Time in Grade

It seems that is takes working for a whole career to gain a perspective on business and economic dynamics.  When I was younger I believed that increases in productivity would lead to higher pay and less hours worked.  While productivity has climbed at a dizzying rate, pay relative to inflation has not grown and one could argue declined, and the average work week has increased.  The myth of 40 hours for professional employees has long been dismissed if you want to be successful.

This has happened throughout all levels of jobs from professional engineers, accountants, etc. to the burger slingers at your local fast food restaurant.  And it is particularly bad in the service industry.  Manufacturing job have left the country.  Customer service jobs have left.  Engineering jobs are leaving.

Globalization has many good qualities.  It is spreading the wealth to the developing countries.  Once it was Japan, more recently India and China.  In the future it might be Africa, South America.  Who knows for sure.  The Internet has made it easier to do jobs remotely.

Automation has also contributed significantly to the decline of well paying jobs in the US.  And there is certainly more of that in our future.  Self-driving cars will eliminate entire industries of jobs: truck drivers, FedEx drivers, taxi drivers, Uber, and the like.

Automation is a major driver behind productivity.  We may eventually reach a point where robots do almost all jobs.  What then?  Where’s the earning power?  The buying power?  Is the future we are headed create a greater split between the haves and the have-nots?


Real Science is in the Bathroom

Much has been written about the lack of scientists and engineers in our American society.  A special effort (STEM) has been launched to encourage women to pursue careers in Math, Science, Technology and Engineering.  But I have discovered where our scientists have been hiding.

You only need to take a look at your bathroom products, to discover where the best scientists have landed.  These products contain incredible advances such as “gravity defying ingredients.”  I imagine that Elon Musk in his attempt to build rockets would want to plunder that R&D group.  There is a product my wife recently bought called “Better Than Sex” eyelash enhancer which guarantees an improvement in the volume of your eyelashes of 1944%.  Think of the precision that that statement requires.  There is a testing process and department that is way beyond the old mil spec tolerances.

And drug researchers abound in the products that guarantee new hair growth or rejuvenation.  A number of them are in the forefront of using stem cell technologies.  Although it is possible it this the cells from the stems of various fruit plants.  Nonetheless they tout their ability to strengthen and regrow hair.  Skin products, too, have progressed to amazing levels.  They have anti-aging creams that actually claim to turn back the aging process.  I’ve secretly been eating these creams for years but have yet to see a big difference yet.

So for fun, next time you are in the shower, take the time to read the labels of a few of your favorite products and be amazed as I am at the wonderful and many advances in bathroom products.

Productivity and the Future

Over the course of history productivity has increased.  We’ve moved from a primarily agrarian society to one clustered in cities, working in factories and communicating electronically.  The rate of change, of new innovations and of productivity has increased geometrically.  By geometrically, I mean it has been increasing at a constantly faster rate of change and this is likely to continue into the future.

The increases in productivity in my lifetime has been amazing.  The amount of work one could accomplish 50 years ago pales in comparison with today’s world with its advanced computer and communication tools.  This might have led to people spending less time working, having more earning power and enjoying the spoils of this increased productivity.  Instead it has resulted in a relatively small number of people becoming obscenely rich.  Yes, obscenely is the right word.

It has been much easier to make money with money than to earn it.  There are structures in place that make this happen.  If you invest money and earn income that increase (and only the increase) is taxed at favorable capital gains rates.  These rates are typically half of what the average earner pays on their income.  This is supposed to keep the wealthy investing their money, as though there were other options.

What does the future look like?  If productivity continues to increase (and it will) there would theoretically come a day when people wouldn’t have to work at all and food would still be grown and delivered to your home, products would be made and sold, and the government will continue to run – all with robots and the like.  Theoretically, anyway.  Perhaps in real life this will be an impossible goal to achieve but.

In the next few decades it is highly likely that driverless cars will become the norm.  Think of all the jobs that innovation will replace.  No truck drivers, no cab drivers, no trash collectors, no UPS or Fedex.  Eventually no postmen – and I say eventually because government agencies are the last to innovate.   Jobs that will just disappear.  Robots are already replacing humans in the manufacturing sector and as much as the politicians want to rebuild a manufacturing capability in the US we know this is a futile fight.

When these jobs disappear where will the new jobs come from?  Well there will continue to be jobs in science, technology, and innovation.  There may be new jobs created in the leisure industry assuming that people have more free time and the money to enjoy it.

But what if jobs disappear at a faster rate than they are gained which I think is highly likely.  Higher unemployment and more competition for the jobs that are left. More competition for the jobs that are left means a great gap between earners and investors (or the poor and the wealthy).  As the poorer class grows from unemployment increasing and wages decreasing, a dangerous social situation will arise.

The greater gap between the rich and the poor will lead to more crime, social unrest and perhaps even revolution.  Possible answers to this is to find a way to fund a welfare state, create unnecessary or optional jobs, artificially inflate wages for lower level positions, lock up a significant portion of the population thereby taking them out of the equation, or find another ways to redistribute the wealth.  Or a combination of the above.  I’m sure this list is not totally inclusive and I would be interested in your ideas about how this potential problem might be averted.

