Rogue Missives -- Tuesday, March 11, 1997 -- Back to Productivity? by Jim Surowiecki

Rogue Missives

ROGUE ARCHIVES

Tuesday, March 11, 1997

Back to Productivity?
by Jim Surowiecki (Surowiecki)
After six years of sustained growth (albeit growth at a historically low level), six years during which 11 million new jobs have been created while inflation has remained low, the question on everyone's mind is: "How long can this last?" And no one, perhaps, is more interested in the answer to that question than investors, who now have an increasingly large share of their personal fortunes -- and futures -- tied up in the stock market.
The rapid and continued influx of money into mutual funds, an influx which has not been slowed in any meaningful way by either last July's mini-correction or the more recent sell-off in technology stocks, has of course provoked a sharp debate about this market's current valuation, which is at historically high -- though not unprecedented -- levels.
As Rogue has suggested before, this debate tends to neglect the historically unique conditions now facing American corporations, as well as to deny one obvious fact: if more people believe that the stock market is an appropriate place to invest, then we will have to adjust our conception of what "fair value" is. Standards set when fewer than fifteen percent of Americans had a connection to the market seem hardly relevant in a period when more than forty percent of Americans have some portion of their assets -- either through pension funds, 401(K)s, or individual investments -- invested in the stock market.
In any case, this current debate seems to be more reflective of a traditional division between bears and bulls than it does any serious attempt at economic analysis. There is, for the most part, one thing that seems indisputable: the sharp rise in the stock market has followed a sharp and long-lasting rise in corporate earnings. To take only one example, according to First Call, well over half the companies reporting earnings for the last quarter beat estimates. Dramatic growth in earnings has become so expected, in fact, that the Street's "whisper numbers" are generally five to ten percent higher than published estimates.
In that sense, current valuations do seem to reflect underlying fundamental strengths. It may seem curious, then, to suggest that the time may have arrived for American corporations to modify their unremitting focus on the bottom line and to rethink the prevailing business attitude toward labor relations. But this is precisely the conclusion that one is led to after reading the late economist David Gordon's new book Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial "Downsizing" (The Free Press: 1996). In this moment of corporate prosperity, when business has -- quite literally -- coffers full of cash, adopting a long-term strategy that could lead to sustained and harmonious growth may be more important than improving next quarter's results. Shareholders have a crucial role to play in fostering that kind of strategy by rewarding companies that adopt it and punishing those that do not.
At the heart of Gordon's book is the problem that was the central issue in the 1992 presidential campaign and, arguably, in the 1994 congressional elections: the twenty-year stagnation of wages suffered by the vast majority of working Americans. While the top twenty percent of the population has experienced a sharp rise in income, the bottom eighty percent has seen its standard of living remain flat. And certain groups of workers, most notably male workers with a high school diploma or less, have seen their hourly compensation actually drop precipitously.
It's important to see that Gordon is not writing about the poor in America, or about the widening (and very real) gap between those at the top and those at the bottom of the economic ladder. He's writing specifically about "working Americans," those who make up the blue-collar, pink-collar, and in some cases white-collar workforces that have made so much money for American corporations -- and, by extension, for investors -- over the last six years. And he's suggesting an explanation for why these people, the ones who, in Bill Clinton's phrase, "play by the rules," have not enjoyed the fruits of the economy's prosperity.
The two most common explanations for the wage squeeze are technology and trade. According to the first, American workers are being left behind as the economy becomes technologically sophisticated and more demanding in terms of worker skills. In this new world, ruled by the "symbolic analysts," there's a smaller and smaller place for the undereducated blue-collar worker. According to the second explanation, globalization has forced U.S. companies into competition with foreign imports, driving wages down and driving companies out of business. At the same time, U.S. corporations have become increasingly able to move capital abroad, and have been able to use this threat to pry wage concessions out of their workforces. Finally, the impact of immigration has increased competition for unskilled jobs and eroded the position of native-born workers.
Both of these explanations have a certain kind of commonsense appeal, but Gordon makes a convincing case that neither can be plausibly assigned the major share of the blame for the relative decline in wages. The much-vaunted technological revolution has proceeded more slowly, and made fewer inroads, than one might imagine from the mainstream press. Tellingly, the major cuts in unskilled employment happened in the early 1980s, before American businesses really embraced the computer. And those sectors where one might expect automation to have a real impact on wages -- most notably in heavy manufacturing -- have actually seen less of a decline than elsewhere. So technology isn't the answer.
Gordon finds the globalization argument slightly more credible, but here again you don't find the kinds of correlation between trade and wage drops that you might expect. The problems American business had in the early to mid-1980s had more to do with the strong dollar than with high labor costs, and the reality of foreign trade today is two-thirds of our imports come from countries with higher labor unit costs than our own. Even the impact of transnational corporations (TNCs) shipping jobs abroad seems muted, at least in direct terms. TNC manufacturing employment in developing countries rose hardly at all over the last decade.
