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Dalia Marin on Outsourcing, Income Inequality, CEO Pay

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Dalia Marin, who Chair in International Economics at the University of Munich, discusses “new new trade theory” and how it looks at phenomena that don’t fit into older models of trade, particularly outsourcing and offshoring. Her work is empirical and here she discusses wage differentials and the various rationales for why CEO pay has exploded in the US. I think readers will enjoy this interview.

Update 4:00 AM: INET appears to be having server problems. I’ve alerted my contact there. The embed code is not working right now and I can’t access the video directly either. I hope you will be patient and check back during the business day US time. This session is worth the trouble.

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41 comments

  1. MaruKun

    Mr. CEO and the Chinese Slave Owner – A Modern Story

    Once upon a time Mr. CEO had a company that made some Stuff. But he wanted more money all for himself. So he said to his friend Mr. Wen the slave owner “I’ll sack half my workers and cut the wages on the rest if your slaves can make my Stuff instead. Me and the Board are going to split the savings, but I’ll make it worth your while”.

    Mr. Wen said “No problem!. My slaves don’t need education or pensions or healthcare or all those decadent western things. And I can work them until they practically kill themselves. We can make your Stuff. And what’s more, we’ll lend you back the money to buy it!”.

    Mr. CEO said “Mr. Wen, that’s a brilliant idea! That way my ex workers can still by all the Stuff they want!”. But Mr. CEO’s friend , Mr. Economist, whispered in his ear, “Look, Mr. Wen will want his money back one day – and then there’ll be trouble.”

    But Mr. CEO said, “No problem. My best friend is Mr. President, and he should be able to kick that can down the road until well after I retire.”

    “And I have a friend Mr. Banker who is really good with money. He can shuffle it around and hide it like nobody’s business for years to come, although he’ll be wanting a pretty big share”.

    “Mr. Economist my old friend, here’s a million dollars. Go and see Mr. Fox at the newsagent and come up with some theory to make it all OK.”. So that’s how Globalization was born.

    So everyone was happy: Mr. COE, Mr. Banker, Mr. President, Mr. Wen, Mr. Fox and even Mr. Economist (everyone except for the workers at Mr. CEOs company and his ex workers that is).

    But one day Mr. Wen phoned up. “Mr. CEO, I need the money back, right now. My slaves want all your decadent western things. Why, they event want democracy! This was all your idea and its all your fault. Give me back my money, right now, so I can keep them happy.”

    But Mr. CEO didn’t have the money. So he went to Mr. Banker and said “Give back Mr. Wen his money, right now.”.

    But Mr. Banker didn’t have the money. So he went to Mr. President and said “Give back Mr. Wen his money, right now”.

    But Mr. President didn’t have the money, So he went to the only people left – the old workers at Mr. CEOs factory and said “Give back Mr. Wen his money, right now. If you don’t they’ll be no schools or hospitals or pensions for you, you lazy bunch of scumbags”.

    But the ex-workers at Mr. CEOs factor didn’t have the money either, because Mr CEO had cut their salaries or laid them off a long, long, long, time ago.

    And that, boys and girls, is the end of the story. I didn’t say it had a happy ending, did I?

    Goodbye.

    PS: For the children who are old enough to know that Santa Claus isn’t real, Mr. CEO and Mr. Banker actually did have Mr. Wen’s money, but they were hiding it really carefully and Mr. President was too stupid to find it (or else he wasn’t looking properly).

    1. mansoor h. khan

      MaruKun,

      It is an ancient saying that if you want to destroy a civilization then “corrupt the priests of that civilization” and rest will follow.

      For all practical purposes economists serve as the “priests” of our modern civilization.

      Mansoor

      1. ECON

        Mansoor, whatever you do for a career or living just maybe you in fact “serve as a priest” rather than economists. Economists too serve a master in the private sector and it is too easy to scapegoat and demonize particular occupations. I would suspect that the CEOs of financial service organizations are not educated and trained in economics. Target the individuals who have done criminal and civil actions over the last 6 years on Wall Street no matter they be lawyers, accountants, MBAs, political types, etc.

