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On June 16, Morningstar, Inc. released a new study that evaluated how much money mutual fund managers have invested in the funds they manage. Since 2005, the Securities and Exchange Commission (SEC) has required mutual fund companies to disclose how much money fund managers have in the funds they manage.
Accessing manager investment information is not difficult. As a general rule, you can find it in the fund’s “Statement of Additional Information” (SAI), which is usually available either in printed form accompanying a fund’s prospectus or on a fund’s website. If you can’t locate the information in either of these two places, ask the fund’s sponsor to provide it to you.
I would think most investors assume that their mutual fund manager had a sizable amount of his/her own money in the fund(s) they manage. I certainly do; in fact, I have the bulk of my non-cash assets invested in the products I recommend.
Yet the new Morningstar study shows that about half of the mutual fund managers they track have NONE of their own money in the funds they manage. ZERO.
Morningstar found that 47% of US stock funds and 61% of foreign stock funds have no investment of the manager’s own money. Bond funds fare even worse with 66% of taxable bond funds, 71% of balanced funds and 80% of municipal bond funds having no manager investment.
Morningstar’s report offers only a few legitimate excuses for fund managers not to invest in their own funds. These might include “index” funds, “target-date” funds that do not meet the manager’s time horizon, single-state municipal bond funds where the fund manager lives in another state and situations where the manager is a foreign national from a country that bars investment in US funds. Those possible exceptions aside, I find it hard to imagine a mutual fund objective that couldn’t merit at least a small allocation of the fund manager’s own money, many of whom earn millions of dollars per year in management fees.
Perhaps the most interesting part of the study was Morningstar’s analysis of its own “Picks and Pans.” This is a service provided by Morningstar where they select funds that may be good long-term investments (the “Picks”) as well as mutual funds to avoid (the “Pans”). When analyzing management investment in these two groups, Morningstar found that the Picks had a median manager investment of $430,000, whereas the median investment by the fund managers in the Pan category was $0. On average, the Picks had seven times the manager investment than the Pans. Get the message?
While Morningstar is quick to point out that the lack of a manager’s investment does not necessarily doom a fund to poor performance, it certainly doesn’t do anything to help an investor’s confidence in the fund. I think this is especially true in light of recent shenanigans in the financial services industry such as last year’s subprime crisis and the mutual fund scandals just five years ago. Sadly, each of these crises highlighted events where personal self-interest outweighed the duty to put clients’ interests first.
Let me be quick to clarify that I’m not trying to equate managers who don’t invest in their own funds to those responsible for the subprime debacle and mutual fund scandals, but I do think it shows a sense of arrogance on the part of many mutual fund insiders that they expect investors to put money into funds that they won’t even invest in themselves.
The Importance of Personal Investment
Some in the investment world and financial press were shocked at the revelations of the Morningstar study, but not me. After evaluating money managers for over 30 years, it’s hard to be shocked by anything I might uncover. It has not been uncommon for me to come across professional money managers who do not invest in their own programs. Fortunately, I can also attest to the fact that there are many money managers who do put their clients first and do invest alongside them in the funds and programs they manage.
As noted above, I invest my own money in all of the programs my company recommends, which I feel is important. You should also know that I require the money managers that we recommend to “eat their own cooking.” The way I see it, if a money manager’s program isn’t good enough for his/her own money, then it’s certainly not good enough for you or me.
Simply put, if I am going to entrust my clients’ money, and my own money, to an Advisor, I want to know they have a significant percentage of their own money in their programs. If an Advisor doesn’t have his own money in his program, I consider that to be a major red flag.
Interestingly, most of the successful Advisors I have met do have a huge amount of their own money invested in their programs – sometimes even more than they should. When you read over some of the bios of our recommended Advisors, you will find that several of them got into the money management business primarily to manage their own money after retiring from another profession or selling a business.
Upon receiving large payouts, they could not find acceptable money managers for their nest eggs, so they decided to do it themselves. Thus, some of the managers I recommend only started managing money for outside investors after they devised a successful system for managing their own money.