It's certainly true that the threat of moving jobs abroad has been crucial in anti-union campaigns across the country, and that the same threat has been used to push wage cuts on employees. It's also true that for a relatively small, but nonetheless sizeable, group of production workers, foreign competition has proved devastating. There's no way, after all, to tell a garment worker whose job has disappeared forever that, on the whole, trade has had a negligible impact on American workers. But there it is.
If the cause of the crisis faced by working Americans is neither technology nor trade, then, what is it? Here's where Gordon's work is most inventive, and most relevant to the question of sustaining future growth. Gordon suggests that the roots of the crisis lie in what he calls the Stick Strategy, and that this strategy in turn has led to a massive overgrowth in the layers of bureaucracy with which American corporations have become padded. Instead of being harmonious and lean, Gordon suggests, American business is fat and mean.
For Gordon, the Stick Strategy is one that relies on constant supervision, hierarchical control, and the constant threat of dismissal in order to get results from workers. It's a strategy that emphasizes conflict over cooperation, views unions as enemies rather than potential partners, and generally sees employees as disposable. And Gordon argues convincingly that the Stick Strategy was initiated in the early 1970s in response to the profit squeeze American corporations faced during those years.
In and of itself, this idea of the Stick Strategy is hardly new. Business Week and Fortune have both commented regularly for years on business' hardnosed approach to worker demands, while accounts of strikes like those at Caterpillar and the Detroit newspapers provide startling anecdotal evidence of the end of the uneasy postwar accord between management and labor. What Gordon adds, though, is the insight that this approach, while successful in driving down the wages of production workers, has required an increase in the number -- and therefore in the salaries -- of nonproduction workers. In fact, in the 1990s, the percentage of the workforce doing supervisory or managerial work actually rose, hardly what one would expect in an era of downsizing.
The fact that most American corporations still have sizeable layers of managerial bureaucracy is a reality, but what Gordon provides is an explanation. Corporations that favor conflict over cooperation need to supervise their workers more than corporations that favor non-hierarchical decision-making. Frustrated workers who are anxious about losing their jobs are less likely to work well independently than those who feel as if their contributions and their input are valued. So, companies that take up the Stick end up having to have lots of supervisors, who in turn need supervisors, and so on and so on.
This vision of American business, of course, runs against the grain of many current accounts of new worker-management cooperation and of the adoption by American business of European- or Japanese-style strategies. But Gordon's evidence is impressive, and suggests that these accounts describe only a small part of the actual experience of American workers.
Still, one might ask, if these strategies have given American corporations the kind of profits they enjoy today, why reconsider them?
Part of that answer has to do with the drop in American productivity rates, which have not rebounded during the boom. If workers who are more involved and who feel more integrally connected to a company are more productive, as international comparisons suggests, then adopting what Gordon calls the Carrot Strategy will improve prospects for long-term growth. Part of the answer has to do with efficiency, since the thrust of Gordon's argument suggests that there is still substantial room to improve margins by paring back the layers of supervisors. And part of the answer has to do with the kind of society one wants to live in. The postwar years in America saw a narrowing of income inequality and rising standards of living for American workers. The years since 1973 have seen the opposite. If this is not an inevitable state of affairs, then the choice of which nation we would rather live in remains ours.
Gordon's prescriptions are simple and direct: a higher minimum wage; an easier path to unionization; support for corporations that emphasize cooperation; assistance in training and adjustment. But while in today's political climate these sound "liberal," in a sense Gordon is more interested in transcending traditional paradigms of inevitable conflict than he is in advocating one side of the equation. For Gordon, moving past the Stick Strategy will create a proverbial win-win situation. Corporations will be more efficient. They will have happier, more productive workers and less labor strife, and they will find it easier to invest for the long term. And workers will have more control over their own jobs and more of an investment in them, as well as being better-paid.
There is, then, something utopian about Gordon's hopes for the future. And it's also true that Fat and Mean undoubtedly overestimates the relative strength of the European and Japanese economies next to America's. (Had the book been written today, one suspects Gordon's conclusions would have been more tempered.) But his analysis of the tensions within the American economy strikes very close to home, and his different vision for labor-management relations seems to fit well with changes the most interesting and innovative American companies have already made.
As Business Week pointed out just three weeks ago, the share of corporate output that goes to worker compensation is now lower than it has been since 1969, even as dividend payments have increased and companies are more cash-rich than ever. Perhaps not coincidentally, consumer debt is also at historically high levels. A serious long-term strategy for growth would recognize that improving worker pay in the context of more cooperative workplace relations is an important step toward improved productivity and continued consumer demand. In looking at the companies they own, shareholders might well be served to sniff out the carrot and push away the stick.