        1. Yves Smith Post author

          I wrote a book that demonstrated how mainstream economic laid the foundation for predatory behavior and looting by the financial services industry and the resulting crisis. Unless you are a heterodox economist, you have a lot to answer for.

    2. jim3981

      Yep. You forgot to mention the part about US politicians finally waking up and figuring out the haven’t had control of government for the last 30 years and it is really some sort of shadow government(along with the media) and the few psychopaths like John Bhoaner, Mitch Mcconnel, Eric Cantor that help these elites own the world.
      Probably has a lot of help from the CIA and pentagon too, since nobody can seems to put a stop to the madness.
      Anytime a person stands up to the meatheads, they end up in some sort of sick smear campaign engineered with the help of the media.

    3. MyLessThanPrimeBeef

      Fortunately, Mr. Schlaaaange is whispering to Mr. President about a magical MMT fruit will make life fun and enjoyble again.

      1. Cedric Regula

        Yes. Don’t tax the job creators – until we get inflation of course.

        But it’s good to have flexible theory so you don’t paint yourself into a corner!

  2. primefool

    Not unlike academic economists to ignore the elephant in the room and “research” interesting little peripheral issues.
    New New New Trade Theory :
    1. Trade has been mostly driven by tax arbitrage effected through transfer pricing. ie. US Global sells chips ( which are the technological guts of the final product) to its Asian sub at a very low price ( and therefore shows very little US taxable income). Asian sub puts the chip in a plastic box and ships it back to the US at much higher market prices. Therefore the bulk of the taxable income is generated in the Asian sub ( mostly very lightly taxed).
    2. As these ofshore profits accumulate in the foreign subs ( and not taxed by the US so long as it is not repatriated to the US) – there is a great incentive to invest these untaxed riches in foreign lands.
    The amounts involved are not small. The evidence for this Theory can be easily obtained by looking at the actual US taxes paid by many large US multinationals – shockingly low – even zero!!
    3. As these huge amounts of capital accumulate abroad and get invested in expansion outside the US – it naturally leads to employment growth and then consumption growth- abroad.
    4. As a corollary – much of the US trade deficit is an illusion – merely reflecting the transfer pricing schemes.

    1. gs_runsthiscountry

      Excellent video ….and Brilliant from 34:00 mim mark on -i suggest every one watch the tail end of the this video at the very least.

      I worked for a German owned firm for the better part of my working career. If people are not familiar with this concept of the decentralization she is talking about, it is very hard to articulate. Working in Manufacturing Engineering I/we helped develop and implement this strategy she is talking about. Let me tell you it was quite a transformation of a company from 1990 to 2000. Yes, this was being done 17 years ago.

      It was quite frustrating to interview with firms that are still trapped in the 80′s, and I am not talking about small firms either, SP500 companies here. Manufacturing VPs spewing TPS, JIT and LEAN as if they were new concepts. And they don’t realize they are still behind the curve, while feeling they are being cutting edge and progressive.

      Glad I am putting that career behind me. Which is also interesting, all the talk about not being able to find qualified talent or engineers. We are still here, full of experience and wisdom. However, anyone with any sense that has spent at least 10 years in industry does not trust the lip service; the lip service that this country going back to being a leading manufacturer. Hence, many, many, people I have countered, like myself, are changing careers and not going back. Tragic actually…pound the s*it out of the manufacturing industry for 30 years and CEO’s now complain they can not find qualified talent….I ask you, what the hell did you expect??

      gs_

  3. Tao Jonesing

    The ignorance of academics is stunning. Truly.

    They simply don’t understand what “performance” shareholders are paying for. The boards know, however, which is why they pay CEOs so much.

    Prof. Marin is profoundly ignorant because she is trapped in theory and understands nothing of the real world.

