Thursday, May 13, 2004

How the (corporate) world works

Discoshaman started a nice discussion in his comments with a post about the recovery of the job numbers. One of the commenters took the tack (and I'm paraphrasing), "Yeah, but they aren't GOOD jobs" and gave an example of Rockford, Illinois losing manufacturing jobs to workers overseas. After further discussion, came this comment
well if this shift were a natural outgrowth of changes in the market, maybe. But when you have a national policy of rewarding companies that close American plants to open factories overseas, then it seems like a not-so-organic change which could be discouraged, even outlawed. Which is better for the economy at large: to have one CEO and few of his execuative buddies increasing their incomes exponentially by trading in the higher paid American worker for the cheap laborer of China? Or to have 1,000 people still employed at the factories they've worked at for a decade, still buying groceries, still buying school clothes and supplies, still contributing to the tax base, still getting haircuts, still going out to dinner on Sunday afternoons and all the things we spend money on when we have work? I don't care how much more these fat cats spend with their bonuses, they aren't spurring the economy the way the working middle class does - when they have work.
For what it's worth, I also think that it's a much better thing for 1,000 workers to have money to spend than just a few "fat cats." But that has nothing to do with the real world. And wishing it were so doesn't change a thing.

There are a couple of things about statistics that need to be understood. The first thing is that whenever you talk about statistics, you have to understand that they are only good for the specific thing they are measuring. The jobs numbers don't pretend to measure the quality of the jobs created, only the quantity. Using this statistic to talk about quality is trying to force it to do something it wasn't designed to do. For example, you can't use the statistic 'Company sales increased by 3% this month' to say 'The company is going to be more profitable than last month.' It might LOOK like a logical leap, but you don't know what happened to the gross margin or the overhead costs. It may very well be that sales are up and profits are down because all of the increase in sales came from items sold below cost. Anyway, the point is, you don't know and it's dangerous to use statistics for anything other than what they are designed to measure.

The second thing about statistics is that they typically only work on a macro level. In other words, they are good at measuring and predicting trends over large amounts of data, but not so hot with limited data or with specific data points. Sticking with the company sales example, the sales increase of 3% is an overall number. Say the company has 1,000 stores and you look at a specific store. How likely is it that the specific store you're looking at will have a 3% sales increase? Not very. Some stores may have only a 1% increase, or maybe a 15% increase, or if it is a relatively new store, it may have a 50% increase. Others may show a sales loss. There is no way to predict what an individual store's results will be even when you know the overall increase is 3%. The same is true for any statistic, so when you talk about 288,000 jobs being created in March, and you look at a specific location like Rockford, Illinois, there is no direct corollation between the two. Rockford may not reflect any job growth at all, and may in fact have had net job losses. Similarly the specific data for Chicago, Dallas, Atlanta and Seattle will have no direct corollation to the overall statistic. In other words, you can't use an aggregated statistic to argue a specific case.

So what about those manufacturing jobs in Rockford? I give you LittleA's Corporate Rules.

Corporate Rule Number 1. Investors are selfish. They expect a reasonable rate of return on their money or they will take it and invest it elsewhere. This is true whether the investor is Joe Richguy with his multi-million dollar brokerage account or Joe Sixpack with the $25 bucks a month he manages to put into a mutual fund. If you don't give him a return, he's going to sell your stock to cut his losses and take his cash and invest it in your competitor. As a result, every corporation is tasked with making a profit on a regular basis. There are no positive results when a company fails to make a profit: purchases are scaled back, hiring is frozen, salaries are frozen, benefits are cut. None of these helps the employee, at least in the short term. It may help him in the long run if the company is successful at returning to profitability and can continue to keep him employed. If not, the next step is usually to start laying people off.

Corporate Rule Number 2. Management is selfish. They know that investors are a fickle lot and will turn on them at a moments notice. As a result, they like to make their money while the getting is good. And as long as the company is making money, not too many folks complain. To their thinking, they are making all the decisions and taking all the risks and sacrificing their lives on the corporate altar, the least they can do is compensate themselves handsomely in return. I'm not saying it's right, I'm just saying it is. One of the pitfalls of this is that management tends to think in the short-term rather than the long-term. They will sacrifice long-term goals to meet short-term investor expectations. And they justify this by thinking, "Hey, I'm not going to still be here in five years. Let the next guy worry about that."

Corporate Rule Number 3. Employees are selfish. As a rule (and there are exceptions), most employees don't really care about the company's profitability. The higher up the ladder you are, the less true this becomes - but it is still true to some extent at the most senior levels. Employees are most concerned about their paycheck. How much overtime can I work? What's my next raise going to be? When am I going to get promoted? What additional benefits will the company provide? The company is only important as a vehicle to provide a steady cash flow. That's not to say they don't earn their money or that they don't enjoy their jobs, just that they are definitely in it for the paycheck. I have never heard of an employee turning down a raise because they didn't think it was in the company's best interest. Unions are just an institutionalized form of employee selfishness.

Corporate Rule Number 4. Customers are selfish. They always want to buy their goods and services at the lowest possible price. There's a reason why Wal-Mart has become so big. And the people who complain about Wal-Mart pushing out the little guys are the same folks who don't seem to like paying more for the same product. "$34.50 for a pair of pants? Why, I can get the exact same thing for $28.75 over at Wal-Mart." And so Wal-Mart gets the business. And the company that sells the $34.50 pair of pants? They either have to change or get out of the pant business. And the company that manufactures the pants? Better start looking at cutting costs so they can offer them for less. Either that or go out of business. If only customers weren't so selfish.

Acting in your own self-interest with a fair amount of predictability is what makes the Capitalist system work so well. Its strength lies in the fact that it is the system which best aligns itself with human nature. Communism and socialism have never worked because they require that people behave in ways which are fundamentally foreign to their nature.

Which brings us back to Rockford. Those manufacturing jobs went away because we, the customers, wanted more for less, and the worker wasn't willing to do the same or more work for less compensation, and management had to act or be replaced because the investors were demanding continued profits. Ultimately, to keep those 1,000 jobs, we all would have to be willing to spend larger chunks of our paychecks on goods we could get cheaper somewhere else.

Let me know if that interests you and I'll start a wholesale business.

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