Friday, February 25, 2011

The Rich and the Unions: Two problems to solve.

Rich guys and unions; often there's something really nasty about both of them, and you really want a cure for what they're doing to you.

Rich guys. I suppose many rich guys have always been about conspicuous consumption and competition for higher ranking on the Fortune 500 (or local 50) list, but things have gotten out of control. Over the past half century, tax rates on the richest of us have dropped dramatically. As Warren Buffet so famously said, "There's something wrong when my marginal tax rate is 15% and my secretary's is 32%" (my paraphrase). Yet, if you listen to Faux News, the rich are getting hosed. It's true, as they repeat incessantly, that the richest of us pay, by far, the lion's share of tax dollars. However, it's also true that the rich own more of America's total wealth than ever before, and their incomes are higher than ever before. It seems rather evident, then, that these taxes have been pretty easy to bear.

Tax reform is the answer to the problem of the rich. We need some more brackets to grab a bigger share from those who are making many millions or billions. We need to reclassify hedge fund profits as ordinary income rather than capital gains. We need to reinstate an estate tax with teeth; perhaps a 25% rate but no exemptions for estates over $100 million. The fact is, without some significant financial leveling our country will soon resemble Saudi Arabia - princes and peons.

Those who favor unbridled capitalism often complain that those who work harder and smarter deserve to keep most of their economic success, while those who have achieved less have not worked so hard and are not so smart. This is baloney. The truth is that the great majority of those who are rich owe their success to the accident of their birth - they enjoyed an upbringing with social and educational advantages that gave them a huge head start over most others. To be honest, I'm one of them but not one who considered wealth to be the most important thing in life. Most of the rich are not "self-made"; they are the logical result of privilege, and they owe others the chance to grow up with many of the same advantages. That's what some of their increased taxes should fund. The great republican, Teddy Roosevelt, expressed this same opinion a century ago because he understood the reasons why he was so successful.

Now to the unions. As one who lived his entire employed life under the rather strong control of management, and was himself "management" for quite awhile, I learned that nothing is so important to an organization as flexibility, and secondly, the ability to discipline employees who are not performing to reasonable expectations. Think of a family with children: the parents have responsibility to set the agenda and expectations for the kids, both of which change over time and circumstances. Parents are "management", and few would disagree. If they say, "There's not enough money to buy you an IPod", that's the end of the story. If they say, "No TV untill the homework is done", there is no debate. For organizations to operate smoothly, management must set the agenda and expectations for employee performance without undue interference from those who must do the work. If management is not always perfect in its judgments, face it, who is? That's the environment that I worked in, for more than 30 years, and I saw very little management conduct that reached the level of "outrageous".

It's historical truth that unions were initially formed to deal with unreasonable hours, work practices (safety, for example), and to fight pay pegged to the lowest common denominator - all of which remain concerns that unions should today be addressing with management through collective bargaining. Over the decades, however, unions used various strategies to obtain agreements that eviscerated management's flexibility to respond to business changes and their ability to discipline or dismiss employees with poor performance. As a result, in many ways the unions, rather than management, gained control of the production process and companies became far more focused on meeting the needs of union employees rather than customers. My one extended contact with GM, in the mid-1990s, left me with the strong impression that the UAW would ultimately cause its demise, for example. And, it did, with the complicity of GM's salaried employees who demanded benefits and work rules equal to those achieved by the unions. I view today's teacher's unions and government employee unions with same level of concern that I did GM's unions many years ago.

Anyone who disputes the idea that union controls over government and some businesses have gone too far should take the time to read a typical union contract. At the simplest level, you will find absolute dependence on seniority and unbelievable protections against discipline. The average person on the street would disagree that tenure, alone, implies ability or dedication, but the unions build their power on this very foundation - a foundation that penalizes many able and dedicated employees to the advantage of some who are neither able or dedicated. And when it comes to discipline, the rules can go past the absurd - as evidenced by the heavily populated "rubber room" of paid teachers that NYC schools will not allow in the classroom but who cannot be terminated for many years if ever. The cost of pursuing endless hearings exceeds the benefit of getting rid of any teacher who does not do something so egregious that even the contract won't protect them. This insanity needs to stop, now.

If unions are to remain a factor in America, they need to adjust to protecting the interests of members who deserve protection - it's that simple. If companies or governments need to make workforce adjustments, they must be able to do so on the basis of merit rather than seniority; objective factors should be part of the process, but not the entire process. If an employee has performance issues, the performance improvement and termination process should be simple and relatively timely. Organizations should be able to move employees from one job to another without impediments other than a fair and prompt appeal process. What bothers me right now is that unions are resisting changes like this; they want to continue to make the rules that govern their members and take away both management's flexibility and its ability to discipline poor performers. It's a battle they should not and likely will not win over the next few years.

So, there you have it. I've got strong feelings about issues other than these, but I do regard throttling back both the rich and the unions as key to progress in America. Both have accumulated too much power and too little accountability over the past 50 years, and both seem adamant about retaining their current destructive positions. Time for change!

Thursday, February 17, 2011

Reducing the Deficit and Debt

The 2010-11 federal deficit is now estimated at $1.6 trillion, and the national debt is over $14 trillion. The increasing debt is a major threat to national security because the interest will ultimately consume a huge percentage of the national income, especially if our government's credit rating slips and interest rates rise. We must deal with this issue sooner rather than later, and I agree wholeheartedly with those in congress who are facing this problem honestly. But, what should we do?

The President's bipartisan committee did an excellent job of defining the problem and identifying solutions. Entitlements, including Social Security, Medicare, federal pensions and Medicaid need to be put on a more secure financial footing by adjusting benefits and increasing the contributions of those who participate in these programs. These adjustments are required because the assumptions in place when these programs were approved or last adjusted are no longer valid, and have not been valid for some time. The benefits and contributions adjustments must compensate for prior year "overpayments" as well as the higher future costs of these programs.

With respect to non-entitlement spending, including the defense budget, a serious belt-tightening regime is required. However, across the board cuts make no sense. Some programs must be increased, others eliminated entirely, and some consolidated. All spending needs to be ranked on criteria related to the mission of the larger cabinet functions and the relative "value" of the outputs produced, using objective criteria. Overall, it should not be too difficult to cut the entire pot of non-entitlement spending by 5% without losing anywhere near 5% of the perceived "value" of all programs. That is due to the simple fact that the marginal utility of the last 5% of spending is often close to zero, especially if budget reductions have not been done on a regular basis.

Although I consider myself a political liberal, I do not believe that the government has a responsibility to be a "jobs" program. Rather, it is to provide necessary services in the most professional way at the lowest possible cost. This gives the private sector far more discretionary resources to grow our economy and compete with the productive capabilities of other world economies.

The approach outlined above would result in many government and private sector employees losing their jobs. I don't mind this outcome, for two reasons. First, in environments where layoffs have not occurred for some time, at least 5% of employees are not performing to minimal job requirements - they deserve to be laid off. Second, if capable people are laid off, for example in programs that are totally eliminated, these people will find jobs fairly quickly; the cream rises to the top, as they say.

Will fixing the deficit and debt be painful? Yes. However, many of those who will feel the pain also benefited for many years from government overspending. As Robert Heinlein famously popularized, "TANSTAFFL" - there ain't no such thing as a free lunch. Time to pay up, America! When the paying is taken care of, life in the U.S.A. will be much less precarious for many years to come.