Collective bargaining is essential but usually fatally flawed

Posted on March 25, 2011 by Edwin Lee

The collective bargaining between the NFL owners and players broke down quickly. Next season is in jeopardy. There are two serious flaws in their negotiations: a lack of mutual respect and an absence of key stakeholders. The first led to the impasse. The second is endemic to most collective bargaining and has contributed significantly to the current economic crisis. Opportunists are seeking to undermine collective bargaining, unions and the government rather than fixing these flaws.

In his post, NFL Labor Dispute: First Thing We Do Is Get Rid of All the Lawyers, Michael Huyghue gives both sides some sound advice on how to resume fruitful negotiations. He says: Dump the litigators. Make the lead negotiators for both sides people with significant stakes in the outcome and people who respect and trust negotiators across the table. Amen. I’ll add this from personal experience: for productive negotiations, lawyers should act like well behaved children in the presence of adults: visible but silent unless called upon. My guess is that there is a shortage of adults on both sides of these negotiations.

Michael’s advice probably won’t be followed for a simple reason: negotiating owners and players don’t respect or trust one another. Appointing a profession­al litigator to represent your position is an act of profound distrust. It is a slap in the face that challenges the other party to a duel. Once one side does this, the other must defend itself with its own hired gun. The two lawyers then proceed to self-righteously reach an impasse while enriching themselves with the fees they drain from their pathetic clients.

As a hi-tech CEO, my policy was to negotiate in person and then to have lawyers document the agreement in legalese. Even this process requires tight control of counsel. On one occasion, we had a trademark dispute with a startup in England. They were unintentionally using our company name. To avoid travel to England, I directed our legal representa­tives in London to work out an amicable conclusion­. Over the next few weeks the thing blew up, with the startup’s husband and wife crying persecution, and our London attorneys recommendi­ng tough action. I flew to England, met with the couple, listened to their side (which was perfectly reasonable­ from their viewpoint) and settled the issue amicably. We paid them a small sum (legally unjustifie­d) which covered the costs of changing their literature­. The lawyers and airfare cost the company far more than the settlement did.

The more tragic flaw is that the fans and the businesses which depend on an NFL football season are not represented at the bargaining table. They are key economic stakeholde­rs in any outcome. Because they are not represented, both owners and players are willing and able get their pounds of flesh from them.

However, this third flaw is part and parcel of most collective bargaining agreements. It is a flaw which has come home to roost in the economic crisis. It is the fatal flaw in contracts between businesses or governments and their workers which promise definite benefits pensions or medical care, or tenure, or pay based on seniority rather than competence. These benefits are not, nor could they be, fully earned or paid for on an ongoing basis by the negotiating parties. Likewise it is a flaw in golden parachute agreements with executives, or teacher tenures, which make it easier for lazy boards or mediocre administrators to attract people, but makes their institutions less manageable afterwards.  It is also a flaw in social programs such as Social Security and Medicare which promise defined benefits largely unearned by the recipients and for which younger citizens must pay. Those of us who got those benefits elected those who gave them to us. They were not, nor would they be, re-elected by those who must pay for the benefits.

Common all these agreements, and to many others, is that the parties who made them didn’t earn or pay for all the benefits they received from them. They dumped the burden on others who were not represented in the negotiations. (In the teacher tenure case, unrepresented students are left with relatively poor or burnt-out teachers who impoverish the students’ educations. There are also fewer openings for younger, more qualified teachers.)

We need collective bargaining. However, collective bargaining agreements should be valid only to the extent that their costs are borne by those constituencies represented in the negotiations.

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Watson: a boon and a danger

Posted on February 18, 2011 by Edwin Lee

 In his essay In the Watson Era, Will the Computer Be Servant, Master, or Savior? , Clay Farris Naff correctly grasps the potential that Watson demonstrat­ed when it beat two Jeopardy champions. As he says, there is no doubt that Watson’s further improved progeny, human-literate expert systems, can dramatically improve medical care and a host of other businesses and services. Unfortunately, he also basks in a human delusion that perfect justice and eternal peace are desirable for the human race.  This  belief in hierarchical order as our ultimate objective was the basis of Medieval cultures (offspring of the City of God), Communism and Nazism, just to name a few.

