The letters page of the daily, non-financial, press is always good for a laugh. Misguided rage and misdirected indignation is good comedy.
The big whine among the nattering classes over the last few weeks seems to be the ongoing strike season. Apparently, union leaders don`t realise we`re in a global recession and that increases can only be given on the basis of productivity increases. Big raises also fuel inflation. The comfortable classes, it seems, has small horizons.
Workers get it on the chin coming and going. In bad times they are expected to forego increases and be thankful they have poorly paid jobs while in the good times they are expected to be reasonable and accept below-inflation raises to keep the economy within inflation targets.
While I agree that high inflation disproportionally affects the poor, I strongly disagree that worker wages, even the “whopping” 13% given municipal workers recently is particularly inflationary. First, it is off a small base. Garbage collectors are not paid much: 13% more of little remains a piffle. Secondly, evidence suggests the major drivers of inflation here are administered prices – fees set by the state, such as fuel, electricity and the like. Keeping workers in penury won`t force the Department of Energy`s hand in setting the petrol price, no matter how much the Reserve Bank or anyone else tries.
Workers also know that all this middle-class good economic sense does not apply to the top echelons. The denizens of Diepsloot know that over the hill the residents of Dainfern don`t have to accept below-inflation increases ever. In good times they get the big bucks in the form of bonus and shares for having done a good job – even where those profits were the result of the labours of others or pure windfall. In bad times their reputed experience, skills or acumen requires large retention payments – we wouldn`t want them to emigrate or defect to a competitor!
People like garbage collectors know this because they read our discarded newspapers in which apologists for the greedy make these arguments. When can they expect fair pay for hard work? Never if it depends on the comfortable. As for productivity, garbage collectors in my street do their work at the run to keep to schedule. Any suggestions anyone how they can increase their productivity?
Quadrangle of death
Cynics suggest the courts are places to avoid blame, not face justice while lawyers exist to get their paymasters around bits of law they don`t like. This is widely believed and part of the reason the profession is held in low regard.
The evidence suggests that the perverse incentives to blame for the above have had a similar impact among auditors and accountants. Indeed, they are emerging as one corner of the “quadrangle of death” that has done so much damage to the global economy.
The causes of the Great Recession are indeed complex but complexity is often abused as a screen behind which to diffuse blame. Spread blame wide enough and responsibility becomes meaningless.
There is certainly enough blame to go around.
Auditors introduced complexity into accounting rules that in the US, at least, led to a situation where liabilities could be presented assets, effectively rendering balance sheets meaningless.
Bankers and market traders invented ever more complicated “derivatives”, vigorously holding, buying and selling – and treating as assets – these packaged debts.
The regulators allowed it, believing market players would show rational self-interest. They didn`t, because as Nobel economics Laureate Bob Aumann has showed, no-one was incentivised to act rationally.
Bloomberg columnist Michael Lynn says when people are willing to pay a certain price for an asset “because everyone else will, not because they think it is really worth it” – one has a bubble. They shrug, suspend disbelief and argue that the asset in question is exempt from the usual laws of economics for some complicated reason that they really don`t have time to explain.” It is the modern version of the emperor with no clothes.
In the movie Three Kings Major Archie Gates (George Clooney) expounds a law of human necessity. He noted humans can always be trusted to do, at any given time, what is necessary for a reward – or to avoid punishment – to the exclusion of everything else.
Here, at home, Eskom is a case in point: The electricity providers` directors and managers were famously incentivised – by means of key performance indicators (KPIs) massive bonuses – to cut costs and advance black representivity. Nothing wrong with that, other than it led to massive “savings” achieved by consuming reserve coal stocks and deferring power station maintenance. There was also a move to empower small (black) coal providers, but without ensuring they could deliver reliably. Affirmative action head-counts also incentivised Eskom`s leaders to rather leave posts vacant than fill them with whites where suitable black candidates, however defined, could not be found.
They achieved their KPIs, received their bonuses – and nearly brought the national power grid down. Providing electricity was simply not important.
Business Report columnist Ann Crotty on August 5 suggested the “wrong sort of incentives played a critical part in causing the US financial crisis, which spilled over into the global financial system. Loan officers were incentivised to issue as many loans as possible. Their executive bosses were incentivised to grow short-term profit without considering sustainability issues.”
Aumann suggests the system can be fixed by a modest amount of targeted regulation and more appropriate incentives. Lynn sees little prospect of that happening.