Read It and Weep

[John F]

Neutron Bomb

by "Robert Cringely"
August 25, 2009
http://www.cringely.com/2009/08/neutron-bomb/

Readers have lately been asking me to write about IBM. It seems the BBC has been on the case somewhat over imposed changes to Big Blue’s UK pension scheme. These mirror similar — though more draconian — changes imposed on IBM’s U.S. workers a couple years ago. Alas, this just seems to be a trend we’ll be seeing more and more of. The problem isn’t in IBM per se, it’s in the distorted reward structure perceived by most public companies.

Two years ago when I covered IBM’s yet-to-be-announced layoffs in some detail it sent the company into a tizzy of denial. Why? “Because you were right,” said a source who still works at IBM. “You called them on the big changes they were planning to make, forcing the company to issue denials then drag those changes out over a couple years where they’d intended to impose them all at once. They never thought one blogger could have that much impact.”

Explain that to my kids, who think I type for a living.

What happened two years ago was IBM deciding to move most of its jobs offshore to save money after a sobering look at the life cycle cost of its U.S. workers. If you look at the total future cost of an American employee for the next 15 years — it is a pretty big number. Then add the double digit inflation cost of U.S. health care and that number becomes bigger still. The only way companies like IBM see themselves being able to continue to operate is by cutting retirement benefits and/or shipping jobs off shore. In IBM’s case they are doing both.

This is at the heart of the current health care debate, because the cost of medical care is killing U.S. jobs.

The IBM USA pension plan was nuked a couple years ago. Many U.S. workers got less than 15 cents on the dollar for the present value of the pension they would have received. Retirement health care benefits for IBM workers are now down to the equivalent of about 18 months of present coverage. This trend is not limited to IBM. How many auto workers have just lost pension and retirement benefits?

A few years ago Congress was considering legislation that would separate pensions from companies so the company could not spend or lose it. We sure blew that one.

This downward trend is continuing. IBM — like nearly all its competitors — is shipping in workers from India to staff many new projects. The work could be done as well — perhaps better — by the U.S. workers who were not long ago laid off. There is something really wrong when a company will lay off its U.S. workers and then import Indian workers to do the same work on-shore.

Now some of IBM’s American workers are being asked to consider taking jobs in Bangalore and other foreign outposts. This program creates new expatriots, giving each a one-way plane ticket. Pay will be in local currency, possibly at local pay scales. IBM is being very elusive about these details. But it is clear that the transported workers will be off U.S. benefits.

But as I say, IBM is merely one example of how messed up things have become for U.S. companies.

During the recession IBM has done extremely well financially with profits better than forecast every quarter. They did this by relentlessly watching their money. Not only do they look at the numbers for the next quarter, but for the next several years.

The automotive industry on the other hand has ignored the long term in their business planning. As a result most car companies were completely blindsided by the recession.

IBM has watched the growing costs of maintaining its U.S. work force. For years they have been cutting staff and moving work offshore. The U.S. auto industry on the other hand was dependent on future car sales to cover obligations made in the past. IBM planned ahead and started shifting the business out of the U.S. Other firms did nothing and have suffered horribly.

What this means is that we should expect more of the same in all industries. Benefits will decrease and jobs will depart.

The new reality at IBM is that if you’re brilliant, work really hard, and earn a world-class degree from a U.S. university, IBM may well have a job for you at one of its U.S. research sites working as a “complementary worker.” But don’t expect that job to last for long. Be prepared to ship out to India or China as a “long-term supplemental worker” after you’ve soaked up knowledge for 13 months.

Newsweek recently reported that IBM, HP, Accenture, and others are finding it profitable to detach from the United States (even patenting the process).

“IBM is one of the multinationals that propelled America to the apex of its power, and it is now emblematic of the process of creative destruction pushing America to a new, less dominant, and less comfortable position,” Newsweek said.