He suggests that putting these expert systems in charge might bring those benefits to human society. He admits that such machines might run amok, like the HAL 9000 did in Arthur Clarke’s “2001”, but implies it is a manageable risk.  In doing so, he misses the greatest danger which comes from actually succeeding: the premature extinction of the human race. An early extinction of humanity is the intrinsic consequence of eliminating human conflict and managing perfect justice.  Let me explain.

Long term survival of the human race, like the long term survival of the biosphere, requires that human societies maintain a dynamic balance between effectiveness and adaptability. We must always be growing, dying, succeeding, failing and adapting in disorganized ways to have the tools to respond to unforeseen changes. A perfectly ordered, hierarchic­al society (or biosphere for that matter) would become un-adaptive and vulnerable to external threats or random changes internal or external to it. We see this phenomenon at work in large banks, oil companies and other businesses. Their size and orderliness make them both reluctant and unable to adapt.

Nature (wiser than any Watsons so far suggested) uses conflict, uncertaint­y and diversity to maintain the web of life’s adaptabili­ty to catastroph­es of all kinds. These things have enabled the biosphere to repeatedly recover from mass extinctions. With Watson’s descendant­s in charge, our abilities to explore, to recover from mistakes, and to lead ourselves would atrophy as we became completely dependent on machines.

Messiness and conflict are essential to durability and to high quality for human lives. They are the sources of pain, but also the sources of joy. They  are an unending challenge, but they are not a curse. Watson and its “progeny” offer us fantastic benefits..­. but one of them is not to put them in charge so as to bring mankind perfect justice and eternal peace. Medieval cultures, Nazism and Communism didn’t fail merely because faulty humans led them, but because they were intrinsically undesirable and unsustainable.

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Economics Symposium at MIT: brilliant and interesting, but largely unreal

Posted on February 2, 2011 by Edwin Lee

Last week MIT kicked off its 150th anniversary with an economics symposium which featured about 30 of the titans of economics and finance connected to MIT, including two Nobel Laureates. More than 1000 people gathered in Kresge Auditorium to listen and to learn. It was both a stimulating and disappointing two days. There were interesting revelations about how panelists got into economics ―very much like entrepreneurs in other fields― and developed some of today’s widely used tools. There were also periods of defensiveness and finger pointing about why their work did not contribute to the financial crisis. (OK, I’ll agree with them only when they narrowly define “contribute” as directly causing)

For me, the symposium lacked three things: a forthright look at what, if anything, these individuals had learned from their mistakes and their accomplishments, a sense of how our economy interacts and co-evolves with governments and cultures and any appreciation of how individual and collective belief systems, including those created by widely accepted economic tools, affect economic decisions at both the micro and macro levels.  Instead, there was a heavy emphasis on more data, more analytical rigor and more systems as though the economic system were an aircraft carrier administered by robots whose mission and overall structure were external and rational.

The financial tools of these titans failed to predict or mitigate a calamity that was fairly easy to see on the horizon by less systematic but well informed observers many years ago. I expected them to have learned more from this.

I cringed every time a panelist praised the idea of efficient markets. As an engineer I know that an efficient system of any kind is a fragile one… the more efficient the more fragile. It is one of reality’s intrinsic trade-offs. These economists seemed to be completely unaware of this trade off.

I’d summarize my reaction to the panel sessions thus: lots of brilliance, lots of male ego, too little humility and too little evolutionary biology. The symposium made me uncomfortable with how MIT might influence our economic future.

At the closing lunch, Robert Merton from the MIT Sloan School of Management gave the keynote talk on “The Future of Finance.” He addressed the looming catastrophe for retiring baby boomers. All three of the financial underpinnings of retirement ―Social Security, Public and Private Pension Funds, and Personal Savings― are grossly underfunded and at risk of collapse. He described a fairly simple financial tool which would encourage greater savings and enable individuals to plan for retirement and correlate their level of savings to a range of retirement annuities with various degrees of confidence. He pointed out that there was no fiscal way to finance a 100% confidence in any savings or investment plan. This tool would enable individuals to plan as wisely as possible for their own financial futures rather than depending on others.

His suggestion reminded me about the early days of cars, when the market was limited because there weren’t enough trained chauffeurs to drive them. The control mechanisms were simplified, anyone could drive and the market exploded. His proposal would improve individual financial management and enhance personal responsibility!

