Understanding Risk

[emacknight]

Your post was almost as hilarious either way. You seem a little dense, so I clipped just to make the hilarity clear even to you.

So you intentionally clipped my quote?

And you do realize I added the "LOSING" part in response to the numerous times that fact got dismissed. The owner is a millionaire with lots of restaurants, who cares if he loses $10,000. It's the dishwasher that risks everything taking the bus to work.


I'm not opposed to compensating employees. Where you seem to have lost the thread is failing to grasp that repricing (among other factors) turns the option into more of a tax-beneficial cash bonus and less of the risk-and-profit-sharing incentive which was such a big deal to you earlier in the thread.

Stock option award are a tax beneficial bonus, that's what they're for and why they're used. They also have the added bonus of being tied to profit sharing. I thought you knew that. But they also don't work if the stock suddenly falls 70% because of outside factors.

[emacknight]

In the restaurant of the OP, sure, the owner has the greatest risk.

Now imagine another restaurant, except this time the owner has several other business investments. Lets suppose he owns ten restaurants. Now, all the owner is risking is 10% of his capital. If the restaurant goes under, who cares? He has another nine. The staff, on the other hand, now find themselves unemployed. They have arguably lost more (their entire livelihood) than the owner, who is still a long way from the poor house.

You have picked the perfect scenario to come up with the conclusion you wanted, ie that capital owners risk everything and labour risk nothing.

If the restaurant goes under, who cares? The evil capitalist still has nine others. It's the employees that risk losing their jobs.

[Borzo]

I don't mean to take this thread off on a tangent, but why exactly are stocks viewed as "profit sharing"? Unless they pay dividends, I fail to see the correlation between stock value and actual profits. True profit sharing would be more along the lines of royalties (a portion of actual profits), no?

[Stratocaster]

Your post was almost as hilarious either way. You seem a little dense, so I clipped just to make the hilarity clear even to you.I thought it was bad form for you to clip it that way, too. Deliberately misleading, a dishonest maneuver.

[Whack-a-Mole]

Do you have anything to say that isn't a non-sequitur? Have you read the OP? Do you know what we're talking about here? Feel free to participate at any point.

Non-sequitur? How so when I directly responded to your post?

Your whole thread is trying to point out that a dishwasher has no right to expect to share in the profits. Only the owners are entitled to that.

So, where are these dishwashers and secretaries demanding a profit sharing scheme? This thread is titled "Understanding Risk" because, presumably, you think people don't and you are here to enlighten us. So where are these people of which you speak?

[Whack-a-Mole]

Stock option award are a tax beneficial bonus, that's what they're for and why they're used. They also have the added bonus of being tied to profit sharing. I thought you knew that. But they also don't work if the stock suddenly falls 70% because of outside factors.

Not a problem. You just try to re-price the stock options already granted or backdate them.

These guys really know risk.

Indeed, several compensation consultants, lawyers and governance experts tell Financial Week they’ve been contacted in recent weeks by corporate clients that are considering repricing underwater options at a lower exercise price or replacing those options with restricted stock.

SOURCE: http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080218/REG/287644456

[Damuri Ajashi]

That's precisely my point in the OP. Each person that adds value is paid in accordance with that value. The investor/gambler is thus the only one that stand to lose or gain capital.

I broke it down into four key players:
1. Investor with the capital
2. Person with skill
3. Commissioned salesforce
4. General labour.

So the gambling scenario works just as well as the restaurant, or or a widget factory.

The investor risks her capital by placing a bet. The skilled tradesmen risks her reputation. The commissioned salesman risks the money he could have made selling something else. The general labourer risks nothing.

Consider if the bet wins:
1. Investor sees a return on his investment and is now richer.
2. Skilled tradesman has increased his net worth, he can now demand more compensation.
3. Commissioned salesman is paid based on the number of bets, she made her money but is now better off because the gambler can bet again if he so chooses.
4. General labourer earned his income.


Consider if the bet fails:
1. Investor loses his capital. It is gone. Regardless of how much he started with, he now has less. He put it at risk, and now it's gone.
2. Skilled tradesman has decreased his net worth. He risked his reputation and now it's tarnished.
3. Commissioned salesman is paid based on the number of bets, she made her money but that's it.
4. General labourer earned his income.

Take a look at #4. He risked nothing, but gained in both cases.

I think EVERYONE understandas what you are saying. I think you are glossing over stuff that other people are saying, mostly because you are defining risk to mean risk of loss of capital.

[Ruminator]

So, where are these dishwashers and secretaries demanding a profit sharing scheme? This thread is titled "Understanding Risk" because, presumably, you think people don't and you are here to enlighten us. So where are these people of which you speak?

I think you are complaining in the same vein as septimus and quite frankly, it's a bit childish. You are asking about literal exact situations instead of just taking the spirit of debate for what it is.

Are there literal-first-and-last-name dishwashers anyone can cite that demanded profit sharing? Of course not. But there are proxies for them who feel what is rightfully owed them. Examples:

Frylock
I'm someone who sometimes finds himself thinking workers should get a share of the profits.

Voyager
The big problem with the OP is that it assumes that only the investor deserves upside benefit. If the restaurant is a success, the reason isn't that her money is any greener than anyone elses. The more an employee can contribute to the success, the more that employee deserves of the upside benefit.

Chronos
But why would risk be the only thing that deserves profit? The chef might not have much risk himself, but the quality of the food he makes is going to change how much risk there is to the owner. If you've got a really good chef who turns your restaurant from being an iffy proposition to a sure thing, doesn't he deserve a reward for that?

Whack-a-Mole
Workers ARE the company. ... As such it is not improper to expect the owners to see that their labor benefits from the success of the company.



Are any of these posters an actual "dishwasher"? I don't know and I don't care. It's irrelevant to the debate. However, you can bet the many dishwashers believe profits (beyond their salaries) also belong to them and the posters here are speaking on their behalf.

If there was a debate about universal health care, it'd be like asking if anyone knows any citizen that demanded a free health care card at their state driver's license office. WE ALL KNOW THAT SCENARIO PROBABLY DIDN'T HAPPEN. That silly debate technique is just trying to shut down the discussion in a childish way.

Once again, the OP isn't trying to correct a dishwasher's flawed legal interpretation of status quo corporate laws. The idea is to argue against the beliefs exhibited by the 4 posters (and any silent "virtual dishwashers" that agree with them). That is the spirit of the debate. If you don't want to participate, you don't have to.

[Damuri Ajashi]

The strawman I am trying to turn is the notion that the dishwasher (general labour) deserves some of those profits. It popped up in the labour/power debate, and in the union busting pit thread. It was mentioned several times in this thread: the owner has a moral imperative to share his wealth.

The difference between profits and wages is not disimilar to the difference between dividends and interest. There is no moral imperitive, its just that in the past, more of the wealth generated by increases in productivity inured to labor but in the last few decades, it has gone almost entirely to the providers of capital.

[Damuri Ajashi]

Most of us would agree that sky-diving is considered inherently risky.

But consider two people jumping out of a plane: one is the soul earner for a family of 12, the other is a terminally ill cancer patient with a billion dollar life insurance policy.

Both face the exact same risk, the issue you are looking at is risk tolerance. Should they take that risk?

They don't risk the same thing.

The terminal cancer patient risks less life and has a billion dollar hedge.

[Whack-a-Mole]

Once again, the OP isn't trying to correct a dishwasher's flawed legal interpretation of status quo corporate laws. The idea is to argue against the beliefs exhibited by the 4 posters (and any silent "virtual dishwashers" that agree with them). That is the spirit of the debate. If you don't want to participate, you don't have to.

The "spirit" of the debate is employees should benefit to some extent from a profitable business.

Left to themselves and emcaknight's sensibilities employees have no right to expect that. The owner takes all the risk thus the owner should take all the profit.

We do not have to imagine where that leads us. We know it because it has happened. An employee may have a theoretical ability to negotiate whatever wages he or she can but the reality is nothing like that. Look to the early 20th century to see what ability workers had to negotiate a safe work environment, job security, freedom from discrimination and a living wage.

As a result we got minimum wages, child labor laws and safety requirements imposed on businesses to set at least a floor on this stuff. Unions came along to apply negotiating leverage that the individual does not have in these sorts of jobs.

Hell, I noted that American football players used to paint houses and such because they were paid so little to actually play football. Meanwhile the owners were making out like bandits. Eventually the football players had to unionize. Does anyone here think the football players had no claim on a better wage than they were getting?