Before Satellites

I was born before satellites existed.  Yes before cell phones but also before computers (the Turing Machine excepted).  I remember horse drawn wagons traveling down city streets.  There weren’t many of them but there was the junk man.  He would pick up your junk and give you a few pennies for it.  Broken lamps, old broken glass, and rags.  Sometimes my mother would argue with him over prices and finally give up and give him stuff for free.  “Just take it!”  It was after all junk.

For fun sometimes, in the winter, we would hang on the back of the wagon and slide along the snow covered streets until he would spot us and yell for us to get off.  Sometimes he would have to stop and make it more than a threat.

My dad would get up on winter mornings and refill the coal furnace.  We lived in one of those triple-deckers built after World War II.  We lived on the top floor.  The owners lived on the second floor.  That way they could keep tabs on all their tenants.  In the basement there were three separate coal bins each about 5 feet by 8 feet.  And three coal furnaces that had to be kept filled and stoked.

In the back of the house there was a pail buried in the back yard where you would put your garbage.  It was the size of a diaper pail and would frequently have maggots in it.  Some poor soul with heavy work gloves would come and empty it once a week.

Our first phone was a party line.  That means you shared your phone with some other family – one you didn’t know.  Each party would have a different ring tone.  And sometimes when you went to make a call you would discover that someone else was using the phone.  We had one phone, of course, with a rotary dialer and attached to the wall, usually in the living room.  To make a long distance call you had to sacrifice a small animal and give Ma Bell a week’s pay.  Ma Bell was the nickname for AT&T who owned everything about telephones including equipment design and sales, operations, home and business phones, etc.  They were a true monopoly.

When I went to work in an office in later years I had a phone with lots of buttons.  One button was for making long distance calls which was a different button then the local dialer.  And you would often have two or maybe three buttons for incoming calls so you could carry on different conversations by putting people on hold.  If you were really important you had someone who screened your calls for you and left you pink slits with the caller’s name and phone number and sometimes a reason they were calling.  When you had a busy period of work, your pink slips would pile up.

There was also a position called a “Secretary.”  A secretary would handle all of your correspondence, filing, typing and screen your calls.  The professional (excuse me if I refer to this person as “he” because in the 60’s and 70’s and into the 80’s there were all “he’s”) would write out letters, lists, sales materials, etc. with pen and paper and hand it over to a secretary who would type it up and return it to the professional.  The professional would then review it, often correcting tying mistakes and return it to the secretary who would draft a second version.

The secretary would use something called carbon paper in the typewriter.  By putting the carbon paper between two sheets of paper you would be able to keep a copy for your records.  Sometimes a carbon copy would be made for another person.  This is where the term cc (carbon copy) stands for used in email today.  (This is a good trivia question for millennials!)

An important criteria for hiring a secretary was how many words per minute they typed since much of their day would involve typing, frequently repetitive stuff.  If you wanted to send the same sales letter to 100 people it would have to be individually typed.  Then IBM came along and invented a typewriter that had the capability of remembering a string of characters (like a letter) and you only had to type the name and address and push a button to type the rest.  Then Wang Laboratories built a word processing system that sold for close to $20,000 but would be a lot of repetitive work.  Dr. Wang made a fortune selling to law firms and insurance companies.

Phones evolved from rotary dialers to push buttons, from party lines to multiple home phones, and then to cell phones.  When cell phones were first conceived there was quite a bit of skepticism about whether it would work.  To work it meant that there had to be a cell within a certain distance (roughly within 2 miles from the phone).  Companies weren’t sure what the market for cell phones would be.  There was an early cell phone technology that could transmit farther but required a large transmitter and battery.  They were called Bag Phones because they were carried around in bags the size of a back pack or computer bag and the usage was costly.  Traveling salesmen were the primary user for these phones.

At the same time that companies like Nokia and Ericsson were promoting smaller cells, lighter phones, etc., Motorola entered a joint agreement with a satellite company to build 64 satellites to cover the entire world (the Iridium Project) and have a phone system that would transmit to these satellites.  As you can imagine it cost billions to put 66 (originally 77) satellites into orbit and by the time they were completed, cell phone technology had established itself.  There were two problems with the Iridium system.  One was that it didn’t always work well indoors and it required a large phone to transmit a signal to reach the satellite.  These phones where affectionately called “Bricks” because they were about the same size.

Iridium went bankrupt.  The technology was bought by someone and rebranded and today, as far as I know, they cater to cruise ships, the government and remote corners of the world.  If you have old stock certificates, I believe that someday they will become valuable as a collector’s item.  It cost $6 billion to build the system and the company was sold for $34 million.

