A Weak Economy as a Competitive Advantage to the Largest Corporations

Size matters, at least in the business world. Richard Fuld, the last CEO and Chairman of Lehman Brothers, overextended "his" bank with risky real-estate and financial derivatives in part so Lehman Brothers would be as big as Goldman Sachs. 

Empire-building (and ego) aside, the largest corporations can indeed perform differently than smaller firms in an economy. In April 2013, it was clear that the biggest companies were outpacing smaller ones. Analysts estimated profits for the 100 largest companies in the Standard & Poor’s 500 stock-index to rise 6.6% in the second quarter, while earnings for the bottom 100 were expected to fall by 1.6 percent. Of all the profits earned by the companies in the S&P 500, 22% would be coming from the 10 largest companies, enabling them relatively more wherewithal with which to gain still more market share. Put another way, beyond a certain point, organizational size can protect or buffer a company in the midst of a languid economy. It is not only the market mechanism that accounts for this phenomenon.
One benefit enjoyed by the big corporations is being able to profit from other markets around the world and thus make up for a slow market at home. Smaller firms, with little or no access globally, are more constrained in the sense of being limited to the conditions of the domestic economy. Additionally, large companies enjoy easier access to credit. A bad economy need not keep the biggies from making investments in expanding operations still more, hence building on their existing size-advantage. There appears to be a certain threshold in organizational size beyond which the size of a company's operations can act as a buffer mitigating the negative effects of a slowing economy. It may even be that the market mechanism itself rewards size, and in so doing facilitates the shift from competition to oligopoly or even monopoly in a given market. This does not necessarily result in greater efficiency in business or benefits for the consumer.

Once an organization reaches a certain size, diseconomies of scale kick in. Further increases in size bring disproportionate increases in costs, which counter the earlier economies of scale. As argued by Thompson in Organizations in Action (1967), as organizational size increases, the cost of integrating the various divisions and departments increases more than proportionately. In fact, coordination and integration can become virtually impossible once an organization has reached a certain size. For example, banks like JPMorgan and Bank of America may be so large that they cannot be effectively managed, not to mention in a cost-efficient way.

In addition to the impact from the market mechanism and business, federal legislation can benefit the largest corporations disproportionately or even exclusively, thereby widening the gap between the "haves" and "have nots." For example, federal budget-cutting tends to hurt small business more than large corporations. Also, large corporations like G.E. can afford to lure tax experts away from the IRS in order to minimize the corporate income tax liability. In fact, G.E. got away with zero tax in 2010, despite having earned billions of dollars in the U.S. that year. 
Furthermore, large corporations have considerably more lobbying power than do small companies. With some strategically-placed political campaign contributions, a large company can get its particular situation explicitly exempted in proposed tax legislation. In some cases, the companies or their lobbying group have even given the tax-writing Congressional staff the legislative language--saving the staff some work.

A large corporation can even create a sustainable competitive advantage for itself by getting Congress to increase the tax burden on smaller firms! Applied to the formulation of regulations by regulatory agencies, a large company with exclusive access to domestic and even international market data can "give" it to the regulators, who depend on such data in crafting regulations that will be effective in the market. Of course, the company can use its informational asset as leverage with which to sway regulators to soften the regulations in a way that benefits the company over its competitors. Even the prospect of future, well-compensated employment can influence a regulator to see to it that the future employer will not face regulations that are too costly. Otherwise, the eventual salary of the regulator-turned-regulatee could be lower amid the lower profits from costly regulations. This use of assets to sway regulators to go easy on the company (but not its competitors!) is known as the strategic use of regulation. I submit that organizational size facilitates such use because the assets that can be used as leverage are more valuable to regulators.

The power of large corporations over public policy and regulations is not the market mechanism at work; rather, it is a manifestation of plutocracy at the expense of representative democracy and the public interest. In a plutocracy, the good of the part trumps the good of the whole. This is sub-optimal for the whole because the interest of a part is not necessarily in line with the interest of the whole. Accordingly, public policy can be justified in countering the “artificial” advantages of organizational size in the political arena. Furthermore, even the size bias of the market mechanism and business itself could be reduced or even countered as per the public interest in more competitive markets in place of oligopolies and monopolies. This would take thinking systemically from the perspective of the public interest.

Source:

Nelson Schwartz, “As Wall St. Soars in Tough Era, Company Size Is a Big Factor,” The New York Times, April 15, 2013.