    Here’s a clue: Germany and France are converging towards the US corporate culture because that’s the price you need to pay to get somebody to shit where they eat. You have to pay a lot to get somebody to work against the invisible hand that binds them to their community and compels them to protect it. Think of Judas and silver, and you get the picture.

    1. Ranjit

      Agreed. And she seemed to imply that increase in the size and complexity of the firm was a major driver behind skyrocketing CEO pay. But does this work? Were major American manufacturers and other corporations all small in the 40′s, 50′s, 60′s, and 70′s, before becoming gigantic in the 80′s and 90′s?

      Moreover, why should increased trade lead to a rise in CEO pay while it leads to a decrease in the wages of unskilled laborers… and even a lowering now of wages of skilled labor?

      So, the explanations she provides do not seem to hold up. What she did not address was the rise of shareholder capitalism, of the culture of providing value to shareholders, and of the rise of the short-term corporate philosophy of downsizing, high dividends, stock buy-backs, and low capital investments.

      1. gs_runsthiscountry

        You guys are both right. The front end of the video gives a history, but her explanations as to WHY fall short, weak at best.

        The multiple races to the bottom continue. For example, the continued implied and veil threats to local governments across the nation by corporations, ergo, give us tax breaks or we are moving (TIF districts are an excellent example, I swear most of the upper Midwest is a TIF district. A once great idea run-a-muck, with no clear evidence there is a true payback). I have news for the local politician, they are going to leave anyway! Extortion of tax dollars in-trade for lower wage jobs that stay for 3 to 5 years, short term loss of tax base, thus transferred back to the local property tax payer and the politician gets to keep his job. This creates a competition between local governments, and an escalation and a cycle of giveaways that never seems to end.

        I watched for years OEM companies squeeze their supplier margins, US based suppliers with employees making at or close to min wage. And internal labor costs of the OEM firm, as a percentage of the product internally, were actually quite low already.

        The writing is on the wall, at the completion of these cycles, within 10-15 years that company is either outsourcing more (enter your job here) or moving to a right-to-work state in the south, or abroad.

        Advice to anyone working in the Northern US in manufacturing at any level, professional, skilled labor, white collar or blue collar…. find a different line of work. As the video suggests, which profession that would be, I do not know. Will we all have to become nurses and radiology technologists in order to find a reasonable, fair and equitable wage that is aligned to skill level, work and education?

        gs_

        1. Blissex

          «Will we all have to become nurses and radiology technologists in order to find a reasonable, fair and equitable wage that is aligned to skill level, work and education?»

          You really really don’t get it. With the end of the Cold War there have been two big changes:

          * The global workforce pool has doubled, as the Second and Third World underemployed labor reserve army has started competing with that of the First World. This means that the capital-labor ration has halved, and capital is now twice as scarce and thus valuable. Therefore global wages will eventually equalize, with those in the Second and Third World going up a bit, and those in the First World falling a lot, in either real or nominal terms.

          * The owners of capital had a reason not to drive the hardest bargain possible with workers during the Cold War as they were scared of creating a fifth column, a strong labor movement that was ideologically aligned with the theoretical ideology of the enemy. That reason no longer exists, and owners of capital can now drive as hard a bargain as they wish with First World workers. The First World was the rear echelon of the Cold War and that meant that critical production and workers attached to them could be outsourced to unreliable front zones like the Third World or to enemy territory like the Second World.

          So increased labor competition and no reason to pull punches will result *necessarily* in a colossal depression of wages in the First World (and a smaller one of Capital in the Second and Third world as First world capital floods it).

          1. gs_runsthiscountry

            Thanks for the response, but for the record I am fully aware of what you are taking about. In an effort to save me some typing i was going to pull a very long response from ZH on or about July 20, 2010. Unfortunately, they have archived older posts.

            In any event, yes you are correct, however in the recent past (and why some companies have decided to move some operations back to North America, for the time being) the accounting tomfoolery that was taking place to justify off-shoring many times excluded shipping costs…simply put, it was short-term leverage against labor to lower wages, or in all fairness, a strategic move as a company moved into a new market (asia for example).