Up to this point I was enthusiastically learning from Dr. Merton’s talk. Then he lost me when he suggested that such annuities could be sold to individuals by private enterprises. There is no fiscally sound way to guarantee any annuity (a guaranteed benefit) for a majority of people. This is precisely the calamity faced by governments and private plans with guaranteed benefits. Such plans are based on the illusion of absolute security within large groups. Merton’s annuities merely shift unmanageable risks to a new set of institutions, but don’t provide greater security, on average, to all individuals.

Another old timer at a nearby table rose with a friendly but pointed question which addressed this point: would the speaker’s annuity scale up? It appeared to be workable when a few percent of the population bought into it, but could it work if 70% or more did? Dr. Merton immediately said it would, then added that if it didn’t the design would be flawed, and he thought it was sound.

That response pretty much summed up the entire symposium.

(MIT will be posting a video of the Symposium and the keynoted talk. It’s worth checking out.)

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Cut the baby in half!

Posted on December 5, 2010 by Edwin Lee

Two women, fighting over a baby, were brought before king Solomon. Both vehemently claimed to be the baby’s mother. Solomon took the baby, drew his sword and said he would give one half to each of them. At this, one of the women tearfully pleaded to let the other woman have it. Instead, Solomon gave it to her declaring that she must be the real mother because she genuinely loved the child.

Last fall, Republicans and Democrats fought over who deserved to manage the nation. Each claimed to love the United States and its democratic processes. The electorate didn’t decide, and both parties were left to fight over control. The Republicans, however, continue to threaten the economic and political health of the nation to wring concessions from the Democrats. Right now, for example, unless the richest 1% continues to get its tax breaks, Senate Republicans will filibuster and block all other legislation thereby killing unemployment benefits which keep 2 million desperate people afloat and torpedoing the START Treaty which prevents a new nuclear arms race with Russia. They even brag about being willing to shut down the government next year, as they did in the 1995, if they don’t get their way.

Perhaps there are Republicans in Congress who, when they think and act as individuals, really love their country and would represent its best interests. However, as members of a political party which demands unthinking unity and loyalty from its members, they no longer strike me as people who love their country more than their party’s selfish interests. Don’t get me wrong, I also have deep concerns about how well the Democratic Party exercises its responsibilities, usually like an overindulgent mother trying to buy love. Yet, I don’t see it, or the President, willing to destroy our economy or a functioning government just to satisfy party ambitions. Thus far, Democrats capitulate whenever Republicans threaten to slice up or throttle the baby, so that government grows ever weaker as Republican tax cuts drain its lifeblood.

It is tragic for us and our children that we, the electorate, didn’t have the Wisdom of Solomon.

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Mr. President: Let the Bush Tax Cuts Expire

Posted on December 3, 2010 by Edwin Lee

The Bush Tax Cuts have already increased the Federal budget deficit by nearly $1 trillion over the last decade. If extended they will add over $100 billion more in 2011. These tax cuts, particularly the elimination of Estate Taxes in 2010, have overwhelmingly benefitted the wealthiest 10% of American families.  

To finance the $1 trillion in cuts, the Federal government has borrowed $1 trillion from this same group of people and through their proxies like China and major corporations. The wealthiest 10% either bought T Bills from the Federal Government or funded loans to the middle class to finance living expenses. The funds from those loans quickly became T Bills, as I’ll explain below.  The net effect was to loan the tax cut to the government for its operating expenses, instead of paying taxes. Consequently, the Federal Government is $1 trillion deeper in debt, the top 10% are $1 trillion richer (in T Bills and IOUs), and the net effect on investments or expenditures which create jobs in the private sector is (at best) $0.

Eventually, the tax burden will have to increase merely to repay this added debt. Don’t add to the future tax burden on the middle class by extending the Bush tax cuts. Since cutting them didn’t stimulate private sector jobs, letting them expire won’t reduce them.

I’m fully aware that the detailed picture is more complicated than I’ve shown. However, the details make the picture even worse regarding jobs growth. China, for example, has purchased a significant share of the additional T bills. Instead of buying all the T bills, the wealthy got IOUs from the middle class (through banks and credit card companies) to buy Chinese goods which created jobs in China and lost them in the USA. Then, China bought T bills with its profits, in part to keep their currency weak and to keep jobs in China. In essence, the US tax cuts contributed to job growth in China, job shrinkage in the USA while they increased public and private debts.  