[Via - Gary D. Halbert]
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GE’s announcement a week ago that it would accept offers for its appliances business marked the death-knell of yet another US manufacturing business, one among so many in US manufacturing’s long and seemingly unstoppable downtrend since 1980.
That decline may seem an inevitable historical trend, and Wall Street’s analysts would claim that the US economy can prosper just fine without it. Yet impartial analysts of the putrefying corpse of US manufacturing capability are forced into an inescapable question: did it die of natural causes or was it murdered?
For the past 30 years, Wall Street’s insouciant attitude appears to have made sense. US manufacturing has slowly declined, as operations have moved to lower-wage centers in the Third World. Yet the US economy as a whole has continued to thrive, as financial services doubled as a share of gross domestic product and grew to provide 40% of the earnings on the Standard & Poor’s 500 share index. Prosperity was heavily skewed towards the very rich, but the majority of Americans continued to enjoy a general, if halting improvement in living standards.
The collapse of the financial services bubble has, however, called into question three of Wall Street’s most cherished beliefs about manufacturing:
First, Wall Street believes that financial services and other services can take the place of manufacturing, and that the United States can remain a prosperous economy thereby. Second, it believes that manufacturing tangible products is an intrinsically low-skill and uninteresting operation, so that the US would do much better to specialize in “symbol manipulation”. Third, it believes that the decline in US manufacturing was and is inevitable, so that decline would have happened whatever strategies management had adopted, and whatever resources and attention it had devoted to manufacturing activities.
The inevitability of manufacturing’s decline is in some ways the most interesting question, which has not been addressed much elsewhere. Most large-scale events of this nature appear inevitable in retrospect, yet if examined in detail can be shown to have been triggered by a series of decisions that could have gone the other way.
Management decision-making, like most human activities, is a slave to fashion: whichever guru has captured the attention of business academics and the business press at any given time is likely to have an inordinate influence on management decisions.
In the 1920s through the 1950s, the production engineering of Frederick W Taylor was fashionable, and the United States built the first mass-production economy. In the 1960s, MBA-credentialed top management was thought able to run anything, and so both conglomeration and strategy consulting came into fashion. From the early 1980s, it became received wisdom that all organizations could usefully be “downsized” and that the traditional corporate welfare protection of employees was wasteful. All these theories had their virtues; the reality however is that they cannot all be universally true since they are largely mutually incompatible.
In the 1970s, the new and very fashionable Boston Consulting Group introduced the “strategy matrix” under which businesses were divided into stars, cows, dogs and question-marks, according to their growth prospects and profitability. Stars, the businesses with the highest growth prospects and profitability, were to be nurtured and given resources, dogs, of low profitability and low growth were to be closed down, and question-marks, of high growth but low profitability, were to be given modest resources to see whether they turned into stars or dogs.
The whole operation was to be paid for by milking the “cows”, those businesses of low growth but high profitability. Cows, as their name suggests, would be denied capital investment, since such investment should not be wasted on low-growth situations. Instead, their cash flow would be milked to provide capital investment for the stars and the more favored question-marks.
There were several problems with this mechanistic, clever-clever approach to business management. One was that the businesses’ typology could not be identified accurately; which businesses were treated as “stars” was more a matter of the business cycle and doubtless of office politics than of the long-term underlying reality. A second, even more fundamental problem was this: cows that are milked and not fed quickly turn into dogs. Businesses that are treated as not part of the company’s glorious growing future quickly wither on the vine, as new opportunities in those business areas are missed. Their profitability starts to decline and quickly the cash flow that was their corporate raison d’etre disappears.
When examined dispassionately in the light of posterity, it appears that far too many of these “cow” businesses were manufacturing operations milked for cash flow that was diverted into more-fashionable businesses in the service sector, particularly in finance. Westinghouse, for example, one of the most important names in electric equipment until 1980, had split up and left manufacturing altogether by 2000. To be fair, Westinghouse management had a good excuse; one of their leading and most successful businesses had been the construction of nuclear reactors, an activity that disappeared in the 1980s owing to political cowardice in the face of environmentalist harassment.
