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Irresponsible Liberalism

by TGeraghty Wed May 24th, 2006 at 03:53:07 AM EST

Note: I use the word "liberalism" here in the American sense, meaning the center-left of the political spectrum.

I have come to an appalling conclusion -- I'm afraid I may be an "irresponsible" liberal.

From the diaries - whataboutbob

I came to that conclusion by my reaction to an opinion column recently written by newly "responsible" American liberal George McGovern:

The End of 'More'

. . . I have always been a supporter of the labor movement. Unions have a proud legacy of improving the lives of millions of workers over the last century.

But lately I have seen developments that have me worried. And I have been reminded of legendary union leader John L. Lewis, who was once asked what his miners were after. His answer? "More."

It was a funny answer, and perhaps it was honest too. But these days, it's not a very effective strategy . . .

"More" has, unfortunately, become "too much" in a global and far more competitive economy.

Many of my friends will consider this view heretical. But it is based on stark reality. . . . It's very difficult to turn around and say that "more" is not always possible.

It sounds to me that ol' George was paid by his local Chamber of Commerce to write this piece. Or maybe by Walmart:

The chief executive of Wal-Mart earns $27 million a year, while the company's average worker takes home only about $10 an hour. But let's assume that the chief executive got 27 cents instead of $27 million, and that Wal-Mart distributed the savings to its hourly workers. They would each receive a bonus of less than $20. It's not executive pay that has created this new world. . . .

The current frenzy over Wal-Mart is instructive. Its size is unprecedented. Yet for all its billions in profit, it still amounts to less than four cents on the dollar. Raise the cost of employing people, and the company will eliminate jobs. Its business model only works on low prices, which require low labor costs. Whether that is fair or not is a debate for another time. It is instructive, however, that consumers continue to enjoy these low prices and that thousands of applicants continue to apply for those jobs.

My response to this was along the lines of "there's more than one way to skin a cat." Is the Walmart model the only economically efficient one? Are there alternatives that are just as, or even more productive and manage to treat workers better? Perhaps irresponsibly, I think so:

Costco's model is paying dividends

After five years on the job, Eva Wasicke makes $20 an hour - about as much as an experienced computer-controlled machine operator working under a union contract in a southeastern Wisconsin factory.

Her employer offers excellent benefits - dental insurance, vision coverage and health insurance for which employees pay about 10% of the premiums, or less than half the average American worker's share.

Wasicke isn't management, and she isn't represented by a union. In fact, she works in one of the lowest-paying sectors of the American economy - retail.

What she has going for her is that she works for Costco.

Even some business types think that the Costco model is a viable one:

Costco's high-wage policy has won praise in many quarters . . . [some] on Wall Street see benefits in a long-range strategy that fosters productivity and minimizes costly turnover.

"I'd say, on balance, the world would be a better place if everybody had Costco's attitude toward labor," HSBC Securities analyst Mark Husson said. . . .

. . . The firm's employees are productive - payroll as a percentage of sales continues to decline slightly - and they stick around, Chief Financial Officer Richard Galanti said. He said annual turnover was about 20%. The U.S. average for full-time retail employees, according to the National Retail Federation, is three times as high.

Said Ivan Feinseth, a stock analyst who is bullish on Costco: "While everybody else is trying to figure out how to pay their employees less, Costco is trying to figure out how to pay their employees more, because the more you pay, the more you get."

Driving this philosophy is James Sinegal, Costco's chief executive officer and one of its founders. Sinegal, said analyst Judson Brooks, subscribes to the largely out-of-favor view that companies thrive when they serve not just stockholders but also such constituencies as communities and employees.

"He really does believe that, ultimately, the best business results are when you serve all those stakeholders well, and he considers the employee an important stakeholder," said Brooks, of Harris Associates, a Chicago money management firm that owns Costco stock.

Not everybody is happy, though:

Critics have argued that Costco could boost its profits - and thus benefit shareholders - by paying employees less.

Indeed, over the last three years, income at Costco's U.S. operations has averaged 2.7% of revenue. Sam's Club averaged 3.3%. Matching its rival's margin would have given Costco another $258 million in income last year.

. . .

One analyst said two years ago that it was better to be a Costco employee than a shareholder.

Imagine that -- a company run for the benefit of its shareholders and its employees! How absolutely irresponsible of them.

Now, I'm not totally irresponsible -- I don't imagine for a moment that Walmart could pay its workers the same high wages that Costco does:

Costco targets higher-income shoppers and, on the whole, sells pricier merchandise, said Patricia Edwards, a managing director for Seattle investment firm Wentworth, Hauser and Violich, which holds Costco shares.

Higher-priced goods carry more profit, so stores selling them can afford to pay their employees more, said David Keuler, who follows retail for Milwaukee's Mason Street Advisors, where he is managing director.

"For a company like Wal-Mart, which tries to work on very thin margins . . . it would be very difficult to have that sort of labor cost structure, and even a company like Kohl's," Keuler said.