The 2012 U.S.Trade Deficit: An Analysis

Coming in at 2.7% of GDP, the U.S. trade deficit fell to $107.5 billion in the third quarter of 2012—down 9 percent from the second quarter’s $118.1 billion, which was 3% of the economy at the time. The current account includes merchandise, services, and investment flows. The surpluses in services and investment were out-done by the deficit in merchandise to produce the overall trade deficit. According to the New York Times, the “improvement in the current account in the third quarter reflected a decline in the deficit on goods and a small increase in the surplus on services, led by a gain in foreign earnings made by financial services, insurance and professional services provided by companies in the United States. The surplus on investment earnings narrowed to $50.8 billion, down from $52.1 billion in the second quarter.” Most of the decline in the deficit on goods reflected a decline in the foreign oil bill, according to Paul Ashworth at Capital Economics.

Analysis:

Lest we get bogged down in the purportedly significant differences between 2.7% and 3.0%, $107.5 billion and $118.1 billion, and $50.8 billion and $52.1 billion, respectively, we might take note of the rather stark difference between goods on the one hand (i.e., sustained deficits) and services and investment (i.e., sustained surpluses). Although it was no doubt true that the economic slow-down in China and the debt/austerity-induced recession in the E.U. were reducing demand for American exports, a basic imbalance between exports of American-made and imports of foreign goods is clear from the numbers year after year. Indeed, in 2006 the current account deficit had reached a record $800.6 billion—suggesting that something fundamental was “out of whack.”

                                               This graph isolates the deficits in goods imported/exported.   source: thismatters.com 

The question may be whether Americans were importing too many foreign goods or were too uncompetitive in making goods. Regarding the former, being able to buy a relatively inexpensive television made in China is not in itself a bad thing, particularly to the consumer. The question is perhaps whether the price was artificially low, due for instance to a relative lack of environmental regulations, lower labor costs, or government/bank subsidies. However, even if due to these factors, a low price is undoubtedly welcome to any consumer.

Regarding American competitiveness, was it hampered by labor and environmental standards or simply by unmotivated workers and bad management? Whereas American consumers benefit from cheap imported products, no such benefit can be found in the U.S. to any sector from a relative inferiority in competitiveness.

There is, however, the argument that an “advanced” economy oriented to professional, business and financial services rather than manufacturing can enjoy a higher standard of living if the services are more premium than the goods would be. The pristine notion of the “knowledge economy” captures this point very well. That not all Americans are willing or even able to participate at this level suggests that the term could never completely cover an entire economy. Hence, it is necessary even in an “advanced,” or “high tech” and “professional,” economy to tackle the problem of competitiveness in manufacturing.  Does it come from high regulatory costs (which can be viewed as part of a demand by Americans for a certain “standard of living” writ large), a lack of product development, or an inefficient labor or management force?  Whereas wanting a decent wage-floor or environment as a condition of manufacturing has merit—the cost being that society may have to support people who would otherwise be working in manufacturing—a dearth of ingenuity, bad employee attitudes, and inept management have no such positive aspect.

I was born and raised in a medium-sized industrial city in the “rust belt.” Furniture was the first industry, following which machine tools were the dominant manufacture until competition from Europe took out most of the factories. Speaking a few years ago with a European who had been sent over to oversee a factory that had been taken over by a European company, I was not surprised when he admitted, “the workers here just are not good. They are not motivated and they don’t pick up on the training very good.” Years before that, I had watched a program on the American public broadcasting network about a man’s effort to prepare inner-city black people for job interviews. Midway through his talk, the man admitted to the folks attending, “from your attitude even here, I have to admit I can’t see how anyone would hire you, so I don’t see any reason to continue here.” The man ended the workshop at that point. Doubtless his decision prompted little if any self-criticism from the participants. A bad attitude is perhaps almost impossible to correct from the outside—even with the inducement of money!—given the nature of a bad attitude. Regarding people under thirty, perhaps a year or two at a military “boot-camp” might break down the attitude’s intransience and build up self-confidence and self-respect, not to mention basic civility. Absent such a strategy, perhaps the segment of the American population unwilling (or able) to become part of the “knowledge economy” is inevitably lost—not being able to compete even on a factory floor. The cost to the rest of society goes well beyond money.