We are now seeing a wholesale assault on those rights. Maine, for example (http://www.huffingtonpost.com/2011/03/30/maine-gop-legislators-loo_n_842563.html), wants to increase the allowable hours they can work and decrease the minimum wage for child labor by $2.25 ($7.50 - $5.25). Gets better, that $2.25 reduction bounces back to regular minimum wage after 180 days. Know what will happen? Employers will fire the employee at day 179 and hire a new one rather than face a 30% wage increase. Know who won't get hired as dishwashers? Adults who cost more. Not as if there aren't plenty of unemployed adults wanting a job that we need to add to the labor pool.

This is not theory. This is happening. Today.

[Voyager]

I

Are any of these posters an actual "dishwasher"? I don't know and I don't care. It's irrelevant to the debate. However, you can bet the many dishwashers believe profits (beyond their salaries) also belong to them and the posters here are speaking on their behalf.

You badly misunderstand my argument. I'm saying that people deserve a piece of the profits in proportion to their contribution to them. I've repeatedly said that the dishwasher almost certainly has a commodity type job, and is therefore not likely to add to the profitability of the restaurant, and therefore doesn't deserve a part of the upside. I can imagine a case where this isn't true, but it isn't very likely.
The OP is saying that no matter what the staff does to increase profits - even someone in a crucial position like the chef - they don't deserve any of them, and will get a benefit in terms of reputation. Screwing the employee who makes you successful by making him more marketable while not giving him anything seems kind of suicidal to me. So the OPs position is nonsense both ethically and pragmatically.

[Voyager]

The difference between profits and wages is not disimilar to the difference between dividends and interest. There is no moral imperitive, its just that in the past, more of the wealth generated by increases in productivity inured to labor but in the last few decades, it has gone almost entirely to the providers of capital.

That's right. The social contract, since the '50s at least, has been to split productivity improvements between workers and capital. It worked very well. Now it has changed to capital and executives with power taking most or all of the productivity gains for themselves. The result has been a disaster. Where as before workers could fund lifestyle improvements from salary gains, during the last decade it got funded from the housing bubble, and we all know how that turned out.

[Borzo]

If employees don't add anything special or unique to the success of the business (eg what many are using the dishwasher example for), then I fail to see why they should see any reward beyond basic wages/salary. Their roles are replaceable by almost ANYONE else.

A chef whose great cooking leads to the restaurant's success, on the other hand, may not be so easily replaceable. The owner knows this, and therefore will pay him as much money as he believe his irreplaceablity is worth. If the owner of the restaurant is not willing to give the chef a raise above $80k, then he is in effect saying that he COULD find another chef that's just as good for the business for $80k.

The employees are competing in a labour market that determines their salaries, while the owner is competing in the restaurant market. If the owner succeeds, I believe he should reap the rewards the the market pays him (just as the $80k chef's salary is determined by his market).

Those who contributed uniquely will get a salary appropriate for their work, just as the owner gets his.

In order to implement some sort of forced profit-sharing system, you'd effectively have to rewrite the definitions/laws surrounding property. What if instead of paying higher wages/bonuses to employees, the owner wants to start a franchise and open up 6 other restaurants? Should the employees have the right (through partial ownership?) to prevent the owner from doing so?


The problem I see posters having, is that merely investing in something and taking a risk does not amount to "work". A rich man can double his wealth and do nothing more than sign off on a few papers, and sit on a nice beach in the Bahamas while the cash rolls in. Is "risk" a good enough reason to get paid? Well, morally/ethically speaking, probably not.

But would we have to implement some sort of economic system where ALL people get income based on labour ONLY? This is probably the most equitable way of doing things... but then, who will start new businesses, and how, and with what money?

[Whack-a-Mole]

I've repeatedly said that the dishwasher almost certainly has a commodity type job, and is therefore not likely to add to the profitability of the restaurant, and therefore doesn't deserve a part of the upside. I can imagine a case where this isn't true, but it isn't very likely.

I agree it is a commodity type job but while not directly adding to the bottom line of a restaurant they are critical to its operation. I have worked as a waiter and saw what happened when the dish washing machine broke down. It brought the restaurant to its knees in short order. The managers and anyone else they could rope in were back there washing madly by hand. It was a big mess.

In short, the restaurant cannot operate without a dish washer. No operation, no profit.

[Borzo]

Additional question:

Is it okay to let individuals who have acquired wealth through the work of others (in addition to themselves, usually) - wealth that we as a society have decided to allow them to possess - make independent choices as to what they do with this wealth?

If not, then who exactly should decide? And how would you implement such a system?

[Damuri Ajashi]

I have nothing against profit sharing. If workers want to they can open a co-op. But do you realize that if there aren't profits no one gets paid? That seems to be the point most people miss. The owner only gets paid if there is profit, the dishwasher always gets paid (assuming enough solvency).

This is not exactly correct.

In the coop scenario, what would have been paid as wages becomes profits. Money is fungible. If there isn't enough to pay the dishwasher in the coop scenario, then all things being equal, there is not enough money to pay the dishwasher in the conventional scenario as well.

[Damuri Ajashi]

What does that have to do with the price of tea in China? Is there something you're trying to say? Use your words.

ETA I found one making $94,000
http://alloveralbany.com/archive/2009/03/04/the-94000-secretary

ETA2 The Secretary of the Treasury makes $194,000.

I thought the implication was pretty clear.

[Damuri Ajashi]

Stock Options are worlthless on their own.

Not true. Stock options are about as worthless as lottery tickets for next weeks lottery. IOW, their value is valuirable and contingent but there is a value you can assign to them today. Even an option that is underwater has significant value if there is enough time value left in it.

They are issued with a strike price (say $60) and usually a vesting period (can't be cashed until a year later). They have no actual value, but allow the recipient the "option" to buy at the price listed.

That is teh right taht gives options the value.

They are used as part of compensation because of the way they don't really cost anything to the company, the recipient doesn't have to pay taxes, and it's believed that it will encourage the executive to take more of an ownership in the company.

I thought I had explained this before but stock options were a device marketed by management consultants. It was supposed to replace other compensation and align management interests with the interests of the shareholder. Well, it didn't take too long before management decided that the really important aspect was the alignment of managemnt interests and not the replacement of fixed compensation so stock options were granted on top of exist6ing compensation.

Then when stock options started expiring worthless due to cyclical or industrywide price drops, the executives frequently argued successfully that it wasn't their fault so their stock options should be renewed at lower strike prices. When the market rebounded, tehre was no mention of windfall gains.

Side note about options: if the strike price is $60, it only has value above $60. At $59.99 it is worthless. If the stock goes up to $70 it's worth $10 per share awarded.

As noted above, stock option valuation includes mroe than the intrinsic value, tehre is time value.

So, the company used stock options to lure/retain a CEO and they felt the package represented $10,000. After the crash, those options were worthless, so the CEO feels like he got cheated. He had been offered options as part of his compensation, but {through no fault of his} those options are worthless. The company, hoping to retain the CEO offers new options at the current strike price, so technically it doesn't cost them anything more.

Dilution of shareholder profits is a cost, technically.

[emacknight]

The difference between profits and wages is not disimilar to the difference between dividends and interest. There is no moral imperitive, its just that in the past, more of the wealth generated by increases in productivity inured to labor but in the last few decades, it has gone almost entirely to the providers of capital.

Moral imperative to share the wealth generated.

Everyone wants some of the upside, but who is willing to share in the downside?

I'll say it again, the providers of capital risk losing that capital, and they weigh the potential upside against that loss.

The dishwasher loses nothing, but gains either way. My broker charges $5 commissions on each trade regardless of if it succeeds or fails. Ultimately, if I stop trading that's bad for him, but the fact remains I put capital at risk, and he gets paid either way. Does he have a moral imperative if I pick a winner? Should I be sharing my gains?

Go back to the OP and consider again what happens when the restaurant fails:
*Owner loses the capital she put in and draws no salary. Regardless of how rich and powerful she was before, she is now worse off as a result.

* The chef earned a salary and gained a year of experience. Her reputation may suffer and it's unlikely she'll walk into another headchef position right away.

* Commissioned sales-staff will earn depending how bad sales were, and may also get a base salary.

* General labour -> gets paid.

It is entirely possible (although unlikely) that after a year the dishwasher is better off than the owner.