This is the HR equivalent of a neutron bomb, which kills people but leaves structures unscathed. So all these companies will be leaner and meaner — mean enough that there may be nobody left to buy their products.

It comes back to the common perception that the sole function of public companies and their CEOs is to “maximize shareholder value” — a phrase that is interpreted to mean “maximize next quarter’s earnings-per-share.” This philosophy works beautifully with the slightly less than four year average tenure of a U.S. public company CEO. Long before the effects of these bad decisions can show, the CEO has bailed, descending beneath his golden parachute toward some retirement heaven.

Where did this cult of shareholder value maximization come from? And who says that’s the prime directive and nothing else ought to matter? Not me. In fact it is bad policy both for the companies and for our society in general.

Companies like IBM that take this position are hurting America. The kids graduating from college now are the first American generation that is likely to do less well financially than their parents. My kids will do less well than me. One reason for this is that we’re eliminating high paying jobs and replacing them with lower-paying service jobs. IBM towns like Rochester, Minnesota and Armonk, New York thrived economically because Big Blue pumped money into the local economy by creating high-paying tech jobs. What happens to the local economy when those jobs are exported? It declines, perhaps permanently. That decline does not have to be inevitable unless we make it so.

Companies and countries follow certain life cycles, but we do ourselves and our culture a disservice by thinking those curves aren’t affected by the corporate decisions we make.

If we’re going to be analytical, let’s at least do it correctly.

[living_stradivarius]

Meh... All this means is that Americans need to get off their laurels to become more competitive, even if it means sacrificing their standard of living for a time. Who cares about high-paying buyers if you can capitalize on returns from scale?

[jbuck919]

Meh... All this means is that Americans need to get off their laurels to become more competitive, even if it means sacrificing their standard of living for a time. Who cares about high-paying buyers if you can capitalize on returns from scale?

What it means is that maintaining the current system of employer-paid health insurance is a potentially disastrous mistake, the perpetuation of a fundamentally wrong-headed way of doing things pursued out of pure inertia and born of the fallacy of "we've always done it that way," a mistake that unfortunately will be propagated even if the Democrats' health care reform is passed in toto, uncompromised and unabridged.

This program creates new expatriots

Now there's the Freudian typo of the year.

To John F.: I thought you were going to avoid controversial topics here, not that I'm not glad to see you back.

[JackC]

Meh... All this means is that Americans need to get off their laurels to become more competitive, even if it means sacrificing their standard of living for a time. Who cares about high-paying buyers if you can capitalize on returns from scale?

What it means is that maintaining the current system of employer-paid health insurance is a disastrous mistake, the perpetuation of a fundamentally wrong-headed way of doing things pursued out of pure inertia and born of the fallacy of "we've always done it that way," a mistake that unfortunately will be propagated even if the Democrats' health care reform is passed in toto, uncompromised and unabridged.

This program creates new expatriots

Now there's the Freudian typo of the year.

To John F.: I thought you were going to avoid controversial topics here, not that I'm not glad to see you back.

The fact is that in a globalized econonmy many jobs will move to the where labor is cheaper. The fact that labor is relatively expensive in the US involves a LOT more than healthcare costs.

Besides, the assumption that "reform" will actually make healthcare cheaper in the US is highly dubious. The congressional budget office looked at the plan and said it did not see any savings being achieved. In fact, there is a big concern that reform will increase costs. Don't forget that "reform" was originally sold to Americans as being a good idea because we could cover the unisured (another entitlement) and also we could make sure that insurance was not denied/cancelled for certain reasons (job transfers, pre-existing conditions, etc) Thus people liked it because they thought they would be getting something they didn't have before. This doesn't come for free, and anyone who assumes that a government program will give you MORE for LESS hasn't been paying attention to what has happened with government entitlement programs.

[piston]

What I'd like to know is once white-collar jobs have left America, along with blue-collar jobs, who's going to consume Chinese, east Indian, Indonesian made goods?

