating the world economic system as this kind of organization I believe that 3rd party ownership is one of the fatal flaws at the heart of many of our social problems. Ending this problem wouldn't be difficult but it would take a revolution in how we think about our economic system. Perhaps momentum will build, this is perfectly congruent with everything I have been reading outside of finance texts with modern business thinking.
[Lest it need be added, while I think freeing firms from ownership is clearly socialistic I see even more problems with state ownership than I do with ownership by investors. Organizations function best when they are independent, while this is a socialist program the state has no role other than in changing institutions to allow for this. I'm going on a tangent but I am very frustrated at how often socialism is confused with the state when the state has nothing to do with socialism in theory or often in practice.]
Thursday, November 21, 2013
Anti-Union Propaganda
Lawyers, Guns, and Money posts a scan of anti-union propaganda given at a Macy's orientation. Now, I think there are pros and cons to to unionization but I have very strong feelings about an employer's role in influencing employees' decision whether or not to unionize due to the employers position of power.* This kind of propaganda should be illegal due to the implicit coercion implicit in the employer-employee relationship. That this is common in low wage jobs is an indictment of the American economic system.
After all, in a free society employees should be best able to look after their own interests, right?
*In case this needs to be explained. With the extremely common at will employment contract that I am sure a business like Macy's uses employee turnover is a normal part of doing business and an employee's decision to leave has little to no impact on the employer. However, for the worker being fired becoming unemployed can be a life changing event that upsets long term plans and potentially destroys an individual's life. If you can't see the coercion implicit in the unequal exchange that is a labor contract you're hopelessly blind to how power and force act in the real world.
After all, in a free society employees should be best able to look after their own interests, right?
*In case this needs to be explained. With the extremely common at will employment contract that I am sure a business like Macy's uses employee turnover is a normal part of doing business and an employee's decision to leave has little to no impact on the employer. However, for the worker being fired becoming unemployed can be a life changing event that upsets long term plans and potentially destroys an individual's life. If you can't see the coercion implicit in the unequal exchange that is a labor contract you're hopelessly blind to how power and force act in the real world.
Monday, November 11, 2013
Is there Anything on the Right Worth Reading Nowadays?
I'm a firm believer in the importance of hearing the views of all sides and constantly challenging one's own views. This helps to sharpen thinking as well as providing a greater understanding and sympathy for people that one disagrees with.
However, I'm finding it increasingly difficult to find anything from the American right worth reading. I like the American Conservative, but they're hardly mainstream. Everything else I've tried reading from the right strikes me as mostly nonsense. Most articles seem to take the dependency theory as established fact, assume business owners, rather than employees and systems, as the economic drivers of society, rely on lazy anti-urban comparisons, often make crazy assertions about the applicability of military power, and deny the reality of settled issues like the cost advantages of public health systems. If they ever advanced evidence in support of these positions it would be one thing, but if I go over to Red State or the National Review it is just assumed that readers KNOW that the welfare state leads to dependency. The closest to an argument that is ever advanced is through single country historical experience, such as Casey Mulligan's The Great Recession (comments on why this book is implausible well handled at Noahpinion).
About the only issue that gets any traction with me is worry about debts and deficits, but even here I am far less than convinced because while the potentials problems of debt are notable I haven't seen an argument offered which addresses the opportunity cost of dealing with the debt nor why it is not preferable to cut the debt through tax increases rather than spending cuts despite the evidence that tax cuts do less economic damage in most situations (and the situations where spending cuts are better are nothing like current conditions).
So, I've expressed why I have trouble reading conservative blogs or other news sources. They make assertions about the world that are testable but that don't stand up to testing yet stick with these assertions. Is there anything out there that I should be reading which doesn't start being wrong at the level of starting assumptions? I'd like to read something from the other side but unless the assumptions are plausible I don't really see the point.
However, I'm finding it increasingly difficult to find anything from the American right worth reading. I like the American Conservative, but they're hardly mainstream. Everything else I've tried reading from the right strikes me as mostly nonsense. Most articles seem to take the dependency theory as established fact, assume business owners, rather than employees and systems, as the economic drivers of society, rely on lazy anti-urban comparisons, often make crazy assertions about the applicability of military power, and deny the reality of settled issues like the cost advantages of public health systems. If they ever advanced evidence in support of these positions it would be one thing, but if I go over to Red State or the National Review it is just assumed that readers KNOW that the welfare state leads to dependency. The closest to an argument that is ever advanced is through single country historical experience, such as Casey Mulligan's The Great Recession (comments on why this book is implausible well handled at Noahpinion).
About the only issue that gets any traction with me is worry about debts and deficits, but even here I am far less than convinced because while the potentials problems of debt are notable I haven't seen an argument offered which addresses the opportunity cost of dealing with the debt nor why it is not preferable to cut the debt through tax increases rather than spending cuts despite the evidence that tax cuts do less economic damage in most situations (and the situations where spending cuts are better are nothing like current conditions).
So, I've expressed why I have trouble reading conservative blogs or other news sources. They make assertions about the world that are testable but that don't stand up to testing yet stick with these assertions. Is there anything out there that I should be reading which doesn't start being wrong at the level of starting assumptions? I'd like to read something from the other side but unless the assumptions are plausible I don't really see the point.