While visiting Miami, I witnessed repeated incidents on the buses from the mainland to Miami Beach of black men shouting and even hitting each other, as well as bumping into (and even falling on!) tourists. The black drivers ignored the shouts (including a drunk black man loudly and repeatedly calling a pregnant white woman a “fucking bitch”) and even fist-fights. Even with tourists begging the drivers that the aggressive passenger be dismissed from the bus, the drivers just drove on. In two cases, the drivers asked the men being hit if they wanted to press charges. They replied that they did not, so rather than get the aggressor off the buses or call the police, the drivers simply started driving again. This happened twice in the last 24 hours of my visit!  Near the beginning of my visit, I myself was pushed against the open bus door of a bus at a rail station while I was attempting to board a bus because I had not allowed all of the black passengers to enter first. The black driver refused to call the police or even tell the aggressive black man who had squeezed me to leave the bus. The driver simply replied to me—as I was pinned to the open front-door—“no, I won’t call the police. You shouldn’t have gotten on then. That’s how it is here.” I should have called the police! I was so stunned at the violence and systemic cover-up that I simply wanted to get to my destination. Just after I took my seat, a nice older black woman asked me where I was from. I told her that I had grown up in Illinois. “It must be worse in Chicago,” she remarked. “No,” I countered, “it is worse here. The blacks there are better.” In spite of being the only white person on the bus, I went on. “Even with the blacks killing each other in south Chicago, the people are better there.” She asked if north Chicago was white and the south part black. “No, the north part of the city itself is integrated, while I think the south is black. I was referring to the north—the blacks there are much better than the ones here. Here—I can’t leave soon enough.” Silence . . . complete silence. It then occurred to me that the entire bus—which still had not left the tri-county rail station—had been listening to this white guy talk about blacks very directly.

As it happened, a month or so later I was in Chicago taking a bus when a black man tried to enter the bus by pushing three old white women in line in front of him. The driver, who was also black, saw the attempt and quickly said, “Hey, what do you think you are doing? Get back out of the bus and let those women on first. Who do you think you are?” Then the driver turned to us in the bus and remarked, “It’s all about him, isn’t it?” The offender must have been startled, for he merely replied, “But it is cold out.” The driver pointed out that it was cold for the women too. The three women ended up sitting near me, and I told them (and the front half of the bus) about what I had witnessed in Miami on the buses there—and that it really was better in Chicago and even warmer despite the cold—even in terms of people moving past each other in the isle. “In Miami, the driver would not have intervened and you all would have been pushed out of the way of the guy who was behind you in line. Even complaining to the driver would have had no effect, and the man would have gotten away with it—whereas here that attitude is an exception. It was therefore countered, or pushed back, and therefore not allowed to become the default.” I don’t know whether the driver heard my compliment.

While it is easy to point to the bad attitude of many of the black passengers in Miami, I contend that the incompetence and attitude of the bus drivers there were just as problematic, and my anecdote from a bus in Chicago demonstrates that the attitude need not be enabled rather than challenged. The fact that the drivers in Miami all reacted the virtually the same way suggests that the decadence is systemic there. Put another way, the rudeness and aggression had become the norm and thus could not be checked. Perhaps this is why the drivers simply ignored even the violence—though this is hardly a viable excuse.

In terms of passive aggression, I witnessed drivers of buses going between downtown and Miami Beach regularly and knowingly cram too many passengers (even tourists!) on the buses and then demand that the extra passengers (who had already paid) shout back into the bus for others to step back so the extras could “get behind the yellow line.” To allow passengers known to be beyond capacity on board and then put them in an impossible situation while refusing to take control of the bus by making an announcement for people standing to move back evinces not only incompetence, but also an almost-sadistic mindset. On several occasions, I saw order itself fall apart on buses there as frustrated passengers—even tourists!—openly challenged the unjust and incompetent drivers on this very point.

Leaving Miami, my overall conclusion was that that county should not be part of the United States of America because of the rudeness, aggression and even the break-down in order—all tacitly sanctioned by county managers and employees. The rudeness, by the way, was nearly everywhere, rather than just on buses. I could not imagine any of the aggressive passengers or enabling drivers lasting more than a few days working in a factory, and the bus company managers (who knew of the incidents, according to local passengers) were doubtless virtually unemployable in the private sector too.

In short, the serial merchandise trade-deficits may point to an America that even many Americans do not know exists. That is, the structural imbalance may reflect a decline in American society—both in terms of labor and management—that manifests in a significant number of Americans compromising manufacturing or even being virtually unemployable. Put another way, I suspect that the condition in the American factory was at least as of 2012 part of a much more serious problem wherein even the social contract itself was under threat, or at the very least the American empire was in decline.

Source:

The Associated Press, “US Shirks Trade Deficit As Oil Falls,” The New York Times, December 19, 2012.

Balancing Company Rights and Worker Security through Public Policy

It would be a cruel joke were an airline to keep the extendable corridor back as the plane’s front door is opened and passengers are pushed out. Not even having a safety net below would neither be sufficient nor fair. When a government gives companies the flexibility to fire workers without yet having in place vocational safety nets, said government acts negligently and perhaps even with partiality to one side of the labor-management duality. At the very least, the flexibility to fire should be held off until the matter of economic security is finalized.

