Category Archives: Business

The Chinese Worker Protection Act

comradeJeremiah, as you know, takes a nuanced view of protectionism.  We favor free trade, but we recognize the role of negotiation.  Since our new president has promised to get tough on China, here is a suggestion: use trade barriers to promote environmental and worker protection standards around the world.

For example, if a Chinese (or any) exporter enjoys a labor cost advantage because it exposes its workers to hazardous conditions, slap punitive tariffs on them until they reform.  Good luck challenging that at the WTO.  If they are polluting Shenzhen, we don’t need to buy their products.

American manufacturers complain that our trading partners can offer cheap goods because they abuse their workers, and it’s true.  Just look factory fires in Bangladesh.  These people labor like slaves in conditions we outlawed a hundred years ago.  Labor advocates worry about a race to the bottom.  We can halt this race using … protectionism!

Now, here is a trade policy that should draw bipartisan support.  We can protect our manufacturers by holding foreign companies to American standards.  This will create jobs in America, and at the same time make life better for exploited workers around the world.


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Social Value

James Montier has a good post over at GMO, The World’s Dumbest Idea, in which he tries to diagnose what has gone wrong with American capitalism. This is now a popular debate. Montier is a superb market analyst, and he adds to the debate by showing, quantitatively, what has happened to American companies over the past forty years. Jeremiah’s readers will recall that America started going to hell in the 1970s.

Before 1976, professional managers were in charge of performance in the real market and were paid for performance in that real market.

Montier lays the blame on Milton Friedman and a management fad called shareholder value maximization (SVM). He makes observations about corporate short termism, executive compensation, and social responsibility. Montier distinguishes the SVM period from an earlier (and better) “era of managerialism.” Here is his chart showing how SVM has shortened the lives of successful American companies.


To some extent, this is a semantic argument about the meaning of “shareholder value.” Obviously, if myopic (and overpaid) executives are destroying big companies, that is no one’s idea of value.

Writing in 1970, Friedman had probably the same idea of value as did most professional managers, i.e., “if we take care of the customer, then the profits will take care of themselves.” Those were the days of investing for the long term, for retirement. The leading newsletter was called Value Line. Montier, himself, is a “value” investor. The idea that executives could use leverage to juice their options hadn’t been invented yet.

If [a sole proprietor] acts to reduce the returns of his enterprise in order to exercise his “social responsibility,” he is spending his own money, not someone else’s.

Friedman’s point was that executives are not hired to spend the shareholders’ money on social projects. They should focus on making a profit, and then the shareholders can – individually – support social projects as they desire.

A confirmed free marketer, Friedman believed that a company serves society best by creating products that people want to buy, and jobs that people want to hold. This is not too different from the oft cited mission statements of companies like P&G and J&J.

Friedman never actually said “shareholder value maximization.” He talked about increasing profits, which – in the old days – was understood to depend on those other values.

We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come.

In the old days, people didn’t expect to get rich quick on their investments. In a market based on value, that is not realistic. The way to get rich quick is to pillage the value built up by more responsible managers.

Montier cites the case of IBM, and their plan to double EPS in five years. Seriously, double EPS in five years? Any cogent director would have to ask how the new CEO plans to do that. Is there a magic elixir to double our sales? Or, is he planning to slash R&D, cut staff, and load up on debt? You would hope that someone whose family name is on the building defenestrates him at that point – Montier supplies a comparison with privately held firms.

The real problem is not Friedman and not, strictly speaking, SVM. The real problem is that mechanisms have been invented whereby executives can pump their share prices, and their compensation, while actually destroying value. Studies and samples vary, but corporate debt in America has gone from something like two times earnings, in the old days, to four times earnings today.

For the last 35 years, stock-based compensation has been tried. It had the opposite effect of what was intended.

Montier’s article is filled with facts about the perverse consequences of stock based compensation, but he doesn’t make any serious recommendations for public policy. He leaves us hanging with a vague notion of “stakeholder capitalism,” and an apology for sounding socialist. Of course, this is where a socialist would say that government should run all the companies, because “the government doesn’t have to make a profit.”

That is actually the world’s dumbest idea. It would merely exchange one set of rapacious managers for another, probably worse. It is also a case of freeze-frame economics. Socialists always want to take over the existing companies, with no provision for entrepreneurial new ones.