            That said, the total lack off accounting for supply chain deliverability (will the products or component parts get here on time) and actual shipping costs were not taken into account. When CFO’s and their minions justify moving a product or production line or receive component parts from aboard, but fail to account for an increase of over 250% in shipping day rates, i think its clear something is off and some other motive is at work.

            Going forward, when this economy does see an upswing, the fact the shipping industry has heartily increased capacity will once again put pressure on wages and encourage outsourcing.

  4. Linus Huber

    When listening to this video with regard to ceo pay, for some reason I got the feeling that I hear one of the reasons why there exists such strong resistance against the idea of creative destruction in the sense that large firms may be let to implode and new start ups rejuvenate the economy.

    It gives me the creeps thinking that for personal gain, the large corporations continue to influence economic policies with the main purpose to ensure their own survival and growing their size at the expense of the economic performance of the country as a whole.

    1. Carla

      It gives me the creeps, too. Then consider that these corporations entirely control our political system, Congress, the Administration, federal government agencies and most functions of our state governments. Their influence on the US Supreme Court was made obvious with Citizens United.

      If you have not already, please sign on at http://www.Movetoamend.org and join the movement for a constitutional amendment to abolish corporate personhood rights, including corporations’ supposed 1st Amendment rights.

  5. craazyman

    truly depressing to hear this idiot-savant trot around the talent myth. I mean really. How much longer does that Frankenstein have to walk among us before they see it for what it is? and is there any more proof needed of the “analytical death by sequential Cartesian analysis syndrome” — i.e. stringing along one two-dimensional correlation after the other like a trail of crumbs, believing that it somehow makes a meal. OK idiot-savant is harsh, but I’m an idiot savant too sometimes, so I can empathise. There should be a clinic for this ailment, but not a re-education camp like in Cambodia. I’m thinking something gentle and supportive that helps you ascend into the consciousness sun.

    1. Cedric Regula

      “I’m thinking something gentle and supportive that helps you ascend into the consciousness sun.”

      Possibly a job in the private sector? But they are getting hard to find.

    2. Anonymous Jones

      It is truly depressing. Agreed.

      We really want the meal, no matter how much the crumbs don’t fit together (even though it seems like they really should sometimes).

      It’s just in our nature. We want to impose order on the chaos; it’s what we do. A fool’s errand, of course, but it’s what we do. It’s neither good nor bad; it’s just what we do.

      I guess it might be knowing this that makes some of us crazy.

      Ignorance really is bliss, I imagine.

  6. avgJohn

    CEO pay is simply due to the effects of economies of scale on a limited “talent” pool?

    I know “talent” can be difficult to define objectively, but I wish that she would have delved a little deeper into just what qualities encompass a “talented” CEO. Do they single-handedly develop a brilliant marketing stategy, engineer and invent new products, structure complex legal entities to shirk any and all ethical responsibilities and dodge international taxes, engineer effective cost cutting programs to keep their products competitive?

    Is talent a willingness to supply potential clients with “good food, good liqour, and good women” in return for their business? How much is talent related to becoming a netwoked member of one the world’s “best” social clubs (www.forbes.com/2005/09/01/luxury-travel-clubs-cx_sb_0901feat_ls.html). Why do you invariably always find several local and state politicians, along with a couple of sleezy corporate lawyers at their social gatherings, or you always find them on the guest list of Senator so and so who’s son or daughter is getting married or whatever? When they need to struture a complex international deal why is it they seek out the services of say, a former Washington senator or congressman with the connections to “make it happen”. Seems more like an expert schmoozer steeped deeply in the art of cronyism, with a pathological callousness to his neighbors and fellow citizens if you ask me

    I’m not saying that their aren’t individuals who have risen to the rank of CEO due to terrific work ethics, great social skills, exceptional leadership qualities, bold visions, and so forth, but it seems to me, on the other side of the coin, their is a whole lot of questionable ethical issues and practices that many top executives seem to be casually brushed aside in their pursuit of corporate power and riches.