General Electric, however, run from 1981 to 2001 by ultra-fashionable “Neutron” Jack Welch, epitomized the failings of the era. It under-invested in many of its manufacturing businesses, entered into a blizzard of divestitures designed to boost its short-term earnings, played games with its pension accruals and built a gigantic financial services empire of low-quality businesses in which it could never be a leader. It also ruthlessly eliminated its middle management and overpaid its top management, winners in the corporate office political game. GE was a much-admired operation in Welch’s later years; it is less so now, and if the bloated global financial services business returns to a historically normal size may finally be seen to have been a disaster.
GE Appliances, GE’s home-appliance business dating back to 1907, the early years of electrification, was long dominant in the home appliance field. GE chairman Jeff Immelt has now put GE Appliances on the sale block so that GE can focus on higher-margin businesses. The appliance side has attracted interest from China’s Haier Group but is expected to be less interesting to South Korea’s LG, because LG manufactures appliances of a higher price and quality. A commoditized and fairly uninteresting business, in other words, currently worth around US$6.3 billion to $6.5 billion, little more than 2% of GE’s $290 billion market capital.
However, if you look back even to 1994, a medium year that was already well into GE’s Welch-inspired transformation, appliances represented 10% of GE’s sales and 8% of operating profit. In other words, the business has been steadily starved relative to GE’s other businesses, and has turned itself from a “cow” into a “dog”.
To see how this happened, think back to the 1950s. Electric appliances were the major growth business of that decade, symbolizing the decade’s new affluence. Forecasters confidently predicted that by 2000 robot appliances would be in every household, removing the drudgery of housework once and for all. As a youthful reader of Isaac Asimov’s Robot stories I shared that confidence - after all, the computerization necessary for robot control systems, which had not existed in 1940 when Asimov wrote the first of his I Robot short stories, was already revolutionizing business management by the late 1950s.
Now it’s not just 2000 but 2008. So where the hell are the robots? GE Appliances has no such offering; if you buy a GE vacuum cleaner you will still have do all the work yourself. Can it be that the technological optimism of the 1950s was misplaced, and that home robots will never exist, or will be invented only in the far distant future? You’d certainly think so from looking at GE’s catalog of products.
However it turns out that GE is simply behind the curve. The iRobot Corporation of Bedford Massachusetts, founded by keen Asimov readers from MIT in 1990, manufactures fully robotized vacuum cleaners as well as some pretty neat robotized mine-clearing equipment for the military. iRobot’s standard model runs around $300, less in real terms than an ordinary vacuum cleaner would have cost you in 1980. iRobot’s total sales are only $250 million, which GE would no doubt class as a rounding error, but dammit, the company doesn’t have GE’s brand name or distribution network.
Had GE had the sense and innovative skill to develop robot vacuum cleaners, can anybody doubt that that product group’s sales would today be several billion dollars, with appropriately high margins? It is thus clear that by starving GE Appliances of investment and, more important, of research dollars, and devoting the company’s efforts to financial services, “Neutron Jack” and his cohorts have deprived the United States of a major new business and deprived us overworked consumers of a major labor-saving technology (unless we are lucky enough to find out about iRobot or its few small-company competitors).
GE has commoditized its appliance business, forcing down prices by manufacturing in ever cheaper-labor parts of the world. Instead it should have been enriching that business, opening up new opportunities for products that could be sold at higher prices and higher margins and provide more value to the consumer.
The sad story of GE Appliances is a paradigm of what has gone wrong in the US economy since 1980. No, manufacturing did not need to leave the United States; US manufacturing was killed by a multitude of foolish short-term-profit motivated decisions by inept and overpaid US management.
The other questions can also be answered. Manufacturing is not intrinsically a low-skill and uninteresting operation. It involves skills at the highest possible level and can readily employ high-wage workers - after all LG’s workforce in South Korea are these days very far from being subsistence-level Third World proletariat. Finally, the US cannot survive through financial services and tech startups alone; it needs to reinvest in manufacturing or it will find itself unable to support an advanced-economy living standard for the mass of its population.