Is everyone aware that for the entire year the owner might not draw a salary? There are no returns on capital for the first few months, how many other players are willing to go three months without pay?

In terms of a co-op, how many of Bob Redmill's 207 employees are willing to go a year without pay? How many of them would bolt at the first sign of a downturn?

[Damuri Ajashi]

If employees don't add anything special or unique to the success of the business (eg what many are using the dishwasher example for), then I fail to see why they should see any reward beyond basic wages/salary. Their roles are replaceable by almost ANYONE else.

Capital is at least as fungible as labor. Why does so much of the additional welath created by higher productivity over the last few decades go to this fungible capital instead of being split more evenly with fungible labor.

The problem I see posters having, is that merely investing in something and taking a risk does not amount to "work". A rich man can double his wealth and do nothing more than sign off on a few papers, and sit on a nice beach in the Bahamas while the cash rolls in. Is "risk" a good enough reason to get paid? Well, morally/ethically speaking, probably not.

But would we have to implement some sort of economic system where ALL people get income based on labour ONLY? This is probably the most equitable way of doing things... but then, who will start new businesses, and how, and with what money?

I don't recall anyone here arguing that the business owner shouldn't get any sort of return on their investment.

[Damuri Ajashi]

Additional question:

Is it okay to let individuals who have acquired wealth through the work of others (in addition to themselves, usually) - wealth that we as a society have decided to allow them to possess - make independent choices as to what they do with this wealth?

If not, then who exactly should decide? And how would you implement such a system?

Its not that we want to replace capitalism and notions of property rights with soemthing else. Its that we have seen a steady tilting of the playing field towards capital and away from labor and the OP is emblematic of the mindset that allowed this to happen.

We tax labor at up to 35%, we tax capital gains at 15% (or less). We see states cutting taxes on capital and making up the difference by increasing taxes on earned income. Its just seems a bit bass ackwards.

[emacknight]

I agree it is a commodity type job but while not directly adding to the bottom line of a restaurant they are critical to its operation. I have worked as a waiter and saw what happened when the dish washing machine broke down. It brought the restaurant to its knees in short order. The managers and anyone else they could rope in were back there washing madly by hand. It was a big mess.

In short, the restaurant cannot operate without a dish washer. No operation, no profit.

And here is born the labour union: Identify a critical but non-skilled component, and hold it hostage.

It is true that without the dishwasher the restaurant can't function, or generate profit. But it's also true that with the dishwasher the restaurant might not turn profit.

The dishwasher has no influence on profit or success, it is a job that is either done, or not done. Someone said "he might break fewer dishes." No, producing clean unbroken dishes is the job. It can't be done better, just done.

And with that said, there are great *people* who do a great job as dishwashers, but there is no justification for paying them more. If you want to reward them you move them out of the dishpit or offer them better hours.

You know what else is critical to the restaurant--> utilities. Without water/gas/electricity that dishwasher isn't going to run. Should Xcel energy demand part of the profits as well? What if they turned off the power and asked for more compensation?

What if the landlord shows up on a busy Saturday night and declares that rent has doubled? Is he also entitled to a share of the profits?

Then there is garbage removal, which is waaaaay more important than the dishwasher. What if they refused to collect until they get their share of the profits?

And the city transit union, who is responsible for getting people to and from the restaurant. Also a critical function, and also want a piece of the pie.

Everyone wants the upside potential, no one wants to risk losing.

[emacknight]

Capital is at least as fungible as labor. Why does so much of the additional welath created by higher productivity over the last few decades go to this fungible capital instead of being split more evenly with fungible labor.

Because the increased productivity wasn't the result of increased skill or increased workload.

Consider the absolutely most simple scenario of a guy that pushes a button for something, like an injection molding machine.

He is critical, if the button isn't pressed widgets aren't made and sales can't happen.

So he shows up, pushes the button, and gets paid.

Then one day investors decide to buy a better widget machine that doubles the output each time the button is pressed.

Does our trusty hardworking button pusher deserve twice the salary? Productivity has doubled, but his work stayed the same. He isn't pushing twice as hard, or working twice as long. Investors took a risk with a new machine in the hopes that they'll be able to sell twice as many units.

Now tell me, if sales fall, and inventory backs up, is the button pusher willing to go without salary? Continue pushing for free until things pick up? Willing to cover the tab on that fancy new machine?

[Damuri Ajashi]

Moral imperative to share the wealth generated.

I don't think that is what I said.

Everyone wants some of the upside, but who is willing to share in the downside?

I don't think this is what I said.

I'll say it again, the providers of capital risk losing that capital, and they weigh the potential upside against that loss.

Yeah, we heard you the first twenty times you said it. We understand exactly what you are saying and the ptoential upside in bsuiness has been going up steadily for decades while the amount going to the dishwashers of teh world has been holding pretty steady.

The dishwasher loses nothing, but gains either way. My broker charges $5 commissions on each trade regardless of if it succeeds or fails. Ultimately, if I stop trading that's bad for him, but the fact remains I put capital at risk, and he gets paid either way. Does he have a moral imperative if I pick a winner? Should I be sharing my gains?

money is fungible. What you call gains could jsut as easily become dishwasher salary. The question is why is so much of the additional productivity going to the owner rather than labor.

It is entirely possible (although unlikely) that after a year the dishwasher is better off than the ownerIs everyone aware that for the entire year the owner might not draw a salary? There are no returns on capital for the first few months, how many other players are willing to go three months without pay?.[/quote]

Once again you are positing the all in small businessman to gain sympathy and to add weight to your moral argument. I thought we were talking about the restaurant owner as n anlogy for the provider of capital, the dishwasher for the provider of fungible labor.

In terms of a co-op, how many of Bob Redmill's 207 employees are willing to go a year without pay? How many of them would bolt at the first sign of a downturn?

If its a coop, they have an investment. They will stick aropund until the paychecks stop coming just like any dishwasher under a conventional arrangement.

[emacknight]

Its not that we want to replace capitalism and notions of property rights with soemthing else. Its that we have seen a steady tilting of the playing field towards capital and away from labor and the OP is emblematic of the mindset that allowed this to happen.

We tax labor at up to 35%, we tax capital gains at 15% (or less). We see states cutting taxes on capital and making up the difference by increasing taxes on earned income. Its just seems a bit bass ackwards.

Taxes are an entirely separate issue. I'm all for taxing capital, hell, I'm all for taxing labour more too.

But look again and what you're suggesting and note you use percentages: the dishwasher gets $20k a year so the government makes $7000, no matter what.

Profit on the other hand is variable, so I do need to ask is the government willing to GIVE the investor money when he loses?

And in theory, there is no limit to the upside potential, so at 15% the investor needs to earn $46,667 for the government to earn $7000. Yet for every dollar after that the government keeps earning.

[Damuri Ajashi]

Because the increased productivity wasn't the result of increased skill or increased workload.

Consider the absolutely most simple scenario of a guy that pushes a button for something, like an injection molding machine.

He is critical, if the button isn't pressed widgets aren't made and sales can't happen.

So he shows up, pushes the button, and gets paid.

Then one day investors decide to buy a better widget machine that doubles the output each time the button is pressed.

Does our trusty hardworking button pusher deserve twice the salary? Productivity has doubled, but his work stayed the same. He isn't pushing twice as hard, or working twice as long. Investors took a risk with a new machine in the hopes that they'll be able to sell twice as many units.

Now tell me, if sales fall, and inventory backs up, is the button pusher willing to go without salary? Continue pushing for free until things pick up? Willing to cover the tab on that fancy new machine?

And THIS is the crux of your argument!!!

No matter how much is produced through the labor and capital, any increases in productivity are almost certainly going to be the result of advances in technology and better equipment. So if we adopted the mentality that any increases in productivity should inure to the owners, then when would fungible labor ever experience an increase in their standard of living despite ever increasing productivity?

So I can now produce 2 widgets instead of one with the fancy new widget machine every time I push the button. Who buys that widget? Without additional salary, either the owners of capital have to buy all the additional widgets or the price of widgets has to drop by half (which won't happen because you still need twice as much material to make twice as many widgets). So you don't need as many widget machines as you used to have and then you need fewer button pushers. Rinse repeat and pretty soon you only need enough widget machines to produce widgets for the owners of capital. An economy based on providing goods to the owners of capital and the people who work to make stuff for the owners of capital is a pretty thin economy. Its why a thick vibrant middle class is so important for an economy.