-- Jim Surowiecki (Surowiecki)
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

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ROGUE ARCHIVES

Tuesday, March 11, 1997
Back to Productivity? by Jim Surowiecki (Surowiecki) After six years of sustained growth (albeit growth at a historically low level), six years during which 11 million new jobs have been created while inflation has remained low, the question on everyone's mind is: "How long can this last?" And no one, perhaps, is more interested in the answer to that question than investors, who now have an increasingly large share of their personal fortunes -- and futures -- tied up in the stock market. The rapid and continued influx of money into mutual funds, an influx which has not been slowed in any meaningful way by either last July's mini-correction or the more recent sell-off in technology stocks, has of course provoked a sharp debate about this market's current valuation, which is at historically high -- though not unprecedented -- levels. As Rogue has suggested before, this debate tends to neglect the historically unique conditions now facing American corporations, as well as to deny one obvious fact: if more people believe that the stock market is an appropriate place to invest, then we will have to adjust our conception of what "fair value" is. Standards set when fewer than fifteen percent of Americans had a connection to the market seem hardly relevant in a period when more than forty percent of Americans have some portion of their assets -- either through pension funds, 401(K)s, or individual investments -- invested in the stock market. In any case, this current debate seems to be more reflective of a traditional division between bears and bulls than it does any serious attempt at economic analysis. There is, for the most part, one thing that seems indisputable: the sharp rise in the stock market has followed a sharp and long-lasting rise in corporate earnings. To take only one example, according to First Call, well over half the companies reporting earnings for the last quarter beat estimates. Dramatic growth in earnings has become so expected, in fact, that the Street's "whisper numbers" are generally five to ten percent higher than published estimates. In that sense, current valuations do seem to reflect underlying fundamental strengths. It may seem curious, then, to suggest that the time may have arrived for American corporations to modify their unremitting focus on the bottom line and to rethink the prevailing business attitude toward labor relations. But this is precisely the conclusion that one is led to after reading the late economist David Gordon's new book Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial "Downsizing" (The Free Press: 1996). In this moment of corporate prosperity, when business has -- quite literally -- coffers full of cash, adopting a long-term strategy that could lead to sustained and harmonious growth may be more important than improving next quarter's results. Shareholders have a crucial role to play in fostering that kind of strategy by rewarding companies that adopt it and punishing those that do not. At the heart of Gordon's book is the problem that was the central issue in the 1992 presidential campaign and, arguably, in the 1994 congressional elections: the twenty-year stagnation of wages suffered by the vast majority of working Americans. While the top twenty percent of the population has experienced a sharp rise in income, the bottom eighty percent has seen its standard of living remain flat. And certain groups of workers, most notably male workers with a high school diploma or less, have seen their hourly compensation actually drop precipitously. It's important to see that Gordon is not writing about the poor in America, or about the widening (and very real) gap between those at the top and those at the bottom of the economic ladder. He's writing specifically about "working Americans," those who make up the blue-collar, pink-collar, and in some cases white-collar workforces that have made so much money for American corporations -- and, by extension, for investors -- over the last six years. And he's suggesting an explanation for why these people, the ones who, in Bill Clinton's phrase, "play by the rules," have not enjoyed the fruits of the economy's prosperity. The two most common explanations for the wage squeeze are technology and trade. According to the first, American workers are being left behind as the economy becomes technologically sophisticated and more demanding in terms of worker skills. In this new world, ruled by the "symbolic analysts," there's a smaller and smaller place for the undereducated blue-collar worker. According to the second explanation, globalization has forced U.S. companies into competition with foreign imports, driving wages down and driving companies out of business. At the same time, U.S. corporations have become increasingly able to move capital abroad, and have been able to use this threat to pry wage concessions out of their workforces. Finally, the impact of immigration has increased competition for unskilled jobs and eroded the position of native-born workers. Both of these explanations have a certain kind of commonsense appeal, but Gordon makes a convincing case that neither can be plausibly assigned the major share of the blame for the relative decline in wages. The much-vaunted technological revolution has proceeded more slowly, and made fewer inroads, than one might imagine from the mainstream press. Tellingly, the major cuts in unskilled employment happened in the early 1980s, before American businesses really embraced the computer. And those sectors where one might expect automation to have a real impact on wages -- most notably in heavy manufacturing -- have actually seen less of a decline than elsewhere. So technology isn't the answer. Gordon finds the globalization argument slightly more credible, but here again you don't find the kinds of correlation between trade and wage drops that you might expect. The problems American business had in the early to mid-1980s had more to do with the strong dollar than with high labor costs, and the reality of foreign trade today is two-thirds of our imports come from countries with higher labor unit costs than our own. Even the impact of transnational corporations (TNCs) shipping jobs abroad seems muted, at least in direct terms. TNC manufacturing