Yes, Virginia, you could have had both robots and the Internet. The 1950s dream of an infinitely prosperous United States full of household robots and other high-tech wonders was not a fantasy, it was there for the taking. Only political and business incompetence prevented us from achieving it.
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.
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Mike Whitney: Fed chairman Bernanke has been on a spree lately, delivering three speeches in the last two weeks. Every chance he gets, he talks tough about the strong dollar and “holding the line” against inflation. Treasury Secretary Henry Paulson even said that “intervention” in the currency markets was still an option. Is all of this jawboning just saber rattling to keep the dollar from plummeting, or is there a chance that Bernanke actually will raise rates at the Fed’s August meeting?
Michael Hudson: The United States always has steered its monetary policy almost exclusively with domestic objectives in mind. This means ignoring the balance of payments. Like the domestic U.S. economy itself, the global financial system also is all about getting a free lunch. When Europe and Asia receive excess dollars, these are turned over to their central banks, which have little alternative but to recycle these back to the United States by buying U.S. Treasury bonds. Foreign governments – and their taxpayers – are thus financing the domestic U.S. federal budget deficit, which itself stems largely from the war in Iraq that most foreign voters oppose.
Supporting the dollar’s exchange rate by the traditional method of raising interest rates would have a very negative effect on the stock and bond markets – and on the mortgage market. This would lead foreign investors to sell U.S. securities, and likely would end up hurting more than helping the U.S. balance of payments and hence the dollar’s exchange rate.
So Bernanke is merely being polite in not rubbing the faces of European and Asian governments in the fact that unless they are willing to make a structural break and change the world monetary system radically, they will remain powerless to avoid giving the United States a free ride – including a free ride for its military spending and war in the Near East.
Mike Whitney : How do you explain the soaring price of oil? Is it mainly a supply/demand issue or are speculators driving the prices up?
Michael Hudson: It’s true that enormous amounts of speculative credit are going into commodity index funds. But bear in mind that as the dollar depreciates, OPEC countries have been holding back supply largely to stabilize their receipts in euros and to offset their losses on the dollar securities they have bought with their past export proceeds. For over 30 years they have been pressured to recycle their oil earnings into the U.S. stock market and loans to U.S. financial institutions. They have taken large losses on these investments (such as last year’s money to bail out Citibank), and are trying to recoup them via the oil market. OPEC officials also have pointed to a political motive: They resent America’s military intrusion in the Middle East, especially in view of how much it contributes to the nation’s balance-of-payments deficit and federal budget deficit.
The U.S. press prefers to blame Chinese, Indian and other foreign growth in demand for oil and raw materials. This demand has contributed to the price rise, no doubt about it. But the U.S. oil majors are receiving a windfall “economic rent” on the price run-up, and are not at all unhappy to see it continue. By not building more refining and shipping capacity, they have created bottlenecks so that even if foreign countries did supply more crude oil, it would not be reflected in refined gasoline, kerosene or other downstream product prices.
Mike Whitney: The Fed has traded over $200 billion in US Treasuries with the big investment banks for a wide variety of dodgy collateral (mostly mortgage-backed securities). How can the banks possibly hope to repay the Fed when their main sources of revenue (structured investments) have been cut off? Are the banks secretly using the money they borrow via repos from the Fed to dabble in the carry trade or speculate in the futures markets?
Michael Hudson: The Fed’s idea was merely to buy enough time for the banks to sell their junk mortgages to the proverbial “greater fool.” But foreign investors no longer are playing this role, nor are domestic U.S. pension funds. So the most likely result will be for the Fed simply to roll over its loans – as if the problem can be cured by yet more time.
But when a bubble bursts, time makes things worse. The financial sector has been living in the short run for quite a while now, and I suspect that a lot of money managers are planning to get out or be fired now that the game is over. And it really is over. The Treasury’s attempt to reflate the real estate market has not worked, and it can’t work. Mortgage arrears, defaults and foreclosures are rising, and much property has become unsaleable except at distress prices that leave homeowners with negative equity. This state of affairs prompts them to do just what Donald Trump would do in such a situation: to walk away from their property.