So, what about policy? The Forbes article quoted here contains specific legal reforms, like getting rid of forward guidance. Another obvious reform would be to hike interest rates. The Fed is ostensibly “independent” so that they can choke off asset price inflation, financialization, and structural traps. It doesn’t take independence to be the stooge of Wall Street.

See also: The Dumbest Idea in the World: Maximizing Shareholder Value

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CVS Quits for Good

Trending on Twitter today is the bold decision by CVS to stop selling cigarettes.  Analysts reckon CVS will lose $2 billion in sales, a selfless sacrifice for the public good.  Isn’t it wonderful to see a big company putting people before profits?  You may applaud this decision if …

  • You are against smoking
  • You feel that companies should serve the public interest
  • You are hopelessly naïve about business

Do you really believe that a Fortune 100 company just tosses 4% of its revenue for the public good?  Did its share price tank?  No?  Jeremiah patiently directs you to the business press.

CVS stated it has identified opportunities to offset this impact, although few details were offered

Management is counting on special treatment from the administration to make up for lost sales.  They are making a push into retail healthcare.  It can’t hurt to have friends at HHS, DOJ and the FTC.  CVS may even get help with their Walgreen’s litigation.

This is an example of what Jeremiah calls Washington skills, wherein companies discover that political favor is more valuable than customers.  One hand washes the other.

See also:  CVS decision isn’t really about smoking

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Potemkin Economy

It’s not so unusual for Jeremiah to agree with Paul Krugman.  That is, we agree on the nature and severity of our employment problem, which Prof. Krugman frames poignantly in his editorial.

These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started.

By the way, if you don’t know that Friday’s employment report was dismal, we invite you to peruse table B-1 and discover where the 204,000 new jobs were created.  One post calls them “dead end jobs,” while labor force participation continues its five year descent.

labor forceKrugman deserves credit for framing the problem.  Many pundits seized on the headline number and declared victory.  That’s propaganda.  You will be better informed if you can keep track of which pundits are political shills.

We differ from the professor, however, on solutions.  He seems to have dropped monetary stimulus, at last, but he is still promoting fiscal stimulus.  His editorial also features a straw man, in the form of “debt scolds” unwilling to finance the stimulus.

There are two good arguments against further fiscal stimulus, one practical and one philosophical.  We have already run trillion dollar deficits for five years, including the ARRA stimulus program.  This approach isn’t working.  One analysis found costs up to $500,000 to create a single job.

This brings us to the second argument, which is that we do not trust the federal government to administer a stimulus competently, or even honestly.  We would prefer to have value producing jobs in the private sector, rather than Potemkin jobs in the government.

In clinging to the textbook approach, Krugman is, so to speak, “fighting the last war.”  We differ from his approach because we have a different analysis of the root cause.

Keynes’ great insight was to reanalyze employment in terms of how entrepreneurs make decisions in the real world.  Entrepreneurs today have different reasons not to hire than they did eighty years ago.

Happily, Prof. Krugman does not have to visit the real world.  The Fed does that for us, in the form of their beige book survey.  Entrepreneurs today are fearful of what they perceive to be an anti-business environment in general, and health care reform in particular.

Boeing tangles with the NLRB, and lays off 5,800 workers.  J.P. Morgan tangles with the DOJ, lays off 19,000 workers.  ANR tangles with the EPA, lays off 1,200 workers.  We read stories like this every day in the business press.  It’s not cause and effect, but it creates a climate of fear.

Real intellects know when to adapt their methods.  If Keynes were alive today, he might just say, “let’s try helping the private sector, this time.”

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Bad for Business

Imagine being a Cisco rep right now, trying to sell telecoms gear in, say, Brazil.  It’s not so pretty when they ask about that NSA backdoor.  Not only is this rogue agency not checked by Congress, they compel American tech companies to get into bed with them – and then lie about it.


If you were an investor, wouldn’t you like to know that Cisco is burned now in foreign markets?  Wouldn’t you expect them to disclose this materially adverse information?  That’s the argument made by Patrick Watson, in this clever article.  American tech companies face a choice between violating an NSA gag order, or violating SEC disclosure rules.

“The National Security Agency will kill the U.S. technology industry singlehandedly,” said Rob Enderle, a technology analyst in San Jose.

Maybe that’s why 5% of Intel stock is sold short.  Intel makes most of its money overseas.  One analyst, cited by Bloomberg, says the NSA has the potential to damage our entire tech industry.  Just to be sure, the agency has also pissed off important allies, like Germany.  Chancellor Merkel is pushing for tough privacy measures in EU trade laws.

