Sunday, April 26, 2009

How Not to Create Broad-Based Prosperity

I'd been meaning to comment on Matt Miller's op/ed column in last Monday's Financial Times ("Businesses must wake-up and take action") but haven't had a chance until now, so here goes. In his column, Miller, a management consultant and senior fellow at the liberal think tank Center for American Progress, suggests that, in order to keep the metaphorical pitchfork-wielding mobs at bay, business leaders need to,

[W]eigh in now on three subjects on which they have been notably absent: executive pay; the need for an updated “social contract” that fits 21st-century realities; and a strategy to make service jobs that cannot be offshored a path to the middle class.

On the first of those three subjects, Miller is on mostly solid ground; on the second two, not so much. On executive pay, he writes,

It is in the enlightened self-interest of business to acknowledge that it is both wrong and politically unsustainable to have chief executives routinely accumulating entrepreneurial-style wealth without taking entrepreneurial-style risk – or worse, while presiding over shoddy results or the actual demise of their companies.

Tough to argue with that, though I would have added that it's in the interests of society for entrepreneurial-style wealth to go to those who not only take entrepreneurial-style risk, but make entrepreneurial-style contributions (in terms of creating new products or services, creating new jobs, etc.). I'd also disagree with Miller's proposed solution, which relies on self-interested restraint on executive pay by corporate boards and CEOs. I think we'd be better off with more-empowered shareholders. Since mutual fund managers tend to vote their shares in lockstep with corporate boards, one way to strengthen the voice of retail shareholders might be to require mutual funds to aggregate the votes of their retail shareholders on, say, the funds' top 5 or 10 holdings, and then vote their proxies accordingly. Warren Buffett put his finger on the main cause of excessive executive pay in a Berkshire shareholder letter we excerpted in a recent post ("Revisiting Warren Buffett's Criteria for Selecting Corporate Directors"): directors who aren't "owner-oriented" or "truly independent". As Buffett wrote,

[M]any directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living. These payments, which come in many forms, often range between $150,000 and $250,000 annually, compensation that may approach or even exceed all other income of the “independent” director.

Clearly, a director who gets more money from her director fees than from her day job isn't going to rock the boat on behalf of shareholders to try to rein in executive pay -- why risk losing her high-paying directorship? It's worth noting, though, that this sort of thing is mostly just an issue at the very largest companies. There are thousands of small publicly-traded companies where executive comp isn't excessive, and directors don't face such big conflicts of interest (mainly because director fees are so much lower, and also because fewer directors are selected for non-business reasons).

On to Matt Miller's other two subjects. On the need for a new social contract, he writes,

A visionary business agenda would make sure average workers feel more secure in an era of accelerating change; this is the only way to avoid a backlash against trade and economic dynamism altogether.

A fair point, though Miller seems to have no idea of how to do this. He gestures vaguely in the direction of universal health care, arguing that,

American business must rethink its odd, outsized role in the provision of health coverage, which may have made sense 50 years ago but which today leaves millions of families falling though the cracks...

It's worth noting here, since Miller didn't, that American business's "odd, outsized role" in health coverage was a direct response to a government policy, specifically FDR's wartime wage controls, which led companies to increase forms of non-cash contribution (such as health care coverage) to attract workers in a tight labor market. That said, there's nothing original about wanting to sever the link between employers and health insurance -- Milton Friedman advocated that, as did even John McCain's advisers during the general election campaign.

Miller is most off-base on his third subject, making service jobs that cannot be offshored a path to the middle class. On this, he writes,

[G]rowing numbers of jobs in the US face effective wage caps because they can be done for less, and often better, overseas. Yet in-person service jobs – such as teaching, home health services or hospice care, for example – cannot be offshored. How can the US turn this kind of work into jobs that can sustain a family?

Where to begin with this one? First, teaching is already a job that can sustain a family. Teachers tend to be paid solid, middle class wages with excellent benefits and job security. This is true as well of many skilled jobs in health care, such as nursing, physical therapy, etc. (though it may become less true if we transition to fully-socialized medicine). Second, although these jobs can't be outsourced, they can be performed by immigrant laborers, and in fact are. My guess is that Matt Miller is a smart fellow, but is relatively young and has little life experience related to the health care of senior citizens. Otherwise, he'd know that many nursing home, hospice, and home health care aids are female immigrants from the Caribbean or the Philippines. If Miller knew this, would he advocate restricting immigration? Somehow, I doubt that.

More broadly, the idea that a broad-based prosperity and a strong middle class can be built on teaching, home health care and the like seems daft. These are important jobs, to be sure, but ultimately the private sector has to earn the money to pay the taxes to support public sector jobs such as those of public school teachers. As for home health aids, in the private sector, the salaries of workers ultimately come from the sale of some product or service; a home health care agency that pays its unskilled health aids as if they were registered nurses won't be able to sell its home health care services at a competitive price. This isn't the way to create high-paying blue collar jobs. The way to do that is to facilitate industries that have high enough margins that they can pay their blue collar employees well -- industries such as natural resources and manufacturing.

The problem is that liberal think tanks such as the Center for American Progress -- although they support the goal of a strong middle class in the abstract -- advocate policies that work against this goal in reality. They oppose most manufacturing and natural resource industries out of concerns about carbon and global warming; they advocate policies that will make energy (and thus energy-intensive industries such as manufacturing) more expensive, for similar reasons; they oppose the vocational tracking that would support a strong manufacturing base, out of egalitarian educational ideals; and they support unskilled immigration, which lowers the wages of blue collar workers in industries such as construction.

The photo above, of oil industry worker who I'm sure earns enough to support a family, comes from the Department of Labor, courtesy of Exxon Mobil.


DaveinHackensack said...

From Matt Miller's bio, he appears to be smart and well-connected -- Brown, Columbia Law School, former White House fellow, etc. -- but not as young as I suspected (he's 47).

JK said...

Service jobs? Is he serious? Who are they going to service? Other broke people? What a depressing vision.

To protect the middle class you need promote what America does best: Innovation! (of businesses that actually produce, not financial engineering innovation)

Any bailout or stimulus should subsidize private individuals who start a high-tech business in young industries like nanotechnology, biotech, or robotics, make widely available and affordable the education requisite to do so (it isn't either now), and provide appropriate tax incentives. Other countries are taking the lead in these fields (Germany, Japan, China) but if history is given weight, then we'll probably commercialize the industries better than anyone else.

Also, without getting overly protectionist, put the brakes on certain offshoring of jobs by large, already profitable companies, either by directly sending them to India/China, or indirectly by bringing foreign workers here on temporary Visas. This is more damaging to the US middle class than the influx of low-skill south americans, because many of the jobs given to the Indians and Chinese are not (or were not) low paying jobs.
Multinationals for the most part are not doing this because they need to, rather it is just a game of global arbitrage, where they have all the benefits of being a US corp (business friendly, stable legal/political system), and all the benefits of being a developing nation corp (low wages), with none of the downside of either.

DaveinHackensack said...

I agree that it's a depressing vision. And while I don't agree entirely with your prescriptions (e.g., limiting outsourcing), you seem to have put more thought into responding to the challenges of globalization than Miller has. I e-mailed the post to Miller, so perhaps he'll weigh in here (I doubt it, but who knows).

Anonymous said...

Nurses, like physicians, have had their earnings and autonomy gutted over the past 20 years. The government will only seek to do more of the same.