One last memory from the 70’s.  Newspapers made a good business in “want ads.”  These were ads placed by a Company looking to hire additional personnel.  You could measure the strength of the economy by counting the number of pages in the Sunday Boston Globe’s want ad section.  A typical Sunday might have 40 pages of ads.  Somewhere around 1975 I remember the Globe changed the name of their sections from Male and Female to Professional and Business and Technical.

Prior to 1975, jobs were divided between those for men like Accountant, Engineer, Manager and those for women like Bookkeeper, Secretary and Assembler.  Less than 50 years ago!  And 30 years after Rosie the Riveter.   I worked in Human Resources and in the years since that barrier was broken women have entered the field and today dominate its ranks.  But that is the material for an entirely different post.

What’s a memory that you have?


Sharing the Riches

About 15 years ago, around the time of Sarbanes Oxley but in a separate action the Financial Accounting Standards Board (FASB) decided that stock options should be treated as compensation income and an expense to a company’s operating statement.  Prior to this many stock options were not considered as compensation expense.  They were treated as an equity issue and voted by the Board and reported as an increase in outstanding stock shares.  Since there was no cash outlay for the stock and it had no compensation value on the day it was issued it was not treated as an expense.

I always found it easy to look at a company’s annual report and see how much equity was being designated for the employees.  This percentage of outstanding shares for employees would vary from 5% in older more stable companies to as much as 18% in high growth newer companies.  With today’s GAAP/non-GAAP reporting I find this information much more difficult to find.

Further, prior to this action, there was extensive use of Incentive Stock Options (ISO’s) which were given to employees including executives at a price equal to the market value of the stock at the time of issue.  In other words they had no value on the day of issue and no value going forward unless the price of the stock increased.  Then the employee could reap the benefit of the difference in price between the market price and their issue price (time the number of shares they were given).  The logic was if the company increased its value in the marketplace, employees as well as stock holders would reap financial benefits.  A reasonable incentive it seemed to me.

Alternatively, Restricted Stock Options (RSO) were usually given at a discounted price and the difference between the employee’s price and the market price has always been treated as compensation expense.  15 years ago RSO’s were used minimally and only for executives as part of their compensation incentive.

Today, ISO’s are used rarely.  The number of employees who receive stock options is dramatically less, most notably in public companies.  And executives are the beneficiary of restricted shares often priced to them at no cost.  For shareholders this means fewer stock options are generated for employees which those with significant investments in the market (read “rich people”) will tell you this is good.

Another negative aspect in my opinion is that the incentive for executives has been changed from growing the value of the company to surviving through the vesting period.  It is not unusual for an executive to join a company stay 4 or 5 years and leave with a bundle of money from his/her RSO’s regardless of whether the company grew in value or not.

Maybe I’m old fashioned but I liked the idea of incenting executives and employees to grow the company’s value and for all to share in success.  For employees it didn’t have the financial impact that it had for executives, of course.  But it could be a new car, a new house, a college education paid for.  Today’s professional employee instead can look forward to a 3% raise every year.

The Shrinking Middle Class

I have a background in Human Resources and I sometimes wonder how much my profession may have contributed to the widening gap between the middle class and the rich.  In the late 1970’s, compensation survey’s became popular.  This was were a third party company would contact all the companies in a particular industry (or geographic area) and collect data about jobs and the pay for jobs.

Companies would compile salary data by job title such as Accountant or Engineer.  This information was then compiled by the third party and sold to companies.  The concept behind it seemed fair.  Everyone would know what the average Accountant or Engineer made and decide if they wanted to position themselves (1) on the market, (2) below the market (and use trainees for example) or (3) above the market.

That followed with companies developing compensation programs that gave higher raises to those who were below the market and smaller raises to those above the market average.  This had the result of forcing people toward the average (because theoretically every year the average moved up some to keep up with the cost of living).

The degree of merit raises were also determined by surveys.  When the first difficult times arrived in the mid 90’s, surveys were already well established and as companies laid people off (especially the older more expensive workers) average salaries, averages raises, etc. went backwards.  Many companies froze wages, skipped merit increases and so forth.

There was a comfort in knowing that most companies were taking similar austerity measures and this knowledge allowed companies to take very conservative positions.  Even after business improved companies continued on a stingy path.  Today the norm is a 3% annual merit increase.  I’m not sure what the cost of living index is but it seems to me like inflation is growing at a faster rate.  If this is true then the middle class is still losing ground.

There are certainly reasons beyond surveys that effect wages.  The overall job market has been negatively effected by jobs moving overseas.  People afraid of layoffs are happy to just have a job as the supply of jobs isn’t keeping pace with the demand.  But it would be naive, I think, to believe that the group mind set that surveys help to create and maintain hasn’t contributed.  It feels a bit like collusion.  Although I realize that if the market had a better balance  – that is, if people were in great demand – then wages would be more inclined to grow.

One final note.  It occurs to me that in the period of the world when the US was becoming increasing more productive as a result of the introduction of technologies in computers and communications, and when significant wealth was being created, the middle class was moving backwards.  There is something wrong with this picture.