The banks are trying to win back their losses by arbitrage operations, borrowing from the Fed at a low interest rate and lending at a higher one, and gambling on options. But options and derivatives are a zero-sum game: one party’s gain is another’s loss. So the banks collectively are simply painting themselves into a deeper corner. They hope they can tell the Fed and Treasury to keep bailing them out or else they’ll fail and cost the FDIC even more money to make good on insuring the “bad savings” that have been steered into these bad debts and bad gambles.
The Fed and Treasury certainly seem more willing to bail out the big financial institutions than to bail out savers, pensioners, social Security recipients and other small fry. They thus follow the traditional “Big fish eat little fish” principle of favoring the vested interests.
Mike Whitney: According to most estimates, the Fed has already gone through half or more of its $900 billion balance sheet. Also, according to the latest H.4.1 data ”the current holdings of Treasury bills is $25 billion. This is down from some $250 billion a year ago, or a net reduction of 90 per cent.” (figures from Market Ticker) Doesn’t this suggest that the Fed is just about out of firepower when it comes to bailing out the struggling banking system? Where do we go from here? Will some of the larger banks be allowed to fail or will they be nationalized?
Michael Hudson: You need to look at what the Treasury as well as the Fed is doing. The Fed can monetize whatever it wants. And as you just pointed out in the preceding question, it has been buying junk securities in order to leave sound Treasury securities on the banking system’s balance sheets. Government bailout credit will keep the big banks alive. But many small regional banks will go under and be merged into larger money-center banks – just as many brokerage firms in recent decades have been merged into larger conglomerates.
False reporting also will help financial institutions avoid the appearance of insolvency. They will seek more and more government guarantees, ostensibly to help middle-class depositors but actually favoring the big speculators who are their major clients.
What we are seeing is the creation of a highly concentrated financial oligarchy – precisely the power that the Glass-Steagall Act was designed to prevent. A combination of deregulation and “moral hazard” bailouts – for the top of the economic pyramid, not the bottom – will polarize the economy all the more.
Cities and states will preserve their credit ratings by annulling their pension obligations to public-sector workers, and raising excise taxes – but not property taxes. These already have fallen from about two-thirds of local budgets in 1930 to only about one-sixth today – that is, a decline of 75 percent, proportionally. While the debt burden and the squeeze in disposable personal income is pressuring workers, finance and property are using the crisis to get a bonanza of tax relief. Democrats in Congress are as far to the right as George Bush on this, as their base is local politics and real estate.
Mike Whtney: According to the Financial Times: “Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books. The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them.” Is there any way the banks can find investors with “deep enough pockets” to provide the capital they need to meet the requirements on $5 trillion dollars? Are most of these off-balance sheets assets mortgage backed securities and other hard-to-value bonds?
Michael Hudson: The practice of off-balance-sheet accounting already has become quickly obsolete this year. The United States is going to adopt Europe’s normal “covered bond” practice of bank head-office liability for mortgages and other loans. (The Wall Street Journal had a good article on this on June 17, anticipating that the U.S. covered bond market might rise quickly to $1 trillion as early as next year.)
This coverage is what has given European banks protection. In view of the heavy losses of German banks in Saxony and Düsseldorf in the U.S. subprime market last summer, it’s unlikely that investors will buy mortgages that no major
bank or government agency stands behind.
Regarding more investor bailouts, I don’t see that it makes sense to lend money to a bank today without getting preferential treatment over existing holders, plus secure collateral. Government guarantees might help, especially for foreign investors. But then, the dollar’s plunge is a problem here.
Mike Whitney: Many of the TV financial gurus –as well as Henry Paulson–keep assuring us that the worst is behind us, but I don’t see it. Foreclosures are increasing, the dollar is falling, unemployment is rising, manufacturing is sluggish, food and fuel are soaring, and consumers are backed up on their credit cards, student loans and house payments. Where would you say we are in the present cycle? What will it take to rebound from the current slump? Will the stock market take a beating before all this is over? What do you think the greatest problem facing the economy is; inflation or deflation?