[Damuri Ajashi]

Taxes are an entirely separate issue. I'm all for taxing capital, hell, I'm all for taxing labour more too.

But look again and what you're suggesting and note you use percentages: the dishwasher gets $20k a year so the government makes $7000, no matter what.

Profit on the other hand is variable, so I do need to ask is the government willing to GIVE the investor money when he loses? [q/utoe]

Yes, its called a capital loss deduction. You keep forgetting about capital's ability to diversify.

[quote]And in theory, there is no limit to the upside potential, so at 15% the investor needs to earn $46,667 for the government to earn $7000. Yet for every dollar after that the government keeps earning.

Same could be said if you increase the dishwasher's salary.

[emacknight]

Yeah, we heard you the first twenty times you said it. We understand exactly what you are saying and the ptoential upside in bsuiness has been going up steadily for decades while the amount going to the dishwashers of teh world has been holding pretty steady.

Because the act of washing a dish hasn't changed. It starts dirty and ends clean. Capital was invested to increase the productivity of the individual dishwasher. New machines, new techniques, new supplies.

If anything, the job of dishwasher is easier now than it's ever been. I just climbed Kilimanjaro and those dishwashers worked their asses off. Water had to be carried in buckets up the side of a cliff then boiled. Now guys have a limitless supply of hot water from a high-pressure nozzle and an fully automated Hobart belt fed machine. They don't even have an incentive to waste less water, just turn it on and let it run. Do you know how often I go back and see the [mechanical] dishwasher running without anything it in? Taps left on? Do you know how many scrubber brushes end up in the garbage disposal? None of that comes out of the dishwasher's pocket, but it all comes out of the revenue. Do you think the dishwasher wants his salary contingent on the amount of water he uses?

Same goes for the cooks, they are still performing the same function of reheating bagged alfredo. But capital was invested making the alfredo better and marketing the shit out of it to sell it for more.

Like the guy in the widget factory, he's still showing up and doing the same job, why does he deserve more or less money than before?

At any point any worker can try to alter the nature of their compensation. The widget man could be paid on a per widget basis. But chances are he doesn't want that because when widget sales slow he's going to take a loss. He's also responsible for investing in new equipment if he wants higher output.

If you move the widget man to an independent contractor and draw a circle around him, you'll see the same thing as the OP. And what I see is that general labour doesn't want to take a risk with their capital. They want to show up, punch out, and get paid.

It seems as if it took a massive economic downturn for people to realize that salaries can't go up 3% every year if sales don't also go up 3% every year.

[Voyager]

I agree it is a commodity type job but while not directly adding to the bottom line of a restaurant they are critical to its operation. I have worked as a waiter and saw what happened when the dish washing machine broke down. It brought the restaurant to its knees in short order. The managers and anyone else they could rope in were back there washing madly by hand. It was a big mess.

In short, the restaurant cannot operate without a dish washer. No operation, no profit.
Then the dish washing machine should get profit sharing. :D
Everyone in an enterprise is reasonably critical, which is why the get paid. However, just about anyone in that kitchen can wash dishes if they had to, while not everyone could create dishes the way the chef could. (And when they can, like in a fast food kitchen, they are treated more like dishwashers than chefs.)
Don't get me wrong, an owner who gives something extra to a dishwasher who stays around might build a better team and profit, but there isn't the same moral obligation as to someone who directly contributes to the increased profitability of the enterprise.

[Buck Godot]

Now tell me, if sales fall, and inventory backs up, is the button pusher willing to go without salary?

He'll probably have to because the employer is going to cut his hours in half so that the employer doesn't have the backing up inventory and can keep the extra productivity for himself and mitigate the effects of the bad risk he took.

[Voyager]

It is entirely possible (although unlikely) that after a year the dishwasher is better off than the owner.

Is everyone aware that for the entire year the owner might not draw a salary? There are no returns on capital for the first few months, how many other players are willing to go three months without pay?

In terms of a co-op, how many of Bob Redmill's 207 employees are willing to go a year without pay? How many of them would bolt at the first sign of a downturn?

Hypotheticals are not the way to analyze this situation. You need to compute the probability of success versus failure, some probability function for the profits, and see who comes out the best. If you do this and the owner comes out with an expected return of less than minimum wage, the owner is either a nitwit or doing it as a hobby. Chances are the expected return is a lot higher than this. If it is much higher than alternative investment options, than the owner has room to maybe increase his chances of profit by sharing. And remember, no downside risk, because the loss doesn't get any worse with profit sharing.

[emacknight]

And THIS is the crux of your argument!!!

No matter how much is produced through the labor and capital, any increases in productivity are almost certainly going to be the result of advances in technology and better equipment. So if we adopted the mentality that any increases in productivity should inure to the owners, then when would fungible labor ever experience an increase in their standard of living despite ever increasing productivity?

The standard of living part is at the other end of the equation. In the widget example productivity doubled, meaning the cost per widget falls. Now the widget-man can afford a widget that previously cost too much.

Take the iPad as a terrible example: Last year the first version cost $500. This year they came out with a snazzy new one (duel core processors, more batter, better screen) but the cost is still the same. Technically speaking, our quality of life improved. For the same $500 we can get a way better iPad.

All this increased productivity gives us the life we have now. A 42" flat panel LCD today costs less than the shitty 26" I bought a couple of years ago.

Ignore inflation for a moment, and consider the dishwasher making the same salary for 10 years. In 2001 I bought a 256mb MP3 player for $100. 5 years ago I bought a 2gig mp3 player for $100. Look (http://www.bestbuy.com/site/olstemplatemapper.jsp?_dyncharset=ISO-8859-1&_dynSessConf=-3750366454324877357&id=pcat17080&type=page&lcn=Audio&sc=audioSP&st=processingtime%3A%3E1900-01-01&usc=abcat0200000&cp=1&sp=-currentprice+skuid&nrp=15&qp=q70726f63657373696e6774696d653a3e313930302d30312d3031~~cabcat0200000%23%230%23%23uh~~cabcat020100 0%23%230%23%232a~~cabcat0201010%23%230%23%231~~nf408||243530202d202439392e3939&add_to_pkg=false&pagetype=listing) at what you can get for $100 now. 16gb with touch screen high resolution video.

But you'll notice the widget-man doesn't have to worry about that, he just shows up and gets paid. Someone else has to worry about finding a market for the widget, and selling it for as much as they can. Widget-man gets paid.

And what happens if people don't want widgets any more? Is the investor required to pay the widget guy forever? Continue giving him a salary to sit next to a powered-down machine?

So I can now produce 2 widgets instead of one with the fancy new widget machine every time I push the button. Who buys that widget? Without additional salary, either the owners of capital have to buy all the additional widgets or the price of widgets has to drop by half (which won't happen because you still need twice as much material to make twice as many widgets). So you don't need as many widget machines as you used to have and then you need fewer button pushers. Rinse repeat and pretty soon you only need enough widget machines to produce widgets for the owners of capital. An economy based on providing goods to the owners of capital and the people who work to make stuff for the owners of capital is a pretty thin economy. Its why a thick vibrant middle class is so important for an economy.

And I agree 100%. But the middle class isn't and shouldn't be made up of general labour. The nature of the job doesn't allow for it. (and here we'll have an issue of what is middle class, I think I'm taking it to be more than $30k a year)

But you're also getting into the classic agriculture issue. It used to take nearly all of our workforce to produce food. Then we got really good at it, designed refrigerated box cars, and allowed people to go off and live their dream of making and buying widgets.

[emacknight]

Hypotheticals are not the way to analyze this situation. You need to compute the probability of success versus failure, some probability function for the profits, and see who comes out the best. If you do this and the owner comes out with an expected return of less than minimum wage, the owner is either a nitwit or doing it as a hobby. Chances are the expected return is a lot higher than this. If it is much higher than alternative investment options, than the owner has room to maybe increase his chances of profit by sharing. And remember, no downside risk, because the loss doesn't get any worse with profit sharing.

The Restaurant-Failure Myth (http://www.businessweek.com/smallbiz/content/apr2007/sb20070416_296932.htm). And interesting read for those who are curious.

[emacknight]

He'll probably have to because the employer is going to cut his hours in half so that the employer doesn't have the backing up inventory and can keep the extra productivity for himself and mitigate the effects of the bad risk he took.