Increasing the wealth of the richest citizens by $1 trillion in IOUs from the middle class and Government might have encouraged some individuals to risk a portion of overall wealth on private enterprise or conspicuous consumption to stimulate the economy. It is just as likely that they bought gold or invested it overseas, which further depressed the economy.

There is no clear evidence, or logic, to support the myth that tax cuts for the wealthy create more jobs in the USA, whereas the debilitating effects on the government, the middle class and our balance of trade are unambiguous.

Significantly, not one legislator who voted for these cuts, or supports extending them, has provided evidence for their benefits. It’s all unsubstantiated rhetoric. Yet, myths and lies, like “don’t raise taxes in a recession” repeated often enough become accepted truths, even as they destroy our ability to govern ourselves. 

Tragically, even reasonably honest and intelligent business people like Michael Bloomberg, self-made billionaire and mayor of New York, mindlessly repeat the myth. Bloomberg did so on Meet the Press last Sunday. He should ask himself what causes him to explain away a $trillion mistake with a mindless myth. I hereby bet him $1000, for his favorite charity, that he can’t demonstrate how tax cuts for the wealthy increase US employment. I will agree to a credible third party as judge.

Mr. President, recant your compromise. We need leadership on this. You and our nation are being ill-served by advisors who urge you to compromise or capitulate.

Ed Lee

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1 Fundamentals of Systems

Posted on November 24, 2010 by Edwin Lee

An economy is a huge, complicated and somewhat uncertain system. It includes materials, machines, networks, companies and governments as well as millions of people who make rational, emotional and arbitrary economic decisions. Some decisions, like buying a suit at Nordstrom or going to Burger King for lunch, are local and short term. Others, like changes in tax laws or trade regulations are far reaching and enduring.  At first blush, such a complex, massive and non-deterministic system would seem to defy adequate analysis, modeling or fixing. I won’t argue about that just yet; the proof will be in the pudding.

The term system identifies a wide range of organized entities, which do similar things and have common properties. We will extract these properties by examining a typical list of familiar systems: car, house, computer, cow, human, tree, microbe, basketball team, company, government, and the biosphere.  Every item in the list is a complex system which incorporates simpler systems. For example, a car includes an engine, and a company includes humans and computers. However, we can examine simple or complex systems as entities and see what obvious characteristics they share. First, let’s examine what systems do and how they do it. Then we’ll examine the properties common to all of them.

   

 

 

 

 

 

 

Figure 1:  A system is an organized concentration of resources which
 uses energy to perform functions in a supporting environment. It produces
 heat and wastes in the process and it degenerates with age unless maintained.

1-Systems perform functions
Cars and airlines transport people and goods. Houses provide warmth and shelter, and usually supply electricity, gas, water and toilets. Computers process information. Cows live, reproduce (with the help of bulls) and give milk. Trees grow, reproduce, provide food and shelter for insects, mammals and microbes, and supply wood for fires. Microbes live, reproduce and some of them process wastes. Companies provide products, services, jobs and profits. Basketball teams provide challenges to players and entertainment for fans. Governments provide social structures in which people are safe, educated and can cooperate. Economies provide products and services, and the means to acquire them. The biosphere sustains the web of life.

Some functions interact with a system’s environment. Others are strictly internal. The function of producing milk interacts with the cow’s environment. The function of living is internal to a cow. Systems usually perform more than one function.

Systems are able to perform their functions because of how their resources are organized and used. These organized resources are called infrastructures. A car’s infrastructure is designed and built to move from place to place while carrying people and goods. A cow is specifically organized to grow, to reproduce, and to give milk.

2-Systems operate only in supporting environments
Cars need paved roads, oxygen and gas stations. They don’t fly in the air, swim underwater, or even drive over boulders. Houses are built for specific climates; those in the tropics differ from those in frigid regions. Cows need air to breathe, food to eat and room to move and defecate.  Various microbes thrive and function only in specific environments. The biosphere requires an earthlike planet orbiting a stable sun, in a part of space relatively free from intense ultra violet radiations and debris.

Supporting environments Continue reading →

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