Michael Hudson: The idea that we’re even in a business “cycle” is whistling in the dark. If we’re in a cycle, then that implies there’s an automatic recovery in store. This happy free-market idea was developed at the National Bureau of Economic Research by opponents of government regulatory policy. But the economy doesn’t move by a sine curve. There is a slow buildup, and a sudden plunge, so the shape is ratchet-shaped. This is why 19th-century writers didn’t speak of economic cycles, but rather of periodic financial crises.
Today’s plunging real estate and stock market prices are not a self-correcting ebb and flow in which downturns set in motion automatic stabilizers that produce recovery. Each U.S. recovery since World War II has started out from a higher level of debt. The result is like driving a car with the brakes pressed more and more tightly. Alan Greenspan at the Federal Reserve flooded the banking system with enough credit to enable debts to be carried by borrowing against the rising price of homes and office buildings, corporate stocks and bonds. In effect, the interest charge was simply added onto the debt balance.
But today, the prospects are dim for paying off debts out of further price gains for homes and real estate. Speculators have pulled out of the market – and as late as 2006 they accounted for about a sixth of new purchases. Asset-price inflation fueled by the Federal Reserve – is giving way to debt deflation. The United States and other countries have reached a limit in which scheduled interest and amortization absorb the entire economic surplus of so many individuals, companies and government bodies that new construction, investment and employment are grinding to a halt. Families, real estate investors and companies are obliged to use their entire disposable income to pay their creditors or face bankruptcy. This leaves them without enough money to sustain the living standards of recent years.
This means that there won’t be a rebound, and it will take longer than 2009 to recover.
MW: I read about 8 or 9 articles every day about the meltdown in housing. I always tell my wife that its like reading a Tom Clancy novel except the ending is less certain. As Yale economist Robert Schiller pointed out last month; the decline in prices is now greater than it was during the Great Depression. Will prices find a bottom in 2009 or will it take longer? If prices keep falling then how are the banks going to sell the hundreds of billions of dollars of mortgage-backed securities that they are presently holding?
Michael Hudson: Prices will keep going down, because they have been fed by plunging interest rates, zero-amortization mortgages and low or zero (or even negative) down payments in recent years. That world has ended.
It means that the banks can’t sell their mortgage-backed securities – except to the government, at a loss except to insiders. The actual losses are much worse than the present price statistics show, because many people are frozen in with negative equity. So instead of price declines, we’ll simply see many more foreclosures.
Mike Whtiney: How serious is the current crisis in the financial markets and housing and what steps do you think Obama or McCain should take to stabilize the markets, reduce the deficits, strengthen the dollar, increase employment, and put the economy on solid footing? Is it possible to have a strong economy without policies that distribute the nation’s wealth more equitably? As chief economic advisor to Rep Dennis Kucinich, what one bit of advice would you give to Obama to restore America’s economic vitality and put the country on the right path again?
Michael Hudson: In academic economic terms, America has never been in as “optimum” a position as it is today. That’s the bad news. An optimum position is, mathematically speaking, one in which you can’t move without making your situation worse. That’s the position we’re now in. There’s nowhere to move – at least within the existing structure. “The market” can’t be stabilized, because it was artificial to begin with, based on fictitious prices. It’s hard to impose fiction on reality for very long, and the rest of the world has woken up.
In times past, bankruptcy would have wiped out the bad debts. The problem with debt write-offs is that bad savings go by the boards too. But today, the very wealthy hold most of the savings, so the government doesn’t want to have them take a loss. It would rather wipe out pensioners, consumers, workers, industrial companies and foreign investors. So debts will be kept on the books and the economy will slowly be strangled by debt deflation.
The US can’t reduce the balance-of-payments deficit without scaling back its foreign military spending. Congress is refusing to let foreign governments invest in much besides overpriced junk here, so central banks are treating the dollar like a hot potato, trying to buy foreign assets that can play a role in their own future economic development.