And, yes, companies raiding and emptying their employees' retirement plans do say a lot about who is truly the "entitled" party in this "global" equation.

[jbuck919]

Meh... All this means is that Americans need to get off their laurels to become more competitive, even if it means sacrificing their standard of living for a time. Who cares about high-paying buyers if you can capitalize on returns from scale?

What it means is that maintaining the current system of employer-paid health insurance is a disastrous mistake, the perpetuation of a fundamentally wrong-headed way of doing things pursued out of pure inertia and born of the fallacy of "we've always done it that way," a mistake that unfortunately will be propagated even if the Democrats' health care reform is passed in toto, uncompromised and unabridged.

This program creates new expatriots

Now there's the Freudian typo of the year.

To John F.: I thought you were going to avoid controversial topics here, not that I'm not glad to see you back.

The fact is that in a globalized econonmy many jobs will move to the where labor is cheaper. The fact that labor is relatively expensive in the US involves a LOT more than healthcare costs.

Yes, but if you read the article, the IBM situation is related directly to the health care costs and the fact that they are rising much faster than inflation. In this particular case, the company is not otherwise motivated to move jobs offshore, and this would be true in many high-tech industries. Americans still have a better aggregate skill set than any cheaper foreign competition. In fact, we're darn good at a lot of things that might already have been exported but have not been.

Besides, the assumption that "reform" will actually make healthcare cheaper in the US is highly dubious. The congressional budget office looked at the plan and said it did not see any savings being achieved. In fact, there is a big concern that reform will increase costs. Don't forget that "reform" was originally sold to Americans as being a good idea because we could cover the unisured (another entitlement) and also we could make sure that insurance was not denied/cancelled for certain reasons (job transfers, pre-existing conditions, etc) Thus people liked it because they thought they would be getting something they didn't have before. This doesn't come for free, and anyone who assumes that a government program will give you MORE for LESS hasn't been paying attention to what has happened with government entitlement programs.

Beyond a doubt, nothing in health care reform is going to make it cheap. However, using a payroll tax as we do for Medicare will drastically reduce administrative costs related to collecting premiums. Also, the cost will be spread over a much larger population. Any private insurance company would drool at the possibility of having a premium base of tens if not hundreds of millions of payers.

I would agree with you that just tacking on a larger payroll deduction to the relatively miniscule deduction for Medicare is not going to do much good without some far-reaching reform in how services are compensated; that is already desperately needed just for Medicare. Also, we would want to avoid a situation where the first thing that happens is that a huge number of the non-indigent make a grab for a "health care tax" exemption for themselves. Finally, I have yet to see any reliable figures comparing what the unit cost (per person including both company and personal contribution) for health insurance is versus the cost of a payroll tax. Right now, we're paying an enormous premium on our premiums, so to speak, because of pure inefficiency.

But all of this is moot, because single payer is not on the table, and the problem of runaway employer-paid premiums will either not go away at all (if we don't get health care reform), or it will be mitigated in an unnecessarily complex, confusing, and inefficient Rube Goldberg fashion instead of by the straightforward expedient of just not doing it that way anymore.

[nut-job]

What I'd like to know is once white-collar jobs have left America, along with blue-collar jobs, who's going to consume Chinese, east Indian, Indonesian made goods?

Chinese, Indians, and Indonesians?

[keaggy220]

A great reason for government to get out of healthcare.

[jbuck919]

A great reason for government to get out of healthcare.

Pssst everyone: He keeps this in a file to insert at random on any thread about health care (which BTW is still two words).

[Corlyss_D]

What it means is that maintaining the current system of employer-paid health insurance is a potentially disastrous mistake, the perpetuation of a fundamentally wrong-headed way of doing things pursued out of pure inertia and born of the fallacy of "we've always done it that way," a mistake that unfortunately will be propagated even if the Democrats' health care reform is passed in toto, uncompromised and unabridged.