employment in developing countries rose hardly at all over the last decade. It's certainly true that the threat of moving jobs abroad has been crucial in anti-union campaigns across the country, and that the same threat has been used to push wage cuts on employees. It's also true that for a relatively small, but nonetheless sizeable, group of production workers, foreign competition has proved devastating. There's no way, after all, to tell a garment worker whose job has disappeared forever that, on the whole, trade has had a negligible impact on American workers. But there it is. If the cause of the crisis faced by working Americans is neither technology nor trade, then, what is it? Here's where Gordon's work is most inventive, and most relevant to the question of sustaining future growth. Gordon suggests that the roots of the crisis lie in what he calls the Stick Strategy, and that this strategy in turn has led to a massive overgrowth in the layers of bureaucracy with which American corporations have become padded. Instead of being harmonious and lean, Gordon suggests, American business is fat and mean. For Gordon, the Stick Strategy is one that relies on constant supervision, hierarchical control, and the constant threat of dismissal in order to get results from workers. It's a strategy that emphasizes conflict over cooperation, views unions as enemies rather than potential partners, and generally sees employees as disposable. And Gordon argues convincingly that the Stick Strategy was initiated in the early 1970s in response to the profit squeeze American corporations faced during those years. In and of itself, this idea of the Stick Strategy is hardly new. Business Week and Fortune have both commented regularly for years on business' hardnosed approach to worker demands, while accounts of strikes like those at Caterpillar and the Detroit newspapers provide startling anecdotal evidence of the end of the uneasy postwar accord between management and labor. What Gordon adds, though, is the insight that this approach, while successful in driving down the wages of production workers, has required an increase in the number -- and therefore in the salaries -- of nonproduction workers. In fact, in the 1990s, the percentage of the workforce doing supervisory or managerial work actually rose, hardly what one would expect in an era of downsizing. The fact that most American corporations still have sizeable layers of managerial bureaucracy is a reality, but what Gordon provides is an explanation. Corporations that favor conflict over cooperation need to supervise their workers more than corporations that favor non-hierarchical decision-making. Frustrated workers who are anxious about losing their jobs are less likely to work well independently than those who feel as if their contributions and their input are valued. So, companies that take up the Stick end up having to have lots of supervisors, who in turn need supervisors, and so on and so on. This vision of American business, of course, runs against the grain of many current accounts of new worker-management cooperation and of the adoption by American business of European- or Japanese-style strategies. But Gordon's evidence is impressive, and suggests that these accounts describe only a small part of the actual experience of American workers. Still, one might ask, if these strategies have given American corporations the kind of profits they enjoy today, why reconsider them? Part of that answer has to do with the drop in American productivity rates, which have not rebounded during the boom. If workers who are more involved and who feel more integrally connected to a company are more productive, as international comparisons suggests, then adopting what Gordon calls the Carrot Strategy will improve prospects for long-term growth. Part of the answer has to do with efficiency, since the thrust of Gordon's argument suggests that there is still substantial room to improve margins by paring back the layers of supervisors. And part of the answer has to do with the kind of society one wants to live in. The postwar years in America saw a narrowing of income inequality and rising standards of living for American workers. The years since 1973 have seen the opposite. If this is not an inevitable state of affairs, then the choice of which nation we would rather live in remains ours. Gordon's prescriptions are simple and direct: a higher minimum wage; an easier path to unionization; support for corporations that emphasize cooperation; assistance in training and adjustment. But while in today's political climate these sound "liberal," in a sense Gordon is more interested in transcending traditional paradigms of inevitable conflict than he is in advocating one side of the equation. For Gordon, moving past the Stick Strategy will create a proverbial win-win situation. Corporations will be more efficient. They will have happier, more productive workers and less labor strife, and they will find it easier to invest for the long term. And workers will have more control over their own jobs and more of an investment in them, as well as being better-paid. There is, then, something utopian about Gordon's hopes for the future. And it's also true that Fat and Mean undoubtedly overestimates the relative strength of the European and Japanese economies next to America's. (Had the book been written today, one suspects Gordon's conclusions would have been more tempered.) But his analysis of the tensions within the American economy strikes very close to home, and his different vision for labor-management relations seems to fit well with changes the most interesting and innovative American companies have already made. As Business Week pointed out just three weeks ago, the share of corporate output that goes to worker compensation is now lower than it has been since 1969, even as dividend payments have increased and companies are more cash-rich than ever. Perhaps not coincidentally, consumer debt is also at historically high levels. A serious long-term strategy for growth would recognize that improving worker pay in the context of more cooperative workplace relations is an important step toward improved productivity and continued consumer demand. In looking at the companies they own, shareholders might well be served to sniff out the carrot and push away the stick. -- Jim Surowiecki (Surowiecki) (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.