  7. Wyndtunnel

    In all seriousness the only talent these CEOs have that matters to firms was summarized nicely by Tao Jonesing above: “that’s the price you need to pay to get somebody to shit where they eat. You have to pay a lot to get somebody to work against the invisible hand that binds them to their community and compels them to protect it.”

    We all spring from the same star-stuff and in an atheistic model of things should all be considered to have equal access to her bounty. If this is the case then CEOs and shareholders are hoarding the productivity gains of automation. The wealth that is flowing to low-labour cost jurisdictions is but a temporary benefit for as we have seen with Foxxcom it is only a matter of time before automation boots cheap labour out on its ass before they start having such crazy ideas as demanding humane working conditions.

    What has happened to 70s promise of the leisure class of the 21st Century? The wealth accumulated by the top 1% at the beginning of the 21st Century is getting close to the kinds of wealth that Emperors used have and there is no denying that that kind of money IS power. I would argue that in all fantasy and sci-fi you could substitute the arch villain and his mastery of black magic with a Central Banker. It’s not much of a stretch to see Sauron and Sarumon as competing central bank chairmen.. Of course Sauron has the advantage of being in control of the One Interest Rate that controls them all… And its giant ZERO of an eye can see into all corners of the world economy informing Sauron as to where to send the Orcs next to subdue any attempts at overthrowing him.

    So the ultra wealthy are literally re-directing the life-force of money from the many into the pockets of a very concentrated few. They must be FORCED to return that wealth to the people of Earth for we all own this place equally. If that means the end of industry and life on Earth become a big Hobbit/Ewok party with fireworks to commemorate the demise of the Evil Empire…well so be it. At least there would be some balance restored to our corner of the Galaxy. Seriously. The wealthy are hoarding the Earth’s bounty. There is no other way to put it. They must give it back or it will be taken from them.

    1. Wyndtunnel

      We have to ask ourselves. What’s the point of all this productivity? It won’t be long before machines make 90% of everything which nobody can afford to buy as all the money is then hands of the people who built the machines to make everything that nobody can afford. The only thing that I come up with is that humanity is entering another dark age for we care more about everything that all the ancient texts have warned us would lead us to our impeding doom…again.

    2. Blissex

      «We all spring from the same star-stuff and in an atheistic model of things should all be considered to have equal access to her bounty.»

      Animals too, and so even the Chinese and Indian. Why shouldn’t the Chinese and Indian have equal access to the good life and CEO-hoarded money?

      «If this is the case then CEOs and shareholders are hoarding the productivity gains of automation.»

      You really don ‘t get it — their argument is that they *own* the productivity, solely and exclusively. Th workers are just flesh units in the production machine.

      The benefits of automation should not go to the automated machines themselves, or to the flesh units that are associated with them, goes the argument.

      In the same way that if a dairy farmer invests in making his cattle more productive, the productivity gains go to the farmer, not into more holidays and bigger homes and more luxurious cars for the cattle. The cattle are just flesh units in the farm business, and are just a cost to be minimized.

      As another example, support that someone in middle class suburb hires a sturdy brown skinned nobody to cut their lawn with an old-fashioned mechanical lawnmower, and the flesh unit takes 4 hours to do the job. Then the next year they buy a motorized lawnmower, and now the flesh unit can do the job in 2 hours. Is the flesh unit paid less or more than previous year? The attitude of many Real Americans would be to pay him not just less in total, but less PER HOUR, because now his job could be done by someone weaker which means more competition to get hired, and only a sucker would want to waste more money than strictly required on a flesh unit.

      Most Real American voters agree wholeheartedly with the arguments above, because they think that they are farmers, not cattle. Thus the Reagan Revolution and the Tea Parties.

