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Wednesday, May 30, 2007


Lardner: few Americans would be anything but grateful if our corporations and financial institutions could develop some respect for our non-material and non-individualistic selves.

This statement must be considered under the light of “rules of the game”. The rules that govern corporate America are those prevalent on its equity markets. Americans, let’s not forget, have abandoned savings plans to invest in equities. They expect equity appreciation and revel in double-digit value growth. (Of course, the ever-so-often “equity bubble” bursts, but that is part of the risk. Remember, they are told guilefully, “The market is long-term investment”. And, indeed it is. In the long term it returns between 10 and 12ù per annum.

But, alas, Keynes was right. What is to become of us in the long term?

Lardner: It is hard to imagine such a fundamental transformation of these giant institutions. It is even harder to imagine a better world in which they remain essentially what they are.

There is an alternative, but it is perilous. Look to France.

The socialists had no compunction whatsoever to make lay-offs extremely punitive. The time and money spent to dismiss workers makes for some job security in France. Unfortunately, it also makes for very little job creation or durable employment. The consequence of this is that France has an aging workforce with job entitlement ... but also with comparatively little rejuvenation.

But, France is France. Which means this: France has, for the longest time, enjoyed the cocoon of protection afforded by EU/Common Market tariff barriers which protected not only jobs but profits. That came to an end about 15 years ago, put to a timely death by the GATT negotiations that greatly reduced trade tariff barriers (but not service tariff barriers).

What this means is that of the companies that constitute the French stock market index (CAC40), 60% make their profits outside of France. That means six of every ten companies maintain French staff simply because of profits earned multinationally. However, for as long as French companies make no profits in France, they don’t expand staff in France. They are expanding feverishly abroad.

My point: One can indeed protect jobs by making firings difficult to happen. But, France is not the US. In fact, it is barely 15% of the US in terms of economic activity. (About that of California). However, by instituting laws that do not permit “overnight redundancies” without a stiff contribution to unemployment payments (say 100% of salary for the first year), then American companies would indeed think twice about firing people.

Would this make America then behave like France? Given the size of the American GDP and employee mobility (which is practically non-existent in France), I think not.

The fact of the matter is that, today, it is extremely easy to let people go in the US. We cannot, according to the rules of the game, expect corporate directors to become suddenly, over night, responsible corporate citizens. It’s against the rules of providing Americans with the equity appreciation that they expect. (And, of course, which makes corporate directors also extremely rich people from both their golde parachutes, stock dividends and stock options.)

Of course, the alternative of making corporations also good citizens, but making them observe certain rules of governance is also possible. But, for the moment, that does not seem to be the prevailing mentality in America. Time will tell ...

Arthur Eckart

Corporate America (or large U.S. corporations) is unethical to some extent. Nonetheless, it generally maintains profit, for shareholders, through productivity. Consequently, a few top managers often receive higher incomes for stagnant wages or lost jobs. However, America's future is in small firms, using capital created by large firms (see link below).


Arthur Eckart

One observation, over my years in banking & investing, is most U.S. corporations are very well-managed, because of intense competition domestically (e.g. number of firms) and internationally (e.g. through cheap imports). The only way a small firm can become a medium or large firm, in the U.S., is through better management. It seems, successful management spares no expense in making sure its workers are the most well-equipped in the world. This is reflected in purchasing prime land and the most durable materials to build facilities (or long-term investment). So, the property tends to increase in value and the buildings require less maintenance. Also, each year, a large batch of new equipment is purchased (or short-term investment). So, workers can utilize the most advanced equipment that function with fewer breakdowns. Moreover, I may add, whether most of the corporate workforce is high-skilled or low-skilled, they both utilize high-quality capital equipment. Given the enormous expenditures in capital equipment, along with wages and other expenses, I wondered how these corporations made a profit. Yet, somehow they manage. Furthermore, I may add, purchasing capital equipment frequently adds to overall economic growth.

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