But, if paying workers more and treating them with respect raises labor productivity, then Walmart could afford to pay higher wage without putting their margins at risk. Maybe not as high as Costco, but higher than what they pay now. Every little bit helps.

So I made a version this argument over at Mark Thoma's place. I argued that firms' choices between the "low-road" model of Walmart and the "high-road" approach of Costco is not just a question of economic necessity, but also a question of what used to be called "political economy." Within limits, Walmart could choose to treat its workers better and reap the gains in higher productivity, but its executives choose not to in favor of allocating more enterprise resources toward themselves.  

As you might imagine, I was immediately slapped with the label - "irresponsible" (actually, "illiterate," but whatever).

So...George McGovern advocates an economically literate liberalism, and heads explode all over the internet. Sigh. . . .

I am very pleased to see more liberals . . . being willing to at least discuss strategies for attaining our values and goals . . . without needlessly -- and harmfully -- distorting the markets themselves.

. . . there are right choices and wrong choices. And measured by return on equity, WalMart makes better choices than competitors like CostCo. And over time, investors in other firms are going to require them to improve their choices -- either by doing what WalMart does, or by finding some other way to make themselves as profitable as WalMart.


I guess if return on equity is your sole criterion for efficiency, you have a point. But that is exactly what makes the Costco approach fundamentally different from the economic conventional wisdom. It contains the seeds of a different way of running firms and the economy:

. . . a new principle should guide corporate governance: Employees who invest and put at risk their human capital should have the same rights to information and voice in corporate governance as do investors who put at risk their financial capital.

-- Thomas Kochan, MIT Workplace Center, Regaining Control of Our Destiny: A Working Families' Agenda for America

If that makes me an irresponsible liberal, well then two cheers for irresponsibility.

To reiterate an important point you made:
. . . a new principle should guide corporate governance: Employees who invest and put at risk their human capital should have the same rights to information and voice in corporate governance as do investors who put at risk their financial capital.


"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Wed May 24th, 2006 at 03:52:00 AM EST
The amusing thing in all this is the relativistic rubbish spewed by these "economic literates."

After all, Costco may have a worse ROE than Walmart, but it's currently better than all sorts of other companies. Why would the "discipline of the markets" focus on Costco if ROE was really the issue?

by Metatone (metatone [a|t] gmail (dot) com) on Wed May 24th, 2006 at 03:55:38 AM EST
The discipline metaphor seems to come up a lot from the neo-libs, and it makes me wonder how their world works.

Psychologically there's something obviously unhealthy about it. There's a diary that could be written about the sadomasochistic overtones of the idea that the markets are supposed to punish people who don't 'perform' economically.

It's really quite creepy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed May 24th, 2006 at 05:33:54 AM EST
[ Parent ]
Really priceless..

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed May 24th, 2006 at 04:21:34 AM EST
Wal-Mart's model only works because local Govt's make up the difference between waht Wal-mart pay and a living wage. They offer medicaid so that the workers can get medicine, they offer welfare so that employees can feed their children, they offer asssitance for school and college so's the kids can get an education.

None of which Wal-Mart contributes to. Wal-Mart is a parasite, just as most shareholder representatives are parasites. Richly rewarded and thus able to gain access to those who run the corporate welfare state, but parsites nevertheless.

Costco would be better off looking at co-operative models than trying to please Wall St.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed May 24th, 2006 at 04:49:45 AM EST

German companies flee to the UK

German companies are considering registering as public limited companies in the UK ahead of possible stock market listings, in order to avoid rules in Germany that give employees a big say in company strategy.


It also shows the opportunities within European Union law to escape a system that is sacred to Germany's unions and the political establishment.

Volker Triebel, a partner at Lovells, said that the law firm was "talking to several companies, especially in the Mittelstand" (small and medium-sized companies) that are keen to become a plc rather than an Aktiengesellschaft (AG), to avoid falling under Mitbestimmung rules, as they grow. Norbert Winkeljohann, a partner at accountants PwC, said several companies "that view Mitbestimmung as an ogre have approached us".

The law demands that companies with 500 employees or more must give one in three seats on the supervisory board to staff representatives, and that those with 2,000-plus workers give them half the votes.

German companies have long complained that complex corporate decision-making and job reduction programmes can be hamstrung by the supervisory boards' staff representatives. SAP, Europe's biggest software group, has clashed with unions over their influence this year.


Since a European High Court ruling in 2002, companies in the European Union are free to incorporate anywhere in the region. Some 30,000 small German companies have since registered in the UK, mainly attracted by the lower cost. The new Societas Europaea, the EU-wide public limited company, does not offer an escape from German rules unless the company relocates outside the country.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed May 24th, 2006 at 05:17:49 AM EST
Walmart stats (2006):

                         (quarter)       (year)
Total Revenue     90,127.00     315,654.00
Gross Profit     20,228.00     72,036.00
Operating Income 5,860.00     18,530.00
Net Income     3,589.00     11,231.00

The argument about the CEO pay was totally beside the point. Most of the profit goes to the four Walton family members who own the bulk of the shares. Each individually is in the top of the world's richest people.