I think that at some point Obama will have to tell the public the bad news that restoring vitality will take radical measures – probably ones that Congress will try to water down so much that things are going to get worse – much worse – before the needed reforms will be made. He can say this before taking office, blaming the Republicans for their regressive tax policies and at the same time bringing pressure on the new Democratic Congress to back a return to progressive taxation and serious financial restructuring. As president, he will have to do what FDR did, and challenge the financial oligarchy with new government regulatory agencies staffed with real regulators, not deregulators as under the Bush-Clinton-Bush regime.
He should make large depositors and “savers” take the losses on their bad bets. And he should repeal the Clinton repeal of Glass Steagall.
Most of all, he will have to make the tax system back progressive again if the domestic market is Social Security and medical care should be paid out of the general budget, not as user fees. And until this change is done, FICA withholding should be levied on total income, without an upper cutoff point. There should be a LOWER cut-off point, however: Only people who earn over $60,000 a year should contribute. This would end up being fairly revenue-neutral. Pres. Obama should say that his policy is not to “soak the rich.” It is to make them pay their way once again by favoring a strong middle class.
Unless he does this, what used to be a democracy will be turned into an oligarchy. And oligarchies historically are so short-sighted that they stifle the domestic economy, driving enterprise and emigration abroad. This threatens to reverse America’s long-term affluence, which means literally a flowing-in – an inflow of capital, of skilled immigrants and other labor, of technology, and of foreign support. All this has now been put in danger by the policies pursued at least since 1980.
Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
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According to salary information collected by new startup Glassdoor, Apple pays its engineers significantly less than competing companies in Silicon Valley. Apple engineers make $89,000 a year, whereas Google engineers can buy four more Segways a year (pre-tax) with their $112,573 paycheck. Microsoft and Yahoo are closer to Google: both companies pay their engineers $105,000 a year. See TechCrunch’s review of Glassdoor for the data.
I wondered how much of a difference this salary disparity made to Apple’s bottom line, so I took a look at its annual 10-K filings from 2003 to 2007. Each of these reports includes, buried among its 170 pages, Apple’s net income and how much it spent on R&D. For simplicity I assumed that the R&D budget was entirely spent on salaries; this isn’t far off the mark in a hi-tech company like Apple.
If Apple were to pay its engineers the same salaries as Google then its R&D budget would increase by 26%. This amount (26% of the R&D budget) is how much Apple saves each year by paying below-market salaries. I calculated what Apple’s net income would have been if it had paid its engineers the same as Google, and these are the results:
Explanation:
- All dollar values are in millions.
- # Employees - from Apple’s 10-K.
- R&D Budget - from Apple’s 10-K.
- Adjusted R&D Budget - had Apple paid its engineers at the same level as Google, this would have been its R&D Budget.
- Net Income - from Apple’s 10-K.
- Adjusted Net Income - had Apple paid its engineers at the same level as Google, this would have been its Net Income.
- Increase in Net Income - the magnitude by which Apple’s net income was higher that year compared to what it would have been had it paid salaries at the same level as Google.
The Adjusted Net Income is a good estimate, but it’s not completely accurate. For example, the increase in Apple’s R&D Budget would have meant that its expenses are higher, so it would have paid less taxes. But the overall trend is clear.
Here’s the Increase in Net Income in chart form:
In 2003 and 2004, the effect of underpaying its engineers made a huge difference to Apple’s bottom line. In 2003, these savings turned around Apple’s year: from a loss to a small profit. In 2004, they doubled the profit. However, once Apple’s earnings began to skyrocket in 2005, the effect of the R&D savings became much smaller: just 6% of the net income in 2007, for example.
Paying low salaries to its engineers was a lifesaver for Apple during its difficult times. But now that Apple is immensely profitable there’s no more excuse for this practice. In the TechCrunch article mentioned previously, the site’s owner Michael Arrington says: “Apple software engineers make only about $89,000, on average, but they get to create some of the most loved products on Earth.” I’m sure this warms their hearts. But an extra $20,000 a year would make their hearts downright toasty, and their spouses’ as well.
[Via - Hurvitz.Org]
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