Ditto for the dishwasher. And what is the response to that? Do they employees see it as helping ensure the success of the business? Or do they see it as getting screwed?

[emacknight]

Also, to address the point of wages and inflation, let's pretend inflation is 3% but wages remain steady.

Last year an mp3 player cost $100, meaning this year it costs $103. One might look and say Labour is worse off because now things cost more money.

But if we actually look at what's going on, the $100 mp3 held 4gigs last year, and it cost $200 for 8gigs. This year the 4gig player is only $50. And for $103 you get 16gigs of video touchscreen.

I'm also not advocating that system, it just happens to be the one we have. I think what most people fail to realize is that if we didn't keep coming up with crap to buy people wouldn't keep showing up for work. Salary earned is only valuable is there are things to do with it.

I work to earn money to buy things I want (99% of which is travel). Remove the option to travel and I'm not going to bust my ass day in and day out.

This is something that I've noticed with quite a few of my friends that remained childless. There was a point where they didn't really want or need more money. They reached a point of upper middle class where they didn't have enough vacation time to use the money they earned. They didn't need a bigger house or car. They had all the stuff they needed and then began looking at the job they were performing. Some of them took unpaid leave, others scaled back their hours.

Like it or not, jobs are the result of consumerism.

[Voyager]

The Restaurant-Failure Myth (http://www.businessweek.com/smallbiz/content/apr2007/sb20070416_296932.htm). And interesting read for those who are curious.

Interesting. I wonder if the common over-estimation has to do with noticing closed restaurants more than open ones, and the effect of the "death location" problem.

[Damuri Ajashi]

Because the act of washing a dish hasn't changed.

The role of capital hasn't changed very much either and in the past the split between capital and labor was not nearly so favorable to capital as it is today.

[septimus]

A chief reason for income inequality (which seems to be the recurring theme of this thread despite its odd title) was already mentioned in a more aptly-named thread:

One of the most important explanations is being overlooked here.

Income sources include workers, and the rent of land and owned capital. In a primitive society the human workers themselves comprised most of the wealth; a semi-skilled worker in a village of 100 might expect to get 1/100 of the income. But with increasing industrialization, more and more of the total wealth takes the form of invested capital, scarce land, and very skilled specialist workers. It is straightforward to conclude that unskilled laborers "deserve" far less than their proportional share.
That was extremely well said.

Curiously, the resident apologist for capitalism's excesses seemed to understand the point. Perhaps his memory is selective.



I work to earn money to buy things I want (99% of which is travel). Remove the option to travel and I'm not going to bust my ass day in and day out.

... quite a few of my friends ... had all the stuff they needed and then began looking at the job they were performing. Some of them took unpaid leave, others scaled back their hours.

Like it or not, jobs are the result of consumerism.

So, only 1% of your income is for non-travel necessities and luxuries. Supposing those needs to be only $40,000/year, that makes your annual income $4,000,000. Lucky you!! Thank you for being such a hard-working contributor to American greatness.

Listening to this, one might almost think emacknight is unaware that some workers have scaled back their hours involuntarily, and have more pressing concerns than which new consumer electronic device to buy.

Wake up, America! The way you let the fat cats dominate discourse makes me suspect that, despite its rhetoric of freedom, your country is becoming the stereotype of a deluded people.

[emacknight]

Curiously, the resident apologist for capitalism's excesses seemed to understand the point. Perhaps his memory is selective.

(from an earlier post) It is straightforward to conclude that unskilled laborers "deserve" far less than their proportional share.

In terms of historical change, our economy is increasingly more dependent on technological advancements and skilled labour.

Consider the act of growing corn. It used to take an entire village. Dozens of people would line up and march down the fields planting and later harvesting the corn. Dozens would sit and shuck. Only to produce a few bushels per acre. And even then, the wealth generated from fields went to the owner, while the labourers earned a base pay for their efforts. Going back to the OP, it was the guy that owned the land who risked crop failure, or cheap Mexican corn flooding the market.

Now, it takes a couple of very skilled farmers and extremely sophisticated equipment to produce considerably much corn per acre.

100 years ago the cost of production was split between material and labour. As technology improved the cost was then split amongst material, labour and technology. Now as markets get more competitive we need to add marketing to the costs. So why shouldn't labour get squeezed out. They're playing a smaller and smaller roll.

We also need to look at how labour is divided now, and realize that it used to be unskilled workers. Then it switched to 1 skilled and 9 unskilled. Now it's 2 skilled and 1 unskilled. The job performed by unskilled labour is still essential, but not nearly as value added as the rest of the players.

So, only 1% of your income is for non-travel necessities and luxuries. Supposing those needs to be only $40,000/year, that makes your annual income $4,000,000. Lucky you!! Thank you for being such a hard-working contributor to American greatness.

No, that's that wrong way to look at personal finances. Half my income goes to necessities, of the remainder 99% goings to travel. I don't waste a lot money on new gadgets or fancy cars. So like I said, if you remove the option of luxury goods (which for me is travel), I'll work half as hard. That's what capitalism and consumerism do for an economy. If all I had to do was earn enough for my government issued car and apartment it would take me about 15 hours a week, then I'd have to sit around bored for the rest of it.

Listening to this, one might almost think emacknight is unaware that some workers have scaled back their hours involuntarily,

You've said this before. As far as the OP is concerned, this statement represents risk that the workers are taking, which lines up with commissioned sales. Again, they are paid from revenue, if there aren't enough sales, they aren't going to be paid to produce.

GM saw sales drop dramatically. So they reduced production to match. Can you think of a reason why they should have continued paying people to produce cars no one wanted?

If hours are scaled back, that represents the opportunity cost they lose not working at a different factory (ie Toyota) who didn't see sales fall as far. Again, you need to look at the big picture and realize that hours were cut because sales were cut. Again driving home the point that there can't be job security without sales security.

and have more pressing concerns than which new consumer electronic device to buy.

And yet they continue to be obsessed with new consumer purchases.

Wake up, America! The way you let the fat cats dominate discourse makes me suspect that, despite its rhetoric of freedom, your country is becoming the stereotype of a deluded people.

That happened long ago when they were convinced the American dream mean two cars in the garage and a chicken in every stove, good luck waking them up now. From 2002 until 2008 people weren't struggling to make ends meet. They were struggling to keep up with the Jones. The gluttony of foreclosed houses were McMansions that went way beyond necessity.

[Voyager]

And yet they continue to be obsessed with new consumer purchases.

Like food and clothing. :rolleyes: The people just on this side of homelessness are not standing in line for new iPads.


That happened long ago when they were convinced the American dream mean two cars in the garage and a chicken in every stove, good luck waking them up now. From 2002 until 2008 people weren't struggling to make ends meet. They were struggling to keep up with the Jones. The gluttony of foreclosed houses were McMansions that went way beyond necessity.
On the contrary, most of the homes on the foreclosure list near me were condos or very small homes of 1,000 sq. ft or less, not McMansions. These were the homes bought by people who had never been able to buy anything before, and they went for the cheapest places they could get.

[emacknight]

Like food and clothing. :rolleyes: The people just on this side of homelessness are not standing in line for new iPads.

Unfortunately they are (no, not specifically iPads). We live in a consumer driving society where it's not enough to live simply, eating rice and beans, and sewing your own clothes. People want boneless skinnless chicken breasts and processed cereal.

A few months ago I watched a few friends take "The SNAP Challenge." Their goal was to live off of what food stamps provides, about $4 per day. Each one of them bitched about how bad the food was, but at the end of the week they all had a ton of leftovers. Meanwhile, my job was to produce complete meals for $1.60 (most of which was packaging).

$4 is a damn lot of food, but it won't include boneless skinnless chicken breasts.

About a decade ago there was an article in Canada about "the new working poor." It described the life of a kid out of college and how bad things were. $50k a year quickly went to rent, car payments, cell phones, computers, internet, cable, student loans, and eating out.

On the contrary, most of the homes on the foreclosure list near me were condos or very small homes of 1,000 sq. ft or less, not McMansions. These were the homes bought by people who had never been able to buy anything before, and they went for the cheapest places they could get.

No, the data doesn't back that up, and you're welcomed to prove me wrong*. People were given the opportunity to buy homes without capital. Think about that for a minute. The biggest challenge to go from rent to own was coming up with the downpayment. Between 2002 and 2009 the downpayment was eliminated! The second biggest challenge was not having a sufficient credit score, and then that was eliminated.

