Greed is the BIG problem

Greed is the real problem with the US economy. Greed on a massive scale. Seventy five dollars an hour may be excessive for an assembly line worker. I hear a lot of gripping from time to time by members of the investor class about assembly line workers making seventy-five dollars an hour.  I don’t know anyone actually working full time who gets those kinds of rates, for what they do – except high middle and upper management. Many of us have worked for companies who billed our services out at $125 an hour and paid us $25. In seventeen years of technical consulting I was never paid significantly more than what was required for our family to live day to day near the work site.

Many years ago on a contract in Florida, having over heard bits of scuttle-butt involving contract employee compensation from the local full time or “real” people, I confronted one whom I knew pretty well.  We consultants are fake people in case you haven’t heard.  He told me someone with connections to accounting had determined their company was paying us contractors $95 bucks an hour.  This was of course nothing near true.  When their accounting department added the cost of our office space, the rate they paid our company, the cost of the parking space outside, heat, air, computer equipment, network service, electricity, our share of the cost of maid service, etc.. someone had come up with $95 and hour.  This miss-presented information was leaked to the masses, creating serious bad feelings.  Their full time people were probably being paid a bit less than we were, and we were watching every penny to live there.  I can imagine how their people felt, even if they were making exactly the same as those of us who were contract employees.  This constant battle over compensation has been going on a very long time, and is part of the larger problem.

Business managers have constructed this “Just In Time” economy where nothing is made until needed, no one is hired until needed, nothing is ordered until needed, and nothing is built until sold. The system has absolutely no “slack” and everyone is stressed to the max. That is an incredibly expensive way to do things because you loose all economy of scale. The reason a corporate client would pay my agent $125 an hour for my services is because they want my services for a few days, weeks, or maybe months – shorter periods have higher rates. Why? Because my agent and I can’t just turn ourselves and our families, or our businesses off so we don’t need food, clothes, transportation, or whatever – until the next time my services are needed by some other “client”. Just In Time gasoline refining is why Atlanta runs out of fuel three days after a gulf hurricane.  Just In Time may look good on the quarterly balance sheet, and it may contribute to significant rewards for investors, but it comes with significant long term cost.

In the effort to emulate the Japanese economy during the 1980’s, and early nineties, we looked only at the growth and profit potentials of eliminating the slack in our business and manufacturing processes. Since those days the Japanese economy has been in a nineteen year recession. Did we really want to copy that model? I think not. But the “decider” class who were mostly business people (blame the MBA crowd) never gamed or modeled this thing. They simply decided short term profit was more important than long term stability. By the time everyone understood the Japanese economy had flat lined, we had already copied, and then “new and improved” these business models they had learned largely from a few US academics. By this time we were pretty much too far committed to revert back. Besides our business experts didn’t want to admit they could be wrong, so the process continued until every bit of the US economy had been “Just In Timed”. No Slack, No Where, for No One.

Welcome to the new America. Why would anyone want to work in this type of environment? They don’t. Then why would they? Money. Only Money. They expect to be well compensated for dealing with the nonsense that goes with working like this. Everyone seems to have at least tried this stuff. A couple years ago I read this article about how a big retailer (NOT WALLIE WORLD) was giving their associates these computer driven gizmos to drive an improvement in performance. One of these stores was my daughter’s favorite. I had never noticed a problem. A few weeks later I was in this store. The employees had the wonderful new gizmo. Every few seconds a mechanical voice would interrupt whatever an associate was doing to rush him off to do something else. The associates no longer had time to deal with customers. Any associate who did not respond to these calls was supposed to be re-educated or fired. The associates of this once busy big box retailer were now slaves of a computer system. A few weeks later I noticed this store had few if any associates. Later they had “Now Hiring” signs everywhere, but apparently no one wanted to work there. When the wonderful new gizmo was gone, they were eventually properly staffed again, but most of their customers had long since migrated across the street to Wally World.

So what does all this have to do with the price of beans in China? The same process has happened with salaries. No mater what any company says about salary policy it comes down to “as little as they can get away with”. If you can’t get it done here for nothing, send the work there, where you can get it done for nothing – call it out sourcing, off shoring, or whatever. It is supposed to be good for the economy. However, an economy is a feed back system. If you want to sell beans in China you have to find something the Chinese are willing to give you in exchange for your boat load of beans. We have traded cola syrup to Korea for tooth picks for a very long time. Initially we traded cola syrup to the Chinese for clothes. In the same way if people in Detroit are to buy Barbie dolls, they have to exchange some good or service for Barbie. Such a system is a barter economy.

By definition the barter means all parties agree on the relative worth of each item involved. Inequities in the barter process are generally worked out over time. At some point successful economies evolve some form of currency, to facilitate the commodity trading process. Primitive currency systems involve coins of precious metals which retain some “actual” value. Primitive currencies are limited by the availability of their coinage metal. Less primitive systems involve certificates which represent a particular quantity of precious metal. These systems restrict the price of said precious metal to a fixed value.

Modern systems are primarily credit based in that we accept credit for work, which we then trade for stuff we want or need, including perhaps precious metals, so that the prices of precious metal is not fixed. There are people who wish to go back to the “silver certificate” – If they could just trade each of their dollar credits for an ounce of silver all would be right in the world. Don’t worry about that ever happening because we would shortly run out of gold and silver, and most of us would be left holding the credits anyway – that is why Nixon floated the dollar to gold exchange rate. When the market price of gold got above thirty five dollar credits an ounce, certain european banks started buying dollars at the exchange rate value and then demanding the gold, which could then be sold for huge profits. If Nixon had not floated the dollar, the US Government would have no gold left in Fort Knox or anywhere else.

Off shoring in particular has taken advantage of the exchange process by introducing currency into a bartered service transaction such that recipients of the payment for service have no hope of ever being able to use their proceeds equitably in the home market of the payer. In other words a computer programmer in Bangalore making 6 credits per day has no hope of even trading them for lunch in New York City. This effectively means by reducing cost, the business entity has also reduced the pool of those who can afford his product or service. Over time this erosion of feedback value produces a situation where the business entity holds all the credits, and has no consumers. No one can trade with him because he owns all the money. You might call it a credit crisis.

In America we have devised business processes which remove the “barter” or “auction” process from day to day transactions.  It is good for retail business because they can set and stick with a price.  It is bad for the consumer, because he has few choices.  His first choice is to pay full price.  His second choice is skip buying the product.  His third choice is to wait until the price comes down.  His down line choices involve  lower quality, or reduced function, for reduced price.  His last choice is to buy with some form of credit.  Some things cannot wait, such as medical care, or housing, when moving to a new job, in a new city.  Providers of these services have a captive market and are inclined to charge whatever the market will bear. Often credit is used to pay for these goods or services.  The cash rich who are over charging for their product or service are investing that cash in banks which ultimately package and sell consumer debt as an investment.  The only choice the consumer may have is to pay the demanded price, allowing the price to value ratio to be ultimately determined after default, in a bankruptcy, or foreclosure proceeding.  To say the least this is a seriously broken business model.

The current situation is a bit evolved, in that those who have been thus removed from the pool of consumers with cash, are forced to become borrowers of credit to survive.  These loans were then packaged by various financial organizations and sold as derivatives to cash rich businesses and private investors.  Borrowers defaulted when things did not improve, causing these businesses to loose their past profits, while the collapsing feed back loop has eliminated the possibility of any near term future profits.


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