John,

You've swallowed the Obama Kool-Aid that health care is what's wrong with the American economy and American business in general. If by your remark you meant that the union-engineered system of screwing health care out of an employer was another example of how models created by unions have been an expensive burden on business and society generally and rendered them less capable of competing with nations like the Asian tigers who don't bother with such nonsense and that what we need to do is more union-busting, I'd agree with you. Unfortunately, I don't think that's what you meant. People need to save for their own health care and stop looking for someone else to pay for their care, including the government. Of course that will mean Americans can't routinely live at 150% of their annual incomes to underwrite the global economy, but that's a correction long overdue.

[keaggy220]

A great reason for government to get out of healthcare.

Pssst everyone: He keeps this in a file to insert at random on any thread about health care (which BTW is still two words).

The compound word policeman (or is it police man or is it police-man?) is out and about! Oh well, I've never memorized all of them. I appreciate the correction.

[living_stradivarius]

What I'd like to know is once white-collar jobs have left America, along with blue-collar jobs, who's going to consume Chinese, east Indian, Indonesian made goods?

They're so cheap that America will continue to buy them, even with the loss of white-collar jobs. Plus you see the rise in living standards elsewhere, so new markets abroad will supplant what little is "lost" from the US.

I also need to mention that companies like IBM, unlike yacht manufacturers and other class-exclusive sellers, create more potential for growth (for both large and growing companies) when they move abroad.

[piston]

They're so cheap that America will continue to buy them, even with the loss of white-collar jobs.

You are very optimistic!

A question: By what mechanism is "capacity to produce" synchronized with "capacity to consume"?

I believe this is the root question to any understanding of the Great Depression.

There's none! Nada!

As the "producers" constantly seek the "point of least resistance" to make profits (Haiti! Be hopeful!!) there's absolutely nobody overseeing a people's capacity to consume. Most analysts agree that the solution out of the current recession rests on the shoulders of American consumers. Well, guess what, keep taking their jobs and pensions away and that "solution" will rapidly evaporate!

I do not like, do not trust, do not believe in "globalization" because it is a quest for the "point of least resistance" that will ultimately, blindedly, lead to a decline in consumption.

[living_stradivarius]

Well, guess what, keep taking their jobs and pensions away and that "solution" will rapidly evaporate!

I do not like, do not trust, do not believe in "globalization" because it is a quest for the "point of least resistance" that will ultimately, blindedly, lead to a decline in consumption.

Doesn't look like there's a problem here in China. More and more people are now able to afford consumer products. As I said in my first post, economies of scale take priority.

The concept of corporate pensions is relatively new here and the public's attachment to them is relatively weak. As for state pensions, most of the public aren't expecting the state to keep up with its promises. When people work with the assumption that they won't have a pension to fall back on, they work harder.

[jbuck919]

Well, guess what, keep taking their jobs and pensions away and that "solution" will rapidly evaporate!

I do not like, do not trust, do not believe in "globalization" because it is a quest for the "point of least resistance" that will ultimately, blindedly, lead to a decline in consumption.

Doesn't look like there's a problem here in China. More and more people are now able to afford consumer products. As I said in my first post, economies of scale take priority.

The concept of "pensions" is relatively new here and the public's attachment to them is relatively weak. When people work with the assumption that they won't have a pension to fall back on, they work harder.

I think we should all be aware that while Henry is in China his posts are subject to search-and-replace filters under the control of the People's Ministry of Propaganda. I happen to have software that will reverse this process, and what he really wrote was this:

Does look there's a problem here in China. Fewer and fewer people are able to afford consumer products. As I said in my last post, economies of scale are bumped by ideological concerns.

The concept of "pension" is considered a Western bourgeois evil here, so the public's awareness of them is almost non-existent. The authorities make the people work until they drop dead rather than grant them pensions at a reasonable age

Just kidding--I hope. But the sentence I've marked in bold shows strong indications that you are being brainwashed.