The poor in American were given an incredible opportunity to go from renting to owning. But instead of seeking to reduce their costs, they choose to maximize their gains. They chose to get the most loan they could, instead of the best loan they could afford.

NPR had an interview with bankruptcy lawyer that spent his career representing foreclosures. The situation had always been the same, foreclosure occurred after something dramatic like single income family lost their only source of income. After 2005 that changed. He was getting answer like:
"my hours got scaled back"
"I was expecting a bonus this year and didn't get it."
"my wife lost her job."

The mortgages people took between 2002 and 2007 represented their maximum possible payment in order to get the maximum possible house.

If you wonder why this bothers me so much, it's because my wife and I moved to the US in 2004, and rented a condo while our friends bought townhouses. As recent immigrants we had a credit score of zero, imagine that. So we spent a couple of years renting a one bedroom and saving. During that time people thought we were weird, first because were renting, then because we shared a 1 bedroom, and also because we said about funny.

While renting, our landlord would frequently try to sell us the condo we were in, each year asking for another $10k as prices kept going up. And every time he did it we looked at our cost of living, then checked to see how much of a mortgage that could get us. Each time we concluded the same thing: mortgage plus association fee was more than our rent. So we continued to rent while people continued to think we were weird.

Finally in 2008 the world went to shit and with it house prices and mortage rates. At the same time our landlord raised our rent $100 and tried to sell it to us again. Now when we looked at what we could get for the cost our new rent plus parking there were options. Now we had a credit score that got us a decent rate, and we had a downpayment to avoid mortgage interest. The result: we bought a house that fits us comfortably and our monthly payments went down not up. We could have maxed out our living expenses and bought a house 3 times as large. Instead we looked for a house that fit us.

And even after all the shit that happened in 2007, the mortgage brokers we met with still tried to push us to buy "3 times our income." We'd ask for $250,000 and they'd say, "we can approve you for $500,000." But we had no desire to a) spend that munch monthly, or b) live in that large a house.

Were we crazy?

*Foreclose rates for subprime remained consistent while it was foreclosures on prime loans that sky rocketed.

[septimus]

Were we crazy?

No. You were intelligent, hard-working, motivated, talented and/or lucky.

Where you lose touch is failing to understand that some people are handicapped. In addition to obvious physical handicaps, some people are gullible (whether due to poor genes, poor prenatal nutrition, indoctrination, or whatever). Where progressives often fall out with right-wingers is when the latter gloat "I got mine, suckers! If you're forfeiting money to banks due to your own stupidity, that's just a bigger pie for me to share in, Ha Ha!"

My goodness. In America, sometimes it seems there's more compassion for pet animals than for fellow humans.

And of course some people who are intelligent, hard-working, motivated and talented still suffer in the New Economy, e.g. if their skill can be outsourced. I remember being astounded in the 1990's (an Era of Prosperity, but Prosperity based on Greed) when a bank manager apologized to me for being unable to perform a simple routine task. The problem was that almost all their employees were part-time -- bank didn't want to pay benefits.

I do agree with you, emacknight, that over-exuberant consumerism is a problem, especially in America. But that's a discussion for another thread in which you'll lose many of your right-wing cheerleaders, as there you're taking a rationalist position.

[Damuri Ajashi]

100 years ago the cost of production was split between material and labour. As technology improved the cost was then split amongst material, labour and technology. Now as markets get more competitive we need to add marketing to the costs. So why shouldn't labour get squeezed out. They're playing a smaller and smaller roll.

Costs for material, technology, marketing, these are all different ways of describing the role of capital.

We also need to look at how labour is divided now, and realize that it used to be unskilled workers. Then it switched to 1 skilled and 9 unskilled. Now it's 2 skilled and 1 unskilled. The job performed by unskilled labour is still essential, but not nearly as value added as the rest of the players.

Nobody is taking exception to the fact that the unskilled worker is making less than the skilled worker, peoplea re taking exception to the distribution fo wealth between capital and labor generally.

You've said this before. As far as the OP is concerned, this statement represents risk that the workers are taking, which lines up with commissioned sales. Again, they are paid from revenue, if there aren't enough sales, they aren't going to be paid to produce.

GM saw sales drop dramatically. So they reduced production to match. Can you think of a reason why they should have continued paying people to produce cars no one wanted?

If hours are scaled back, that represents the opportunity cost they lose not working at a different factory (ie Toyota) who didn't see sales fall as far. Again, you need to look at the big picture and realize that hours were cut because sales were cut. Again driving home the point that there can't be job security without sales security.

And doesn't this mean that the factory worker is taking enterprise risk?

[Voyager]

Unfortunately they are (no, not specifically iPads). We live in a consumer driving society where it's not enough to live simply, eating rice and beans, and sewing your own clothes. People want boneless skinnless chicken breasts and processed cereal.

Sorry, I hadn't realized that a chicken breast was a consumer item, and I also hadn't realized that there was a crisis due to the overconsumption of healthy food by the working poor. I'm glad we have food stamps, because before they were around a lot more people did go hungry.
I'm waiting for the right to propose replacing them with tax credits - should happen any day now.

About a decade ago there was an article in Canada about "the new working poor." It described the life of a kid out of college and how bad things were. $50k a year quickly went to rent, car payments, cell phones, computers, internet, cable, student loans, and eating out.

About two years ago there was an article in the Times about how bankers said they needed their bonuses because it all went to private schools, nannies, and payments on their million dollar Manhattan condos. Things are tough all over.


No, the data doesn't back that up, and you're welcomed to prove me wrong*.

Have data on that? Clearly McMansions couldn't have driven the crisis, since there weren't that many of them. Of course it depends on what you call a McMansion - I'd hardly think a 1,000 sq ft. house qualifies, even if it goes for $300K.
Yes, foreclosures on prime rate loans did skyrocket, after the recession from the collapse in subprimes drove people who were qualified for them out of work, and as the decline in property values meant they couldn't sell their houses to perhaps downsize. But they didn't start the collapse.

People were given the opportunity to buy homes without capital. Think about that for a minute. The biggest challenge to go from rent to own was coming up with the downpayment. Between 2002 and 2009 the downpayment was eliminated! The second biggest challenge was not having a sufficient credit score, and then that was eliminated.

The poor in American were given an incredible opportunity to go from renting to owning. But instead of seeking to reduce their costs, they choose to maximize their gains. They chose to get the most loan they could, instead of the best loan they could afford.

Now, who let this terrible thing happen where it never happened before? Did the poor and those not qualified to get a big loan walk into mortgage offices with a gun, demanding one? Did the government force the banks to make the loans, even ones like Countrywide which were not under the programs to give loans to minorities and which did lots of subprime business? Or was it the mortgage companies and the banks who, once they found out they could sell the paper and hide the crap amidst real loans to make the paper AAA? They got high interest rates with supposedly low risk. If you consider yourself an expert on the very topic of this thread, you know that is a disaster in the making.

NPR had an interview with bankruptcy lawyer that spent his career representing foreclosures. The situation had always been the same, foreclosure occurred after something dramatic like single income family lost their only source of income. After 2005 that changed. He was getting answer like:
"my hours got scaled back"
"I was expecting a bonus this year and didn't get it."
"my wife lost her job."

The mortgages people took between 2002 and 2007 represented their maximum possible payment in order to get the maximum possible house.

No, given the low initial rates and the balloon rates after, and that the mortgages were hard to get out of, they represented a concerted effort by the banks to sell mortgages which would maximize their profits. These people have sophisticated models which tell who is a safe risk or not. These do not involve giving mortgages without documentation of pay. The salesmen got their mortgages and the lendees got screwed. Really, have you been asleep the past three years?

And even after all the shit that happened in 2007, the mortgage brokers we met with still tried to push us to buy "3 times our income." We'd ask for $250,000 and they'd say, "we can approve you for $500,000." But we had no desire to a) spend that munch monthly, or b) live in that large a house.

Were we crazy?