      1. colinc

        Ding-ding-ding-ding-ding! We have a winner! Outstandingly succinct and apt metaphor, sir. Alas, just like cattle (or sheep), only with supremely delusional narcissism, virtually none of the blissful masses will pay any heed. The “Game of Life” is already over and to the “Victors” go the spoils. Personally, I find it rather amusing that those “captains of industry” and “titans of Wall St.” aren’t smart enough to realize that the “spoils” they will wind up collecting are just the piles of their own spoiled, fetid fecal matter, which they justly deserve, of course.

  8. Sauron

    Soon even J.K Rowling and James Cameron will be looking over their shoulders as a CEO will hire a million monkeys with a million typewriters and a million orangatuans with a million cameras.

    Of course, soon the economists will be replaced by a million chimpanzees, all thinking about how to “fix” the economy without helping any of the people in it. (It has been utterly depressing how the proposed solutions to 2008 reveal just how deeply embedded the self-serving assumptions of supply-side, trickle down economics are. They should be scorned out of hand–we have neither a problem of supply, or insufficient wealth at the top. Oh, well, another day in Orwellville.) And a million gorilla congress to explain why we can’t.

  9. Phichibe

    I could not disagree with this woman more if she said the Sun rose because the rooster crowed in the morning.

    The INET presentation I watched may have been different than the one referenced above – the URLs didn’t work for me, but I found her speaking on YouTube at INET’s Bretton Woods Panel on Global Markets. It was 18:54 minutes long. My comments are about this talk.

    The substance of her insights are that firms are flattening, and that mgmt talent is scarce. There seemed to be an implied cause and effect between the two, but in fact flattening of firms would increase the available talent relative to the number of mgmt jobs. For further elaboration, consult any 6 year old who’s played the game of musical chairs.

    As for the scarcity of mgmt talent and the rise in compensation in the 90s and onward, I think she has completely missed the critical enablers of this. This woman appears old enough to remember the period in the 1980s when compensation started to skyrocket (not that it was ever low for CEOs in the US). There were two developments that occurred at the time that were especially pernicious: the rise of the superstar CEO and the boom in take overs/LBOs. As to the former, go back and read the hagiographic articles and books about such as Lee Iaccoca, Jack Welch, etc. This was the “In Search of Excellence” era, when snake-oil salesmen like Tom Peters were peddling the idea that mgmt could be taught by slavish hero worship.

    Even more pernicious were the take-over/LBO wars. For those who are too young to remember, the craze that was kicked into high gear by a geyser of capital that Drexel Burnham raised for a select group of predators such as Boone Pickens, Carl Icahn, et al. Read “Barbarians at the Gate” for what is probably the best account of one the biggest of these deals, the RJR/Nabisco LBO. What happened in this period was that the predators (read “Predator’s Ball” for another account of these villains), after being rebuffed by company after company, quickly discovered that they could coopt the incumbent mgmt of a target company by offering them a piece of the action, stifling resistance to the take-overs and wholesale gutting of acquired corporations.

    BTW, the real reason firms are flattening mgmt structures has almost nothing to do with an enlightened decentralization of control and everything to do with this process of cost cutting. I saw Carl Icahn speaking on CNBC a few years back (I was stuck in an airport lounge and didn’t have the initiative to go the bar instead when he came on) and he announced to the roars of the studio audience that the first thing he did when he acquired a company was cut headcount 25% on the general principle that there was that much fat in any organization. A lot of those 25% came out of middle mgmt, and this has been true across industry after industry. This, by the way, is why this woman’s arguments about scarcity of mgmt talent are so offensively off-base. Simply put, she’s not only wrong, she’s so wrong that even an academic organizational behaviourist should know better. Oh yeah, about Icahn: there was no small irony to seeing him when I was at an airport, as the very first flight I ever flew was on TWA; again, for those of you too young to recall, those used to be the initials of an airline, until Icahn bought it and applied his mgmt insights to its operations. Try flying TWA today. Nuff said on that one.