[Kevin R]

What I'd like to know is once white-collar jobs have left America, along with blue-collar jobs, who's going to consume Chinese, east Indian, Indonesian made goods?

They're so cheap that America will continue to buy them, even with the loss of white-collar jobs. Plus you see the rise in living standards elsewhere, so new markets abroad will supplant what little is "lost" from the US.

I also need to mention that companies like IBM, unlike yacht manufacturers and other class-exclusive sellers, create more potential for growth (for both large and growing companies) when they move abroad.

Amen! The current era of globalization has been a boon to consumers in the US and workers in other nations (the increase in living standards throughout the world, minus Africa, has been astounding).

[living_stradivarius]

Well, guess what, keep taking their jobs and pensions away and that "solution" will rapidly evaporate!

I do not like, do not trust, do not believe in "globalization" because it is a quest for the "point of least resistance" that will ultimately, blindedly, lead to a decline in consumption.

Doesn't look like there's a problem here in China. More and more people are now able to afford consumer products. As I said in my first post, economies of scale take priority.

The concept of "pensions" is relatively new here and the public's attachment to them is relatively weak. When people work with the assumption that they won't have a pension to fall back on, they work harder.

I think we should all be aware that while Henry is in China his posts are subject to search-and-replace filters under the control of the People's Ministry of Propaganda. I happen to have software that will reverse this process, and what he really wrote was this:

Does look there's a problem here in China. Fewer and fewer people are able to afford consumer products. As I said in my last post, economies of scale are bumped by ideological concerns.

The concept of "pension" is considered a Western bourgeois evil here, so the public's awareness of them is almost non-existent. The authorities make the people work until they drop dead rather than grant them pensions at a reasonable age

Just kidding--I hope. But the sentence I've marked in bold shows strong indications that you are being brainwashed.

Actions speak a whole lot louder than words in this case, John. Live in China for a few months and you'll know what I'm talking about.

As for economies of scale, just do the math. Ideology has nothing to do with it.

[Corlyss_D]

The concept of "pensions" is relatively new here and the public's attachment to them is relatively weak. When people work with the assumption that they won't have a pension to fall back on, they work harder.

More importantly, they save. There's no "safety net" in China. Just wait till the SEIU gets ahold o' them!

Actions speak a whole lot louder than words in this case, John. Live in China for a few months and you'll know what I'm talking about.

As for economies of scale, just do the math. Ideology has nothing to do with it.

Famous Investment Biker Jimmy Rogers has been saying on Batchelor's show since last fall that the West is toast and the only place for sane investing is China. I have a modest position in the China ETF which is performing very nicely. It hasn't doubled my investment yet, but I don't doubt that it will. If I could afford it, I'd buy more. I wouldn't put all my money in a Communist government, but so far, theirs is the only "stimulus" package that's working, and Cramer praises them almost weekly as the only real capitalists left. It's an Alice-in-Wonderland world when the Chinese Communists are the most effective capitalists on the planet.

[keaggy220]

The concept of "pensions" is relatively new here and the public's attachment to them is relatively weak. When people work with the assumption that they won't have a pension to fall back on, they work harder.

More importantly, they save. There's no "safety net" in China. Just wait till the SEIU gets ahold o' them!

Exactly! The only thing China has going for them is poverty and all the "benefits" of being a poor people. They are happily the lowest bidder.

[jbuck919]

Well, guess what, keep taking their jobs and pensions away and that "solution" will rapidly evaporate!

I do not like, do not trust, do not believe in "globalization" because it is a quest for the "point of least resistance" that will ultimately, blindedly, lead to a decline in consumption.

Doesn't look like there's a problem here in China. More and more people are now able to afford consumer products. As I said in my first post, economies of scale take priority.

The concept of "pensions" is relatively new here and the public's attachment to them is relatively weak. When people work with the assumption that they won't have a pension to fall back on, they work harder.