*Foreclose rates for subprime remained consistent while it was foreclosures on prime loans that sky rocketed.
Well, good for you. I don't know where you live, but in the Bay Area lots of young people new to the job market, and with new families, were good and rented, saving their money, only to see themselves getting further and further away from being able to own a house. Some of them got into cheaper houses by moving far away from their jobs, to get screwed when gas prices rose and to see their far away houses fall in value more than ones closer to Silicon Valley.
A house 3X your income is not necessarily a bad deal if you have a stable job with growth potential. But you see that the bankers didn't really care how much you could realistically afford, but how much they could get out of you. Dopers have reported how their mortgage brokers tried to switch them to subprimes at the last minute, as another example. Now, take innumerate people, who've been reading about how owning a house makes them part of the American dream, give them to mortgage brokers who lie about how they can always refi their subprimes because housing prices always go up, and you have a disaster. They sold so many subprimes because there was demand for subprimes from investors, not because house buyers wanted them. Surely you've read of people who owned their homes free and clear and who were enticed to take out a subprime loan on them so they would be able to get all that money out of their homes. The airwaves were full of ads for home equity loans, none of which mentioned paying them back.
Sure people shouldn't be so consumption driven, but when that happened in 2008-9 look how the economy crashed. The very attitude you're expressing here, that workers don't deserve a part of productivity growth, has stalled wages and caused people to use credit to make up for it. I suspect everyone would have been better off if some of the wealth was shared - the relatively rich lost more in the market crash than the poor, after all. A more equitable society is good for everyone.

[emacknight]

Nobody is taking exception to the fact that the unskilled worker is making less than the skilled worker, peoplea re taking exception to the distribution fo wealth between capital and labor generally.

What do you mean by distribution of wealth in that sentence? I interpret it as meaning you think labour deserves more of the profits, since to me wealth comes from profits.

So if you go back to the OP, what you'll see is that I think profit come from risking capital.
risk -> profit -> wealth

I'm then frustrated (and accused of creating a strawmen) when statement such as your as made, without including the qualifier that you think risk should also distributed between capital and labour. Because to be risk and wealth are one in the same.


And doesn't this mean that the factory worker is taking enterprise risk?

So we're back to the beginning of the debate. Consider the comment before that:
Listening to this, one might almost think emacknight is unaware that some workers have scaled back their hours involuntarily,

The conclusion I draw after the 2008 recession is that labour isn't interested in sharing the risk. They don't want to have their hours scaled back, or make fewer tips, or earn fewer commissions. They want job security, an annual pay raise that matches inflation, and get pissed off if they have to increase productivity. Or if productivity does increase, they then think there should be a bonus to match, regardless of what their role in that was. (this is in reference to the sandwich maker in the other thread). From everything I've observed over the past decade, wages in the US need to fall, but good luck convincing unions of that. When unemployment was down around 5% a few years ago wages rose too far too fast. Just like in the dot-com era, they shot up to unsustainable levels. Now they need to return to normal, which means a lot of people will make a lot less.

Hence the need for a thread about understanding risk, so at least I can understand what the hell people are talking about when they say a cashier is investing just as much as the owner. Or that a general labourer invested 15 years in a company.

[emacknight]

Sorry, I hadn't realized that a chicken breast was a consumer item,

I know, few people realize that. Americans are trained to expect meat with every meal, "a chicken in every pot." At $5.50 per pound boneless skinless chicken breasts are a luxury item (and actually costs more than lobster where I'm from). So someone making $20k a year, or getting food stamps (SNAP) goes to the store and wonders why they can't afford to eat. The answer is that they aren't smart enough to eat properly. I spent two years teaching low income families how to shop and cook before I got fed up.

The US has the cheapest food in the world, yet no idea what to do with it. I was compared to Scrooge a few posts back, think about that story, a Christmas goose was a big deal, because few people would have meat that often. Except now we're conditioned to have chicken with every meal.

and I also hadn't realized that there was a crisis due to the overconsumption of healthy food by the working poor.

Low income neighbourhoods have high rates of obesity. It's not an issue of being able to afford food, it's an issue of not knowing what to buy or what to do with it. I watched Food Inc. a few months ago and showed a family that went through the McDonalds drive thru every morning because they thought it was cheap, "Just look at all those $1 items."

Then it shows the family in the grocery store complaining about the cost of an apple. But they had no problem spending $1 on a small soda. The meal at McDonalds costs way more than $4 per person. But it's advertised as a $1 menu so people think it's cheap.

Watching middle class educated friends try the SNAP challenge was hilarious because they had no idea how to cook rice, oatmeal, or even a chicken thigh. So then they'd complain how crappy the food was and how shitty/hungry they felt through the day. One of my friends was sitting there with me trying to each a bowl of oatmeal, he complains about how much he hates oatmeal, then complains that he's got three days left and a lot of oatmeal. Then I told him if he mixes his cooked oatmeal with flour and yeast he'll have oatmeal brown bread. Which combined with his left over peanut butter is a great breakfast.

Skill is a valuable asset. Without it you will always be worse off.

I'm glad we have food stamps, because before they were around a lot more people did go hungry.

I'm glad we had it too, I just wish it came with instructions. $4 a day is a damn lot of food, but it won't buy you boneless skinless chicken breasts with every single meal. What's even worse, while I'm on the subject, is that a typical breast in the store is nearly 8oz! No one needs 8oz of chicken. Americans have such a warped perversion towards food that they are unhappy and unfull with 2.5-3oz.

About two years ago there was an article in the Times about how bankers said they needed their bonuses because it all went to private schools, nannies, and payments on their million dollar Manhattan condos. Things are tough all over.
I know you're joking, but it's the same thing I'm talking about. Poor is a state of mind. I saw a similar article about millionaires in Silicon Vally struggling to make ends meet, and that you needed at least $4million a year to not be poor.

Living pay check to pay check isn't about the income you earn. I have a lot of friends that are "cash poor" because they don't know how to cook and eat out every day for lunch. That's $12 a day they could put to better us. My wife takes leftovers, is she a sucker?

Have data on that?

There's lots, it's all been done before in the multitude of threads about the crash. I also use the term McMansion loosely, and tend to mean any of the new development from 2002-2007. There weren't a lot of modest houses built during that time. At least in my area new houses weren't built with 2 bedrooms and 1 bath.

Clearly McMansions couldn't have driven the crisis, since there weren't that many of them. Of course it depends on what you call a McMansion - I'd hardly think a 1,000 sq ft. house qualifies, even if it goes for $300K.

Right, too many 1000sqft houses sold for $300k. You can look for data about the types of homes on the foreclosure list. The key point was that before 2006 McMansions weren't part of the foreclosure list. It used to be a rare find for a nice house to go up for auction. It wasn't until (I believe) 2005 that lots of McMansions started being foreclosed on. All the result of middle-class families that had to have 4 bedrooms so there'd be an empty room between them and each of their two kids.

Yes, foreclosures on prime rate loans did skyrocket, after the recession from the collapse in subprimes drove people who were qualified for them out of work, and as the decline in property values meant they couldn't sell their houses to perhaps downsize. But they didn't start the collapse.

It was all tied in together, not linear the way you think. Subprime loans were always part of the foreclosure rate, I believe upwards of 90%. It wasn't until house prices stopped going up that prime loans started being foreclosed on, which hadn't happened since the Depression. Part of that was people buying multiple homes with prime mortgages.

Subprime is the most misused and misunderstood term in the American lexicon today.

Now, who let this terrible thing happen where it never happened before? Did the poor and those not qualified to get a big loan walk into mortgage offices with a gun, demanding one?

Hold that thought, it will be needed in a minute.

No, given the low initial rates and the balloon rates after, and that the mortgages were hard to get out of, they represented a concerted effort by the banks to sell mortgages which would maximize their profits.

Did they hold a gun to anyone's head?

These people have sophisticated models which tell who is a safe risk or not. These do not involve giving mortgages without documentation of pay. The salesmen got their mortgages and the lendees got screwed. Really, have you been asleep the past three years?

Last three years? I've been well aware of this mess for the past 6 when I first learned what a variable rate mortage was. When a very slimy mortage broker tried to talk me into a mortgage that I could refinance once my house value went up. Am I seriously the only one that followed that with, "what happens if my house value goes down?"

Seriously, did not one single American ask what happens if house prices fall?

Well, good for you. I don't know where you live, but in the Bay Area

I don't live in the Bay Area, wanna know why? Because I can't afford it. I don't live in Manhattan either, wanna know why? I'll let you guess.

lots of young people new to the job market, and with new families, were good and rented, saving their money, only to see themselves getting further and further away from being able to own a house.

Yup, and now they can.

A house 3X your income is not necessarily a bad deal if you have a stable job with growth potential.