With the largest automaker in the E.U. state of France announcing the firing of 1,300, the largest supermarket-chain in the state set to cut 2,500, and 200 at a major clothing retailer in January, 2018, companies were already “taking advantage of new rules that make it easier to hire and fire. But the other changes, those designed to help cushion the blow like retraining programs,” were not yet in place, “leaving workers vulnerable to a coming wave of downsizing” in a state whose unemployment rate had been “persistently stuck at more than 9 percent for more than a decade.”[1] The Times goes on to point out that “the initial imbalance between employer rights and workers’ protections means the economic picture could get worse before it gets better.”[2] This way of expressing the matter highlights the possibility that the government officials were biased in favor of the business lobby (and cash).

I submit that protections for citizens—providing a safety net even if only for workers in transition—is more important than employer rights (i.e., property rights) because even just risking sustenance is a greater harm than holding on for a while to old rigid rules on firings. The case of an impending bankruptcy may be different, as firing some employees could save the jobs of the majority.

In this analysis, I am drawing on Bentham’s utilitarian ethical theory, wherein the greatest good in terms of pleasure (less pain) is the criterion. Generally, a public policy that restricts the choices of a company’s management creates less pain than the corresponding pleasure (without pain of losing sustenance) for the workforce. Opening up the choices creates pleasure (and reduces pain) for managements and stockholders, but the pain of being unemployed is more. Even given Bentham’s claim that such pleasure and pain could be put in quantitative terms, the pain from losing the means of livelihood and possibly having to do without even on the basics (food, shelter, and medical care) is high indeed—so high that even comparing it to the pleasure obtained by the companies seems an injustice. This is not a justification for regulation or socialism (i.e., the state owns the means of production); rather, I submit that balance, such as in the timing of the public policies on firings and worker-security, is a ripe additive to Bentham’s theory.

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[1] Liz Alderman, “Newfound Freedom . . . to Fire,” The New York Times, January 24, 2018.

[2]Ibid.

Disentangling a Worsening Trade Deficit: Sector-Specific Industrial and Macro Economic Policy

he U.S. trade deficit rose 9.6% in January, 2017, to the highest level since 2012. The gap of $48.5 billion of exports exceeding imports looks daunting, yet the story is more complex at the sector level.[1] According to Neil Irwin of The New York Times, “What really matters is not whether the trade deficit is rising or falling. What matters is why?”[2] Distinguishing macro factors such as a strengthening dollar from sectoral strengths and weaknesses is thus necessary.

 The Port of Oakland. (source: Jim Wilson/NYT)

In the automotive sector, a $1.3 billion increase in exports corresponds to a $900 million increase in imports—essentially a draw. The $2.1 billion more in exports of industrial supplies is favorable, suggesting that that sector is doing well, but exports of civilian aircraft fell by $611 million, and other high-tech capital goods were also down, while imports of consumer goods—notably cell phones—increased by $2.4 billion. Boeing may simply have had a bad month, though it is also possible that Airbus had been out-competing its American competitor. The numbers on electronics add to the general perception that the U.S. is not competitive in such manufacturing. Industrial policy could address the possibility that automation and tax incentives (and penalties on American companies producing abroad only to import the finished goods back to the domestic market) could rectify this weakness in the American economy. 

Meanwhile, the balance of trade in services worsened by $5.3 billion. The fact that the money that foreign travelers spend in the U.S. on hotels and restaurants counts as exports suggests that a strengthening dollar could have been in play.[3] The Federal Reserve’s monetary policy was thus in play, for rising interest rates mean a strengthening of the dollar. Industrial policy may thus be less relevant here.

“A big piece in the rise in imports was crude oil and other petroleum products. They were up by a combined $2.2 billion.”[4] Exports also increased, by $1.2 billion, so this sector obviously contributed significantly to the overall trade deficit. To be sure, an increase in the price of oil favored producers, but this matter is dwarfed by the strategic national-security goal of self-sufficiency on fossil fuels. In terms of industrial policy, an expansion of domestic sources of oil and refining capacity may have been advisable at the time—not so carbon emissions would increase, but, rather, so imports of oil could drop.

In short, analyzing changes in a trade deficit requires distinguishing sectors, and, moreover, discerning where industrial policy recommendations are in order from cases in which macro political economic policy is at issue. Ideally, sector-specific industrial policies and macro policies are “on the same page.”

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[1] Neil Irwin, “The Huge January Trade Deficit Shows Trump’s Hard Job Ahead,” The New York Times, March 7, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Analysis of Italy’s 2016 Referendum: Beyond the Euro and the E.U.

The predominate axis of analysis in the wake of the Italian referendum in early December, 2016 centered on the euro, the federal currency of the European Union. 

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.