By William Lazonick, professor of economics and director of the UMass Center for Industrial Competitiveness. He cofounded and is president of the Academic-Industry Research Network. His book, “Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States” (Upjohn Institute, 2009) won the 2010 Schumpeter Prize. Cross posted from Alternet
Americans are understandably upset about profits without prosperity. Corporate executives seem to be the big winners, while the middle class is declining and young people face a bleak economic future. How did this happen? It's easy to blame technology, especially the automation that supposedly displaces workers. But that's not the real story. The fact is that automation creates jobs. It's the misuse of corporate profits that are destroying them.
Citi is a particularly blatant example of a way of operating that has become endemic in American business: when things get tough, throw as many employees as possible under the bus, and use that to maintain or even increase the pay of the top echelon.
American readers may tell themselves that the failures and stresses of European banks are Europe’s problem. That’s a simplistic view. Major European banks are significant lenders in the US, particularly to corporations. And European banks also fed heavily at the trough of US rescue facilities, as did the bank in case study, Dexia.
Dexia is a classic example of a not very sophisticated bank deciding to get into the big leagues and coming to ruin.
My last post on this little mess implied that there was pretty slack official monitoring of the NZ Company Register for obviously false or impermissible registration information. But one or two other sightings invite the question: does anyone in New Zealand take Para 1, Section 377 of the Companies Act seriously, any more? 377 False statements […]
By Michael Crimmins, who has worked on risk management and Sarbanes Oxley compliance for major banks
JP Morgan’s jawdropping revelations in its Friday earnings call don’t seem to be attracting the attention they deserve. The market may have shrugged off the size of the losses and the corporate governance modifications plans, but the announcement opens the door wide for the next phase of this scandal. The biggest question is whether Jamie Dimon should keep his job.
Last month, shareholders finally rebelled against Citigroup, the worst of the Too Big To Fail bailout disasters, by filing a lawsuit against outgoing chairman Dick Parsons and handful of executives for stuffing their pockets while running the bank into the ground.
Anyone familiar with Dick Parsons’ past could have told you his term as Citigroup’s chairman would end like this: Shareholder lawsuits, executive pay scandals, and corporate failure on a colossal scale.
As we’ve said repeatedly, despite bank executives braying about the need to be bigger to compete or to gain efficiencies, the evidence runs completely the other way. Every study on bank efficiency in the US has found that once banks hit a certain size level (the most commonly found one seems to be ~$5 billion in assets) banks exhibit a slightly positive cost curve, which means they are more, not less, costly to run. Any economies of scale are probably offset by diseconomies of scope.
So why do bank executives sell and act on a patently phony story? Aside from the fact that doing deals is much more fun than managing a business, the BIG reason is CEO pay is highly correlated with the size of the bank, measured in total assets.
So no one should cry at the prospect that Bank of America might have to shrink to if it continues to be in financial and litigation hot water.
Although it is remarkably difficult to come up with decent data, from what I can tell, the Japanese bubble was considerably bigger relative to the size of its economy than the US debt binge was. Yet even though the Japanese aftermath has been remarkably protracted, and arguably worsened by a slow and cautious initial response, visitors to Japan find the country wearing its malaise remarkably well.
One of the reasons may be the Japanese preoccupation with employment. Entrepreneurs are revered not for making money but for creating jobs. Japanese companies went to great lengths to keep workers, cutting senior pay to preserve manning. That was done largely for cultural reasons, since companies are seen as being like families.
But was this preoccupation also good economic policy, and might it have played a more direct role in buffering the worse effects of the bubble aftermath?
To some readers, the answer to the headline may seem obvious: Yes, American management is clearly worse than it was, say, thirty or fifty years ago, because short-termism is endemic among public companies, and short-termism leads to all sorts of bad outcomes, like underinvestment and accounting gaming.
But that analysis is simplistic. Short-termism simply shows that management has adopted good for them, bad for pretty much everyone else (save maybe their bankster allies) goals and are pursuing them aggressively.
A comment by John Kay of the Financial Times has the effect of raising much more fundamental questions about the caliber of top managers.