Right, but there is no such thing as a stable job with growth potential, ever. Lots of people took mortgages on the assumption that they could afford it when they got their pay raise or yearly bonus. Suddenly they didn't get a bonus and foreclosed on their house. They weren't subprime borrowers, they were solidly upper-middle-class duel-income families.

But you see that the bankers didn't really care how much you could realistically afford, but how much they could get out of you.

So did they put a gun to anyone's head? I got offered considerably more than I planned to spend, I got offered all kinds of deals. I knew what I could and could not afford.

Surely you've read of people who owned their homes free and clear and who were enticed to take out a subprime loan on them so they would be able to get all that money out of their homes.

Yes, am I supposed to feel bad for them? House values doubled and people thought home equity loans were free money. That's a really stupid thing to do.

The airwaves were full of ads for home equity loans, none of which mentioned paying them back.

Nor should they, that's up to the moron that signs up for it.

Sure people shouldn't be so consumption driven, but when that happened in 2008-9 look how the economy crashed. The very attitude you're expressing here, that workers don't deserve a part of productivity growth, has stalled wages and caused people to use credit to make up for it.

Bullshit, consumerism and over consumption caused people to use credit, unless a gun was put to their head. Every single store I go into offers me a credit card, and for some it seems like free money. Why wait when you can have everything you want right now?

I suspect everyone would have been better off if some of the wealth was shared - the relatively rich lost more in the market crash than the poor, after all. A more equitable society is good for everyone.

Sure, but that means sharing more risk.

[Voyager]

Then it shows the family in the grocery store complaining about the cost of an apple. But they had no problem spending $1 on a small soda. The meal at McDonalds costs way more than $4 per person. But it's advertised as a $1 menu so people think it's cheap.

I agree that we need a lot more education about food. But the home economics classes that everyone had to take when I went to junior high, boys and girls, are gone now, because the schools can't afford them. It is nice to talk about healthy food, but the profit margin on junk is higher, and it gets sold in the relatively small, high rent, markets in poorer areas. We buy boneless skinless breasts for $1.99 / lb all the time. I bet urban markets never have them that cheaply.

Skill is a valuable asset. Without it you will always be worse off.

So is intelligence. But do you want to abandon people who are neither?



I know you're joking, but it's the same thing I'm talking about. Poor is a state of mind. I saw a similar article about millionaires in Silicon Vally struggling to make ends meet, and that you needed at least $4million a year to not be poor.

Families living in cars or in homeless shelters don't just think they are poor.


There's lots, it's all been done before in the multitude of threads about the crash. I also use the term McMansion loosely, and tend to mean any of the new development from 2002-2007. There weren't a lot of modest houses built during that time. At least in my area new houses weren't built with 2 bedrooms and 1 bath.

No houses true. Given the price of real estate and construction during the bubble house builders wanted to maximize the profit from each. But there were plenty of smaller condos built during that time, smaller row houses close to jobs and transportation. Those got clobbered.



Right, too many 1000sqft houses sold for $300k. You can look for data about the types of homes on the foreclosure list. The key point was that before 2006 McMansions weren't part of the foreclosure list. It used to be a rare find for a nice house to go up for auction. It wasn't until (I believe) 2005 that lots of McMansions started being foreclosed on. All the result of middle-class families that had to have 4 bedrooms so there'd be an empty room between them and each of their two kids.

I doubt it was 2005. 2007-2008. If you wanted new construction then, 4 bedroom houses were what you had to take. There were some build a block from me. I was not impressed by their layout or quality, but there were no 3 bedroom houses in the development.


It was all tied in together, not linear the way you think. Subprime loans were always part of the foreclosure rate, I believe upwards of 90%. It wasn't until house prices stopped going up that prime loans started being foreclosed on, which hadn't happened since the Depression. Part of that was people buying multiple homes with prime mortgages.

What I said. Especially when the higher rates cut in, and the owners could not refinance the way they were told they could.


Did they hold a gun to anyone's head?


In a sense they did. There was a major imbalance of experience and confidence. On one side you had a couple who never bought a house before, who weren't exactly rocket scientists, and whose English was not so great sometimes. (One broker made Spanish speaking couples sign a contract in English.) On the other was a guy in a suit, who understood the business, who had a carefully designed sales pitch telling these people that they deserved a house, it was the way to the American dream, and that they shouldn't worry about all those terms. You and I have no trouble with this, but the great untapped market was those who wouldn't have qualified before.
The banking system does not work by giving loans to anyone who asks for one, and then tsk tsking about how dumb they are. It works by giving loans to only those for whom the risk is reasonable. When you can dump the risk on someone else, you don't have to worry about them defaulting.

Last three years? I've been well aware of this mess for the past 6 when I first learned what a variable rate mortage was. When a very slimy mortage broker tried to talk me into a mortgage that I could refinance once my house value went up. Am I seriously the only one that followed that with, "what happens if my house value goes down?"

Variable rate mortgages are not new. I had one 25 years ago. They were very good when the interest rates were high and going down.

Seriously, did not one single American ask what happens if house prices fall?

I'm sure some did, but the risk departments of the major banks didn't. If they had, they wouldn't have been pushing these loans so hard, and people who weren't qualified wouldn't get them.


I don't live in the Bay Area, wanna know why? Because I can't afford it. I don't live in Manhattan either, wanna know why? I'll let you guess.

If you work in the computer business there is no real option. When I wanted to leave Bell Labs, there was no place in NJ to go to. When I moved here, and later wanted to leave Intel, the only impact on me was a somewhat shorter commute. Houses were expensive, even relative to the Princeton area, but it turned out that I bought at the low.


Right, but there is no such thing as a stable job with growth potential, ever. Lots of people took mortgages on the assumption that they could afford it when they got their pay raise or yearly bonus. Suddenly they didn't get a bonus and foreclosed on their house. They weren't subprime borrowers, they were solidly upper-middle-class duel-income families.

My bonus never counted in my income, nor should it. Over the years reasonable, cost of living, raises make fixed monthly payments more affordable. It is not an unreasonable strategy. That is different from assuming you are getting a 10% raise or a promotion, and banks shouldn't give out mortgages based on hopes. People are unrealistically optimistic, banks shouldn't be. But they were.



Yes, am I supposed to feel bad for them? House values doubled and people thought home equity loans were free money. That's a really stupid thing to do.

Nor should they, that's up to the moron that signs up for it.

How about 75 year old widows who can be talked into things? In the old days, the local bank and banker also suffered the consequences when a loan defaulted. These days, they took their big commissions and laughed at the suckers who bought the loans.


Bullshit, consumerism and over consumption caused people to use credit, unless a gun was put to their head. Every single store I go into offers me a credit card, and for some it seems like free money. Why wait when you can have everything you want right now?

You know why they offer you a credit card? Because using their card means they don't pay to Visa and MasterCard. They can also track purchases and market to you more effectively. And, as I said, if everyone were like me, buying a new car every 12 years whether I need to or not, we'd be in serious trouble. You can't give raises out of nothing, but you can out of productivity improvements. If the owners keep those for themselves, they shouldn't complain that no one buys, The holy grail has been to sell to China and India, and has been for 20 years, but it hasn't worked very well because of their protectionist policies.

Sure, but that means sharing more risk.
You've read about the execs of TransOcean, who built the BP platform, getting raises and bonuses because they had their safest year ever, right? Risk? Pull the other one, it has bells on.

[Damuri Ajashi]

....

At this point I give up.

I have pointed out the fungibility of money, the changes in the relative share of wealth allocable to labor versus capital, the fact that lenders also risk capital and you still insist that your half baked theory is fact.

Yes capital takes risk, that is teh FUNCTION of capital in a capitalistic system, that has ALWAYS been the function of capital in a cpitalistic system. It takes risk in the form of equity and debt. It is the application of labor to capital that results in prduction and over time, labor has enjoyed increased wage levels along with increased productivity.

This allowed labor (with their consumer hats on) to consume at levels commensurate with their productivity and there was a virtuous cycle of economic growth.

Now we have labor being squeezed by capital with the result that labor (in their role as consumer) producing far more than they are able to buy. This results in reduced demand for labor which reduces demand for product and creates a vicious cycle.

To the extent that you believe that the marketplace should be structured to maximize human utility, the first scenario is far more favorable than the second scenario.

That is why we have governments. Governments are not supposed to protect the interests of business except to the extent that those interests are aligned with the interests of the people. What we have today is a system taht is movingm more and more in the direction of protecting markets and businesses to the detriment of people.