I think we should all be aware that while Henry is in China his posts are subject to search-and-replace filters under the control of the People's Ministry of Propaganda. I happen to have software that will reverse this process, and what he really wrote was this:

Does look there's a problem here in China. Fewer and fewer people are able to afford consumer products. As I said in my last post, economies of scale are bumped by ideological concerns.

The concept of "pension" is considered a Western bourgeois evil here, so the public's awareness of them is almost non-existent. The authorities make the people work until they drop dead rather than grant them pensions at a reasonable age

Just kidding--I hope. But the sentence I've marked in bold shows strong indications that you are being brainwashed.

Actions speak a whole lot louder than words in this case, John. Live in China for a few months and you'll know what I'm talking about.

As for economies of scale, just do the math. Ideology has nothing to do with it.

If you come back here with the notion that the promise of eventual retirement on a pension makes softies of us all, then you haven't heard the beginning of "words."

[living_stradivarius]

My family and I grew up with that notion. Seems like we've done ok (including my grandparents).

If you'd care to explain the incentive mechanism involved in your line of reasoning, I might give you a virtual candy

[jbuck919]

My family and I grew up with that notion. Seems like we've done ok (including my grandparents).

If you'd care to explain the incentive mechanism involved in your line of reasoning, I might give you a virtual candy

Your grandparents depend on their children and grandchildren for a living? Or perhaps they are still working at the age of 85? Or maybe they're survivalists who get by on $100 a year. No, I imagine they have pensions, which may be entirely from their own savings, though this is unlikely, but more probably from some combination of income-producing investments designed precisely to provide for them in their retirement. Wanting to be confident that such preparations are in place is not the sign of a lazy or unproductive character (it can in fact be exactly the opposite as an "incentive"). By that criterion, we're a nation of bums.

If you were referring only to government income-transfer type pensions (e.g., Social Security), that is another matter. They too are not to be simplistically dismissed out of hand as though anyone with sense has to agree with that, but it is another matter. But again, are your grandparents refusing their SS "distributions"? I imagine not. Don't talk to the living (like my parents) plus the ghosts of tens of millions of people who slaved all their lives and then were allowed some reasonable comfort in their last years about "incentive mechanisms." There will always be a need for provision for the well-being of the elderly, however it is managed; it is an imperative of a civilized society.

[living_stradivarius]

Re: my grandparents, their children were their investment and no, they don't receive SS benefits.

[jbuck919]

Re: my grandparents, their children were their investment and no, they don't receive SS benefits.

Does that mean that they live off their children? I thought you were against the younger generation having to pay for the older. They might also be independently wealthy, but then we're back to investments.

Of course, I don't know enough to conclude that whatever arrangement they have is not entirely honorable and workable for them. I certainly don't think that people should be required to take their Social Security if it is coming to them. If they have other means and for philosophical reasons don't need or want the SS then that is up to them.

In fact, I would be open in principle to a range of possible SS reforms, because the near-universal habit of automatically figuring it in as part of one's retirement plans is a problem. It's not a question of character; almost everybody, including moi, who does any retirement planning at all figures in Social Security because it's there. It's a problem of availability, i.e., maybe it shouldn't always be there. But phasing out SS as an entitlement would be very tricky politically, and would involve a lot of (probably quite complicated) grandfathering. It might in the end be the first of the "hard decisions" Corlyss talks about that we actually make. But it will not eliminate the SS tax. Everybody will pay in; they'll just have to get used to the idea that it's a tax, not an investment, which of course is what it has been all along. Yup, a political nightmare.

[living_stradivarius]

When I said their children were their investment, I was referring to their priorities.

Who said investment was bad (i.e. buying securities)? Corporate pensions (traditional defined benefit plan designs) are not an efficient form of "investment". They typically end up being a liability for so many businesses in the US.

Anyways, existing pension systems are unsustainable. Your suggestions for reform?