Try spreading some of the $11 billion around to the employees and see how far it goes. Remember that this is already a cooked number, the true profit is $72 billion. Accounting tricks are used to lower it so that less taxes are paid.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed May 24th, 2006 at 10:18:19 AM EST
Remember that this is already a cooked number, the true profit is $72 billion. Accounting tricks are used to lower it so that less taxes are paid.

I'm sure that the second sentence is correct, but not the first - surely some of the difference is legitimate and not just accounting tricks, and in any case isn't the 'net income' post tax?

by MarekNYC on Wed May 24th, 2006 at 03:32:23 PM EST
[ Parent ]
What about "irresponsible" capitalism?! "More and more" is precisely its moto, so capitalism must be irresponsible by definition. Yet it is hailed for that and only for that! ;-]
by das monde on Thu May 25th, 2006 at 04:01:24 AM EST
[ Parent ]
Costco is a great company, and you're right to point it out.  And I don't see very large differences in prices between Costco and Wal-Mart (or Sam's Club).  I wish Costco would open a store near my apartment, since I don't shop at Wal-Mart but would love to have access to another "buy in bulk" competitor.  My mother is a big fan of Costco and shops there quite often.  The bargains are excellent.  If you make the average Costco wage, and shop at Costco, I think it's safe to say that, in most areas of the country, you can make a decent living, and, as Eva Wasicke's story shows, Costco rewards its employees for being loyal to the company and working hard.

I'm wondering what you all might think of an employee stock program, of the sorts that are used at UPS and Publix, for a company like Costco.  Those seem to be very successful, as far as encouraging high productivity is concerned.  (My grandfather made a decent bit of money in Publix's employee stock program.  He didn't need it for anything other than extra spending money, but it seemed to be a gift from God to younger employees who were trying to begin stashing some money away.)  The employees also seem much happier than at the competing firms.  They always do the job well, and they treat customers like friends.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed May 24th, 2006 at 10:34:06 AM EST
I think it's a potentially positive idea in principle, but a lot depends on some implementation details.


A lot depends on whether stock is in lieu of wages or is additional to it. When it is in lieu, the value rarely reflects the risk that comes out of all the eggs in the basket. (I guess an example might be the investing of Enron pension funds in Enron stock.)

Likewise, the relative power of employees vs other shareholders is probably important somewhere along the line.

And then of course there is the evidence question. Is it stock holding that makes the employees feel valued and committed or is it just that the kind of companies that will put in these programs already value their staff, treating them well in other ways and the stock is just another small signifier?

by Metatone (metatone [a|t] gmail (dot) com) on Wed May 24th, 2006 at 11:28:18 AM EST
[ Parent ]
All good points and absolutely right on implementation.  Unfortunately, I don't design these sorts of systems for a living and am, therefore, limited in my knowledge of how to do so.

I believe the Publix program is voluntary.  Employees may take their earnings and invest them in the company's shares.  The share price is generally rising, since Publix continues to develop a lock on the market in the Deep South.  (The other companies are simply pitiful.  People will, literally, drive by a Winn-Dixie -- I worked for that company, and people are right to do this -- or an Albertson's to get to a Publix, even if it's a few miles out of the way.)  I think they're also paid some shares, based on how long they've been in the company, but I may be wrong.

It's always dangerous, and very stupid, to pour one's entire savings into one stock, unless that person is the CEO, in which case it probably means that the company will perform well, since the CEO's ass is on the line, and become a decent investment.  Nonetheless, if there is any justice in the world, Ken Lay will continue to lose his shirt.  He's going to be penniless before all is said and done, if the NYT and WSJ stories are to be believed.

Shareholders will probably be stronger than employees in nine out of ten cases, since they're the owners and, in Costco's case, the employees don't hold rare skills.  If they were (say) pharmaceutical researchers, they might be more powerful, because that knowledge is so highly valued, as the critical piece of a sickeningly profitable, high-growth industry.  But it seems reasonable to suspect that employee power would rise if they were also shareholders.  Surely it couldn't fall, since they would be covering two of the various corners of the power struggle instead of one.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed May 24th, 2006 at 12:01:55 PM EST
[ Parent ]

Basic Risk mitigation is to spread financial assets across several different areas.  To depend on one source for one's living AND one's stock market investments is ... dumb.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed May 24th, 2006 at 12:54:37 PM EST
[ Parent ]
One analyst said two years ago that it was better to be a Costco employee than a shareholder.

Oh yeah.  "One" stock analyst.  There's an authority.  Stock analysts have been so successful predicting future stock price movement.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed May 24th, 2006 at 12:50:26 PM EST

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