Berlin’s unexpected move highlights the anger generated in Germany by claims that American intelligence eavesdropped on a wide range of targets, including Chancellor Angela Merkel.

We bugged her phone and now she doesn’t want to buy technology from us.  Did we mention that Merkel grew up in East Germany?   By contrast, here is Europe signing a fat free trade agreement with Canada.

Now that it’s hitting their finances, collaborators like Eric Schmidt are crying crocodile tears.  The NSA answers to no one – apparently, not even the president – but companies can feel pain.

See also:  Stop Using Google

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Charitable Giving

The Times has an exclusive interview with Bill Gates.  The Gates Foundation is doing amazing work around the world, notably in the fight against malaria. People will look back at Gates and remark that building Microsoft was only the warm up.  In the old days, rich guys would simply leave their money to charity and hope for the best.

Gates is using goals, metrics, and control systems – the tools of modern business – to ensure his billions will produce results.  Furthermore, he is not aiming for immortality, like the ridiculous Nobel prize.  He has organized the Gates Foundation to give everything away and liquidate itself.  It doesn’t get any stronger than that.

The moral equivalent is, we’re going to take 1% of the people who visit this museum and blind them.

For Jeremiah, the fun part was Gates’ contempt for froufrou giving, like galas and gadgets, in contrast to real issues like poverty and disease.  For instance, he questions why anyone would build a new wing for a museum rather than spend it on preventing diseases that can cause blindness. “The moral equivalent is, we’re going to take one percent of the people who visit this museum and blind them.”


By the way, anti-GMO activists are destroying golden rice in the Philippines.  That’s the rice that’s genetically modified to fight childhood blindness.  For every year they delay the project, another half million kids will go blind.  Gates is facing the same challenge, fighting polio in Afghanistan.  This challenge is called “ignorance.”

Another billionaire, Pierre Omidyar, is profiled in the Economist.  The eBay magnate is a pioneer in “venture philanthropy,” like microfinance.  He believes that business can be a force for good in the world.  Omidyar has recently set up Glenn Greenwald, of NSA leak fame, with his own news network.  The common thread, of course, is that if you want to do good in the world, you have to do it yourself – and it helps if you have business skills.

Finally, the Economist brings us this gem about simply giving cash money to poor people.  Without obstruction from corrupt agencies and phony charities, researchers have found that “giving money directly to poor people works surprisingly well.”

For decades, it was thought that the poor needed almost everything done for them and that experts knew best what this was.

Jeremiah’s readers will recognize this idea from his rules for public spending.  The problem with governments wanting to be charitable is not the spending, per se, but the involvement of a swollen and parasitic bureaucracy.

See also:  Do Not Give To Red Cross

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Frack with Crude

WaterBarrelContinuing our series of “iconoclastic environmentalism,” we consider hydraulic fracturing.  Jeremiah is a huge fan of cheap natural gas.  This is a clean and abundant source of energy – especially for electrical generation, where it displaces coal.  He does not believe the hype about setting off earthquakes or contaminating groundwater.  Groundwater is miles above the typical gas deposit.

The environmental damage from fracking is in the huge quantities of fresh water consumed by the fracturing process.  If only there were an alternative.  It would have to be an incompressible liquid, like hydraulic fluid, and it would have to be readily available at the site.  Hmmm.  What liquid could that be?

Since oil and gas are often extracted together, by the same driller, it would seem natural to use oil as the fracturing fluid – unless you’re a petroleum engineer.  They are hardwired to pull oil out of the ground, not pump it back down.  Plus, oil is $100 a barrel and water is basically free.  This highlights a famous paradox of resource pricing – water must be cheap because life depends on it, but keeping water cheap opens it up to abuse.

Water must be cheap because life depends on it, but keeping water cheap opens it up to abuse.

You may think that oil is $100 a barrel and water is eight cents – but neither of these is the relevant price.  The relevant price for the oil is the cost to pump it down, install the proppant, and pump it back out.  It’s not going to escape.  Normally, you would pump out the contaminated water anyway, so the cost is invariant.

Obviously, this glosses over some engineering challenges, but it illustrates the key point.  Drillers use water as an industrial fluid costing eight cents a barrel.  They are making an arbitrage profit on the artificially low price of water.

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