    What’s so horrible about this woman’s so-called research is that it’s reminiscent of what happened in the 80s/90s. A wave of accommodating compensation consultants like Graef Crystal made an enormous amount of money writing pseudo-scientific studies of executive compensation (the beginning of ‘benchmarking’, it can be argued) justifying these enormous paydays. Ironically, years later Crystal had an attack of integrity which led him to publicly recant his earlier work, but it was too late: the CEO to average compensation ratio had by then jumped from approximately 100-1 to 400-1 where it is today. Firms like McKinsey made a fortune along the way telling the CEOs they were underpaid. Talk about the courage to speak truth to power.

    The last element in the explosive growth of CEO compensation that can’t be omitted from the discussion is the utterly supine corporate board in publicly held American corporations. These boards were and are mutual back-scratching clubs where CEOs incestuously cover each other’s asses and assure that mgmt is unchallenged in anything it wants. Sarbanes-Oxley was supposed to change this but just look at the Lehman, Countrywide, etc boards for examples of how well that’s worked. In any case, as the 90s progressed, CEO compensation was ratcheted up within industries with each pay raise for one CEO being rippled across its competitors almost instantaneously; and this happened between industries with scarcely less alacrity.

    I’ve gone on long enough on this but in short I think this woman is a disgrace to academia; but sadly she is not an exception in this. People like her are a principal reason I left my Ph.D. program at Stanford GSB back in 1988. Since then I did, however, get to enjoy the spectacle of the Dean of the GSB when I was there, Dr. Robert Jaedicke, be publicly degringoladed by a congressional committee for his role as a senior director on the board of a small corporation called Enron. He was, among other things, on the compensation committee. Nuff said about that, too.

    Phichibe

    1. Cedric Regula

      Sometimes I get so overwhelmed with alternate universes that I just decide I don’t have the energy to comment, but I’ll peck away at the keyboard a little.

      This lady must have an extremely poor opinion of the meteoric rise of the MBA school system in this country and the legions of MBAs it graduates if she thinks there is a shortage of talent out there.

    2. gs_runsthiscountry

      Interesting, I am looking at this from a manufacturing prospective and my personal experiences. And i will say this, your idea of flattening and what she is talking about is so off base i do not know where to begin.

      In fact, the flattening she is talking about, in the end, requires more equipment and people to deploy. If i was to pull a number out of the air i would say implementing and deploying the processes of flattening net-net increases headcount by 5%. The decreases in upper-middle management are offset by the increases of needed personnel in other areas. The payback is productivity, creativity, base-level employees that know the problems are given power to solve them, thus, higher quality and lower scrap rates.

      You have manufacturing plants that can take up multiple football fields on just one campus alone. The logistics of producing component parts in one area and driving them a mile to be assembled is inefficient. Flattening an organization in fact is creating what are called “focus factories” and not at all what would have been called a “department” in the 70′s. The flattening she is talking about is like taking a mammoth 900k sqft facility and creating 5,6- even 10 smaller companies under the same roof.

      The irony in all this, it is proof positive that economies of scale can be mythical. Economies of scale reach a point of diminishing returns.

      Now,…
      If I was to translate this to the financial sector, I can infer from my experience and tell you proof positive the top 4 banks in this country reached the point of diminishing returns of economies of scale LONG AGO! Different industry, same conceptual problems, you can become too big for your own good (i.e replace above mentioned higher quality and lower scrap, with happier customers, better customer service and lower prices to the consumer).

      This is reason enough to break up the top 4-6 Financial Holding Companies.

  10. Stanley

    Our society has become so global it’s really no surprise that economics has become global as well. Outsourcing is just one way that it is expressed. And as the economy continues to struggle, it is likely that outsourcing will only become a prevalent trend.

  11. fRED

    My understanding was that CEOs are able to gouge out huge pay increases because of the rise in managerialism: that is, the way in which boards have become detached and unaccountable to highly difuse (and often disinterested) shareholders. Am I missing something, or is Ms Marin missing something.

  12. Fred

    The police should be authorised to use water cannon and rubber bullets on CEO looters. It’s the only way to deal with anti-social scum.

Comments are closed.