A Bit More Evidence Against the Dependency Thesis
Since this is a topic that's rather important to me I thought I'd post a link to a blog post from Economix examining the question about whether welfare programs erode the work ethic and increase dependency. As with any other evidence based approach to this topic, the answer is that they don't.
A few specific programs are mentioned. Regarding the EITC: "She noted that studies of the impact of the earned-income tax credit revealed a far stronger effect encouraging low-income parents to enter employment in the first place than its phaseout (the decline in benefit levels as earnings increase past a certain point) has in reducing work effort."
Of course, things would be even better if we didn't phase out the program, but according to those opposed to welfare this would break the budget, or something.
Another particularly important pro-work program is the child care subsidies from TANF:
I encourage you to read the whole piece. As I've written before, if you want to examine the impact of welfare policies you need to realize that these policies will have both work increasing and work decreasing effects. These effects will vary based on an individual's characteristics. The net effect depends on the distribution of these traits in society. All of the evidence points to the idea that all but the worst designed welfare policies are net work encouraging, even if they do make some slackers into even bigger slackers. But these individuals are the least likely to be those who would make significant contributions to society under any policy regime, forcing a natural slacker to work results in nothing but a lazy, good for nothing worker who will quit as soon as their minimum needs are met. Welfare programs that reduce barriers to hard work, like child care, medical care, nutrition, and basic income (to reduce stress and to give people a feeling that their income gets them somewhere, any manager knows who important morale is to hard work and there is no reason to believe this doesn't apply at the population level) lead to greater work effort by the highest quality marginal workers who are both more productive workers and more numerous than the slackers that reduce work effort in response to welfare.
Yet, American right wingers are basically at war with the welfare state making baseless assertions about its impact on society. Furthermore, they reduce the effectiveness of welfare programs to elicit less work, the worst offender is Social Security disability which has the unrealistic and counter-productive requirement for virtually no paid labor. Other historical culprits were restrictions on AFDC which had strong negative impacts on the family, particularly black families, by their moralizing regulations which sought to enforce standards regarding breadwinner-homemaker families but instead encouraged single parents and co-habitation as well as reducing work efforts by single mothers (TANF solves the work effort of single mothers but continues to do a poor job supporting families, though it is better than AFDC particularly when combined with EITC).
Why is it that these folks remain mired in moralistic tales about the effects of state support when all the evidence contradicts them? How long can people hold on to these lies?
A few specific programs are mentioned. Regarding the EITC: "She noted that studies of the impact of the earned-income tax credit revealed a far stronger effect encouraging low-income parents to enter employment in the first place than its phaseout (the decline in benefit levels as earnings increase past a certain point) has in reducing work effort."
Of course, things would be even better if we didn't phase out the program, but according to those opposed to welfare this would break the budget, or something.
Another particularly important pro-work program is the child care subsidies from TANF:
Temporary Assistance for Needy Families (known as TANF) toward subsidized child care contributed to significant increases in the labor-force participation of single mothers between 1996 and 2000.Another big cliff often mentioned as a reason to oppose welfare regards Medicaid.
Unfortunately, in 2012, federal TANF money used for child care, including direct spending and transfers to the Child Care and Development Block Grant, reached their lowest level since 1998.
Recent cross-national research shows that women’s labor-force participation has increased more rapidly in recent years in countries with generous child care and other family-friendly policies than in the United States.
It is sometimes argued that the means-tested health benefits provided by Medicaid tempt workers to avoid or drop out of paid employment.
But analysis of a recent policy experiment in Oregon, where benefits were extended to a randomly selected group of low-income individuals, showed no statistically significant impact on their employment.
I encourage you to read the whole piece. As I've written before, if you want to examine the impact of welfare policies you need to realize that these policies will have both work increasing and work decreasing effects. These effects will vary based on an individual's characteristics. The net effect depends on the distribution of these traits in society. All of the evidence points to the idea that all but the worst designed welfare policies are net work encouraging, even if they do make some slackers into even bigger slackers. But these individuals are the least likely to be those who would make significant contributions to society under any policy regime, forcing a natural slacker to work results in nothing but a lazy, good for nothing worker who will quit as soon as their minimum needs are met. Welfare programs that reduce barriers to hard work, like child care, medical care, nutrition, and basic income (to reduce stress and to give people a feeling that their income gets them somewhere, any manager knows who important morale is to hard work and there is no reason to believe this doesn't apply at the population level) lead to greater work effort by the highest quality marginal workers who are both more productive workers and more numerous than the slackers that reduce work effort in response to welfare.
Yet, American right wingers are basically at war with the welfare state making baseless assertions about its impact on society. Furthermore, they reduce the effectiveness of welfare programs to elicit less work, the worst offender is Social Security disability which has the unrealistic and counter-productive requirement for virtually no paid labor. Other historical culprits were restrictions on AFDC which had strong negative impacts on the family, particularly black families, by their moralizing regulations which sought to enforce standards regarding breadwinner-homemaker families but instead encouraged single parents and co-habitation as well as reducing work efforts by single mothers (TANF solves the work effort of single mothers but continues to do a poor job supporting families, though it is better than AFDC particularly when combined with EITC).
Why is it that these folks remain mired in moralistic tales about the effects of state support when all the evidence contradicts them? How long can people hold on to these lies?
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